Academy/Taxes, Audits & Financial Compliance
Reviews
A review costs less than an audit and gives less assurance. Here's exactly what your CPA is, and isn't, checking.
A review is a CPA engagement that provides limited assurance: based on asking questions and checking that the numbers make sense, not testing every transaction. It costs more than a compilation and less than an audit. Whether your association needs a review, an audit, or a compilation is usually set by your bylaws or state law, not by choice.
Where a review sits on the assurance ladder
Accountants offer four levels of service for association financial statements, in order of how much work goes on behind the report: preparation, compilation, review, and audit. A review sits in the middle. The accountant does not test transactions the way an auditor does, but a review is not a rubber stamp either: it is built on inquiry and analytical procedures, asking management questions and checking whether the numbers move the way you'd expect them to. The result is called limited assurance, weaker than an audit's tested opinion, stronger than a compilation's no assurance at all.
What "limited assurance" actually means
In a review, the CPA asks the treasurer and manager how transactions were recorded, compares this year's numbers to last year's and to the budget, and follows up on anything that doesn't line up. A review does not verify individual invoices, confirm bank balances directly with the bank, or test internal controls the way an audit does. The report the board receives says the accountant is not aware of anything that needs to change to make the statements conform to the applicable framework. That is a narrower claim than "the statements are correct," and it is worth reading literally.
Who decides you need a review, not the board alone
Whether your association must have a review at all, or an audit or a compilation instead, is typically set by your state's statute or by your own bylaws and CC&Rs, not by board preference or by the Internal Revenue Code. Check your governing documents and your state's association statute before assuming a review is optional or sufficient. A lender or insurer may also require a specific level as a condition of a loan or master policy.
Compare review to review, on the same basis of accounting
A review is most useful compared against last year's review, not against a stray audit from years back or a budget built on different assumptions. Before comparing, check that the association used the same basis of accounting, cash, modified accrual, or full accrual, in both periods. The same transaction can look very different depending on which basis produced it.
"Understanding your association's basis of accounting is necessary to provide readers of financial statements with a foundation of basic and useful knowledge."
Source: Your Association's Financial Statements: Basis of Accounting, CAI HOAresources
If the basis changed and nobody flagged it, a trend that looks like a jump in spending might just be a bookkeeping change.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
Your CPA delivers a review report on the association's financial statements. What does that report actually tell the board?
The board wants to skip this year's audit and get a cheaper review instead. What should they check first?
Comparing this year's review to last year's, the treasurer notices expenses that used to appear right away now show up spread over several months instead. What's the most likely explanation?
Sources
- Statements on Standards for Accounting and Review Services (SSARS), AICPA, summarized by Journal of Accountancy and NSA
- Your Association's Financial Statements: Basis of Accounting, by Jeremy Newman, CPA, CAI HOAresources
Related elsewhere in the Academy
Taxes, Audits & Financial Compliance
Next, see what an audit adds beyond a review, or how a compilation differs on the low end.
Whether your association must have a review at all, and what your CC&Rs or state statute set as the minimum engagement level, varies by state and by your governing documents.