HOA board members have crucial responsibilities. To ensure a comprehensive financial assessment of the HOA, many boards and condo associations opt for HOA audits. However, questions often arise regarding the nature of an HOA audit, when it is necessary, and the differences between an audit, a review, and a compilation.
In this post, we will delve into the HOA audit process, addressing critical issues and highlighting changes for 2021. We will explore the procedures involved, costs and fee structures, as well as compliance considerations. Let’s dive right in.
Table of Contents
- What is an HOA Audit?
- How does an Association Audit Work?
- Who Provides an HOA Audit?
- What Audit Procedures are Performed?
- What is the Difference Between an Audit, Review, or Compilation?
- When Should an HOA Consider an Audit?
- How Much Does an HOA Audit Cost?
- How Often Should an HOA be Audited?
- Top 5 HOA Audit FAQs
- Final Thoughts
What is an HOA Audit?
Most HOA board members do not have a deep understanding of the association’s financial details. Therefore, it is advisable for every association to consider an audit periodically. This ensures a closer look at the HOA’s financial condition and ensures that the management company records transactions accurately and reviews accounts for discrepancies.
An HOA audit involves applying accounting procedures to financial records to determine the accuracy of the financial statements. It includes examining the financial statements, discussing internal controls with the management company, and assessing annual assessments, vendor contracts, payments, and reserve sufficiency.
In summary, an audit provides reasonable assurance regarding the accuracy of the numbers, assesses internal controls, and instills confidence in the board and unit owners.
How does an Association Audit Work?
The auditing process is complex and involves comprehensive analysis and reviews of financial data. The audit primarily relies on the HOA’s historical financial statements. An audit is the highest level of assurance provided by a CPA (Certified Public Accountant), indicating a low risk of material misstatement.
Financial statement audits adhere to Generally Accepted Accounting Principles (GAAP), which serve as the framework for reviewing the association’s profit and loss, balance sheet, and cash flow statement. The CPA performs an audit to obtain reasonable assurance that the financials are free from material misstatement. They gather supporting evidence and provide an opinion on whether the financial statements comply with accounting standards.
At the end of the engagement, the CPA issues a report expressing an opinion on the fair presentation of the financial statements and highlighting significant weaknesses in the organization’s internal control structure.
Who Provides an HOA Audit?
An HOA audit is performed by a licensed CPA firm with experience in auditing HOAs and condo associations. Performing audits in this context carries a higher level of risk for CPAs, resulting in some firms declining to conduct them due to elevated litigation risk and lack of competitive pricing.
During an audit engagement, the CPA is required to understand the association’s internal control systems, assess fraud risk, perform inquiries and analytical procedures, as well as verification. Although HOA audits are relatively less complex than small business audits, they still require specialized knowledge regarding HOAs, condo associations, and areas that necessitate additional focus.
What Audit Procedures are Performed?
The nature and extent of audit procedures depend on the size of the HOA or condo association and the internal control environment. Audit evidence is obtained through various activities such as inquiries, analytical procedures, physical inspections, examinations, observations, third-party confirmations, and other procedures.
In comparison to reviews or compilations, audit procedures are more extensive. Specific tests typically performed on financial accounts include:
- Bank reconciliations to verify proper reconciliation of HOA bank accounts, including confirmation of bank account balances through correspondence with the bank.
- Fluxuation analysis to identify unusual variances in financial statement groupings and analyze them further.
- Review of cash receipts and disbursements, including property assessments and vendor payments.
- Examination of insurance coverage for board members and general liability, property, and casualty insurance for the community.
- Evaluation of the HOA’s reserve fund accounting and adequacy of reserve studies.
Upon completion of the audit, the CPA issues a report providing reasonable assurance that the financial statements are free from material misstatement.
What is the Difference Between an Audit, Review, or Compilation?
Many HOAs are unaware that they have different types of financial services available, including audits, reviews, and compilations. While these terms are often used interchangeably, they involve distinct testing procedures. Here’s a quick overview:
- Agreed-upon procedures: Focuses on specific procedures as per established guidelines.
