(Note: Following amendments to SIS Regulation 13.15A,
references to Risk Management Statement in this
Circular should be read as references to Derivative
Audit Requirements For Risk Management
The purpose of this Addendum is to provide details of the audit requirements for
Part B Detailed Risk Management Statements for the 1997/98 and subsequent
financial years. In addition, it provides a brief explanation as to what trustees of
superannuation entities should expect from such audit reports.
These requirements will have application to all approved trustees regardless of
whether they use derivatives. The requirements will also apply to the trustees of other
funds that are reporting entities (as defined in Accounting Standards) where they
invest in derivatives either directly, or through a mandate provided to an investment
manager. The new requirements will first apply for the year of income ended 30 June
Trustees are expected to comply with these new requirements unless exceptional
circumstances render this impracticable, for example the fund’s audit was largely
complete prior to the release of this new requirement.
For trustees of funds that are not reporting entities, the new format of audit report is
not required regardless of whether or not the trustee has invested in derivatives. The
only audit report required of these funds is the approved form annual financial and
compliance audit report in accordance with section 113 of SIS.
Appendix 1 to Superannuation Circular II.D.7 entitled ‘Derivatives’ issued on
17 February 1997 included a requirement that the Part B ‘Detailed Risk Management
Statement’ (RMS) be subject to an annual sign-off by an external auditor. The
Circular indicated that the external auditor would sign off:
• that the RMS existed;
• that the major procedures laid down in the RMS have been followed; and
• that any changes to the RMS have been approved by the trustee or the
directors of the trustee board.
On the 25 August 1997, after discussions with the Auditing Standards Board of the
Australian Account Research Foundation, the Insurance and Superannuation
Commission released an Addendum to the Circular which provided further guidance
on the form of the audit engagement necessary to meet the above requirements.
Essentially the Addendum gave the entity responsible for preparing the RMS the
option of two types of auditor engagements. The first option was an agreed upon
procedures engagement but alternatively responsible entities could seek an audit
• An agreed upon procedures engagement is where the auditor issues a report of
factual findings based on procedures that have been agreed with the trustee or
investment manager. The report does not provide a conclusion and therefore
no assurance is expressed. The report provides information from which the
user can draw conclusions and derive assurance as a result of the agreed
• An audit opinion engagement provides a high but not an absolute level of
assurance on the matters to be reported on. The nature, timing and extent of
the procedures performed remains the responsibility of the auditor. Those
procedures are those determined to be necessary to provide sufficient
appropriate audit evidence to enable reasonable conclusions to be drawn and
to issue an expression of opinion.
The Addendum also noted that the appropriateness of the above procedures would be
reassessed prior to June 1998 and that further guidance would be provided after
consultation with investment industry representatives and the auditing profession.
It should be noted that the audit report referred to in this circular is a special purpose
audit report relating only to RMS requirements. This report is in addition to the
annual financial statement and compliance audit report required to be provided to
trustees in accordance with section 113 of SIS. This additional report is not required
to be lodged with APRA when submitting the annual return but may be examined by
APRA officers in the context of a fund review.
Future audit requirement
For 1998 (and future years) the audit report should take the form of an ‘attestation
report’. This involves the auditor reporting on a written representation by the trustees
of a superannuation fund or directors of the investment management company that
they have met their responsibilities with respect to an RMS. APRA favours this
approach as it more clearly reflects the appropriate accountability relationships
involved and should reinforce with trustees/directors their primary responsibility for
the risk management of derivatives.
The written representation/certification to be used by the trustees of a superannuation
fund or directors of the investment management company is as set out in
Form of audit report
As indicated above, the audit report is in the form of an ’attestation report’. The form
of the audit report is set out in Attachment B.
The auditor’s report should be addressed to the members of the Board of the entity
that prepared the RMS i.e. the superannuation entity trustee (in the case of a fund that
invests directly in derivatives), or the trustee of the collective investment or the Board
of the investment manager as appropriate.
It should be noted that while an RMS from an investment manager, and the auditor’s
report on it, may be referred to by the auditor of a superannuation fund when forming
an opinion on the fund’s financial report this is not a substitute for the requirement of
Australian Auditing Standards for the fund auditor to obtain sufficient appropriate
audit evidence about the managed assets and related transactions as outlined in
Auditing Guidance Release AGS 1026 “Superannuation Funds - Auditor reports on
Externally Managed Assets”.
What trustees should expect from the external auditor
The Australian Auditing Standard AUS 202 entitled ‘Objective and General
Principles Governing an Audit of a Financial Report’ states that:
“the objective of an audit is to enable the auditor to express an opinion on
whether a financial report is prepared, in all material respects, with an
identified financial reporting framework.
Although the auditor’s opinion enhances the credibility of the financial report,
the use cannot assume that the opinion is an assurance as to the future
viability of the entity nor the efficiency or effectiveness with which
management has conducted the affairs of the entity...
The responsibility for the preparation and presentation of the report is that of
the management of the entity. The audit of the financial report does not
relieve management of its responsibilities.”
Essentially this means that the auditor’s report is limited to expressing an opinion (on
the basis of testing conducted by the auditor) on the assertions made by the trustees of
the superannuation fund or directors of the investment management company.
