Financial Reporting and Controls Flashcards

To establish strong internal controls and reduce the risk of financial mismanagement, what is a recommended best practice for handling an association's invoices?

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.

An association's manager prepares a financial report using the accrual basis of accounting. This report will show:

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.

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?

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.

When investing a community association's reserve funds, which of the following is the MOST important objective for the board of directors?

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.

A community association's Balance Sheet shows 'Assessments Receivable' of $25,000. What does this line item represent?

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.

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?

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.