Residential Service Charge Audit

The lease states that a service charge audit is required

What is the risk?

If the lease requires an audit, a decision to procure another type of examination could be challenged by a lessee and the landlord / managing agent might fail to recover service charges on this basis.

Meaning of an audit

The Lease is the contract for the administration of service charges and if it refers to an audit then in principle an audit should be carried out.

Auditing has changed fundamentally since the Auditing Practices Committee was established in 1976. Where a lease that has been drawn up since 1980 refers to an audit (or it is construed as requiring an audit or the landlord or managing agent requires an audit to be carried out),  the International Standard on Auditing 800 ( ISA 800) Special Considerations – Audits of Financial Statements, prepared in accordance with special purpose frameworks, should be followed for the audit of service charge accounts.

The auditor will assess the level of risk involved in the instruction, in relation to the internal controls of the managing agent and the size, complexity and nature of the building, and adjust the level of work accordingly. An audit is likely to be time consuming and hence costly. The auditor may also need to employ an expert to carry out certain work, for example a review of leases on their behalf.