1. Presented by: Gayle L. Cagianut, CPA CAGIANUT & COMPANY, CPA ACCOUNTING SEMINAR 10-23-15

2. A clean audit from start to finish! Performance at its best ~ SUPER CHARGE YOUR ACCOUNTING: SPEED, POWER AND VICTORY!

5. START YOUR ENGINES!! Before the Audit Process Begins

6. GETTING READY… DO’S & DON’TS DO: Make sure you have documentation or explanation for all material balances on the financial statements. Have year-end statements for ALL (that means ALL) cash and investments DON’T: Expect the auditor to “fix” the financial statements. Do NOT make adjustments after issuing reports. Do not give us reports that don’t agree.

7. GETTING THE GREEN FLAG Starting the Audit Process

8. GETTING THE DOCUMENTS TO AUDITOR Electronic Using C&C DropBox E-mail Allowing C&C Access to System Paper Files Shipped at C&C expense In a few cases, picked up by C&C Most importantly – take the time to ensure that the files are complete

9. COMMUNICATION DURING THE AUDIT PROCESS Who – your end?? – We try and ask the right questions of the right people. If we miss it – let us know! Who – our end? – Tax extension, starting audit process, preauditor, auditor & reviewer Timeliness is VERY important – Let us know if this is not a good time for you so we can put the audit aside and not keep bugging you. – Within 2-3 days seems reasonable to us

10. CAUTION!!! YELLOW FLAG Warning: Crash Ahead or Debris on the Track Those Accounting Issues That Get Us Off Track

11. WHAT BRINGS OUT THE YELLOW FLAG: Bad Debts Foreclosures, etc. Per Use Fees Fixed Assets Insurance Claims Management Transitions Fund Reconciliations Special Assessments

12. BAD DEBTS Determining the Allowance for Bad Debts – It is an ESTIMATE – Must be made by the Association, not us Writing off the Bad Debt – Board decision – Write off to expense or against allowance? Adjusting the Allowance During the Year – Depends Bad Debt Recovery – Current year income

13. FORECLOSURES, ETC Is it an Association asset? How to account for the Receivable at the time of possession Continuing Monthly Assessments Other Costs Renting out the unit - from an accountant’s standpoint What if additional monies are received from bank? When the units sells…and there is a profit

14. PER USE FEES Types of Per Use Fees Accounting for Per Use Fees Internal Controls Taxation of Per Use Fees

15. PER USE FEES Types of Per Use Fees – Move In/Out Fees – Guest Suite Rentals – Parking/Storage Rentals – Other Amenity Usages – Laundry

16. PER USE FEES Accounting for Per Use Fees – Separate income category for significant amounts – Offsetting expenses should clearly be identified in a separate expense account

17. PER USE FEES Internal Controls – Completeness is the objective – Fraud OR Error – Independent verification – Reconciliation, Review or Random – Document

18. PER USE FEES Taxation of Net Per Use Fees – Form 1120-H – Taxable unless charged annually – Form 1120 – Nonmember income is taxable

19. FIXED ASSETS GAAP – Real Property – Real Property Directly Associated with Units – Real Property Not Directly Associated with Units – Removing Real Property from Financial Statements GAAP - Personal Property Accounting – Operating Fund – How to account when reserve monies are used to purchase asset Depreciation Capitalization policy

20. INSURANCE CLAIMS Segregate Accounting Reconcile to Insurance Claim Documents Defer Insurance Proceeds when appropriate Excess Insurance Proceeds

21. MANAGEMENT TRANSITIONS What to DO – Enter financial statement balances exactly as shown on the last financial statement/general ledger – Include ALL A/R as shown on the prior aging report – Verify that equity agrees – Enter year-to-date income statement balances. – Enter transition adjustments in a separate equity account – Keep documentation and backup of the transition reports, reconciliations and adjustments

22. MANAGEMENT TRANSITIONS What NOT to do – Enter the bank balance and not the reconciled bank balance Do not ignore outstanding checks, deposits in transit and other reconciling items – Use a financial statement that is not the final from prior management company – different cut-off dates Let’s agree to cooperate with one another!

23. FUND RECONCILIATIONS Fund Accounting is not required, but recommended – FASB – More informative to users – Recommended by CAI and most CPAs Accounting Basics – Keeping the Fund in Balance! Due Between Funds Transfer Between Funds Accounting – Provide the Reconciliation so the Board, with Management’s input, can decide!

24. SPECIAL ASSESSMENTS & LOANS Basic Scenario The Association has a major project. It is decided that there will be a special assessment. The members have the option of paying their portion in full or over time. The Association gets a bank loan for those members that are financing The unit owners who pay over time pay interest per loan. The bank loan is repaid at the same rate as the special assessments are billed/paid.

