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2010-11-19 21:43:34
Performing Substantive Audit Procedures CIRAs

Performing Substantive Audit Procedures for CIRAs
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  1. 703.1 As discussed in section 610, SAS No. 108 (AU 311.19) requires preparing an audit plan, commonly referred to as a
    written audit program.
  2. The audit programs in this Guide provide detailed guidance on designing substantive tests. For each audit area, the programs link
    • the financial statement assertions with audit objectives. Those
    • objectives are in turn linked with a detailed list of procedures to
    • consider. This section discusses general considerations in designing
    • audit procedures to test the major accounts unique to CIRAs
  3. Cash and Cash Equivalents

    Cash is often more material to a CIRA's balance sheet than is the case
    for a typical commercial business and may require proportionately more
    audit time. CIRAs are notorious
    • for maintaining numerous bank
    • accounts and for opening and closing accounts frequently. Separate
    • accounts in a financial institution may be required for replacement
    • funds, but there are also many possible discretionary accounts.
    • Particularly when a managing agent is used, a CIRA may maintain separate
    • accounts, such as pool key deposits or social fund accounts, that are
    • unknown to the managing agent and not recorded on the accounting records
    • it maintains.
  4. 703.3 Confirmation of Accounts

    Auditors ordinarily should inquire about the existence of accounts in
    financial institutions that are not reflected in the accounting records
    and review the minutes of board of directors' meetings for accounts
    opened or closed during the period
    • Once all accounts that were open
    • during the period are identified, the auditors need to decide which ones
    • to confirm. If the CIRA uses only a few accounts, the auditors may
    • decide to confirm all of them. However, valuable time can be saved by
    • confirming only the primary accounts and relying on statements from
    • financial institutions to substantiate the balance of other accounts if
    • they are numerous and relatively small. In some states, it has become
    • increasingly difficult to obtain accurate confirmation responses without
    • one or more follow-up requests. If the CIRA has a simple depository
    • relationship with a financial institution, it may be more efficient to
    • verify balances by performing alternative procedures on year end
    • statements in lieu of sending standard financial institution
    • confirmations. In addition, at least one financial institution has
    • announced that it would no longer respond to paper confirmations.
    • Instead, it will only respond to electronic confirmation requests
    • submitted via designated third-party providers. Such providers serve as
    • intermediaries who provide a secure link between the auditor and a
    • validated financial institution. Currently, numerous financial
    • institutions have designated Capital Confirmation, Inc. as the
    • third-party provider for submitting electronic confirmation requests
  5. 703.4 For confirmation procedures, SAS No. 103, Audit Documentation, requires the auditor's documentation to include identification of the items selected for confirmation.
    • If a CIRA holds funds in trust for members, such as in a social fund
    • account, the cash is not an asset of the CIRA. (See discussion of “Other
    • Cash Funds” in section 301.)
    • However, if the amount is material, the auditors may want to treat the
    • account the same as other accounts as a matter of client service. The
    • volunteer board members of a CIRA are normally financially
    • unsophisticated and will expect the auditors to apply procedures to
    • material cash balances even if those balances are not included in the
    • CIRA's financial statements
  6. 703.5 State laws or governing
    documents may specify who can sign checks on CIRA bank accounts. Some
    auditors may consider it worthwhile to confirm
    • authorized check signers because
    • CIRAs often have frequent turnover of directors and managing agents who
    • are authorized to sign checks and, in some cases, the CIRA's procedures
    • for notifying the financial institutions of changes in authorized check
    • signers may be lax. 2 The practice aid “Confirmation of Authorized Signatories” at HOA-CL-6.3 may be used for that purpose.
  7. 703.6 Restrictions and Uninsured Balances State laws or governing documents may restrict the types of accounts in which CIRAs may invest excess cash
    • Auditors ordinarily obtain an
    • understanding of those matters during the risk assessment process and
    • consider them in determining the nature, timing, and extent of further
    • audit procedures. Restrictions on accounts holding replacement funds are
    • common. Transfers between restricted and unrestricted accounts may be
    • prohibited, and use of interest earned may be designated. Any
    • restrictions or designations of cash balances should be disclosed. Also,
    • consider whether the CIRA has material amounts of cash in certificates
    • of deposit or money market accounts that are uninsured or that exceed
    • insurance limits. FASB ASC 815 (formerly SFAS No. 133) requires that such concentrations of credit risk be disclosed.
  8. 703.7 Commingled Cash
    When the CIRA uses a managing agent, the auditors should consider
    whether the agent commingles the funds of the various CIRAs managed.
    • (However, state laws may prohibit
    • CIRAs from commingling funds.) A managing agent may deposit collections
    • into one central account (sometimes called a sweep account) and later
    • disburse funds to separate accounts for each CIRA. Also, a managing
    • agent may deposit cash from all CIRAs into a common account and account
    • for the funds separately only in the accounting records. If funds are
    • commingled, there is a greater risk of material misstatement, and the
    • auditors may need to expand cash procedures to test more cash
    • transactions during the period. Expanded testing of transactions is
    • necessary when funds are commingled because the cash balance cannot be
    • confirmed with an independent source. Control activities in the cash
    • area are particularly important in those circumstances. The auditors
    • have to be concerned that the managing agent may pay the bills of one
    • CIRA with the funds of another. The auditors should be satisfied that
    • the expenses charged to the CIRA client were authorized and incurred
  9. 703.8 Single Brokerage Accounts

