Managing Audit Risks For the year ended 30 June, 2018 Presented by - - PDF document

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Slide No: 1

Managing Audit Risks

For the year ended 30 June, 2018

Presented by

Belinda Aisbett CA. BAcc. SSA SSAud

Director Super Sphere Pty. Ltd.

  Slide No: 2

Introduction

• Asset valuation risks
• Cost base relief hangover risks
• Contribution cap risks
• Earning allocations
• Asset segregation
• ECPI calculations
• NALI

Slide No: 3

Introduction

• TRIS & Part IVA considerations
• Contribution splitting and member

balance equalisation

• LRBA
• Legal considerations
• 3-year audit cycle

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Slide No: 4

Asset Valuation Risks

• Incorrect asset valuations to distort

member balances

• Chopping and changing between

member choice and pooled investments to distort member balances

• Incorrect asset valuations to distort CGT

relief

Slide No: 5

Example

• Distortion of asset values as at 30 June,

2017 to manipulate member account balances

• SMSF:
• 30 June, 2016 property worth $17m
• 30 June, 2017 property worth $6.4m
• 30 June, 2017 4 pension members

Slide No: 6

Example

• Distortion of asset values as at 30 June,

2017 to manipulate CGT cost base relief

• SMSF held shares as at 30 June, 2017 worth

$1.60

• Shares were connected to an IPO being

finalised post year end, where shares were expected to be worth $2.60

• Fund wanted to report investment at $2.60

to maximise CGT relief

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Slide No: 7

Example

• Distortion of asset values as at 30 June,

2017 to manipulate CGT cost base relief

• 14 properties held
• $’000 of repairs and maintenance costs

incurred

• All capitalised to obtain greater cost base

relief.

Slide No: 8

Provision for Disposal Costs?

• Appropriate?
• Possible?
• Audit risks?

Slide No: 9

Asset Valuations

• Regulation 8.02B of SIS requires all

assets to be reported at market value at year end

• Regulation is signed off on in the audit

report, so this must be reviewed by the auditor

• Sufficient appropriate audit evidence

must be on file

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Slide No: 10

Hangover Risks

• Cost base re-setting
• You become aware an asset had the cost

reset when the asset was not eligible

• Deferred last year, but disposals calculated
• n uplifted cost to proceeds only
• Discounting is incorrectly applied

Slide No: 11

Member Account Manipulation

• Earnings allocated disproportionately

between members

• Contributions being mis-allocated

between members

• Impact on earning allocations post

manipulation of asset valuations or contributions

Slide No: 12

Example

• Two member fund
• Mum and Dad now going through a

nasty divorce

• Past 3 years contributions from family

business were split 50/50 between members

• If not split Dad would have been

excessive

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Slide No: 13

Example

• Dad now claiming wife never worked

for the family business, so the contributions should have been allocated 100% to him

• Dad claiming auditor was not

independent because auditor has a connection to the wife’s family

Slide No: 14

Example

• Dad wants member statements re-stated

showing 100% of family business contributions being allocated to his member account

• Property disposal allocation was

distorted because member balances were wrong

• Earning allocations to also be re-stated

Slide No: 15

Audit Risks

• Litigation risk – Dad is considering legal

action against the auditor

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Slide No: 16

Contribution Cap Audit Risks

• Essential that the audit file contains

audit evidence as to who the contributions belong to, to ensure allocation to member accounts is correct

• What about historical issues?
• Representation letter considerations

Slide No: 17

Earning Allocation

• Must be done on a fair and reasonable

basis

• Must not advantage one member over

another

• Is signed off on in the audit report, so

must be checked by the auditor

Slide No: 18

Example

• Two member fund
• 75 year old mum
• 40 year old son
• 5 years ago, land was sold
• Profit allocated 100% to son’s account
• nly
• Now realise son can’t access profits until

age 65

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Slide No: 19

Example

• Mum now wants to re-state earning

allocation & re-do financials for previous 5 years

Slide No: 20

Audit Risks

• Can this even be done?
• What about minimum pension
• bligations if Mum’s account is restated?
• Can ECPI be claimed by mum on her

pension account?

• Is this being done now purely to lower

the son’s balance to allow more contributions?

Slide No: 21

Asset Segregation post 1 July

• Member investment choice is still

permitted, however earnings on all assets are grouped for tax purposes

• Allocation of earnings to member accounts

and the associated tax needs to be reviewed by the auditor

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Slide No: 22

Asset Segregation post 1 July

• Funds are not permitted to use the

segregation method for pension members with balances greater than $1.6m

Slide No: 23

Actuarial Certificates

• Disregarded small fund assets
• If at 30 June of the prior year a member has

more than $1.6m in super (across all funds and all account types), the fund must use the unsegregated method to claim ECPI and must obtain an actuarial certificate

Slide No: 24

Asset Segregation post 1 July

• Circumstances now where a fund with

100% pension accounts will still need to

• btain an actuarial certificate

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Slide No: 25

Actuarial Certificates

• Needed if a member’s pension account

exceeds the transfer balance cap, for example:

• SMSF $1,600,000 on 1 July, 2017
• Earnings $96,000
• Pension drawn $64,000
• Balance $1,632,000 at 30 June, 2018

The SMSF still needs an actuarial certificate

Slide No: 26

Multiple Funds – ATO Issue

• Minimal risk to the auditor
• Auditor will need to be aware of other

super balances held by each member

• This should be an annual question for every

fund audit

Slide No: 27

TBAR and the Auditor

• Should the auditor even review?
• How will the auditor obtain comfort that

TBAR information is up to date?

