How does the audit of an AFSL license work?

If you wish to provide financial services in Australia, you must hold a current Australian Financial Services License, or AFSL. To be granted, and continue to hold an AFSL, you or your business must meet a range of obligations and standards set out by the Australian Securities and Investment Commission (ASIC) and Australian Accounting Standards Board (AASB). Compliance with these standards is reviewed each year with an AFSL audit.

What is an AFSL?

An AFSL is a licence that authorises entities to provide a range of financial services and products including:

• Crowdfunding services
• Superannuation trustee services
• Financial products and advice
• Claims handling and settling services
• Traditional trustee company services
• Custodial and depository services

Licensees must meet and maintain the following financial and general compliance obligations laid down by ASIC:

General obligations:

• conduct and disclosure
• the provision of your financial services
• the competence, knowledge and skills of your responsible managers
• the training and competence of your financial advisers and authorised representatives
• ensuring your financial advisers and authorised representatives comply with the financial services laws
• compliance, managing conflicts of interest and risk management
• the adequacy of your financial, technological and human resources, and
• your dispute resolution and compensation arrangements (if your clients include retail clients)

Financial obligations (may vary depending on what products and services are offered):

• responsible entity
• corporate director of a corporate collective investment vehicle (CCIV)
• operator of investor directed portfolio services
• custodial or depository services provider (including as a provider of incidental custody services)
• trustee company providing traditional services
• issuer of margin lending facilities
• foreign exchange dealer, and
• retail OTC derivative issuer.

What is an AFSL audit?

An AFSL audit is an annual review of a licensee’s financial statements and compliance documentation. Two specific forms—FS70 and FS71—must be lodged each year by the following dates:

• 31 October (corporate license holders)
• 30 September (disclosing entities with corporate licenses)
• 31 August (all other licensees)

AFSL audits review two key areas of compliance:

• General standards: This part of the audit ensures that the licensee adheres to ASIC’s general requirements for ASFL holders, including but not limited to ongoing training and competency, risk and conflict of interest management, compliance with relevant laws, and appropriate dispute resolution arrangements.
• Financial standards: The review of financial standards can be complex as the specific requirements change depending on the type of financial business and what licence is held. This audit covers simple components such as cash needs and General Purpose Financial Statements (GPFS) through to Net Tangible Assets (NTA), Surplus Liquid Funds (SLF) and Adjusted Surplus Liquid Funds (ASLF).

What does an AFSL auditor do?

An AFSL auditor is a trained professional with experience in assessing AFSL compliance. They will prepare and lodge your FS70 (for financial statements), FS71 (for the audit report) and GPFS. During this process, the auditor will meet with the relevant manager or director of the entity being audited.

To assist, the licensee may be asked to provide:

• A statement of financial performance (Profit and Loss Statement)
• Statement of financial position (Balance Sheet)
• Statement of changes in equity
• Statement of cash flows
• Director’s report
• Notes concerning the financial statements

An additional set of documents will be requested to assess the compliance aspect of the ASFL. Documents that may be requested include:

• Professional Indemnity Insurance
• Risk Management and Internal Controls
• IT Management
• Complains & Breach Management
• Organisational capacity (including availability of resources and appointment of responsible managers)
• ASIC reporting and lodgements
• Conflicts of interest

ASFL auditing is a specialised area of practice and it’s essential that you engage a service provider with proven experience in assessing compliance with the Corporations Act 2001 and the standards set by the AASB and ASIC.

How do I engage an AFSL auditor?

An AFSL auditor must be appointed within one month of your license coming into effect. Once a suitable auditor or firm has been selected, you’ll need to meet and formalise the appointment with a letter of engagement.

This letter outlines:

• The responsibilities of each party
• Agreed fees
• Scope of the audit
• Reporting timelines
• Communication protocols.

After you have appointed your auditor, you must notify ASIC in writing within 14 days using a FS06 form, indicating the name of your auditor and the date from which they commenced.

How do I dismiss an AFSL auditor?

Approval must be sought from ASIC prior to removing an appointed AFSL auditor at least three weeks before the desired date of dismissal. An FS07 form must be completed and submitted online to ASIC along with the following:

• A specific reason for the AFSL holder to remove the auditor
• The status of the audit (in progress, not yet started etc)
• Confirmation that a replacement auditor has been engaged and ready to commence, pending removal of the current appointment.

ASIC will not consent to the removal of an auditor unless you have notified, or attempted to notify, the currently appointed individual or firm of your intention to dismiss. Following their dismissal, a new auditor must be appointed via the above process within 14 days.

Additional steps are required for proprietary and public companies, which you can read about here.

What if my AFSL auditor resigns?

If your appointed AFSL auditor wishes to step down, they will need to follow a similar process and notify ASIC of their intentions at least three weeks prior to the resignation date. In addition to the completion of the FS08 form, the outgoing auditor must:

• Provide reason for their resignation
• Advise the date of their final day of engagement
• Outline the current audit status (ie in progress, not yet started etc)
• Submit written confirmation from a replacement auditor

Your auditor must advise you of their application to resign.

For further information pertaining to the resignation of a AFSL auditor of proprietary and public companies, click here.

If you’re interested in learning more about our AFSL Audit Services, get in touch with our team today or call us on 1300 157 712.