The Importance of Understanding the Difference between Contracting for an Audit or Review or Compilation for Your Community's Financial Records
The primary purpose for conducting an audit of your community association records is to determine if the financial reports are accurately reflected. Financial statements are perhaps the best way to evaluate an association's performance and determine its financial health and debt paying ability. In general, there are three types of financial statements - audited, reviews and compilation. Audited financial statements are those statements that have been reviewed by an independent Certified Public Accountant (CPA), who has expressed his/her professional opinion of the association. The CPA is bound by generally accepted auditing standards. Un-audited financial statements contain no such opinions or statements. This greatly limits their usefulness in evaluating an association's financial health.
Your association audit engagement letter with your auditor will specify the work to be done and the nature of the work to be completed. Depending on what your association contracts for there are varying levels of testing that your Auditor will conduct. In general, associations choose from three different levels of service. The scope of the work that can be contracted for is as follows (listed in order of highest to lowest scrutiny):
1. Audit - Audits provide the highest degree of assurance for evaluators. An independent CPA uses various techniques to verify the accuracy of the information in the statement, and then expresses an opinion on the fairness of the financial statements and provides assurance that the underlying data has been tested. The CPA provides written assurance that financial reports are fairly presented in conformity with generally accepted accounting principles (GAAP).
2. Review - Reviews provide a much lower degree of assurance than audits. During a review, the CPA firm makes inquiries and performs analytical procedures, which allows the CPA to express limited assurance that it is not aware of any material changes. Keep in mind that during a review, a CPA does not confirm balances with the banks or creditors, observe inventory counting, or test selected transactions by examining supporting documents. While a review doesn't provide the same degree of assurance as an audit, some financial statement users may find it an acceptable alternative.
3. Compilation - Compilations provide no assurance. The CPA firm only assists in preparing the financial statements, but it is not obliged to verify the information. Since the information is not verified, the CPA gives no assurance as to whether the financial statements meet any of the professional standards. In a compilation, the CPA only agrees to demonstrate that he/she has a high level of knowledge of accounting principles and practices. The CPA also makes certain that the data are in the correct format and clerically accurate. In the end, it is up to the person or entity who is using the financial statement to determine the financial health of the association, to assess their own level of comfort with the statements. Lenders and customers need to be assured with the accuracy of the financial statements and contract based on the level of scrutiny they require.
We highly recommend that your association routinely conduct an audit. External verification of the accuracy and completeness of your community's financial records is a sound practice and in some cases may be required by your governing documents. Sometimes the biggest driver determining whether an audit, review or compilation is conducted is the dollar costs of each, instead of the level of assurances that you expect the audit and auditor to yield. It is important to know the difference between each service. It is perfectly appropriate to request from the auditor the specific level of testing and scope of service that they will be conducting
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Imagineers LLCEmail: Gpassacantando@imagineersllc.com
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