CIRA financial statements and required supplementary information. (common interest realty associations)by Rutledge, Marilyn Z.
* Estimates of current or future costs of future major repairs and replacements of all existing components, such as roofs, including the following:
a. Estimated amounts required;
b. Methods used to determine the costs;
c. Basis for calculations, including assumptions, if any, about interest and inflation rates;
d. Sources used; and
e. Dates of studies made for that purpose, if any.
* A presentation of components to be repaired and replaced that includes the following:
a. Estimates of the remaining useful lives of the components;
b. Estimates of current or future replacement cost; and
c. Amount of funds accumulated for each component, designated by the CIRA's board of directors.
Figures 1 and 2 illustrate two alternative presentations of required supplementary information.
When required supplementary information is presented with audited financial statements in auditor-submitted documents, SAS 29 at AU Sec. 551.15 and SAS 52 at AU Sec. 558 apply.
* AU Sec. 558 requires auditors to apply certain limited procedures to the required supplementary information; and
* AU Sec. 551.15 requires auditors to disclaim an opinion on required supplementary information unless they have been engaged to audit and express an opinion on it.
The auditors' responsibilities for required supplementary information are summarized in the flowchart in figure 3.
Applying Limited Procedures
Required supplementary information differs from voluntary presentations of information outside the basic financial statements because standard-setting bodies such as the AICPA's AcSEC or the FASB consider the information an essential part of the financial reporting of certain entities and because authoritative guidelines for presentation of the information have been established. Thus, AU Sec. 558 requires auditors to apply certain limited procedures to the required supplementary information whenever it is included in the same document with audited financial statements, even though the required supplementary information is unaudited and auditors disclaim an opinion on it. The limited procedures are described in AU Sec. 558.07. In general, they require auditors to:
* Make inquiries of management about a) how the required supplementary information was prepared, b) whether the required supplementary information conforms to guidelines prescribed in the guide, c) significant assumptions underlying the information, and d) whether the information has been prepared on a consistent basis.
* Compare the required supplementary information for consistency with management's responses to the preceding inquiries, the financial statements, and any other information of which the auditors are aware.
* Consider whether to include representations about the required supplementary information in the client representation letter.
* Apply additional procedures specified in the guide.
* Apply additional procedures if the auditors believe that the required supplementary information amy not conform to the guidelines in the guide.
Figure 4 lists the required procedures contained in AU Sec. 558.07. The exhibit also compares those general procedures with procedures tailored for required supplementary information on future repairs and replacements in the guide. The guide states that auditors should consider its specific procedures in carrying out the required procedures in AU Sec. 558.07. Auditors should tailor their inquiries to the approach followed by the CIRA in developing the required supplementary information. For example, if the required supplementary information has been prepared by the board of directors, auditors should address their inquiries to the particular members responsible for developing the information.
A Very Limited Responsibility
Although auditing standards require auditors to apply limited procedures to presentations of required supplementary information, the objective of the procedures differ significantly from the objective of procedures applied during an audit of financial statements. Since the limited procedures do not include examining evidence or testing to corroborate management's responses to auditors' inquiries, auditors do not have a basis for expressive an opinion on the
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required supplementary information. Rather, their objective is limited to reporting deficiencies in the information based on the results of applying the limited procedures.
Smaller CIRAs or those that do not employ a managing agent may request auditors to assist their board of directors in developing the required supplementary information. In those cases, auditors are more likely to want to obtain the CIRA's acceptance of responsibility for the required supplementary information, preferably in writing, for example, by including that representation in the client representation letter.
Auditors' reporting responsibilities for required supplementary information depend on whether the CIRA's financial statements and required supplementary information are presented in a client-prepared document or an auditor-submitted document. In most cases, the CIRA's financial statements and required supplementary information will be presented in an auditor-submitted document, and SAS 29 requires auditors to disclaim an opinion on the supplementary information unless they have been engaged to audit and express an opinion on it. The disclaimer may be presented
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either as a separate report as illustrated in Figure 5 or as a separate paragraph of the auditors' report on the financial statements, generally following the opinion paragraph. In rare circumstances when the financial statements and the required supplementary information appear in a client-prepared document, auditors need not refer to the required supplementary information or to their limited procedures unless the circumstances in the following paragraph exist.
Regardless of whether the required supplementary information appears in a client-prepared or auditor-submitted document, AU Sec. 558 requires auditors to add a explanatory paragraph to their report on the basic financial statements in the following circumstances:
* The required supplementary information is omitted. However, auditors need not present the required supplementary information if the CIRA omits it.
* The auditors have concluded that the required supplementary information departs materially from prescribed guidelines.
* The auditors are unable to complete the prescribed procedures. Although auditors are unable to complete the procedures, if they conclude that the information has not been measured or presented in conformity with the guidelines in the guide and the CIRa refuses to revise it, they should describe material departures in their report.
* The auditors are unable to remove substantial doubts about whether the
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required supplementary information conforms to prescribed guidelines.
In addition, if the required supplementary information is presented in a client-prepared document with an indication that the auditors have applied procedures to the information without also stating that the auditors do not express an opinion on it, the auditors should disclaim an opinion on the required supplementary information in their report on the basic financial statements.
The explanatory paragraph may either precede or follow the opinion paragraph of the auditor's standard report. However, since required supplementary information is not part of the basic financial statements and is not necessary for the financial statements to be presented in conformity with GAAP, none of the preceding circumstances preclude auditors from expressing an unqualified opinion on the basic financial statements.
Information Presented in a Note
to the Financial Statements
According to the guide, CIRAs should disclose the required supplementary information about future major repairs and replacements outside the basic financial statements. Nevertheless, some state statutes currently require some of that information to be presented in notes to the financial statements. AU Sec. 558.10 does not prohibit placing the required supplementary information in the notes to the financial statements, and states, that in those situations the note should be marked "Unaudited." For example, certain state statutes require changes in replacement fund balances allocated to each common property component to be disclosed in notes to the financial statements. Thus, with the issuance of the guide, some CIRAs may present the preceding information in the notes to the financial statements and the estimated remaining useful lives and estimated replacement cost of each common property component in a supplementary schedule outside the basic financial statements. The authoritative literature does not prohibit that practice. However, reporting in an auditor-submitted document would be cumberson in those cases, since the note would include both required supplementary information and other information, and some required supplementary information would be a schedule outside the basic financial statements. Thus, it would be difficult for the auditor's disclaimer to clearly identify the required supplementary information by descriptive title or page number of the document. Accordingly, whenever possible, it is preferable to present all the required supplementary information either in a note to the financial statements or in a separate schedule outside the basic financial statements.
Marilyn Z. Rutledge, CPA, is an executive editor for Practitioners Publishing Company. She was formerly a manager with the Auditing Standards Division of the AICPA and has eight years of local firm experience. Ms. Rutledge is co-author of PPC's Guide to Homeowners' Associations and Other Common Interest Realty Associations and several other PPC guides and CPE courses.
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