- Compilation: The lowest level of assurance, presenting financial statements without CPA verification, except for obvious issues.
- Review: Involves management inquiries and analytical procedures applied to the financial information.
What is a Review?
A review significantly differs from an audit. In a financial statement review, the CPA mainly relies on analytical procedures and management inquiries to support their opinion. Limited testing is performed to determine the accuracy of accounting records. Reviews do not involve an in-depth analysis like audits but provide limited assurance of the absence of material misstatements.
What is a Compilation?
The HOA’s bylaws should specify the frequency of audits and the possibility of conducting reviews. If the bylaws are silent on these matters, state laws may provide guidance. Several states mandate annual audits, reviews, or compilations.
What Type of Service Should an HOA Select?
The choice of service depends on the purpose of the report. HOAs should consider whether an audit is required by bylaws or if there are suspicions of fraud. The reasons for conducting an audit must be carefully evaluated. Additionally, associations’ size and risk exposure should be taken into account. Smaller associations may have lower risk levels and may not require an audit.
Consider the table below, which outlines the pros and cons of audits:
| Issue | Pro | Con |
|---|---|---|
| Expensive | Provide detailed financial insights | Higher accounting fees for HOA |
| Less Expensive | Ensure compliance with regulations and bylaws | Limited resources for comprehensive financial analysis |
When Should an HOA Consider an Audit?
HOAs should consider an audit in various situations to ensure a clear understanding of the association’s financial health. An audit should be considered when:
- The bylaws or state laws require it.
- There has been a change in the management company, necessitating a review of internal controls.
- New board members are joining.
- Financial fraud is suspected.
- The association receives significant sums of money, such as insurance payouts or construction defect settlements.
- The board or the CPA observes significant or unusual reserve or replacement fund activity.
- There is a poor internal control environment, especially in small associations or with inexperienced management companies.
- Segregation of duties is lacking, and one person handles check writing, signing, and bank reconciliations.
- The association has an inadequate or malfunctioning accounting system.
- Concerns arise regarding fraud or embezzlement.
- Internal conflicts occur between board members and with the management company.
- The previous board resigns through special election or recall.
- Control of the association transitions away from the developer.
- The association is facing financial issues, necessitating an audit to assess its financial accounts.
- Large associations with HOA assessments exceeding $1 million or significant cash on hand may benefit from conducting audits.
Many states mandate associations to conduct audits, reviews, or compilations annually. The association’s bylaws often indicate the required frequency. Some HOAs may require an audit every year, while others may specify it after a certain number of years.
How Much Does an HOA Audit Cost?
HOA audit fees depend on the association’s size and location. Associations in larger cities generally incur higher fees. However, as a general guideline, prices typically range from $1,500 to well over $10,000, with most audits costing between $2,000 and $4,000.
It is crucial to acknowledge that audits incur higher costs compared to simple tax returns. The involved fieldwork and reporting requirements are more extensive.
How Often Should an HOA be Audited?
The frequency of audits depends on legal requirements and the board’s discretion. Some HOAs demand annual audits, even when not legally required, to enhance board comfort and limit liability. Risk-averse boards may view audits as an integral part of their annual procedures, although this can increase accounting fees.
Top 5 HOA Audit FAQs
Given the complexity of audits, we address the top 5 frequently asked questions below:
- Who performs an HOA audit?
- How long does an HOA audit take?
- What documents are needed for an HOA audit?
- How can an HOA prepare for an audit?
- What happens after an HOA audit?
Final Thoughts
HOA board members bear significant responsibilities, with one of the most vital being monitoring the community’s financial health. While the cost of an audit may raise concerns for some HOAs, it can be worthwhile. Audits uncover irregularities that might otherwise go unnoticed and often come with valuable financial recommendations to enhance controls and reporting.
Board members should consider audits every few years to gain insights, maintain compliance, and ensure adherence to state regulations and association bylaws.
Source: Kienthucykhoa.com
Remember, an audit helps put the financial health of your HOA in focus, ensuring transparency and accountability for everyone involved. So, don’t overlook the benefits that come with a well-executed audit.
