An engagement letter, more commonly referred as a proposal in the community association industry, is the contract between an association and a Certified Public Accountant (“CPA”) for specific services. Engagement letters identify the specific accounting period and year end the engagement will encompass, together with the estimated fee for the services.
In California, all associations with gross income of $75,000 or more are required to have an independent CPA perform a review engagement. Should an association’s governing documents require an audit, the audit requirement trumps the review requirement because an audit is a higher level of attest service performed by a CPA.
An engagement letter sets forth the scope of work, the auditor’s responsibilities, the responsibilities of those charged with governance, and the expected deliverables upon completion of an audit. Typically, an audit engagement letter includes a section stating that the CPA will also complete an association’s income tax returns.
We recommend that managers request proposals from CPAs before the year end in order to give the Board of Directors sufficient time to review proposals and make an informed CPA selection. The selection process should include determining the credentials of the CPA firm. Does the firm have the resources available to complete an audit in a timely and professional manner? Does the firm have qualified CPAs on staff who are sufficiently knowledgeable to complete an audit and to prepare audited financial statements that comply with auditing and accounting standards?
Upon receipt of a request for proposal, a CPA firm will request documents to assess the scope of an audit. Things to consider are unusual activities and events such as litigation, special assessments, settlements, insurance claims, transition from self-managed or from a previous management company, whether an audit was performed in the previous year, are all units in the association paying assessments, or is the association under development, with a phasing of assessments.
The CPA will then prepare a fee estimate and send an engagement letter (proposal) addressed to the Board of Directors for consideration. Upon Board approval of the proposal, a Board member signs the engagement letter, and it is returned to the CPA. The CPA, or auditor, will then correspond with management and/or the Board of Directors regarding the next steps. The auditor is required to document it’s understanding of the association’s accounting system, including controls, as well as planning the engagement in accordance with Generally Accepted Auditing Standards. Upon completion, obtaining and auditing evidence of balances and transactions occurs. Upon completion of an audit, the auditor typically prepares the financial statements and opines on the financial statements. The draft financial report is provided to the Board of Directors together with a representation letter and other required documents. Once the Board approves the financials, the Board signs the representation letter, returns it to the auditor, who in turns prepares the final audited financial statements for delivery to the association’s members.
Jeremy Newman, CPA
Newman Certified Public Accountant, PC, 2021