25. SPECIAL ASSESSMENTS & LOANS Accounting Basics A 3 rd Fund should be considered. Separate cash account and chart of accounts set up. Loan is recorded on books & adjusted monthly. Additional principal payments are sent to the bank to reduce the loan. Amortization schedules are required for EACH owner

26. SPECIAL ASSESSMENTS & LOANS Perfect World The special assessment and the loan amount agree at the onset. The loan date agrees with the date of the special assessment. As payoffs are made, the loan is reduced and/or monthly loan payments are made at the same time as the special assessment payments ~ the loan and special assessment receivable will be reducing at the same rate and they will agree. The loan automatically re-amortizes. The loan interest coming agrees with the loan interest paid out. A true “matching” of monies in and monies out occurs.

27. SPECIAL ASSESSMENTS & LOANS Real World - Part 1 The loan and special assessment dates/amounts do not agree. The expenses are over a period of time and the loan is on a draw system; thus, special assessment is being paid ahead of or behind the actual expenses. The interest rates are not the same – either at the beginning or the loan resets and the special assessment does not. The Board decides to pay down the loan but the special assessments keep going on.

28. SPECIAL ASSESSMENTS & LOANS Real World – Part 2 An additional principal payment is made and is missed being sent to the bank. – Interest continues to accrue. There is a bad debt write-off and that additional amount is not paid to the bank. – Interest continues to accrue. A unit pays off (either “just because” or at escrow) and accounting misses it and keeps billing the unit. Etc, Etc. Etc

29. SPECIAL ASSESSMENTS & LOANS Full Receivable Method of Accounting for SA The “pro’s” of this method of accounting:  No negative fund balance/equity (“perfect world”).  The receivable is on the books so that everyone is aware of the responsibility of the owner to pay this assessment over time. The “con’s” of this method of accounting  Requires an elaborate accounting system – especially when there are various amortization schedules for units  AR systems may not be able to handle inclusion of the full AR on the books – without trying to assess late fees, lien, etc.

30. SPECIAL ASSESSMENTS & LOANS Annual Assessment Method The “pro’s” of this method of accounting: – Bookkeeping is much easier. – The financial statements may be easier to understand for non-accountants. – The assessment amount received should be what is budgeted (except for payoffs).

31. SPECIAL ASSESSMENTS & LOANS Annual Assessment Method The “con’s” of this method of accounting – There is a large negative fund balance for the life of the loan, – The total receivable does not show on on the A/R ledger, so separate “off books” ledgers must be kept to ensure payoff at the time of sale of the unit. – A separate reconciliation of remaining AR to loan balance should be kept, or prepared at least annually, to ensure that there are adequate monies to repay the loan and to ensure that payoffs have not occurred and not been sent to the bank.

32. SPECIAL ASSESSMENTS & LOANS Which Method is Correct?? – BOTH (for now) – But..whatever method you choose – do it right! This is the #1 reason we cannot give an audit opinion

33. CHECKERED FLAG Taking It to the Finish Line What to do at the End of the Audit

34. FINISHING THE RACE (AUDIT): Review the Internal Control Points Make sure the tax return is filed Post the adjusting journal entries – Use One Balance Sheet Only Method – Post ALL or NONE of the AJEs – What to reverse – RECONCILE EQUITY IF AJES ARE POSTED! – If not posting AJEs look at carryover balances that make no sense.

35. REVIEW INTERNAL CONTROL POINTS CFO/Lead Accountant should be receiving and reviewing Review while in DRAFT mode. Ask the following:  Is there a process that needs to be revised?  Are there controls that are missing?  Does the staff need additional training?  Did the auditor make an error in fact or judgment?  Is there additional information that we neglected to provide ?  Are there subsequent events that could mitigate the point? Use as Educational tool to better your firm and systems

36. MAKE SURE TAX RETURN IS FILED And… – Taxes are paid, if needed – Estimated tax payments are set up to be paid, if appropriate

37. POST ADJUSTING JOURNAL ENTRIES…OR NOT # 1 Rule – Post ALL or None of the Entries If you post ALL the adjusting journal entries, be sure and reconcile equity. The adjusted beginning equity should agree with the ending equity in the audit. IF only posting a few adjustments – Separate equity account – Document and Identify

38. POST ADJUSTING JOURNAL ENTRIES…OR NOT ONE BALANCE SHEET ENTRY (OBSE) – preferred The audit adjustments will have no impact on the current year’s budget. The year-end financial statements were issued to the Board The OBSE highlights that beginning equity was revised. Interim financial statements are not GAAP anyway. In most cases, the impact to the operating expenses is not material. Thus, we feel that the Board can manage to the exception rather than re-stating the prior year reports.

39. POST ADJUSTING JOURNAL ENTRIES…OR NOT What/When to reverse audit entries? Leave on books all year – Most common – Explain to Board that these are audit adjustments. Reverse accruals and accrue as needed during year – Prepaid Insurance, Accounts Payable, Prepaid Expenses, Other Liabilities, Deferred Income – Be sure and not distort next year’s income Reverse specific adjustments – to a separate equity account

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