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ATO issues updated auditor independence guidance

The ATO has released new guidance on the APESB Independence Guide which further clarifies what firms need to do to overcome independence hurdles and its compliance approach for 2020–21 and beyond.

SMSF Miranda Brownlee 15 October 2020
— 3 minute read

As previously announced, the ATO said while its approach to compliance with the restructured APES 110 Code of Ethics for Professional Accountants for the 2020–21 income year will be to provide support and guidance to auditors, for audits completed after 1 July 2021, firms will need to comply for any audits completed after 1 July 2021.

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The ATO clarified that this will also apply for audits that are completed after 1 July 2021 but are completed for earlier financial years.

“For audits completed after 1 July 2021, firms will need to comply with the new code. This includes audits they have completed for 2020–21 and future financial years and any audits that need to be completed for earlier financial years,” it said.

“If we find firms are breaching this independence standard after 1 July 2021, we may refer the auditor to the Australian Securities and Investments Commission (ASIC) for further action.”

Addressing the independence hurdles

In an online update, the ATO said that based on the restructured APES 110 Code of Ethics for Professional Accountants, there are three main hurdles that need to be overcome before a firm can perform audit and assurance services as well as non-assurance services such as preparation of the fund’s accounts for the same client.

The first hurdle is that a firm cannot assume a management responsibility for an audit client, it said.

“There are examples of management responsibilities at paragraph 600.7A3 of the code. These include preparation of the financial statements, as well as other advice or decisions that might be made with respect to the fund’s compliance with the super laws,” the ATO said.

“They are typically activities or decisions which involve the exercise of professional judgement.”

To avoid assuming a management responsibility when providing non-assurance services to an audit client, the ATO stressed that the firm must be satisfied that the SMSF trustee makes all judgements and decisions that are the proper responsibility of management.

“The second hurdle is a firm or network firm who is looking to provide an audit to a client that is not a public interest entity such as an SMSF, accounting and bookkeeping services including preparing financial statements on which the firm will express an opinion, cannot do so unless the services are routine or mechanical,” it said.

“The third hurdle is, even where the firm can demonstrate they did not take on management responsibilities for the audit client and the preparation of the financial statements were routine or mechanical in nature, the firm must address any threats that are not at an acceptable level.”

The ATO noted that since trustees generally hand over the management of their fund to their administrator or accountant rather than make all judgements and decisions themselves, most firms will find it difficult to get over the first hurdle.

“Trustees cannot simply approve everything after the fact,” it said.

“Therefore, regardless of how simple the fund’s investments may be, or whether those investments are on data feeds, the auditor will not be able to conduct the audit for a client of the same firm if they have assumed management responsibilities for the trustee.”

Evidence requirements

In order to demonstrate that a firm has not assumed management responsibilities for the trustee, the firm must document and provide sufficient appropriate evidence on the audit file showing the trustee has the suitable skills, knowledge and experience to remain responsible at all times, for the accounting and compliance decisions of the SMSF.

“We will want to confirm the trustee’s ability to do so, and ensure they have a clear understanding of their responsibilities compared to those of the firm,” the ATO warned.

“If the firm can demonstrate the trustee’s ability to take responsibility — for example, the trustee has an accounting or similar qualification — then the auditor needs to have evidence on the file that the second hurdle has been overcome — that is, the preparation of the financial statements was routine or mechanical and the firm has addressed any threats that aren’t at an acceptable level.”

The ATO explained that evidence of the preparation of the financial statements being routine or mechanical must demonstrate the trustee approved the records and entries in the trial balance that the auditor’s firm then used to prepare pro-forma financial statements.

“We may contact trustees to confirm their understanding of their fund’s transactions and compliance with Superannuation Industry (Supervision) Act 1993 (SISA) legislation,” it said.

ATO issues updated auditor independence guidance
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