Every year, your association should enlist the services of a certified public accountant (CPA) for various reasons. A CPA is an accounting professional who has been licensed by a state board of accountancy after meeting certain requirements, including the passing of four certification exams that test the individual’s comprehension on a variety of core competencies: generally accepted accounting principles, taxation, auditing, business law, business environmental concepts, and so forth. In short, a CPA should be someone you trust to service your association’s financial needs.
The primary focus of this writing will explore the assurance and tax services that your CPA can provide. Certain associations may be required to have either an audit or a review performed each year, depending on what state statutes apply to your association. The overarching principle behind an audit or review is that an independent, certified public accountant is engaged to provide a level of assurance that the financial statements of an entity are accurate and reliable. If a financial statement user has doubt regarding the accuracy of the financial statements, then such statements have diminishing value.
With an audit, the CPA provides the highest level of assurance available. As part of an audit, the CPA is required to obtain reasonable audit evidence that substantiates the validity of the financial statements. If the procurement of certain evidence is limited or deemed impossible, then a CPA may have to issue a modified opinion or even withdraw from the engagement entirely. When receiving a set of audited financial statements, one of the first measures that you should observe is the type of opinion explicitly stated in the auditor’s report. If the opinion is an adverse opinion, disclaimer of opinion, or a qualified opinion, then there may be some cause for concern.
An adverse opinion occurs when the auditor obtains sufficient audit evidence to formulate an opinion and the auditor discovers both material and pervasive misstatements in the financials. As such, the financial statements may be viewed by the financial statement user as both unreliable and inaccurate. A disclaimer of opinion is issued when the auditor was unable to obtain sufficient audit evidence to formulate an opinion, usually referencing a specific area of the audit that involved a notable lack of accounting evidence. A qualified opinion can occur under two main circumstances. In the first instance, the auditor was able to obtain sufficient audit evidence, but the auditor determinates that certain material misstatements are present, but not pervasive. In the second instance, the auditor was not able to obtain sufficient audit evidence, and any possible misstatements might be material, but not pervasive.
A review is somewhat different from an audit, but it still provides some level of assurance to the financial statement user. To that effect, the key concept to note here is that a review provides what is known as limited assurance, due to a review’s substantially narrower scope. A review service only includes analytical procedures, inquiries, and other limited procedures to provide limited assurance—whereas an audit requires far more evidence, testing and analytics to be performed. With that being said, the review process still provides a degree of assurance regarding a financial statement’s potential reliability.
Now that a basic understanding of an audit and a review have been established, you might ask yourself why an association should receive such an assurance service. The board of directors for an association has a fiduciary duty to the members of an association to manage the operations and funds of an association. While a management company might be hired to help bear this burden of management, ultimately the board maintains such responsibility. To that effect, the board is responsible for ensuring the association has an accurate set of financial statements. Financial statements have many uses and purposes. For one, they depict the financial well-being of an entity. For an association, both the current and prospective membership should care about this fact. If assessments are not being collected timely or your association’s reserves are not well-funded, you as a member should be concerned. If your association’s financial statements do not provide an accurate depiction of these facts, then you might be unable to see such concerns. Furthermore, an audit or review may help to detect whether the assets of the association are being misappropriated. In other words, assurance services help to protect your membership from financial concerns.
Generally speaking, when an audit or review is performed, the CPA will also be engaged to prepare the association’s income tax returns, both federal and state—if applicable. With that in mind, let’s examine how this entire process normally functions:
- A request for proposal is sent by the association or its management company to the CPA firm. This should be sent to the CPA firm before the association’s year-end, in order to give the board of directors ample time to consider whom to hire for these services.
- The CPA then provides the association with an engagement letter, which is a type of contract that is sometimes referred to as a bid.
- The engagement letter sets forth the scope of the work, the responsibilities of each party in the contract, and the fee.
- The quoted fee generally considers your association’s level of financial activity, the type of services to be performed, and the estimated time needed to complete those services.
- Certain circumstances may cause the fee estimate to be higher than usual due to the increased amount of services that would be required to be performed. These circumstance include: association’s involvement in litigation, the existence of special assessments, settlements, insurance claims, a management transition, whether an audit or review was performed in the previous year, is the association still under development, and so forth.
- Once the contract has been signed, the next step would be the gathering of necessary documentation to perform the engagement. The type of documentation needed will vary depending on the facts and circumstances as well as the services to be performed.
- Such documentation may include: reserve study, board meeting minutes, monthly financial reports, invoices, bank and credit card statements, investment statements, check registers, accounts receivable and accounts payable reports, payroll reports, general ledger, governing documents, and so forth.
- Once all of the necessary documentation has been gathered, the CPA will then perform the requested services. The length of time needed to perform those services will generally vary, but is affected by certain factors, such as the time of year and the client’s timeliness of delivering requested information.
- Once these services have been completed, the CPA will then send the client the work products for the board of directors to review.
- If the board approves the draft audited or reviewed financials, then the board is required to sign the representation letter and return this document to the CPA. At that point in time, the CPA can then issue a final version of the audit or review report to the association.
- If the board approves the tax return, then the board will need to sign the tax return and have it filed.
Newman Certified Public Accountant, PC, 2021