    A trend in cash management is the use of a single, managed brokerage
    account. Funds in the account are invested by the broker in certificates
    of deposit or other types of investments at more than one bank or other
    financial institution. Advantages of such an arrangement to the
    association are as follows:
    • • The association deals with only one “institution”—the broker.
    • Diversification of investments means the CIRA runs less risk of
    • exceeding the FDIC's insured deposit limit (temporarily raised in late
    • 2008 from $100,000 to $250,000 through 2013).
    • With the help of a knowledgeable broker, the CIRA can maximize
    • interest earned by matching long-term deposits with its replacement
    • funding program.
  10. A single brokerage account
    generally enhances the auditors' ability to obtain confirmation of the
    year-end balance. However, disadvantages of using single brokerage
    accounts may include the ability to transact business over the phone on
    • a single individual's authority,
    • thereby losing protection of dual authority over cash management.
    • Furthermore, certain state laws may require two board members or
    • officers to authorize transactions. Auditors have an additional
    • responsibility with single brokerage accounts to determine that the
    • brokerage accounts' underlying investments are owned by the CIRA, not
    • the brokerage house.
  11. 703.9 Practice Aids A complete audit program for cash is included at HOA-AP-3 or HOA-AP-3-S.
    The authors have designed the following receipts and correspondence or
    confirmation letters to provide sample formats that may be used when
    auditing cash and cash equivalents:
    • • HOA-CL-6.2, “Receipt for Cash Counted by Auditor.”
    • • HOA-CL-10.6, “Confirmation of Line of Credit.”

    • HOA-CL-10.5, “Confirmation of Compensating Balances.”
  12. Investments and Derivatives

    A CIRA's governing documents or state or local statutes may restrict
    the types of investments CIRAs are permitted to make. Auditors should
    • obtain an understanding of those
    • matters as part of the risk assessment process and consider them in
    • determining the nature, timing, and extent of further audit procedures
    • relative to investments. Frequently, a CIRA's investments are limited to
    • certificates of deposit, which may be substantiated as part of cash
    • work. (See discussion beginning at paragraph 703.2.)
    • Thus, a separate audit program for investments may not be needed.
    • (However, a CIRA audit program for investments is included at section HOA-AP-8.)
  13. Prepaids, Deferred Charges, and Other Assets

