Audit, Review, or Compilation: What Do NJ Boards Need?

Your New Jersey association should choose an audit, review, or compilation based on applicable requirements and the assurance the board needs, not price alone. An audit provides reasonable assurance, a review provides limited assurance, and a compilation generally presents financial information without assurance.

Before choosing, ask your CPA and association counsel to identify the required engagement for your community. Your governing documents, applicable regulations, and financing arrangements may affect the answer. Treat the annual report as a board oversight tool rather than a document to file away after signing.

What is the difference between the three engagements?

The central difference is how much assurance the CPA provides about the financial statements. The engagement label describes the scope of the CPA's work, not whether your association has good finances. A stronger engagement also does not make your board's ongoing oversight unnecessary.

An audit typically includes risk assessment, testing, and other procedures supporting an opinion on whether the statements are fairly presented under the applicable reporting framework. Reasonable assurance is a high level of assurance, but it is not absolute assurance. Ask the CPA what the engagement includes and what it does not cover.

A review typically relies primarily on inquiries and analytical procedures to provide limited assurance. A compilation generally helps present information supplied by management in financial-statement form, without providing assurance on it. Your CPA should explain the independence requirements and disclosures relevant to the proposed engagement.

Request comparable written proposals so different scopes do not look like interchangeable services.

What does New Jersey generally expect from associations?

New Jersey regulations under the Planned Real Estate Development Full Disclosure Act, or PREDFDA, generally require associations to prepare annual financial statements. For many associations, depending on the size of their annual budget, those statements generally must be audited by an independent certified public accountant. Confirm the exact thresholds, applicability, and timing with your association's CPA and counsel.

Do not assume a neighboring community's engagement is sufficient for yours. Ask counsel to identify the requirements that apply to your association, and ask the CPA to connect those requirements to the proposed scope. Keep that guidance with the engagement decision so a future board can understand it.

Your governing documents may also contain financial reporting provisions. Review the declaration or master deed, bylaws, and relevant resolutions rather than relying on a past board's informal practice. A lender may separately require specified reports or supporting information under a financing agreement.

If those sources appear inconsistent, ask the professionals to resolve the question before approving a lower-assurance engagement. A compilation may be useful in some circumstances, but it should not be chosen as a cheaper substitute for a required audit. Document the requirement and the reason for the selection.

How do you choose a CPA with association experience?

Choose a CPA who can explain association accounting, the proposed engagement, and the board's responsibilities in language directors can use. Ask about experience with operating and reserve funds, owner receivables, capital projects, and association tax reporting. Familiarity should show up in the questions the firm asks, not just in its marketing.

Request an engagement letter identifying the reporting framework, deliverables, responsibilities, anticipated schedule, and fees or scope changes. Ask whether tax returns are included or covered by a separate engagement. Confirm independence where required, including any relationship that might affect the engagement.

Useful interview questions include:

• What records will you request from the board and manager?
• How will you communicate missing support or proposed adjustments?
• Will you meet with directors to explain the final report?
• How are internal-control observations communicated?
• Who handles tax questions and lender reporting requests?

Ask how a change in accounting personnel or management would affect the work. Your board should understand who can answer questions during the engagement and how unresolved issues reach the directors. Avoid choosing solely on the lowest quoted fee when proposals include different work or different deliverables.

When should the engagement fit into budget season?

Plan the engagement backward from the association's fiscal year, reporting obligations, and budget decisions with your CPA. There is no single planning calendar suitable for every community. A year-end report may arrive after the next budget is adopted, so the board should identify which findings can inform the next available forecast or budget cycle.

Start with our NJ association budget season calendar, then add the CPA's document requests, fieldwork expectations, draft review, and final delivery milestones. These are agreed planning targets, not a replacement for legal requirements. Confirm any required reporting timing with counsel and the CPA.

Prepare a records checklist covering bank statements and reconciliations, owner ledgers, invoices, contracts, reserve activity, insurance records, minutes, and relevant legal correspondence. Assign an association contact for each missing item. Ask counsel how to handle privileged material rather than forwarding an entire legal file without review.

Keep a list of questions arising from the monthly financial packages. An unexplained transfer should be investigated when discovered, not held for the annual engagement. The board can continue reviewing cash, collections, and budget variances while the CPA works on the year-end statements.

How should directors read the audit report and letters?

Read the independent auditor's report first, then connect it to the financial statements and notes. The report identifies the scope, reporting framework, and opinion. Ask the CPA to explain any qualification, other modification, or emphasis language before the board summarizes the findings for owners.

An unmodified opinion generally addresses fair presentation of the statements under the applicable framework. It is not a promise that every transaction is correct or that future funding will be adequate. Ask what judgments, estimates, or accounting policies are especially important to your association.

Read the notes for explanations of receivables, reserve information, significant commitments, and other matters relevant to the report. Distinguish the CPA's financial reporting work from engineering judgments. For reserve-related obligations, consult our NJ reserve-study guide and obtain guidance from counsel and a reserve specialist.

A management letter, when issued, may discuss process weaknesses or recommended improvements. It is different from the auditor's opinion. Ask which comments need board action, who will handle them, and how completion will be checked.

For example, a recommendation about payment approvals should lead to a documented workflow, not merely an acknowledgment in the meeting packet. Request plain-English explanations for proposed accounting adjustments and preserve the final versions together. That gives the next board a usable record of what changed and why.

How do Form 1120-H and Form 1120 fit into the process?

Tax returns are a separate part of the association's annual financial work, and the appropriate federal filing approach should be evaluated by its CPA. Form 1120-H is generally a homeowners association income tax return for qualifying associations that elect that treatment. Form 1120 is generally the corporate income tax return, which may be relevant depending on the association's circumstances.

Do not select a form simply because the prior board used it. Ask the CPA to review eligibility, income sources, expenses, and the consequences of the available approaches. Investment income and other activities may need different treatment from assessment collections.

Request an explanation of who prepares the return, who reviews and authorizes it, and what information is still needed. Confirm filing and payment requirements directly with the CPA rather than assuming the audit schedule covers them. The engagement letter should make clear whether tax work is included.

Keep the approved return and related advice in the association's controlled records. If the financial statements and return use different treatments, ask the CPA to explain the distinction for directors. This article is a planning guide, not tax advice for your association.

How should you share results with owners?

Share the final reporting results through a documented process that follows applicable requirements and your governing documents. Ask counsel what must be distributed or made available, when, and how confidential or privileged material should be handled. Do not treat draft statements as the final report.

Prepare a concise cover explanation identifying the engagement level, report period, and significant board follow-up. Separate what the CPA concluded from what the board plans to do next. Owners should not have to decode accounting terminology to understand a reserve question or a corrective action.

If findings affect a budget decision, explain the connection without blaming individual owners or volunteers. Our guide to how association assessments are set can support that conversation. Use the association's established communication channels and provide a way to submit questions for a coordinated response.

How Homestead Can Help

Homestead Management Services can help organize annual reporting records, coordinate CPA requests, and track board follow-up alongside routine financial management. To discuss management support for your New Jersey association, request a proposal.