Understanding the Difference Between an Audit and a Review


Kendra Gangal, CPA, Synergy CPA & Advisor


Navigating the world of financial reporting can be confusing. It seems in many instances the words “audit” and “review” are used interchangeably, or there is a lack of understanding regarding what each service provides. In this article, we explain the differences between an audit or a review, other services a CPA can provide, and what may or may not be required for your association.


CivilCodesection 5305 requires an annual review of the financial statements for all associations with an annual gross income over $75,000. The review report should be distributed to members within 120 days after the close of the fiscal year (April 30 for calendar year associations). However, you should always check your governing documents as they might have more stringent standards (e.g., an audit). In that case, follow your governing documents. Even if your association’s gross income does not exceed $75,000, if your governing documents mandate an audit or review, you still need to abide by those requirements.


Let’s start with a quick list of the levels of service a CPA typically offers. These are listed, in order, from the highest level of assurance offered, to no assurance:


• Audit - An audit is the highest level of assurance a CPA can offer. CPAs perform procedures to obtain “reasonable assurance” (which is defined as high but not absolute) aboutwhether thefinancials arefreefrommaterial misstatements.


• Review - A review is a step down from an audit, but still provides limited assurance on the financials.


• Compilation - A compilation is a service that does not provideany assuranceonthe financials. ACPA will normally read the financials and consider whether they appear appropriateinformand arefreefromobvious material misstatements.


• Preparation - A preparation is a basic financial preparation servicewhere no assuranceisgiven.Itisprimarily intended for in-house use.


AUDIT An audit is intended to provide association members comfort with the accuracy of the financials. In performing an audit, we first obtain an understanding of your internal control and assess fraud risk. This means we want to understand and document


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your processes and procedures in the accounting department that are used to ensure the integrity of financial reporting and regulatory compliance. A few examples include procedures for managing operating and reserve funds, invoicing and collecting assessments, processing accounts payable, and month-end financial reports. If your association works with a management company, we normally askthemfor theirprocesses and procedures documentation. If you self-manage, we go through the same process, but with the board and any bookkeeper or accountant you use.


We also want to know what types of reports the board receives each month from the management company, what kind of communication the board has with the management company, and how questions between the board and management are resolved. Once we know the processes, we can better determine if there are any risks, and if there are any issues with controls where something could go wrong. This also helps us determine what areas we should test, which areas might be of greater risk, and the quantity of testing we believe necessary to obtain “reasonable assurance.”


Once we determine the level of testing, we do our fieldwork. This is the process whereby we corroborate the amounts and disclosures in the financial statements. We do this by obtaining audit evidence through inquiry, inspection, observation, confirmation, examination, and analytical procedures. For example, during expense testing, we may select an item listed in the reserve replacement fund. We would then look for the vendor invoice that supports this item. We want to see that it was paid to the correct vendor, paid timely, paid for the correct amount, and is reasonable given the circumstances. We may also ask management and/or the board for additional clarification. Keep in mind this is just one example of the many items we analyze during an audit.


A quick list of takeaways for an audit is:


• An opinion is issued on whether the financial statements are presented fairly, in all material respects, in accordance with your financial reporting framework (e.g. GAAP-Generally Accepted Accounting Principles, or Cash Basis or Tax Basis);


• Reasonable, but not absolute assurance is provided; • CPA must be independent; • Most expensive of the four options;


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