    CIRAs frequently keep their accounting records on a cash basis, and
    the auditors' primary concern with respect to prepaids is identifying
    items that require accounting recognition.
    Common types of prepaids are insurance expense and service contracts, such as landscaping or snow removal.
  14. 703.19 An issue that sometimes
    arises in practice is the auditors' responsibility for assessing the
    adequacy of insurance coverage. Accounting standards
    • do not require disclosure of the
    • adequacy of insurance coverage. However, GAAP does not discourage
    • disclosure of uninsured or underinsured risks, if appropriate.
  15. Thus, assessment of adequacy of
    coverage is not necessary to form an opinion on the CIRA's financial
    statements and is not ordinarily a part of the auditors' responsibility.
    Some auditors
    • do advise their CIRA clients in
    • that area strictly as a matter of client service. Also, a cooperative
    • housing corporation may have a mortgage agreement that mandates certain
    • insurance coverage. In that case, consideration of insurance coverage is
    • a normal part of assessing compliance with debt requirements.
  16. Receivables

    Member assessments represent the primary source of revenues for a
    CIRA. There may be both regular assessments and special assessments.
    • Auditors need to consider whether
    • member assessments have been recorded as revenue and receivables when
    • assessed, whether the allowance for uncollectible assessments is
    • reasonable, whether the CIRA's policies and procedures for late fees and
    • liens and foreclosures are being followed, and whether any assessments
    • have been prepaid by members and should be reclassified as a liability.
    • Also, particularly during the initial operating period, auditors need to
    • consider whether amounts due from the developer/sponsor related to
    • unsold units have been properly recorded and are collectible.
  17. 703.21 Confirmation of Assessments 5 It is generally not a common practice
    • to confirm assessments receivable
    • from members for a variety of reasons. Frequently when confirmations are
    • used, the members either do not return the confirmations or return
    • inadequate replies. Thus, alternative audit procedures are necessary.
    • Normally receivables are collected shortly after assessment. Those
    • balances that are uncollected for longer periods are usually delinquent
    • accounts that are often in foreclosure, and no confirmation response can
    • be obtained. For those reasons, the normal audit approach for
    • assessments receivable from members is to test subsequent cash
    • collections to substantiate recorded amounts, if material.
  18. 703.22 SAS No. 67 (AU 330.34), The Confirmation Process, 6
    prohibits substituting effective alternative procedures, such as
    testing subsequent receivables collections, for confirmation of accounts
    receivable unless one of the following criteria exists:
    • Accounts receivable are immaterial

    • .• The
    • auditors' assessment of the risk of material misstatement is low (in
    • other words, the combined assessment of inherent and control risk is
    • low), and that assessment, together with evidence from other substantive
    • procedures, will be able to meet the audit objectives.

    • The use of confirmations would be ineffective.
  19. Auditors who omit confirmation procedures are required to document the reasons they were able to do so.
    • It is ordinarily not sufficient to merely assert in the workpapers that
    • the use of confirmations would be ineffective without providing some
    • type of evidence or analysis to substantiate that assertion.
  20. 703.25 Examining Subsequent Cash Collections

    As mentioned in paragraph 703.21, testing subsequent cash collections to substantiate assessments receivable ordinarily is performed only
    when receivable balances are material.
  21. When examining subsequent cash collections, auditors consider whether
    the specific payment being tested relates to the year end receivable
    • That is, it would be inappropriate to conclude that a year end
    • receivable balance was collected if the payment was actually for an
    • assessment for a period after year end. Consequently, if there is some
    • question as to how the client is applying subsequent payments,
    • subsequent collections may not provide reliable audit evidence about the
    • existence of year end receivable balances
  22. Also, auditors examining subsequent cash collections as a primary
    substantive test in lieu of confirmation procedures (see the discussion
    beginning in paragraph 703.21) consider the need to obtain evidence that the source of the payment was
    • in fact, the CIRA member, and the cash collected was neither cash
    • remitted by a different CIRA member nor cash transferred from a
    • different CIRA's account by the managing agent.
  23. 703.26 Collectibility

