Academy/Taxes, Audits & Financial Compliance
Reading an audit report
Know which paragraph actually tells you whether the numbers are right.
An audit report has four parts: the opinion, the basis for the opinion, management's responsibilities, and the auditor's responsibilities. Read the opinion first. It states whether the statements are fairly presented (unmodified), presented with an exception (qualified), materially misstated (adverse), or not able to be opined on (disclaimed). Everything else explains why.
First, confirm what kind of report you're holding
Not every report from an accountant is an audit. A compilation presents management's numbers with no assurance they're free of error. A review offers limited assurance, built on inquiry and analysis rather than testing. An audit is the only one where the accountant tests the underlying records and gives an opinion on whether the statements are fairly stated. If the document a board received doesn't have an "Opinion" section, it isn't an audit, and reading it as one is a common mistake.
The four parts, in order
A standard audit report follows the same skeleton every time: an opinion section, a basis-for-opinion section, a description of management's responsibilities, and a description of the auditor's responsibilities. The opinion section is the only one that actually says whether the numbers are trustworthy. The other three explain how the auditor got there and who is responsible for what; they don't change the verdict.
"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
What the opinion paragraph actually says
Four outcomes are possible, and only one of them means "no problems found":
| Opinion | What it means |
|---|---|
| Unmodified (unqualified) | Statements are fairly presented, no exceptions |
| Qualified | Fairly presented except for one identified issue |
| Adverse | Statements are materially misstated |
| Disclaimed | Auditor could not form an opinion at all |
A board that sees the word "qualified" and assumes it means "the auditor is qualified to do this" has misread the single most important sentence in the document. Qualified means an exception exists. Read that paragraph word for word, not just the heading.
Two things the opinion doesn't cover
A management letter is a separate communication, not part of the opinion. It flags internal control weaknesses, such as one person handling both deposits and reconciliations, without stating any conclusion on the financial statements themselves. Getting a clean opinion and a management letter full of warnings at the same time is normal, not contradictory.
Also check the association's basis of accounting (cash, modified accrual, or full accrual) before comparing this year's numbers to last year's. The same transaction can look very different depending on which basis produced it, and a change in basis without disclosure can make a trend look like it moved when it didn't.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A report titled "Independent Auditor's Report" opens with a heading called "Opinion," followed by "Basis for Opinion" and two paragraphs on responsibilities. A director skims only the last paragraph and reports back "everything's fine." What should the director have read to know if the statements are fairly presented?
An audit report states the financial statements are fairly presented in all material respects, with no exceptions noted anywhere in the opinion. Which type of opinion is this?
Along with the audit opinion, the CPA sends a separate letter noting that the manager and treasurer are the only two people who touch bank deposits, with no second reviewer. It states no conclusion about whether the financial statements are fairly presented. What is this document?
Sources
- Statements on Standards for Accounting and Review Services (SSARS), summarized by Journal of Accountancy and NSA
- Clarified auditing standards on the auditor's report, AU-C 700 to 706, AICPA
- Your Association's Financial Statements: Basis of Accounting, Jeremy Newman, CPA, via CAI HOAresources
- Understanding the Management Letter on Internal Control, HBK CPAs & Consultants
Taxes, Audits & Financial Compliance
Next, see what a management letter covers that the opinion doesn't: Management letters.
Whether your association is required to have an audit at all, and what the report format looks like, depends on your state's statute and your governing documents, so check your bylaws and CC&Rs. Management letter contents also vary by CPA firm.