Levels of Financial Review. There are three levels of review for
financial statements.
- Audit. If an association's governing documents require an audit, a licensee of the California State Board of Accountancy (a Certified Public Accountant) performs an extensive examination of the association's financial
records and issues a statement as to their compliance with generally accepted accounting principles (GAAP). An audit provides a "reasonable level of assurance" that the financial statements are materially correct. As a result, audits are more expensive than reviews and compilations.
Review. If an association's governing documents are silent regarding an audit, the Davis-Stirling Act requires a "review" of the finances for any fiscal year in which the association's gross income exceeds $75,000. Civil Code §1365(c). In a review, a CPA performs limited inquiries but does so in accordance with GAAP. The report is done with accrual accounting and the CPA gives "limited assurance" that the financial statement is materially correct.
- Compilation. A compilation is the lowest level of review in which a CPA assembles information provided by an association. The CPA need not be independent and is required to perform very few procedures. Further, the CPA takes little responsibility for the financial statement and gives no assurance as to compliance with GAAP.
NOTE: Neither audits nor reviews guarantee that
embezzlement will be detected by the CPA.