    Auditors need to consider whether the allowance for uncollectible assessments is
  24. Managing agents may be lax about
    enforcing collection of assessments. Also, many CIRAs make no attempt to
    evaluate the collectibility of assessments receivable because a lien
    can be filed against units.
    • However, a lien does not ensure
    • collectibility. For example, CIRAs may not be able to enforce liens in
    • some circumstances (for example, the unit owner files for bankruptcy),
    • or amounts realized from liens may not be sufficient to satisfy balances
    • due. As a result, there might be little or no equity remaining in units
    • after a settlement is reached with tax authorities and secured
    • creditors with priority liens, or the collection costs might be more
    • than the assessed charges. Thus, auditors need to consider the CIRA's
    • enforcement process for late fees, liens, and foreclosures. That should
    • be coordinated with obtaining a legal representation letter. Auditors
    • consider collectibility of assessments in light of the CIRA's prior
    • experience, the opinion of legal counsel, local economic and real estate
    • market conditions, and the status of the CIRA's claims relative to
    • other creditors.
  25. 703.27 Developer Receivables
    When amounts are due from the developer/sponsor related to unsold
    units, auditors may obtain written confirmation of the amount owed.
    However, the use of confirmations may be ineffective if there is a
    dispute between the CIRA and the developer/sponsor
    In that case, the audit work should be coordinated with obtaining the legal representation letter from the CIRA's attorney.
  26. 703.29 Assessments Received in Advance
    It is fairly common for members to pay assessments in advance. Thus,
    auditors need to identify prepaid assessments and, if they are material,
    propose reclassification of them as a liability.
  27. Property and Equipment

    Most CIRAs other than cooperatives do not capitalize common real
    property directly associated with the units (for example, exterior
    walls, roofs, public hallways, underlying land, sidewalks, driveways,
    roads, some parking areas, and greenbelts). However, those CIRAs
    typically capitalize common real property not directly associated with
    the units (for example, recreational facilities, managers' apartments,
    and properties that are primarily used for commercial operations) if
    specific conditions are met.
    • Capitalize
    • if CIRA has title and (1) can sell and retain proceeds or (2) can use
    • the property to generate significant cash flows from members on the
    • basis of usage or from nonmembers
  28. Accounts Payable, Accrued Liabilities, and Other Liabilities

    703.34 Confirmation of Accounts Payable Most auditors believe it is not necessary
    to confirm accounts payable because the search for unrecorded liabilities (see paragraph 703.35) is the primary procedure for testing completeness of accounts payable.
  29. However, if there is a high risk that payables are incomplete or if the
    CIRA has extended payment terms with vendors or significant debit memos
    in accounts payable balances, auditors may
    • decide to confirm accounts payable. When confirmation procedures are
    • necessary, auditors should comply with the provisions of SAS No. 67, The Confirmation Process. 9 For confirmation procedures, SAS No. 103, Audit Documentation,
    • requires the auditor's documentation to include identification of the
    • items selected for confirmation. A sample accounts payable confirmation
    • is presented at HOA-CL-10.1. The Extended Procedures (Procedures for Additional Assurance) section of the audit program at HOA-AP-10 include procedures for accounts payable confirmations.
  30. 703.35 Search for Unrecorded Liabilities

    The audit approach to the search for unrecorded liabilities is to
    • (a) review disbursements after the
    • balance sheet date and open purchase orders, (b) review vendor invoices
    • and statements above a specified cutoff amount, and (c) inquire of
    • responsible client personnel about their knowledge of additional sources
    • of unprocessed invoices.

    • To meet the requirements of SAS No.
    • 103, the workpapers should identify the items inspected. For example,
    • the auditor may identify the source and selection criteria, such as “all
    • disbursements exceeding $2,000 from the cash disbursements journal for
    • the period 1/1/X3 through the date of the auditor's report.”
  31. 703.36 Auditors should also use
    their knowledge of the CIRA's industry and operations to identify
    unrecorded liabilities. Many disbursements are for routine, recurring
    items such as
    • utilities and landscape
    • maintenance. Auditors ordinarily should consider whether all of those
    • items are recorded and whether they are recorded in the proper period.
    • Other annual expenditures are for local taxes or fees (for example,
    • water and sewer taxes, rent taxes, and vault taxes). Based on an
    • awareness of the local taxes and fees levied against CIRAs, the auditors
    • should consider whether all of those items are properly recorded.
  32. 703.42 Governing Document and Loan Restrictions

