Are your Association Finances in ?

1. Are your Association Finances in ? Understanding your Annual Audit to Help Answer that Question Gayle Cagianut, CPA Cagianut & Company, CPA

2. Our goal today is to learn the following: • To know Washington RCW requirements for audits for HOAs and Condominiums • Why have an audit? • When is an audit especially important? • To know the auditor’s role in the audit process • To know the manager’s and Board’s role in the audit process • To know what is and isn’t in the audit report/process • To walk away with the 6 main things to look for in an audit

3. AUDIT REQUIREMENTS HOA Condo 50 units or more – no waiver allowed Under 50 units – required but waiver allowed Unless waived by 60% of unit owners other than Declarant Upon transfer of control from Declarant to Unit Owners Unless 2/3 of owners waive • Annual assessments $50K or more • Unless waived by 67% of membership Washington RCW

4. RCW requirement • Governing Document requirement • Independent outside party • Possibly to catch errors and fraud • Ensure GAAP financial statements • Resale Certificates – Condos • Consistency for users of financial statements • Management tool for Board and managers • Internal Control weaknesses exposed • You love your auditors and want them to ask you lots of questions! Why have an audit??

5. MUST • RCW and/or governing documents require it and you can’t get the owners to waive it • Developer transition - Condo SHOULD • Developer controls the Board • Management company transition • Large settlement (insurance or litigation) • Large special assessment • Association gets a bank loan • Political infighting within Association and/or Board • When the Association is experiencing financial stress? (Really…you want us to spend money we don’t have??) When to have an audit?

6. Board & Management Company/Onsite Manager (Note: the Board is “charged with governance”) Association's Responsibility for the Financial Statements The Association is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. THE FINANCIAL STATEMENTS, INCLUDING FOOTNOTES BELONG TO THE ASSOCIATION AND NOT TO THE AUDITOR • Auditor Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. THE ONLY THING OWNED BY THE AUDITOR IS THE AUDIT REPORT Who is responsible in an audit?

7. Audit Report – CPA’s Opinion • Financial Statements • Footnotes • Required Supplementary Information (RSI) • This is a summary of the reserve study • It is required unaudited information • Report of Internal Controls What is included with the audit “report”?

8. Examination of trivial (“clearly inconsequential”) amounts • An audit is based on the financial statements being MATERIALLY correct • Any assurance that the reserve funds are ADEQUATE Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. We have not applied procedures to determine whether the funds designated for future repairs and replacements are adequate to meet such future costs because that determination is outside the scope of our audit. • Assurance that cost center accounting is correctly done • An audit is for the financial statements TAKEN AS A WHOLE What is NOT included in the audit process?

9. What are the 6 most important things to ask/learn from the audit??

10. Was there a CLEAN opinion? (Preferable) • Financial statements, taken as a whole are materially correct and in compliance with GAAP Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Condominium Owners Association as of December 31, 2012, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. • If there is a qualified opinion • Know WHY and HOW you can fix it for next year Basis for Qualified Opinion We were not able to ensure that the Special Assessment Receivable balances, including Special Assessment Interest income were complete and accurate during the current year or prior years. Qualified Opinion In our opinion, except for the possible effects of the matter discussed in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Condominium Association as of December 31, 2012, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 1 - Type of Opinion

11. CAI and C&C recommend that an Association have a balance in the Operating Fund that is 1-3 month’s of operating expenses • If your Association under that, have a plan for contingencies • If your Association over that, consider whether monies should be transferred to the Replacement Fund (Reserves) (On Balance Sheet) 2 - Is the Operating Fund Balance Adequate?

12. Is there an amount Due Between Funds? • If so, does the Board have a plan to repay those monies? • If not, should/can the amount be forgiven? (On Balance Sheet) • Have there been Transfers Between Funds during the year? • Does the Board understand/agree with those transfers? (On Statement of Changes in Fund Balances) 3 - Replacement Fund Items

13. Did the Operating Fund have a Net Income or Loss? (On the Statement of Revenues and Expenses) • Reminder – this is on the accrual (REAL) basis • Do you know the reasoning for any large income or loss? • Are you planning accordingly? 4 - Net Income or Loss??

14. Are the Footnotes understandable? • Do they correctly explain the financial transactions? • Be especially aware of unusual footnotes: • Contingencies • Subsequent Events • Litigation • Read footnotes closely – was there anything surprising or incorrect included? 5 - Footnotes

15. Do you understand each of the Internal Control points – whether significant or material? • Document in the minutes the Board’s plan to resolve the items or acknowledge that the items were resolved • Use the Report of Internal Controls as a tool to help the Association – don’t view it as something to be hidden or ignored (Example on next slide) 6 - Report of Internal Controls

17. Were you paying attention?? Now it’s your turn to play !

18. What did YOUR audit report say? Is your Association in Financial Jeopardy? What??? You don’t know??? Go home and READ your audit report! And if you didn’t get an audit this year…budget it for next year!