The auditor’s opinion does not represent an endorsement of the derivatives
policy. Nor does the auditor’s report indicate that the entity’s control and
monitoring mechanisms are appropriate.
Trustees/directors must satisfy themselves that they can meet the requirements
contained in the “Trustees/Investment Manager’s Certification” shown above.
RISK MANAGEMENT STATEMENT - TRUSTEES/INVESTMENT MANAGER’S
In the opinion of the Trustee/Investment Manager of.....................................................,
following an appropriate investigation, a Part B Risk Management Statement;
(A) was in place for the year of income ended.................... throughout the period
(a) was in a form which was appropriate to the fund and its operations (for
trustees)/appropriate with respect to the provision of contracted investment
services to superannuation entities (for investment managers)*;
(b) was consistent with ISC Superannuation Circular II.D.7;
(c) any changes to the RMS have been appropriately approved; and
(d) the procedures described in the RMS
(i) have been followed throughout that period; or
(ii) the procedures described in the RMS have been followed
throughout that period with the exception/s of those matters listed in
(B) was not required in accordance with ISC Circular II.D.7 at any time during the
year of income ended...................................*
Signed by a Director of the Trustee/Investment Manager in accordance with a
resolution from the Board.
_____________________________ Date __________________
_____________________________ Print Name
*cross out whichever is not applicable. Note that all Approved Trustees must
complete this certificate whether derivatives are used or not – other reporting entities
need complete this only if derivatives are used.
INDEPENDENT AUDIT REPORT
To (the Trustees of ABC Superannuation Fund)/Directors of ABC Ltd Investment
I/we have audited the assertions made by the (Trustee(s) of ..., a Superannuation
Entity Fund/Directors of ..., an Investment Management Company*) which are
contained in their (Trustees/Investment Manager’s Certificate dated ... that the
requirements relating to Part B Risk Management Statement (RMS) under
Superannuation Circular No.II.D.7 Derivatives (“the Circular”) have been complied
with by the Fund for the year ended 30 June, 1998. The (Fund’s Trustee(s)/Directors
of the Investment Management Company*) is/are responsible for the preparation and
presentation of an appropriate RMS. The (Fund’s Trustee(s)/Directors of the
Investment Management Company*) is/are also responsible for ensuring that an
appropriate RMS is consistent with the Circular and the information contained
therein. I have conducted an independent audit in order to express an opinion on the
assertions of the (Trustee(s)/Directors of the Investment Management Company*) that
the RMS exists in a form that is consistent with the Circular, that the procedures in the
RMS have been followed during the year, and that any changes to the RMS have been
My/Our audit has been conducted in accordance with Australian Auditing Standards
to provide reasonable assurance that the RMS has been prepared in a form that is
consistent with the Circular, that the major procedures in the RMS have been
followed and that any changes have been appropriately approved, and accordingly
included such tests and procedures as I/we considered necessary in the circumstances.
These procedures have been undertaken as the basis for gathering and evaluating
evidence on which to support my/our audit opinion on the assertions contained in the
(Trustee(s)/Directors of the Investment Management Company*) Certification, based
on the criteria outlined in the Circular or for any purpose other than for which it was
The audit report has been prepared for the (Trustee(s)/Directors of the Investment
Management Company*) for the purposes of meeting their responsibilities under the
Circular. I disclaim any assumption of responsibility for any reliance on this report to
any person other than the (Trustee(s)/Directors of the Investment Management
Company*), or for any purpose other than for which it was prepared.
There are inherent limitations in any internal control structure, and errors or
irregularities may occur and not be detected. As the requirement for an RMS is part
of the risk management policy relating to the use of derivatives and control over their
use, it is possible that either the inherent limitation of the general internal control
structure, or weaknesses in it, can impact on the effective operation of the specific
control procedures over derivatives. Furthermore, projections of any evaluation of
internal control procedures to future periods are subject to the risk that control
procedures may become inadequate because of changes in conditions, or that the
degree of compliance may deteriorate. Consequently, there are inherent limitations
on the assurance that can be provided.
The objective of this engagement is to report on your assertions as
(Trustee(s)/Directors of the Investment Management Company*) as to compliance
with the Circular and the procedures described in the RMS referred to in your
Certification. The assurance provided does not include an evaluation of the adequacy
of the procedures described in the RMS or the internal controls over those procedures.
Furthermore, I have not evaluated the appropriateness of the use of derivatives by the
fund described in the RMS.
The audit opinion expressed in the report has been formed on the above basis.
In my/our opinion, the assertion(s) of the (Trustee(s)/Directors of the Investment
Management Company*) as contained in the (Trustee(s)/Directors of the Investment
Management Company*) Certification Statement for the year ended 30 June 1998,
that the RMS is in the form that is consistent with the Circular, that the major
procedures in the RMS have been followed during the year, and that any
changes in the RMS have been appropriately approved / that no RMS was
required in accordance with ISC Circular II.D.7 at any time during the year of
income ended 30 June 1998*
are/is fairly stated in all material aspects.
Signature of Auditor ............................... Date .................................
Name of Auditor ..................................... Firm .................................
* Delete as applicable