CMCA Financial Reporting and Controls 3 — Questions and Answers
Question 1: Which document provides an independent third-party opinion on whether an HOA's financial statements are free of material misstatement?
- Internal budget report
- Auditor's report (Correct answer)
- Reserve study
- Accounts receivable aging report
Correct answer: Auditor's report
An auditor's report, issued by an independent CPA, provides an opinion on the fairness and accuracy of the financial statements.
Question 2: What is the key difference between a compilation and a review engagement for HOA financial statements?
- A compilation includes an audit opinion; a review does not
- A review provides limited assurance; a compilation provides no assurance (Correct answer)
- A compilation is performed by the board; a review by an outside CPA
- A review only covers reserve funds; a compilation covers operating funds
Correct answer: A review provides limited assurance; a compilation provides no assurance
A review provides limited (negative) assurance through analytical procedures, while a compilation simply presents management's numbers with no assurance.
Question 3: An HOA treasurer discovers that the prior month's bank reconciliation was never completed. What is the immediate risk?
- The association's reserve fund will be depleted
- Errors or fraudulent transactions may go undetected (Correct answer)
- Homeowner assessment rates will increase automatically
- The annual audit will be canceled
Correct answer: Errors or fraudulent transactions may go undetected
Bank reconciliations are a key detective control; skipping them allows errors, unauthorized transactions, or fraud to remain undetected.
Question 4: In an HOA's statement of revenues and expenses, what does a net loss indicate?
- Reserve funds were used during the period
- Total expenses exceeded total revenues for the period (Correct answer)
- The association failed to collect all assessments
- Capital improvements reduced equity
Correct answer: Total expenses exceeded total revenues for the period
A net loss occurs when total expenses for the reporting period exceed total revenues generated during that same period.
Question 5: What is the purpose of a fidelity bond (crime policy) for a community association?
- To insure the common property against damage
- To protect the association from financial loss due to employee dishonesty or theft (Correct answer)
- To guarantee homeowner assessment payments
- To cover directors and officers against lawsuits
Correct answer: To protect the association from financial loss due to employee dishonesty or theft
A fidelity bond protects the association if an employee or manager steals or misappropriates association funds.
Question 6: Which reserve funding method maintains a target percent-funded level calculated against the fully funded benchmark?
- Cash flow method
- Percent-funded method (Correct answer)
- Threshold method
- Straight-line method
Correct answer: Percent-funded method
The percent-funded method measures the ratio of actual reserve balance to the fully funded ideal balance and targets a specific percentage.
Question 7: A manager receives an invoice for $8,500 that was not included in the approved budget. What should the manager do first?
- Pay the invoice immediately to avoid late fees
- Reject the invoice and ask the vendor to resubmit next year
- Present the unbudgeted expenditure to the board for approval before payment (Correct answer)
- Charge the amount to the reserve fund
Correct answer: Present the unbudgeted expenditure to the board for approval before payment
Unbudgeted expenditures above a board-established threshold require board authorization before payment to maintain proper financial controls.
CMCA Financial Reporting and Controls 3
Which document provides an independent third-party opinion on whether an HOA's financial statements are free of material misstatement?