    Auditors ordinarily should determine that the CIRA has complied with
    any restrictions related to debt. For example, the governing documents
    of some CIRAs require member approval prior to incurring any debt.
    Auditors can review the CIRA's articles of incorporation, bylaws,
    declarations, covenants, and other governing documents to determine that
    the documents
    • allow the CIRA to incur debt. Also,
    • the debt may contain covenants. Auditors determine the CIRA has
    • complied with the covenants, and procedures may include confirming
    • compliance with the financial institution.
  33. Income Taxes

    Auditors should consider whether the CIRA has complied with tax laws
    and regulations that could have a direct and material effect
    on the financial statements in the event of noncompliance.
  34. The CPA firm performing the audit
    will often also have tax return preparation responsibilities, even if
    the CIRA uses a managing agent. Usually auditors do not need to apply
    • additional audit procedures in that
    • area beyond the work involved in preparing the tax return and
    • considering the information from other audit areas.
  35. Equity

    703.49 When a CIRA uses fund accounting, the auditors need to obtain or prepare an analysis of the transactions
    • affecting fund balance and inspect
    • appropriate support for any changes in the balance. Audit work on the
    • replacement fund should be coordinated with procedures applied to major
    • repairs and replacements. (See discussion beginning at paragraph 703.85.

    703.50 The audit program at HOA-AP-13 or HOA-AP-13-S contains procedures for auditing equity.
  36. Revenues, Operating Expenses, and Major Repair and Replacement Expenditures

    703.51 Revenues As explained in paragraph 703.20,
    member assessments represent the primary source of revenues for a CIRA.
    Because the legal documents creating most CIRAs require that
    assessments be based upon budgets
    • the budget becomes the financial defining structure of how the CIRA is
    • expected to operate. Thus, auditor comparison of recorded revenue to the
    • CIRA's budget is a key analytical tool and is suggested by the AICPA
    • guide at Paragraph 7.49. Any significant difference between recorded revenue and the budget should be investigated.
  37. 703.52 Auditors will generally
    also compare recorded assessment revenue with the prior year's actual
    amounts as part of audit planning. Additionally,
    SAS No. 99 requires performance of analytical procedures related to revenue, as discussed in paragraph 808.4, through the end of the reporting period.
  38. To perform a predictive test of assessment revenue, auditors can determine the number of units, the frequency of assessments
    • , the assessment rate or amount in effect during the period, and
    • whether, and if so when, the assessment rate or amount changed during
    • the period.

    Any difference between recorded revenue and that amount should be explained.

    • Also, auditors can determine whether special rates or amounts apply to
    • any units. With that information, auditors should be able to determine
    • the expected assessment revenue for the period
  39. A fairly common reason for the difference when recorded revenue does not agree with analytical predictions stems from
    • a unit or units that have inadvertently not been billed. This could
    • occur when a new unit opens and the initial assessment billing has not
    • been set up. Auditors who encounter this situation should consider if
    • the association has inadequate procedures for initial assessment
    • billings and whether the circumstance is a significant deficiency that
    • should be communicated to management and those charged with governance
  40. Another possible reason for a difference between recorded revenue and expected revenue could
    be late fees that are recorded as regular assessment revenue.
  41. 703.54 As discussed under the topic of “Special Assessments” in section 303,
    CIRAs may levy special assessments for various purposes. Auditors
    review documents such as minutes of the board of directors, legal
    documents, governing documents, etc., to determine how the CIRA should
    levy special assessments, for example,
    • whether developers that own unsold units should be assessed. Auditors
    • also review special assessments to determine that the CIRA has
    • recognized the assessment revenue in the appropriate accounting period;
    • for example, special assessment revenue may be deferred if it is
    • designated for specific expenditures that have not yet been incurred.
    • Auditors should consider examining expenditures, if any, related to
    • special assessments. Relevant expenses, including allocable costs,
    • whether incurred or budgeted, should be directly associated with the
    • assessment.
  42. 703.55 Auditors consider whether
    late fees are being properly computed and assessed. The arrangements for
    late fees often are found in the minutes or house rules. For many
    CIRAs, late fees are not material, and the auditors can test the late
    fee revenue
    • through analytical procedures. If
    • the CIRA has material late fees, the auditors can scan the deposits to
    • the bank account in which assessments are deposited. The monthly
    • deposits for assessments can be computed based on the same information
    • used to analytically predict total revenue as described beginning in
    • paragraph 703.51.
  43. 703.58 As discussed in paragraph 604.37, SAS No. 99 requires auditors to perform preliminary analytical procedures related to revenue
    to identify unusual or unexpected relationships that may indicate fraudulent financial reporting.
  44. The analytical procedures related to revenue should be updated during the final review stage of the audit, that is
    • the procedures should be performed through the end of the reporting
    • period. In addition, SAS No. 99 requires auditors to presume that
    • improper revenue recognition is a risk that may result in material
    • misstatement of the financial statements due to fraud. The auditor may
    • be able to overcome that presumption, but, if so, should document how
    • the presumption was overcome. If the auditor is unable to overcome the
    • presumption, then a response to the risk of improper revenue recognition
    • is required.
  45. 703.60 A nonauthoritative AICPA
    PITF Practice Alert 98-3, “Responding to the Risk of Improper Revenue
    Recognition,” discusses conditions that may indicate an increased risk
    of improper revenue recognition, planning considerations for the
    auditor, and the auditor's communications with management and the board
    of directors or audit committee (if the CIRA has one). The Practice
    Alert is nonauthorative, but it may help auditors identify and deal with
    revenue recognition issues. The Practice Alert is available at www.aicpa.org/download/auditstd/2004_0415_PracticeAlert98-3.pdf.
    According to the Practice Alert, factors related to the control
    environment that may indicate an increased risk of improper revenue
    recognition include—
    a. Aggressive accounting policies or practices.

