What is an SMSF audit and how does it work?

One of the advantages of establishing an SMSF is the flexibility to design the way you build your retirement savings. You have complete control over investment decisions and can tailor your choices according to your goals and risk tolerance.

But such control and flexibility come with responsibility. 

SMSFs are not a set and forget structure. Managing a fund requires a fair amount of investment knowledge and significant time commitment. One of those responsibilities is ensuring your SMSF undergoes an annual audit in compliance with Australia's superannuation laws. 

See also: A guide to SMSF administration

So, what does an SMSF audit entail and what are the requirements? Let's find out.

What is an SMSF audit?

An SMSF audit is a mandatory annual check of a self-managed super fund's financial statements and compliance with superannuation rules.

Per Australian Taxation Office (ATO), trustees must appoint an ASIC-registered SMSF auditor no later than 45 days before the due date for lodging the SMSF annual return (SAR). The audit must be completed before the SAR is lodged.

An SMSF audit consists of two separate but related reviews, a financial audit and a compliance (regulatory) audit. 

Financial audit

The financial audit examines the SMSF's financial statements and accounting records to determine whether they present your fund's financial position fairly and accurately in accordance with Australian Auditing Standards (ASAs).

The auditor verifies that transactions are supported by evidence such as bank statements, contract notes, rental statements, invoices and other source documents. The auditor may request these documents, along with any additional information needed to complete the audit. 

Compliance audit

The compliance audit assesses whether your SMSF has complied with Australia's superannuation laws and regulations, primarily the Superannuation Industry (Supervision) Act 1993 (SIS Act). 

The auditor may review whether your fund's investments are consistent with its documented investment strategy, the fund's assets are kept separate from you and other trustees' personal assets, and your fund has complied with borrowing rules, among other things. 

If the auditor identifies certain significant breaches of superannuation laws, they are generally required to report those contraventions to the ATO.

See also: How to roll over super to an SMSF

Why does an SMSF need an annual audit?

An annual audit is a legal requirement for all self-managed super funds. Every SMSF must be audited by an auditor registered with Australian Securities and Investments Commission (ASIC). The audit has to be completed before the fund's SMSF annual return is lodged with the ATO. 

The annual audit aims to verify the accuracy of your SMSF's financial records, assess compliance with superannuation laws and ensure trustees are meeting their obligations. 

See also: What are SMSF trustees and what do they do?

According to the ATO, the audit is required even if no contributions or payments are made in the financial year. 

How to choose an SMSF auditor?

The annual SMSF audit must be conducted by an ASIC-registered SMSF auditor. Trustees are responsible for appointing the auditor. You can start your search on the ASIC Auditor Register.

The auditor must be independent of the fund, its members and trustees. This means they should not audit if they hold any financial interest or have a close personal or business relationship with the SMSF members or trustees. 

The ATO's auditor independence requirements all but rule out in-house audits where businesses are also providing accounting, bookkeeping or management services to the SMSF.

Before engaging an SMSF auditor, consider the following:

Verify their registration

Make sure they are registered with ASIC and have a valid SMSF auditor number, which you need to provide on your SAR.

Ensure they are independent

They cannot audit their own SMSF, an immediate family member's SMSF, or any fund where they have personal or financial relationships.

Compare fees carefully 

Audit fees vary depending on the complexity of the fund, the investments held and the quality of records provided. But while cost is important, choosing the cheapest auditor may not always be the best option (more on that below).

Ask about turnaround times

The annual audit must be completed before you can lodge your SMSF annual return, making it important to ensure you meet the deadline. Ask prospective auditors about their expected turnaround times particularly during peak periods. 

Understand their document requirements

You must provide the auditor with source documents to verify the fund's transactions. This will include bank statements, contract notes, financial statements and more. Some auditors can work with cloud accounting software and electronic data feeds, negating the need to provide physical documents. 

However, don't assume this. Check whether the auditor you work with has the applicable software and whether there are data feeds in place. Understanding their requirements upfront can help make the audit process smoother. 

What is the role of an SMSF auditor?

An SMSF auditor is an independent professional who examines your SMSF's financial records and assesses whether the fund has complied with Australia's superannuation laws. 

Per the ATO, the auditor you engage to conduct the audit must: 

• Provide you with the audit report
• Advise you of any breaches of the rules
• Report certain contraventions to the ATO 

1. Take note: If the auditor identifies breaches of super laws, they are required to report them to both trustees and, in some cases, the ATO even if you terminate their engagement or they don't finish the audit. This may involve lodging an Auditor Contravention Report (ACR) with the ATO. As trustee, you should take steps to rectify any contravention as soon as possible. 

How much does an SMSF audit cost? 

There is no fixed cost for an SMSF audit. Fees vary depending on factors such as the complexity of the fund, the types of assets it holds and the quality of its records.

According to ATO data, the median SMSF audit fee was $550 in 2022-23, while the average fee was $641. The median fee has remained remarkably stable at around $550 for several years. For several years, the lion's share of SMSF audit fees has fallen between the $500 and $999 range. 

See also: A complete guide to SMSF fees

Average and median SMSF auditor fees

Source: ATO statistical data reported by SMSF industry sources

Should you choose the cheapest option?

If you're trying to cut costs and save money by getting a cheap SMSF audit, tread carefully. While cost is an important consideration, trustees should also consider an auditor's experience, independence and reputation. 

