What Happens When an SMSF Audit Is Qualified?
For many SMSF trustees, receiving a qualified audit report can feel concerning. However, in most cases, it’s not something to panic about. A qualification simply means the auditor is highlighting a specific issue or limitation.
To understand what a qualified audit means, it’s important to first understand how an SMSF audit report is structured.
An SMSF audit report is divided into two distinct sections:
Part A – Financial Report Audit
Part B – Compliance Audit
Each section serves a different purpose, and a qualification in one part does not necessarily affect the other.
Part A: Financial Report Audit
In Part A, the auditor’s role is to obtain reasonable assurance that the fund’s financial report is free from material misstatement.
When a qualification arises in Part A, it is usually because the auditor hasn’t been able to obtain sufficient appropriate evidence to verify a particular aspect of the financial report.
Common Reasons for Part A Qualifications
1. Comparative Figures (New Auditor)
If a fund has appointed a new auditor, they will typically only audit the current financial year. As a result, the auditor may qualify the report to note that the prior year was audited by a different auditor.
2. Wrap Accounts and Custodial Services
Where an SMSF uses a wrap platform or custodian, the legal ownership of assets sits with a third party on behalf of the fund.
This creates additional audit risk, and a qualification may be issued to highlight that the auditor cannot directly verify ownership of those assets.
3. Bullion and Collectables
Where a fund holds assets such as gold bullion, artwork, and other collectables, it is impractical for a SMSF auditor to sight those assets. Even if they did sight those assets, they are not experts in the field of bullion or art work and are unlikely to be able to conclude that they have sighted the actual item. A qualification arises where stating that the auditor has not seen the asset.
4. Valuation of Assets
Some assets—particularly private or unlisted investments—can be difficult to value reliably.
If sufficient evidence to support market value is not available, the auditor may qualify the report.
What Does a Part A Qualification Mean?
In most cases, a Part A qualification is simply informing trustees of something they already know. After all, trustees are responsible for the investment decisions of the fund.
Part A is primarily for trustees and members, not the regulator. There are generally no penalties or regulatory action arising from a Part A qualification, with one exception: Trustees must disclose audit qualifications in the fund’s tax return. The ATO typically only takes interest where the issue affects taxable income—for example, cases involving Non-Arm’s Length Income. These situations are relatively rare.
Part B: Compliance Audit
Part B focuses on whether the SMSF complies with the Superannuation Industry (Supervision) Act and Regulations. A qualification in Part B is more serious than in Part A, as it relates to breaches of superannuation law.
What Should Trustees Do?
If a compliance issue arises, trustees should act quickly to rectify it—ideally before the audit is finalised.
Where a breach is corrected promptly, the auditor can report to the ATO that the issue has been resolved. In our experience, this significantly reduces the likelihood of further action, provided the breach is not repeated or severe.
Common Part B Compliance Issues
1. Funds Withdrawn by Members or Trustees
Whether intentional or accidental, accessing SMSF funds inappropriately is a breach.
The usual remedy is to repay the amount, along with interest.
2. Asset Valuation Issues
As with Part A, insufficient evidence supporting market value must be reported. The ATO is increasingly focused on accurate valuations, and this scrutiny is expected to grow as more members enter retirement and the new Division 296 tax measures come into effect.
3. Outdated Investment Strategies
Trustees are required to maintain and regularly review their investment strategy. This is one of the easiest issues to fix—simply ensure the strategy is properly documented and updated before each audit.
4. Non-Arm’s Length Transactions
These commonly arise with related-party property arrangements. When a business is struggling or doing extremely well it is at times tempting for trustees to forget to pay rent or overpay rent to seek a better tax outcome. When this occurs, we generally work with trustees to put the fund back in the correct position and remind the trustees of their obligations to ensure transactions are kept at arm’s length market rates.
5. Missing Documentation
When it comes to missing documents, we’ve seen it all — amnesia, fires, dog ate it, floods, disgruntled trustees destroying documents, simple misplacement. Lost or incomplete records are more common than you might expect. In most cases, documents can be retrieved or reconstructed. Where this isn’t possible, the issue may still needs to be reported, along with steps taken to resolve it.
Will a Qualified Audit Lead to ATO Action?
In the vast majority of cases, no.
While ATO reviews and penalties can occur, they are typically limited to situations where:
Non-compliance is serious
Issues persist over multiple years
Trustees have knowingly breached their obligations
For most trustees, compliance issues are isolated and unintentional. When identified, they can usually be resolved with the right advice and prompt action.
Part A qualifications highlight limitations in financial evidence and are usually informational.
Part B qualifications relate to compliance breaches and should be addressed promptly.
The key is to understand the issue, take corrective action where needed, and ensure processes are in place to prevent it from happening again.
Working proactively with your auditor and adviser will help ensure your SMSF remains compliant and well-managed over the long term. For more information, or to answer any questions you might have regarding your audits, contact our team today.