When Is a Review or Audit Required or Recommended? - California

When Is a Review or Audit Required or Recommended? - California

California State Law - Requirements

Davis-Stirling Act
Civil Code Section 5305
Unless the governing documents impose more stringent standards, a Review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed to the members within 120 days after the close of each fiscal year, by individual delivery pursuant to Section 4040.


California law allows an exception to the Review requirement when gross income is $75,000 or less. Our firm has identified ten particular circumstances where we strongly suggest that a Review or Audit be performed. They are as follows:

  1. When large amounts of money are received for unusual circumstances. Two examples are construction defect settlements or large insurance proceeds.
  2. When there is unusual replacement fund/reserve activity. This may be when there are large reserve projects, when the Association is severely underfunded, or if the Association is not meeting budgeted expectations.
  3. When there is a change in management companies. (This is not an absolute, but it seems to be a good time to ensure that the transition between the management companies results in the correct balances being carried over and properly set up on the new books.)
  4. When there is little or no internal control. An example of this would be when the Association is self-managed, and the treasurer writes the checks, signs the checks and prepares the bank reconciliations.
  5. When the board has not been receiving financial statements on at least a quarterly basis. This is especially true when there is no standard accounting system in place.
  6. When there is suspected fraud or embezzlement. (Please tell your CPA of your suspicions before the engagement begins! Possibly, the CPA will refer you to a Forensic Accountant rather than the standard GAAP/GAAS audit.)
  7. When there is a lot of political infighting among the board members or there is a transition from one board to another which is not pleasant, such as the case of a recall.
  8. When the developer turns over control of the Association to the homeowners. (Even when not required by the state law.)
  9. When the Association is having financial difficulties. It may seem strange that the Association should spend more money when it is losing money. But, it may be that the Association needs a professional to spend some extra time on the books to ensure that everything is being properly recorded. When an Association is in financial trouble is when they need help the most.
  10. Associations with over $500,000 in annual assessments.