    b. Pressure from management to increase revenues and earnings.

    c. Lack of involvement by those responsible for the accounting function in sales transactions.
  46. 703.62 Auditors may find it
    helpful to obtain representations from management concerning specific
    revenue recognition issues. The management representation letter HOA-CL-3.1 includes example wording related to receivables and the related assessments.
    • Because of the potential for significant audit risk, auditors should
    • approach this area with an appropriate degree of professional
    • skepticism.
  47. 703.64 Operating Expenses
    Auditor comparison of actual expenditures to budget is equally as
    important as the revenue comparison to budget discussed at paragraph 703.51.
    • Since the operations of CIRAs are generally based upon the budget, this
    • comparison is a key performance indicator for whether the CIRA is
    • controlling the use of its resources as planned and obtaining its
    • financial goals. Differences between the current budget and actual
    • expenditures should be investigated.
  48. 703.65 The auditor will normally
    also compare recorded operating expenses with the prior year's actual
    amounts. This comparison, and the budget comparison discussed at
    paragraph 703.64, generally improves the auditor's understanding of operations during the period. Additionally,
    • since many expenses of CIRAs are standard amounts each month, auditors
    • can multiply the standard monthly amount by 12 to determine whether the
    • association has recorded a full year of expense. This procedure allows
    • certain expenses, such as management fees, landscaping, pest control
    • services, utilities, etc., to be quickly reviewed and identifies those
    • expenses that need additional testing. (This times 12 test can also be used to review assessment revenue for many established associations.)
  49. 703.66 However, additional
    substantive procedures may be necessary to test operating expenses that
    are considered significant, unusual transactions. Certain major expenses
    can be substantiated by
    • analytical procedures such as
    • predictive tests (for example, mortgage interest of a cooperative
    • housing corporation) or by reference to contracts or agreements (for
    • example, management fees). It may be useful to review a list of approved
    • vendors with appropriate board members or management before reviewing
    • support for expenditures.
  50. 703.83 The association is
    responsible for designing and maintaining an adequate system of internal
    control to limit the risk of loss to the association.
    • For an association with a limited
    • number of appropriately skilled staff personnel and inherently high risk
    • cash transactions exist, this can be a challenging situation. If the
    • association is unable to maintain adequate segregation of duties over
    • cash, it may be necessary for the association to design mitigating
    • review and oversight procedures. It is not uncommon for associations to
    • accept a risk of internal control system design deficiencies that cannot
    • be reasonably overcome by the association, merely due to lack of
    • appropriate personnel. In that situation, the auditor should evaluate
    • the control deficiency against the requirements of SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit, discussed in section 812.
  51. 703.85 Major Repairs and Replacements
    If the CIRA accumulates funds for major repairs and replacements,
    audit testing of expenditures should be coordinated with testing of the
    related replacement fund. Auditors may test the clerical accuracy of the replacement fund balance and
    • trace beginning and ending fund
    • balances to the trial balance. Changes posted to the fund balance
    • account, such as increases for assessments, decreases for expenditures,
    • and interfund transfers, ordinarily should be reconciled to the trial
    • balance and tested by inspecting supporting documents. Interfund
    • transactions and similar transactions should be approved by the board of
