Audits, Auditors and Condominiums
What is an Audit?
A financial audit, or more accurately, an audit of financial statements, is the examination by an independent third party of the financial statements of a company or any other legal entity (including governments), resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented.
Financial audits are typically performed by firms of practising accountants due to the specialist financial reporting knowledge they require. The financial audit is one of many assurance or attestation functions provided by accounting and auditing firms, whereby the firm provides an independent opinion on published information.
Why does the condominium have an audit and what does an auditor do?
An audit is required by the Condominium Act of Ontario so that unit owners who have little input into the day to day operations of the condominium community will have assurance that the monies they provide to the corporation are being disbursed in an appropriate manner and with their best interests in mind. The auditor is appointed by and solely responsible to the unit owners. He or she is their representative who looks at the financial operations of the condominium and prepares an “audit report” that is presented to the unit owners at the Annual General Meeting together with the financial statements it is reporting on.
An auditor performs two main functions;
- to ensure that the financial statements are prepared in accordance with GAAP and
- that he or she has performed appropriate procedures under GAAS in order to prepare the audit report.
GAAP is short for Generally Accepted Accounting Principles. These are a set of standards for financial statement presentation. Examples of GAAP are that financial statements have to be prepared on the accrual basis, amounts have to be recorded at cost and there has to be appropriate disclosure of matters of significance such as law suits and reserve adequacy.
GAAS is short for Generally Accepted Auditing Standards. These are a set of standards for procedures that the auditor has to perform in order to sign his or her audit report. In brief, the auditor assesses internal controls, tests account balances and ensures that all appropriate amounts and only appropriate amounts are recorded in the books of account. Procedures used verify bank balances, test collection of accounts receivable, ensure all payables and accruals are recorded, test common element fees to ensure appropriate amounts are charged and test that expenditures are properly supported and were made for the benefit of the corporation.
Last and just as important, the auditor typically attends the Annual General Meeting to review the financial statements and answers any questions unit owners may have. Most treasurers of condominiums are not professional accountants nor are they comfortable speaking in public. It is an important function for the auditor to explain the financial statements in everyday language so the owners understand the costs of operating their community of homes.
What can't the auditor tell you?
Auditors can't tell you why this or that much was spent here and there.
How come we spent $8000 in flooring for the guest suites?
Isn't that too much for such a small area?
It is a valid question but not for the auditor. All the auditor can say is that the money was spent on that job. It is not his or her decision to approve how the condominium spends the money.