CMCA CMCA - Certified Manager of Community Associations Financial Reporting and Controls Questions and Answers 2 — Questions and Answers
Question 1: A bank reconciliation is performed to:
- Determine homeowner assessment balances
- Verify that the association's accounting records match the bank statement balance adjusted for outstanding items (Correct answer)
- Compare the association's budget to actual spending
- Calculate the reserve fund contribution for the year
Correct answer: Verify that the association's accounting records match the bank statement balance adjusted for outstanding items
Bank reconciliation reconciles the balance per the association's books with the balance per the bank statement, accounting for outstanding checks, deposits in transit, and bank errors or fees.
Monthly bank reconciliations are a fundamental internal control. They detect unauthorized transactions, data entry errors, and potential fraud. An unreconciled bank account can hide embezzlement or accounting mistakes for months.
Question 2: Which financial statement shows the results of an association's operations over a specific period?
- Balance sheet
- Income statement or statement of revenues and expenses (Correct answer)
- Cash flow statement
- Reserve study
Correct answer: Income statement or statement of revenues and expenses
The income statement shows all revenues and expenses over a period, typically a month, quarter, or year, revealing whether the association operated at a surplus or deficit.
Unlike the balance sheet which is a snapshot at a point in time, the income statement covers a period. For community associations, it compares assessment income and other revenues against operating expenses, showing whether the budget is on track.
Question 3: An accounts receivable aging report helps a community manager:
- Track vendor payment due dates
- Identify how long homeowner assessment balances have been outstanding (Correct answer)
- Calculate the depreciation of capital assets
- Determine the reserve fund's current balance
Correct answer: Identify how long homeowner assessment balances have been outstanding
An accounts receivable aging report categorizes delinquent assessment balances by how long they have been outstanding such as 30, 60, or 90 or more days, enabling managers to prioritize collection efforts.
The aging report is the primary tool for managing collections. It allows the manager to identify accounts that need escalation to attorneys, track the effectiveness of collection efforts, and provide the board with a clear picture of delinquency trends.
Question 4: Accrual basis accounting recognizes revenues and expenses when:
- Cash is actually received or paid
- They are earned or incurred regardless of when cash changes hands (Correct answer)
- The board approves them
- Year-end financial statements are prepared
Correct answer: They are earned or incurred regardless of when cash changes hands
Accrual accounting records revenue when it is earned such as when assessments are due, and expenses when they are incurred such as when a service is performed, regardless of actual cash flow timing.
Most community associations use accrual basis accounting because it provides a more accurate picture of financial position. Under accrual accounting, January assessments are recorded as income in January even if some owners pay in February.
Question 5: An internal control requiring two authorized signatures on checks above a certain dollar amount is an example of:
- Dual approval and separation of duties (Correct answer)
- Reserve fund management
- A liquidated damages clause
- An audit requirement
Correct answer: Dual approval and separation of duties
Requiring two signatures on large checks is a separation-of-duties control that prevents a single individual from authorizing large expenditures unilaterally, reducing the risk of fraud or error.
Separation of duties is a cornerstone of financial controls. By requiring dual authorization for checks above a threshold, the association ensures that no single person can divert funds without a second person's knowledge. This control is inexpensive but highly effective at preventing fraud.
Question 6: When an association's financial audit reveals a material weakness in internal controls, this means:
- The association has a strong financial position
- There is a significant deficiency in internal controls that could allow material misstatement of financial statements to go undetected (Correct answer)
- The audit found a minor clerical error
- The association failed to complete a reserve study
Correct answer: There is a significant deficiency in internal controls that could allow material misstatement of financial statements to go undetected
A material weakness is a serious gap in internal controls, one significant enough that there is a reasonable possibility that a material misstatement in the financial statements would not be prevented or detected in a timely manner.
Auditors classify control deficiencies on a spectrum: deficiency, significant deficiency, and material weakness which is most serious. A material weakness triggers mandatory communication to the board and management and immediate corrective action.
CMCA CMCA - Certified Manager of Community Associations Financial Reporting and Controls Questions and Answers 2
A bank reconciliation is performed to: