Audits, Reviews, and Compilations
There are three levels of examination of financial statements.
If an association's governing documents require an audit, a licensee of the California State Board of Accountancy (a Certified Public Accountant) must perform an extensive examination of the association's financial records and will issue a statement as to their compliance with generally accepted accounting principles (GAAP). An audit is performed in accordance with GAAS (generally accepted auditing standards) established by the American Institute of CPAs (AICPA). The auditing standards are described in statements on Auditing Standards (SAS). Audits provide a "reasonable level of assurance" that the financial statements are materially correct. Consequently, audits are more costly than reviews and compilations.
If an association's governing documents are silent regarding audits, the Davis-Stirling Act requires, at the minimum, a "review" of the finances for any fiscal year in which the association's gross revenue exceeds $75,000. In a review, a CPA performs limited inquiries in accordance with generally accepted auditing standards, and gives "limited assurance" that the financial statement is materially correct. Reviews are less costly than audits.
A compilation is the lowest level of review in which a qualified accountant reviews the information provided by the association. The accountant does not need to be independent or a CPA and is required to perform very few procedures with a compilation. The accountant takes minimal responsibility for the financial statement and gives no assurance as to compliance with GAAP.