• Should the auditor try to keep track of

the member transfer balance cap?

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Slide No: 28

Non-Arm’s Length Income

• Major risk to the auditor if not identified
• Financial statement balances will be

materially mis-stated

• Where identified ensure communicated

to the trustee directly (not just via the referring accountant), even if balance is immaterial in year 1

Slide No: 29

Part IVA Risks

• TRIS pensions commenced to obtain cost

base relief only to be commuted on 1 July, 2017

• Consider reasons for commutation,
• therwise there may be Part IVA risks

Slide No: 30

Contribution Splitting

• Expect an increase in splitting in 2018
• nwards as funds try to equalise their

balances between spouses

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Slide No: 31

Additional Audit Risks

• Members have manipulated the

proportion to be split to gain a greater allocation to one spouse

Slide No: 32

LRBA Risks

• Documentation still not stacking up
• Some problem LRBA’s include
• Custodian has the debt, and the fund agrees

to be responsible

• Bank loan does not say limited in recourse,

but given there are no guarantees accountant thinks this is implied

• Guarantees in place are not limited in

recourse

Slide No: 33

LRBA and Total Super Balance

• Total super balance will include the
• utstanding loan amount of an LRBA

that starts after 1 July, 2018 where the member has:

• Satisfied a nil cashing restriction; or
• It is a related party LRBA

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Slide No: 34

Reserves

• Be aware this is an area of focus for the

ATO, refer SMSFRB 2018/1

• Sole purpose test
• Part IVA
• Contribution reserves still ok

Slide No: 35

Legal Considerations

• Lessons from Cam & Bear
• Ensure financial report disclosures are

appropriate

• Don’t simply rely on representations for

matters you could test directly

• Be careful on whose representations you

place reliance

• Don’t exclude the trustee from important

conversations or communications

Slide No: 36

Managing Legal Risks

• Key is to remember the use of

professional scepticism

• If in doubt…
• Emphasis of matter
• Qualification of Part A opinion
• Communicate with the trustee directly
• Consider wording of specific issue

representation letters

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Slide No: 37

Legal Considerations

• Lessons from Cam & Bear
• Time for a PI insurance review?

Slide No: 38

3 Year Audit Proposal

• SMSF with a history of good record

keeping and compliance can move to a year 3 year cycle

• Suggested that a 3 year cycle will reduce

red tape and save on costs for the SMSF

Slide No: 39

Proposed Triggers

• Commencement of a pension
• Death of a member
• Roll out of member, or admittance of

new member

• Receipt of NALI*
• LRBA

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Slide No: 40

Proposed Triggers

• Acquisition of an asset from a related

party

• Investment, loan or leases with a related

party

• In-specie lump sum payments*

Slide No: 41

Further Trigger Suggestions

• Cryptocurrency investments
• Payment split between divorcing couple
• Contribution splitting
• Derivatives investments

Slide No: 42

Proposed Operation

• 3 year cycle is proposed to be self

assessing

• Trustees do not have to opt in if they are

eligible

• If a trigger event, audits need to be done,

so if an event in year 2, audits for year 1 and year 2 need to be done before year 2 SAR is lodged

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Slide No: 43

Opinion….

• Most people I speak to think it is a bad

idea

• Few who think it will be good
• Couple “free years” to run rampant
• Simple fund, it should save on costs
• Few who think SMSF’s shouldn’t be

audited at all!

Slide No: 44

Opinion….

• Impact on the sector
• Impact on the integrity of the system

Slide No: 45

What’s Next?

• Await Treasury response to submissions
• Discuss with clients & gauge their

position or thoughts

• Prepare for 2020

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Slide No: 46

2018 / 2019 Audits

• Review deeds for audit requirements

and make a management letter point where the deed will need to be updated before the trustee can elect a 3 year audit cycle

• Review fund in light of proposed trigger

events & communicate these

Slide No: 47

2020 Audits

• Workflow and staff management will be

paramount and completely dependent

• n the rollout of the proposal

Slide No: 48

Questions?

• Feel free to e-mail me at

baisbett@supersphere.com.au

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Slide No: 49

Super Sphere Pty. Ltd.

• Super Sphere provides audit, training

and consulting services specifically in relation to SMSF audit issues.

• An SMSF Audit Toolkit is available for

$550 to assist professionals compile and complete an audit file.

• For more information visit

www.supersphere.com.au