What Are Some of the Audit Procedures?

A CPA must follow generally accepted auditing standards (GAAS). There have been over 130 Statements on Auditing Standards (SAS’s) issued to-date; however, many of the earlier ones have been superseded. They are quite extensive; however, they allow for a lot of latitude and judgment on the part of the auditor. Thus, different CPA firms have different audit procedures. They must do, and document, enough to issue an opinion on the financial statements.
We cannot say what procedures other CPA firms perform with regards to Association audits; however, with 30 years' experience and currently working with more than 400 Association clients, we have standardized most of our process. That said, we adjust as needed for each engagement based on the facts and circumstances of that Association. Below, however, is a good representation of many of the audit procedures that we perform on a routine basis:

Cash

• Obtain and verify the accuracy of the bank reconciliation.
• Ensure that there are statements or other current verification (as of the end of the audit year) for ALL bank accounts.
• Inquire about old, outstanding checks and deposits in transit.
• Inquire about investment policies and whether funds are FDIC insured
• Determine if there is segregation of operating and reserve cash.

Assessments Receivable (AR) & Assessment Income

• Verify that the AR (including prepaid amounts) on the aging agrees with the financial statements.
• Inquire about delinquent accounts and the Association’s estimate of a bad debt allowance.
• Review minutes for approval of bad debt write-offs.
• Test assessment income compared with the budget.
• Test special assessment income. Determine if special assessment monies have all been spent, if not, defer to next year.

Prepaid Expenses & Miscellaneous Assets

• Test insurance expense and set up prepaid insurance, if necessary.
• Verify the Association’s Prepaid Insurance balance or record/adjust prepaid insurance, if necessary.
• Vouch deposits and other miscellaneous assets.
• Inquire about existence, collectability and accuracy of other assets.
• Inquire about a capitalization policy.
• Ensure assets are capitalized in accordance with the Association’s capitalization policy.
• Test inventory, if any, based on client’s physical inventory or other documentation.

Account Payable (AP)

• Test client's AP report.
• Review subsequent month paid invoices. Record accrual, as needed.
• Test monthly expenses for items needing accrual for which invoices have not been received.

Other Payables

• Obtain verification for other payable amounts.
• Ensure that the other payable amounts are accurate and are currently valid.
• Inquire, as needed, regarding existence, accuracy and obligations associated with the other payables.
• For significant payroll activity, test payroll tax expense as compared with quarterly and year-end reports.
• Verify that payroll, including employee benefits, appears reasonable as compared with the budget, prior year or other documentation.
• For bank loans, obtain a copy of the year-end statement and verify interest expense for the year.

Taxes

• If appropriate, make the tax determination between 1120 & 1120-H.
• Calculate tax expense, booking the prepaid tax and/or tax liabilities.

Replacement Fund/Reserves

• Compare allocations to replacement fund with the budget and reserve study.
• Trace cash and the Association’s financial activity.
• Record due between funds, if needed.
• Inquire about approved repayment plans if there is a Due Between Funds balance.
• Read minutes for board approval of all reserve expenses, borrowings and permanent transfers between funds.
• Compare expenses with reserve study projections.
• Determine if interest income is correctly stated.
• Examine all significant reserve expense invoices.
• Determine operating expenses appear to be coded to reserves, or vice versa.

Others Fund

• Compare allocations/deposits to budgeted activity (e.g. settlement monies, special assessments, etc).
• Trace cash and the Association’s financial activity.
• Record due between funds, if needed.
• Inquire about approved repayment plans if there is a Due Between Funds balance.
• Read minutes for board approval of all expenses and transfers between funds.

Other Income

• Determine if other income items are reasonable as compared with prior year and/or the budget.
• Inquire about controls on other income.
• Document and verify large income items, such as insurance settlement proceeds.
• Determine if other income is taxable.

Expenses

• Compare year-end expenses against the budget and prior year.
• Verify that recurring expenses have the appropriate number of billings (e.g. 12 for monthly, 4 for quarterly) and that they are reasonable.
• Vouch significant invoices.
• Haphazardly choose a few random invoices to test.
• Inquire about classification of reserve-type of expenses paid with operating monies.
• Inquire about expenses that appear to qualify to be capitalized, based on the Association’s policy to do so and accounting requirements.

General

• Review the Association’s financial statements, including subsidiary reports and general ledger.
• Read all board meeting minutes, including executive session, looking for approval of financial transactions and to determine that all disclosures are made.
• Scan the governing documents for financial requirements.
• Gain an understanding of the accounting procedures and internal control policies.
• Inquire about subsequent events.
• Review legal invoices and inquire about potential or pending litigation.
• Ensure that there is adequate documentation in the audit file for all material account balances and for all required disclosures in the financial statements.