HOA Accounting: What is the Difference Between a Compilation, Review and Audit?

Many HOA residents believe that their association is audited every year. In many situations, this is simply not the case.  While HOAs must file tax returns, they are not necessarily subject to annual audits.  State law or an association’s bylaws will typically spell out if an audit is required.  But in many situations a lower level of assurance is allowed.

In this post, we are going to examine the three different forms of assurance. The goal of which is to understand what each form entails and when they are applicable.

The three levels of service available to an HOA by a CPA are: (1) compilation; (2) review; and (3) audit. Each service has different objectives.  In addition, as the procedures get more extensive the cost will increase. The procedures performed can be somewhat technical, but I will try to make it as simple as possible.

For each level of service, the CPA must have an understanding of the industry in which the entity operates. In addition, the CPA should understand the client’s role in the industry and he or she  should ensure that they have the proper background and foundation of knowledge regarding the industry.

Compilation

As the lowest level of service of the three, the CPA will essentially present the financial statements and related footnotes. With this level of service, the CPA does not express any opinion on the statements. As a result, the accountant will not “verify” the numbers or provide any assurance.  The CPA will certainly examine the financial statements for any obvious errors or mistakes.

Review

Next up, we have a review, which provides more assurance than a compilation. The CPA will perform analytical procedures over the financial statements and perform extensive inquires of the association management. By performing these procedures, the CPA can provide limited assurance that there isn’t any material misstatement. At this level, testing of the financial accounts and records is not required.

For inquiries, the accountant will ask questions similar to the following:

• Has business activity changed in any way since the last review?
• Have reconciliations been performed to ensure the financial information is appropriate?
• What procedures does the company have in place so that all accounting information is properly collected and recorded?

For analytical procedures, the accountant will consider the following:

• Comparing revenues and expenses in the current year to the prior year and examine significant variances.
• Comparing assets and liabilities (like operating and reserve accounts) to amounts from the prior year and again examine significant variances.

Audit

Finally, this process provides the highest level of assurance.  Accordingly, it requires extensive procedures to be completed by the CPA. The CPA will perform the services performed in a compilation and review, but also test the financial statement accounts.

The testing procedures will entail confirming operating and reserve fund balances. The CPA will also need to understand and examine the internal control structure.  The goal is to make sure that the association has procedures in place to allow for effective reporting of financial information. But please realize, audits are not full proof and there is no “guarantee” that there are no errors.

It is important to note that the auditor will operate with professional skepticism. For all service levels, the CPA should not be involved if there are any suspicions of fraud or illegal acts. Associations should always plan ahead and ensure that the CPA has enough time to perform his or her services before the report is due to the board of directors.

Summary

You now understand the basic differences between a compilation, review and audit. HOAs and condo associations will often have a review or compilation completed and it is referred to as an “audit”.  Make sure you understand the difference. 

 If you are unsure which level of service has been applied to your association, it should be clearly spelled out in the report.  That way you can at least have dialog with your board of directors and accountant to ensure that this is the proper level of service.

Paul Sundin is a CPA and works with many HOAs and condo associations on tax and accounting issues.  You can find out more about him at www.hoatax.com.