There are three levels of examination 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 is performed in accordance with GAAS (generally accepted auditing standards) established by the American Institute of CPAs (AICPA). The auditing standards are described in Statements on Auditing Standards (SAS). 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, at a minimum, a "review" of the finances for any fiscal year in which the association's gross income exceeds $75,000. (Civ. Code §5305.) In a review, a CPA performs limited inquiries in accordance with GAAS (generally accepted auditing standards) established by the AICPA and gives "limited assurance" that the financial statement is materially correct. Reviewing standards are described in Statements on Standards for Accounting and Review Services (SSARS).
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.
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