What is a trustee representation letter? A trustee representation letter is an essential document required for every audit under ASA 580 and ASAE 3100. The auditor is responsible for obtaining written representations from the trustees.
A trustee representation letter is a form of audit evidence. It is written confirmation of certain understandings between the auditor and the trustees. It is used to support other audit evidence and to provide evidence that is otherwise not available.
A trustee representation letter is not a lengthy document. For compliance purposes, it covers almost all the SIS sections the auditors sign off. A well-structured representation letter can be used as a concise and comprehensive tool for SMSF trustees to enhance fund compliance and operation.
Every item in the representation letter falls into one of the following three categories:
(1) With respect to the financial audit, the trustees acknowledge their responsibility for the fair presentation of the financial report in accordance with the adopted applicable financial reporting framework; they acknowledge their responsibility for the design and implementation of internal control; they acknowledge that they’ve approved the financial report and that the misstatements are immaterial.
(2) With respect to the compliance audit, the trustees acknowledge that they have conducted the affairs of the SMSF in compliance with the SISA and SISR throughout the period.
(3) For both the financial audit and the compliance audit, the representation letter confirms specified matters when other sufficient appropriate audit evidence cannot reasonably be expected to exist.
Technically, trustees can choose not to sign a representation letter if they don’t agree with what the letter says. In this case, the auditor should make reference to ASA 580 and respond accordingly. When an SMSF has certain breaches during a financial year, signing a standard trustee representation letter is to some extent a false representation. For example, the representation letter would most likely state that “the fund is maintained for the sole purpose of providing retirement benefits…” while the trustees might have signed the letter anyway despite the fact that fund money was transferred to assist their son’s business.
In theory, a trustee representation letter should be modified according to the individual requirements and circumstances of each engagement. In reality, auditors normally issue a standard trustee representation letter to all trustees.
A trustee representation letter should be provided to the auditor before the financial report is signed. It would be helpful for accountants/advisors to go through certain items in the letter with the trustees when they come in to sign the financials; especially those that fall into categories (2) and (3) above. When the fund circumstances do not match with the statements in the letter, they should be brought to the auditor’s attention. This will ensure that trustees are not making any false representations to the auditor. In addition, given the valuable content of the letter, it’s a perfect opportunity to enhance the trustees’ compliance knowledge and provide them with some insights into fund operation in general.
When SMSF auditors sign off on SIS sections S35AE, S35B, S103, S104, S104A, and S105, they often rely solely on the trustee representation letter. These sections cover the following: keeping accounting records for at least 5 years, keeping accounting statements for at least 5 years, keeping the minutes and records of meetings for at least 10 years, keeping trustee consents for at least 10 years, keeping ATO trustee declarations for at least 10 years, and keeping member reports for at least 10 years. If the trustees have not actually kept these records or don’t know how long they should keep certain records, the letter could be a good reference point.
Auditors sign off on certain sections of SIS relying on the trustee representation letter as critical audit evidence along with other additional audit evidence, which includes the following:
S17A: part of the definition of an SMSF, no member is an employee of another member, unless they are relatives
S126K: trustees are not disqualified persons
Reg13.12, Reg13.13, Reg13.14: There are no liens or encumbrances on any assets or benefits and no assets, benefits or interests in the fund have been pledged or assigned to secure liabilities of others.
A good representation letter incorporates other important SIS sections as well: S17A definition of SMSF, S62 sole purpose test, S109 arm’s length transactions, S66 related party, S82-85 in-house assets, S65 financial assistance, S67 borrowings, Reg 4.09A separation of assets, Reg 4.09 investment strategy, Reg 7.04 contributions and Reg 5.08 and Reg 6.17 benefit payment. Reading the trustee representation letter will enhance trustees’ knowledge of SIS compliance and ensure there is no misunderstanding between the auditor and the trustees.
A trustee representation letter also has valuable information on fund operation such as fund conduct in accordance with the trust deed, internal control, fraud, and asset management.
A trustee representation letter is an opportunity to bring internal control to the attention of trustees once again. It is always a good internal control practice to require two signatories to withdraw money. Internal and external fraud does happen, and trust is not an internal control and therefore should not be relied on as a safeguard.
The letter is also a reminder to trustees that assets are held in accordance with the investment strategy, are registered in the name of the fund and should be carried at market value.
Trustees are not necessarily familiar with the trust deed. For accountants and advisors, the question is probably “Are the trustees conducting the affairs of the fund in accordance with the trust deed as it currently stands? Is the trust deed up to date?”
A trustee representation letter is not only crucial for the audit process; a good trustee representation letter can be used as a great reference point on SIS compliance and better fund operation.
Please see the attached trustee representation letter, as used by Access Super Audit.