The ATO has previously conducted an investigation into 'lower-cost audits' (defined as those that charged below $400 at the time) and found several issues with them failing to meet basic standards. 

Industry watchdog, ASIC administers a register of SMSF auditors, requiring them to pass a competency exam and meet minimum practical experience and educational requirements.

The ATO regularly refers auditors not meeting their requirements to ASIC for further investigation and/or prosecution, which can result in SMSF auditors being struck off the ASIC register.

SMSF audit checklist

Preparing for your annual SMSF audit can help make the process smoother and reduce delays. 

Before the auditor can begin the audit, the ATO requires trustees to provide them with a statement of financial position and an operating statement for the previous financial year. If your auditor requests more information, you have 14 days to provide it. 

Fund establishment documents

If it is the first time an auditor is auditing the fund, they may request copies of the documents that established the super fund. These may include:

• Signed trust deed and any amendments
• Trustee declarations
• Current investment strategy
• Member applications and trustee consents
• Minutes of trustee meetings and resolutions
• Details of corporate trustee (if applicable)

Financial records

The auditor will typically check: 

• Bank statements for all SMSF accounts
• Annual financial statements
• Details of income and expenses
• Tax records and prior-year audit reports
• Evidence supporting member balances and transactions

Investment documents

Depending on the assets held, you may need to provide:

• Rental income statements and lease agreements
• Property settlement statements
• Term deposit statements
• Managed fund statements
• Share portfolio statements

Contribution and benefit payment records

Your auditor may request evidence of:

• Employer and personal contributions
• Contribution caps monitoring
• Pension payments
• Lump sum withdrawals
• Documents supporting conditions of release for benefit payments

See also: A guide to SMSF retirement phase

Borrowing and related-party arrangements

Where relevant, have these documents ready:

• Limited recourse borrowing arrangement (LRBA) documents
• Loan agreements
• Related-party transaction records
• Asset ownership documentation
• Evidence that transactions were conducted on arm's length terms

See also: A guide to SMSF borrowing

What are the common issues auditors identify?

Some of the common issues that constitute a breach or will see an SMSF auditor issue a formal caution include:

• Not holding onto the documents that established the super fund.
• Not keeping sufficient documentation to substantiate activities and transactions of a super fund.
• Not having a current investment strategy. This is a formal document that is reviewed and regularly updated.
• Not keeping the assets of the fund in the name of the super fund. An SMSF's assets need to be entirely separate from the trustees' personal assets.

See also: A guide to SMSF investment strategies

Do you need to audit an SMSF that is winding up?

If you're winding up an SMSF (closing it down), the trustee has to appoint an SMSF auditor to do the final audit and check that the fund is compliant with wind-up requirements.

The auditor must perform additional checks when conducting the final audit of a fund that is winding up, which are listed in great detail on the ATO's website if you want a bit of light reading.

What happens if you don't complete an SMSF audit?

Failing to complete an annual SMSF audit can have serious consequences. Firstly, you won't be able to lodge your annual return. Depending on the circumstances, the ATO may impose penalties, direct trustees to rectify breaches, disqualify trustees or take more serious compliance actions. 

• You can't lodge your SMSF annual return

An SMSF audit is a mandatory requirement before lodging the fund's annual return. Trustees need information from the auditor's report to complete the return. 

• The ATO may take compliance action

If an SMSF fails to meet its obligations, the ATO can take a range of actions depending on the nature and severity of the breach.

There is a long list of SMSF non-compliance penalties starting with enforceable undertakings and rectification directions. These basically inform SMSF trustees of their funds' non-compliance and require them to rectify the issues within a certain timeframe.

Serious or repeated non-compliance may lead to:

• Freezing of a fund's assets
• Disqualification of its trustees
• Forcible winding up of the fund
• Civil or criminal court proceedings

• Trustees can be personally fined

The ATO may also choose to impose administrative penalties, or monetary fines, to be paid from a trustee's personal funds, not from the SMSF. These penalties cannot be reimbursed from fund assets. 

• The fund could be made non-complying

In the most serious cases, the ATO may issue a notice of non-compliance. A non-complying SMSF can lose its concessional tax treatment, significantly increasing the amount of tax payable by the fund.

See also: Top tax tips for SMSF trustees

• Previous breaches can lead to harsher outcomes

The ATO is very clear on how it deals with non-compliance. In assessing what penalties to apply, the ATO will generally consider factors such as:

• The trustee's compliance history
• The extent of the non-compliance
• Whether the non-compliance can be satisfactorily rectified within a suitable timeframe 

It's best not to fall foul of the authorities in the first place as any previous non-compliance may lead to more serious consequences down the track.

1. Savings.com.au's two cents

If you're thinking about running an SMSF (or you currently are), it's essential to understand your responsibilities and obligations. 

If the task seems too challenging or time-consuming, you can investigate whether it may be better to hand over administration of your fund to a specialist SMSF administrator. This can still allow you to maintain more control over your superannuation than joining an APRA super fund. 

Alternatively, you could also decide to roll over your SMSF into an industry fund. Ultimately, there is no right or wrong option when it comes to superannuation – it entirely depends on what best suits your own goals and circumstances.

And if you just can't get enough of reading about SMSFs, we've got a lot more where that came from.