This article about statutory financial statements audit has been supplied by Tony Tassone, Property Audit & Assurance (A division of Lowe Lippmann Chartered Accountants).
In Victoria, as an OC Manager, you probably know that if an OC is prescribed (has annual levies greater than $200,000 or has more than 100 lots) it needs to prepare financial statements at year end and have them audited for presentation to owners at AGM. This is under the Owners Corporations Act 2006 and is generally widely understood. It means having an auditor appointed who:
- performs the audit (according to Australian Auditing Standards), and
- may assist with the preparation of the financial statements and reporting.
So with an auditor in place, all things going well, no issues, job done, right?
Well, as with many things in life, things are not always what they seem!
Recently, I was asked to examine and give my thoughts on the financial statements of a prescribed OC. These were signed statements that had been presented to the owners and were approved as the final accounts of the OC for that year in line with statutory requirements. However, what was apparently overlooked was that the auditor’s report set out that the audit was a limited audit, and therefore not a statutory audit performed under the above legislation. The auditor’s opinion too expressed only a limited opinion, again not what is required.
Under appropriate circumstances an auditor may modify his or her report including detailing that the scope of the audit was limited; say – if there was a major loss of records. This or similar was not the case in the above situation. It seems the audit was simply scaled down.
Three points for OC Managers/Committees on what the above Act requires:
- Section 33 Financial records
An owners corporation must keep proper accounts that cover all income and expenditure, assets and liabilities of the owners corporation; and provide for the making of true and fair view reports of the financial situation of the owners corporation.
- Section 34 Financial statements
An owners corporation must prepare annual financial statements for presentation at the annual general meeting of the owners corporation.
A prescribed owners corporation must prepare its financial statements in accordance with the standards required by the regulations. (Profit and Loss Statement, Balance Sheet, notes and declarations thereon, in accordance with Australian Accounting Standards as applicable).
- Section 35 Audit of accounts of owners corporations.
A prescribed owners corporation must, after the end of each financial year cause its financial statements to be audited by a registered company auditor; or a firm of registered company auditors; or [other approved person].
A person who audits the accounts of an owners corporation must provide the owners corporation with a written report of the audit.
If an OC is not prescribed and does not need to prepare audited financial statements then it may if it chooses, prepare financial statements in a manner which meets the owners’ requirements and may if the owners so choose, not be audited or be only partly audited, e.g. a ‘Balance Sheet audit only’. However, this is not applicable if the OC is prescribed.
If the OC is prescribed, then the audit needs to follow Australian Auditing Standards and be able to appropriately report on the financial statements as required under the Act. The auditor has a statutory function and the audit needs to be done according to what’s required (and not say to what may have been agreed). It’s reasonable to assume and expect that the owners in the example would be relying on both the OC Manager and the auditor to get it right. I dare say it can also reflect badly on the OC Manager if the audit was not performed appropriately, but nevertheless accepted.
So, as a Manager, what should you do? We suggest for prescribed OC’s:
- you review your auditor’s ‘engagement letter’ and the year end audit report of the prior year, in particular the ‘scope’ and the ‘opinion’ given in the report.
- Does the auditor (by arrangement or otherwise) appear to limit the work say to a ‘review’ or to the audit of the ‘Balance sheet’ only?
- We suggest you be familiar with the appropriate wording and scope of work and opinion that is to be provided in an audit of a prescribed OC and use that to compare. This is something like: ‘In our opinion, the financial report gives a true and fair view of the financial position of Owners Corporation #X as at Day Month Year, and its financial performance for the year then ended in accordance with the accounting policies described in Note 1 to the financial statements.’
Without being critical on the OC Manager and/or the auditor, what may occur from time to time is that an agreed approach for a limited audit (which may be applicable and seem familiar for non-prescribed OCs) has found its way into an audit for a prescribed OC, overlooking the reporting requirements. An inappropriate audit, for whatever reason leaves everyone a little bit exposed.
The photo associated with this post has been supplied by Flickr: Bodie Strain.
Interested in more information about statutory financial statements audit or strata legislation particular to Victoria? Visit our FactSheet: Strata Committee Concerns OR FactSheet: Strata Title Legislation VIC