Academy/Taxes, Audits & Financial Compliance
Audits
The highest level of financial scrutiny an association can get, and who decides you need one.
An audit is the highest level of assurance an accountant provides: the auditor tests the association's underlying records and expresses an opinion on whether the financial statements are fairly presented. That is different from a compilation or a review. Whether your association needs an audit is usually set by state statute or your governing documents, not by the IRS.
What an audit actually tests
An audit sits at the top of a ladder that also includes preparation, compilation, and review. Preparation and compilation carry no assurance at all: the accountant presents management's own numbers, sometimes with a report attached, but does not check them. A review adds limited assurance built on inquiry and analytical procedures, comparing this year's numbers to last year's and asking management questions, but stops short of the deep testing an audit requires. An audit is the only one of the four where the accountant actually tests the underlying records, invoices, bank statements, reserve balances, and then states an opinion on whether the financial statements as a whole are fairly presented.
That opinion has to follow a specific standard.
"The auditor's report must state that the audit was conducted in accordance with GAAS."
Source: Clarified auditing standards on the auditor's report, AU-C 700 to 706, AICPA
GAAS stands for Generally Accepted Auditing Standards, the AICPA's rulebook for how an audit has to be performed before the accountant is allowed to sign an opinion.
Who decides you need one
Nothing in the tax code and nothing in AICPA's own standards tells your association whether it must get an audit at all. That decision belongs to two other places: your state's statute and your own governing documents (bylaws or CC&Rs). Many states set a dollar threshold or an owner-petition trigger that forces an audit; some set none and leave the decision entirely to the governing documents. Check your CC&Rs and bylaws first, then your state's association statute, before assuming a review or compilation is enough.
Even where no rule forces the issue, boards weigh the same practical factors: how large and complex the budget is, how much sits in reserves, whether a lender or insurer requires an audited statement before writing a loan or policy, and how much scrutiny the community wants after a transition from the developer or a period of turnover in the treasurer's role.
Reading the opinion
An audit report ends in one paragraph that actually matters: the opinion. Everything around it, the basis for the opinion, management's responsibilities, the auditor's responsibilities, explains how the auditor got there, but the opinion paragraph is the verdict.
| Opinion | What it means |
|---|---|
| Unmodified (clean) | Statements are fairly presented, no exceptions |
| Qualified | Fairly presented except for one specific, disclosed issue |
| Adverse | Statements are materially misstated |
| Disclaimed | Auditor could not form an opinion at all |
Read the opinion paragraph first. A board that only skims the confident tone of the surrounding sections can miss a qualified or adverse opinion sitting in the middle of the report. See Reading an audit report for how to work through the rest of it.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your bylaws say the association must get "the highest level of assurance" on its financial statements each year. What should the board ask for?
The board only wants to know one thing: did the management company deposit the assessments it collected? A full opinion on the whole financial statement isn't needed. What fits?
The audit report's opinion paragraph says the statements are fairly presented in all respects except for one disclosed item. Which opinion is this?
Sources
- Statements on Standards for Accounting and Review Services (SSARS), summarized by Journal of Accountancy and NSA
- AT-C Section 215, Agreed-Upon Procedures Engagements, AICPA, summarized by Deloitte DART
- Clarified auditing standards on the auditor's report, AU-C 700 to 706, AICPA
Taxes, Audits & Financial Compliance
Next: see how a review and a compilation differ from an audit, and cost less to get.
Whether your association is required to have an audit at all, and how often, is set by your state statute and your own bylaws or CC&Rs, not by federal tax law or by AICPA standards. Check both before assuming a review or compilation will do.