Common Interest Realty Associations Industry Developments 2006/2007 – Audit Risk Alert

This Alert will help you plan and perform your audits by identifying the significant business risks that may result in the material misstatement of your client's financial statements.

The AICPA Audit and Attest Standards staff has reviewed the auditing guidance in this Alert (defined as Other Publications by SAS No. 95) and is presumed to be appropriate.

Understanding the Organization and Its Environment and Assessing Risks

An auditor should obtain an understanding of relevant industry, regulatory, and other external factors. These factors include the following:

• Industry conditions
• The regulatory environment encompassing, among other matters, relevant accounting pronouncements
• The legal and political environment
• Other external factors, such as general economic conditions

The CIRA industry may be subject to specific risks of material misstatement arising from the nature of the business, the degree of regulation, or other external forces (for example, political, economic, social, technical, and competitive).

The auditor should obtain an understanding of the CIRA's objectives and strategies, and the related business risks that may result in material misstatement of the financial statements. Business risks result from significant conditions, events, circumstances, actions, or inactions that could adversely affect the organization's ability to achieve its objectives and execute its strategies, or through the setting of inappropriate objectives and strategies. An understanding of business risks increases the likelihood of identifying risks of material misstatement, although the auditor does not have a responsibility to identify or assess all business risks. Many business risks could eventually have financial consequences and, therefore, affect the financial statements; obviously, however, not all business risks give rise to risks of material misstatement.

After gaining an understanding of the organization and its environment, the auditor needs to make risk assessments at the financial statement and relevant assertion levels based on that understanding.

Presented in this Alert are current business, economic, regulatory, accounting, and auditing matters that may affect your clients. Reading about these matters and properly addressing them as necessary will help you gain a better understanding of your client's environment, better assess risks of material misstatement of the financial statements, and ultimately strengthen the integrity of your audits.

Current Economic and Industry Developments

For a complete overview of the current economic environment in the United States, see the AICPA general Audit Risk Alert--2006/07 (product no. 022337kk).

Residential Community Association Demographics

In 1970, there were approximately 700,000 homes in 10,000 community associations. As part of a mid-1970 report, the U.S. Department of Housing and Urban Development (HUD) projected that 50 percent of American homes would be living in community associations by the late 1980s. Although premature, the HUD prediction was not that wrong. Today, it is estimated that 85 percent to 90 percent of all new for-sale housing is located in one of the three basic types of community associations. Somewhere between 40 percent and 60 percent of CIRAs are contract managed by specialized community association management (CAM) companies while the other 40 percent to 60 percent are self-managed either solely by volunteers or with association-hired staff. Regardless of management structure, all associations are governed by a volunteer board of directors elected by the membership.

Housing cooperatives represent approximately 5 percent to 7 percent of all association units. Condominium associations represent from 38 percent to 42 percent while planned communities constitute the balance. Condominium associations, in the last two to three years, have definitely increased in acceptability and popularity.