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I am auditing a fund that has invested in Aquifers which licenses the Fund to harvest water, limited to a specific number of units, from the Lower Murray Darling ground water. This is then sold to end users as and when the allocations are made available by the State authority. This means that there is no regular income as is the case for a rental property nor are there any leases. There were allocations and income for the 2018 and 2019 years and nothing for 2020. Generally, it is a high yielding investment.
The questions are:
As the income cannot be determined in advance, nor is there anything of substance to tell what the future income should be, what sort of qualification should be included? I am considering a Part A qualification similar to auditing a non profit organisation that has the wording "...it is not practical to ensure completeness of the accounting records....unable to express an opinion of the income...until such amounts are recorded in the financial records." Is this adequate and suitable for an SMSF?
Is there any breach of SISA or SISR?
Should I be questioning the market valuation of the Aquifers by the water agent who valued the licenses ($1.1m) without taking into account a zero yield for 2020?
Thank you
Hi Ron
There may be differing views as to how to approach this issue.
Firstly I have no knowledge or experience with investing in Aquifers.
My view is that if you as auditor are satisfied that there was no income received (or entitled to be received) by the Fund re the investment in the 2019/20 year then there would be no reason to issue a Part A financial qualification re there being no income. As an example if you can ascertain that there was no income received as there were no allocations to the Fund even though the asset was fully open to allocations. If you are unable to verify / audit this then yes a Part A qualification would be valid. Normally the financial statements are prepared on a cash basis and often state that the revenue is recognised when it is received or receivable.
Re a breach of SIS having no income is not a breach in itself. It would be a breach of SIS in my view if the asset was not available to income (to receiving an allocation) or the income was not received on an arm's length basis. The main relevant SIS sections are section 109 (arm's length basis) and section 62 (sole purpose test).
Re the valuation if it is normal that income is not regular you would expect that the valuer would take this into account in doing their valuation. The relevant audit standard is ASA 620 - "Using the work of an auditor's expert". Yes if you have any concerns re the valuation obtained you should request an explanation from the valuer and or the trustees.
Thanks
SMSF AAA