What Does the Audit Report Say?

What Does the Audit Report Say?

The audit report is the only part of the year-end financial statement packet that is “owned” by the CPA. The financial statements and footnote disclosures are the Association’s. While the CPA assists in the preparation of the financial statements and disclosures, they are nonetheless the responsibility of the Board and management.

The audit report has very standardized wording. In the majority of the cases the audit report gives what is known as a “clean opinion”. That is, the CPA feels comfortable stating that the financial statements are in compliance with with accounting principles generally accepted in the United State (GAAP), are materially correct, are consistent in their application of accounting principles, are properly presented with all required financial statements, and have complete and accurate footnote disclosures.

There may be an “Emphasis of Matter” paragraph which emphasizes something that is included in the footnotes. This is still a clean opinion.

There is always an “Other Matter – Required Supplemental Information” paragraph in association audits. Certain reserve study information is required to be included. This paragraph states whether that information is or is not included with the audit report. This information is UNAUDITED, so it does not affect the opinion.

A “qualified opinion” is a modification of the audit opinion and will clearly be stated in the audit report. The heading will say “Qualified Opinion” and above it will be a paragraph “Basis for Qualified Opinion” that will explain the qualification. It often will be because some material account balance cannot be independently verified. It also could be because the scope of the audit was limited or the financial statements were not in compliance with GAAP. The Board needs to closely read the reason for the qualification and discuss with the CPA how the Association can work towards a “clean” opinion in future years.

A “disclaimer” of opinion is a modification of the audit opinion whereby the auditor does not give an opinion. There are options – Disclaim on Income Statement, Disclaim on Balance Sheet or Disclaim on all Financial Statements. This will clearly be stated in the audit report. The heading will say “Disclaimer of Opinion” and above it will be a paragraph “Basis for Disclaimer of Opinion” that will explain the qualification. A “disclaimer” of opinion is when there are pervasive and material issues. Generally, there is a scope limitation whereby there is a lack of sufficient, appropriate audit evidence. Whether to qualify or disclaim is a matter of judgment. If the potential effects relate to many financial statement items, their significance is likely to be greater than if only a limited number of items is involved. If the Board and management refuse to sign the Letter of Representations, there must be a disclaimer on the audit opinion. A disclaimer is a serious issue and the Board needs to closely read the reason for the disclaimer(s) and discuss with the CPA how the Association can work towards a “clean” opinion in future years. It may be that there is one event that will require a disclaimer for several years (e.g. an unreconciled special assessment). In other cases, it may be that the Board needs to take action on a year-end balance in order to move forward (e.g. Assessments Receivables). If the Board and management address the issue(s) in the first year of disclaimer, they may be able to resolve the matter(s) for future years.

An “adverse” opinion is a modification of the audit opinion and is common called a “negative” opinion. It will clearly be stated in the audit report. The heading will say “Adverse Opinion” and above it will be a paragraph “Basis for Adverse Opinion”. With an adverse opinion, in the auditor’s judgment the issues are material and pervasive, and the financial statements are deemed to be materially misstated. This should seldom, if ever, be the case in an Association audit. If the Association receives an adverse opinion in the audit, the Board and management need to determine what step to take in the future to ensure that their financial statements are materially complete and accurate, and in compliance with GAAP.