    • directors or the members, depending on the provisions of the CIRA's
    • governing documents.
  52. 703.87 As part of gaining an
    understanding of the CIRA and its environment, auditors obtain an
    understanding of the CIRA's policy on funding major repairs and
    replacements and whether
    there are any requirements of state statutes or governing documents to accumulate funds for that purpose.
  53. If noncompliance with those
    requirements could have a direct and material effect on the CIRA's
    financial statements, the auditors ordinarily should test compliance
    • applicable state statutes or rules
    • specified in governing documents. Some CIRAs may be in violation of
    • funding requirements because of economic developments and natural
    • disasters. For example, reserve funds may be earning lower returns on
    • investments, and some CIRAs may be forced to forego assessments for
    • future repairs and replacements due to economic difficulties in the area
    • or region. In addition, natural disasters (such as hurricanes and
    • floods) may have depleted the reserve funds so that violations of
    • funding requirements have occurred. Lastly, due to economic conditions,
    • some CIRAs may be using reserve funds to finance current operations.
  54. 703.88 FASB ASC 972-235-50-2 (formerly the AICPA guide, Paragraph 4.27), requires disclosure of two broad categories of information concerning major repairs and replacements.
    • First, the notes to the financial statements should describe the CIRA's
    • funding policy and disclose whether there are requirements in state
    • statutes or the CIRA's governing documents (or mortgage on governmental
    • bodies funding requirements, such as FHA) concerning funding, compliance
    • with the policy and requirements, and certain related information. If
    • the CIRA funds major repairs and replacements as the need occurs rather
    • than accumulating funds, that policy also should be disclosed
  55. 703.89 The second category of information concerns the estimated cost of future major repairs and replacements.
    • FASB ASC 972-235-50-2
    • requires CIRAs to present estimated costs and funding of major repairs
    • and replacements as unaudited supplementary data outside the basic
    • financial statements. (Section 306
    • discusses financial statement disclosures including required
    • supplementary information.) Auditors are required to apply certain
    • limited procedures to the required supplementary information as
    • discussed beginning in paragraph
  56. 703.90 Associations may also consider making two additional disclosures:
    • Disclosing the type of funding plan goal that was used in the reserve study

    • Disclosing the level of service used to perform the reserve study
  57. 703.91 Disclosing the type of funding plan goal used in the reserve study allows
    • financial statement readers to
    • understand the implications of the method chosen and make informed and
    • educated decisions. Three types of non-statutory funding plans are
    • baseline funding, full funding, and threshold funding. The funding plan
    • goal used could contribute to significant fluctuations in assessment
    • levels. Reserve funding plan goals are further discussed in section 308.
  58. 703.92 The National Reserve Study
    Standards discuss three levels of service used to prepare a reserve
    study and the levels vary greatly in detail. These levels of service are
    (a) full,

    • (b) update—including a
    • site visit and on-site review, and

    • (c) update—without a site visit or an
    • on-site review. Disclosure will allow financial statement readers to
    • know what level of service was performed in preparing the reserve study.
    • (See the “CIRA Disclosure Checklist” at HOA-CX-13
    • for a complete listing of disclosures related to future major repairs
    • and replacements, as well as all required financial statement
    • disclosures.)
  59. 703.93 The audit program at
    HOA-AP-14 or HOA-AP-14-S contains procedures for auditing major repairs and replacements.