Many HOAs receive CPA review reports on an annual basis. This could be a requirement of your HOA bylaws, state mandates, or the board may just desire a report to be issued. Many HOAs do not have strong internal accounting and controls to prepare the required statements according to the accounting framework. You will, therefore, have to look for a CPA to do this task. Only a licensed CPA is allowed to perform these services.
What is an HOA Financial Statement Review?
A financial statement review service is where an HOA CPA conducts analytical procedures and inquiries to obtain limited assurance that there are no material modifications that should be made to a company’s financial statements for them to be in conformity with the financial reporting framework. A review is generally cheaper and narrower in scope as compared to an audit.
It does not need to obtain an understanding of your company’s internal control, assess fraud risk, or examine accounting records through required audit procedures. This, therefore, means reviews provide less assurance to the user of the financial statements. But they do provide more assurance than an HOA compilation report.
Procedures in an HOA Review Report
The HOA or condo association has the responsibility to prepare and present the financial statements to the CPA. The CPA should have sufficient knowledge of the entity and the industry to review these statements. He or she is supposed to conduct necessary procedures, concentrating on areas with higher risk of misstatement. The procedures to be conducted include:
- Conduct a ratio analysis of historical and forecasted results;
- Investigate inconsistent findings;
- Inquire procedures used to record accounting transactions;
- Investigate unusual or complex situations that may have an impact on reported results;
- Investigate transactions occurring near the end of an accounting period;
- Follow up on previous reviews’ questions;
- Inquire about material events that occurred after the date of the financial statements;
- Examine depreciation expense and compare to prior year;
- Investigate significant journal entries;
- Review communications from regulatory agencies;
- Read the financial statements to confirm if they are in line with the financial reporting framework; and
- Review the management reports from previous reviews or audits.
Specific areas a CPA can focus on are:
- Fixed assets
- Notes payable and accrued expenses
- Long-term liabilities
- Contingencies and commitments
- Revenue and expenses
These procedures give a better understanding of the key relationship among certain numbers and enable the CPA to ascertain the reasonableness of the financial condition presented by the financial statements. If the CPA finds some material misstatements, he or she should perform additional procedures to obtain a limited assurance that there is no need to make material modifications to the financial statements.
Any material misstatements should be disclosed in the report accompanying the financial statements or the CPA may choose to withdraw from the review. Because a review engagement is substantially narrower in scope than an audit, the CPA cannot express an opinion on the fairness of the financial statements taken as a whole.