CMCA Financial Reporting and Controls 5 — Questions and Answers
Question 1: What is the purpose of requiring two board member signatures on checks above a certain dollar threshold?
- To speed up the payment process
- To provide an additional authorization control over large disbursements (Correct answer)
- To satisfy IRS reporting requirements
- To satisfy the association's insurance carrier
Correct answer: To provide an additional authorization control over large disbursements
Dual-signature requirements on large checks add an extra layer of authorization, reducing the risk of unauthorized or fraudulent payments.
Question 2: Which of the following best describes a 'special assessment' in a community association context?
- A routine monthly charge for common area maintenance
- A one-time charge to homeowners to fund an unbudgeted or emergency expense (Correct answer)
- A penalty fee for HOA rule violations
- An annual audit fee charged proportionally to all owners
Correct answer: A one-time charge to homeowners to fund an unbudgeted or emergency expense
A special assessment is a non-recurring charge levied on homeowners to cover costs not adequately funded through regular assessments or reserves.
Question 3: An association uses a management company that also handles its bookkeeping. Which control is most important to implement?
- Allowing the management company full check-signing authority
- Having the board independently review monthly bank statements and financial reports (Correct answer)
- Delegating all financial decisions to the management company
- Combining the operating and reserve accounts for easier oversight
Correct answer: Having the board independently review monthly bank statements and financial reports
Independent board review of bank statements and financials ensures the management company's work is overseen and limits the risk of undetected errors or misappropriation.
Question 4: What does 'adequate reserves' mean in the context of community association management?
- Having enough cash to cover one month of operating expenses
- Having sufficient funds set aside to repair or replace common elements as they wear out (Correct answer)
- Maintaining a zero balance in the reserve account
- Keeping reserve funds in a non-interest-bearing account
Correct answer: Having sufficient funds set aside to repair or replace common elements as they wear out
Adequate reserves means the association has accumulated enough funds to address expected major repair and replacement costs without resorting to special assessments.
Question 5: Which financial report would a board member review to determine whether the association has enough cash to pay its bills for the next 90 days?
- Balance sheet only
- Cash flow projection or cash forecast (Correct answer)
- Accounts receivable aging report
- Reserve study update
Correct answer: Cash flow projection or cash forecast
A cash flow projection shows expected cash inflows and outflows over a future period, helping the board assess short-term liquidity.
Question 6: An HOA's governing documents limit borrowing to 10% of the annual budget without homeowner approval. The board wants to borrow 15% for emergency repairs. What must happen first?
- The board may exceed the limit at its discretion in emergencies
- A homeowner vote must be held to authorize the higher borrowing amount (Correct answer)
- The management company must approve the loan
- The reserve study must be updated before any borrowing
Correct answer: A homeowner vote must be held to authorize the higher borrowing amount
Governing documents are binding; exceeding a borrowing limit set in those documents requires homeowner approval as specified in the association's rules.
Question 7: When preparing the annual budget, which cost factor is most critical to review for reserve contributions?
- Prior year's actual operating expenses
- The current reserve study's recommended annual contribution (Correct answer)
- The management company's standard fee schedule
- The previous board's discretionary spending history
Correct answer: The current reserve study's recommended annual contribution
The reserve study calculates the annual contribution needed to keep reserves adequately funded; ignoring it risks underfunding future capital repairs.
CMCA Financial Reporting and Controls 5
What is the purpose of requiring two board member signatures on checks above a certain dollar threshold?