Associations with December 31st year ends make up a large share of annual audits. There is often intense pressure on managers, accounting departments and audit firms to complete accurate and complete audits in a timely fashion. Completing an efficient audit requires strong communication and sharing of information.
Signed engagement letter
CPA audit engagement letters should be approved by the Board for all audits. Signing the contract well before the association’s year end will provide more time for the CPA to plan and prepare for the audit, and more time for the client to assemble supporting reports and documents.
Documents and reports needed for an audit
A lot of documents and reports are common for most associations; however additional information will be needed as circumstances dictate. Typical information and documents include:
- Governing documents
- Prior year audit and tax return
- Communication with the previous auditor as applicable
- Reserve study
- Board meeting minutes
- Correspondence with the Association’s legal counsel
- Shared cost agreements
- Cost center details
- Correspondence with governmental agencies
- Special assessment information
- Loan agreements
An association’s accounting department generally provide the following reports, and access to information:
- Year-end financial reports:
- Balance sheet
- Statement of revenue and expenses (often referred to as budget variance reports)
- Bank statements and bank account reconciliations
- Aged receivables and prepaid assessments report
- General ledger
- Check register
- Financial reports for the periods after the year end date.
- Access to paid and unpaid invoices
Accrual versus non-accrual
Presenting audited financial statements in accordance with U.S. Generally Accepted Accounting Principles often requires auditors to record certain adjustments to the financial reports prepared by a management company. Management companies prepare monthly financial reports using the cash basis of accounting, modified accrual basis, or the accrual basis.
Under the cash basis of accounting, income reflects money received and expenses represent money spent. Assessments receivable and accounts payable are not presented on the balance sheet. As part of the audit, the CPA proposes adjusting journal entries including recording a bad debt allowance and any amounts payable to vendors for unpaid invoices.
Modified accrual basis accounting generally records assessment revenue when assessments are billed (accrual basis). Expenses are generally accounted for on the cash basis (as above).
Using the accrual basis, financial reports include assessment income when billed, and expenses using invoice dates rather than payment dates.
Completeness of records for the audit
Often, the success of an audit can be measured by the completeness, accuracy, and timeliness of the audit and audited financial statements. Efficiency requires full, complete and timely access to accounting records and documentation.
Cash is one of the most critical audit areas. Cash, meaning all petty cash, bank accounts, and investment accounts. Together with the general ledger, bank and investment account statements can act as a roadmap of an association’s financial activity. For accounts where statements are not provided by the banking institution, an auditor will generally require an independent confirmation of the account balances as of the year end date. In terms of efficiency, this situation is often one of the main hurdles to completing audits on time. CPA’s can verify account balances in various ways. The most common method is to transmit an account confirmation/verification form to the banking institution. Banks require confirmations to be signed by an authorized signer on the account. It is imperative that signature cards are updated whenever signers change. Excessive time can be spent transmitting the confirmation forms to the board, waiting for a signature, sending the form to the bank, then waiting for a response from the bank. Many times, audits are nearly complete, but cannot be released until the banking institution returns a signed completed confirmation to the auditor.
Representation letter and final audit
Upon completion of the draft audited financial statements, the board reviews the audit report together with a representation letter. The client representation letter confirms management’s and the board’s representations, oral or implied, during the audit, and upon signature, the auditor will release the final audit report for distribution.
Jeremy Newman, CPA | Newman Certified Public Accountant, PC 2021