CMCA - Certified Manager of Community Associations Financial Reporting and Controls Questions and Answers — Questions and Answers
Question 1: To establish strong internal controls and reduce the risk of financial mismanagement, what is a recommended best practice for handling an association's invoices?
- The community manager should approve the invoice, sign the check, and reconcile the bank statement.
- The board treasurer should be the sole person responsible for receiving, approving, and paying all invoices.
- The person who approves an invoice for payment should be different from the person who signs the check. (Correct answer)
- All invoices should be paid immediately upon receipt by any available board member to ensure good vendor relationships.
Correct answer: The person who approves an invoice for payment should be different from the person who signs the check.
This represents a fundamental principle of internal controls called 'segregation of duties'. Separating the authorization/approval and payment functions makes it much more difficult for fraudulent payments to occur. One person having all responsibilities (A and B) creates a significant risk. Paying invoices without proper approval (D) is poor financial management.
Question 2: An association's manager prepares a financial report using the accrual basis of accounting. This report will show:
- Income only when cash is received and expenses only when cash is paid out.
- Only the cash transactions that have occurred during the reporting period.
- Income when it is earned and expenses when they are incurred, regardless of when cash is exchanged. (Correct answer)
- A modified cash basis that includes reserve contributions as an expense.
Correct answer: Income when it is earned and expenses when they are incurred, regardless of when cash is exchanged.
The accrual basis of accounting provides a more accurate picture of an association's financial health by matching revenues to the period in which they are earned (e.g., when assessments are due) and expenses to the period in which they are incurred (e.g., when a service is provided). This is in contrast to the cash basis (A, B), which only records the movement of cash. Generally Accepted Accounting Principles (GAAP) favor the accrual method for its accuracy.
Question 3: A community association's governing documents require the highest level of independent financial scrutiny. Which type of financial report should the board commission from a CPA?
- An audit (Correct answer)
- A compilation
- A review
- A treasurer's report
Correct answer: An audit
An audit provides the highest level of assurance. The CPA performs extensive testing, examination of evidence, and verification procedures to express an opinion on whether the financial statements are fairly presented. A review provides limited assurance, and a compilation provides no assurance. A treasurer's report is an internal document, not an independent CPA report.
Question 4: When investing a community association's reserve funds, which of the following is the MOST important objective for the board of directors?
- Maximizing the rate of return on investments.
- Safety and preservation of principal. (Correct answer)
- Investing in long-term growth stocks for capital appreciation.
- Ensuring immediate liquidity for all funds.
Correct answer: Safety and preservation of principal.
The primary fiduciary duty when investing reserve funds is to ensure the safety and preservation of the principal amount. While a reasonable return and appropriate liquidity are important, they are secondary to ensuring the funds are secure and available when needed for major repairs and replacements. High-return or growth-oriented investments like stocks often carry risks that are inappropriate for essential reserve funds.
Question 5: A community association's Balance Sheet shows 'Assessments Receivable' of $25,000. What does this line item represent?
- The total amount of assessments the association expects to collect for the entire fiscal year.
- Pre-paid assessments from homeowners for the following fiscal period.
- Funds that have been collected from homeowners but not yet deposited in the bank.
- Money owed to the association by homeowners for assessments that have been billed but not yet paid. (Correct answer)
Correct answer: Money owed to the association by homeowners for assessments that have been billed but not yet paid.
On a Balance Sheet, 'Assessments Receivable' (or Accounts Receivable) is an asset that represents money legally owed to the association by its members for assessments and other charges that have been billed but not yet collected as of the date of the report.
Question 6: A condominium association's board determines that an unbudgeted, emergency repair to the main water line costing $75,000 is necessary. The reserve fund is insufficient to cover the full cost. Which of the following is the board's most likely course of action, according to typical governing documents?
- Immediately take out a bank loan without member input.
- Use operating funds, even if it means deferring other essential services.
- Wait until the next budget cycle to approve the funding for the repair.
- Levy a special assessment against all homeowners. (Correct answer)
Correct answer: Levy a special assessment against all homeowners.
When a large, necessary, and unforeseen expense arises that cannot be covered by the operating budget or existing reserve funds, the primary mechanism available to an association is to levy a special assessment. This is a one-time charge to homeowners to cover a specific shortfall. Waiting is not an option in an emergency, using operating funds could cripple daily functions, and taking out a loan often has specific requirements, including potential member votes.
CMCA - Certified Manager of Community Associations Financial Reporting and Controls Questions and Answers
To establish strong internal controls and reduce the risk of financial mismanagement, what is a recommended best practice for handling an association's invoices?