CAE EVALUATION EXAMS ANSWERS AND
QUESTIONS SET A+
Segregation of Duty - ✔✔No individual should control all 4 aspects of a financial
transaction.
Initiation (check request)
Authorization (approval to pay)
Asset custody (keeping the checkbook)
Recording transaction (posting)
✔✔Clean Audit - ✔✔An opinion that provides the *highest level of assurance* that the:
-Statement of Financial Position
-Statement of Activities
-Statement of Cash Flows
are all fairly presented.
✔✔Accounting Services Levels - ✔✔Audit (greatest level of assurance)
Review (limited scope - uncovers misstatements)
Compilation (no assurance of accuracy)
✔✔Sarbanes-Oxley - ✔✔The two provisions that impact non-profits are:
1. Whistle-blower protection
2. Prohibition of document destruction upon commencement of a federal investigation
✔✔Management Letter - ✔✔A letter issued by an independent auditor that
communicates what levels that management needs to address in order to come into
compliance with GAAP accounting practices.
✔✔Statement of Activities - ✔✔Shows financial activity by month and on a year-to-date
basis.
Reports:
Revenue generated
Expenses incurred
Results in net income or net loss
, ✔✔Statement of Cash Flows - ✔✔Helps creditors determine ability to generate future
cash flow to meet obligations. Cash flow and ability to convert assets into cash
important to maintain financial flexibility.
✔✔Accrual-basis Accounting - ✔✔Recognizes revenues when earned and expenses
when incurred.
This is a best practice in association accounting. It gives a better picture than cash
accounting.
Allocate dues when earned monthly rather than lump sum when received.
✔✔Chart of Accounts - ✔✔Lists all the line item accounts being used.
✔✔Liquidity Ratio - ✔✔Measures ability to pay *short term obligations*.
✔✔Current Ratio - ✔✔Total Current Assets / Total Current Liabilities
✔✔Profitability Ratio - ✔✔Profits / Losses (over a period of time).
✔✔Quick Ratio - ✔✔Measures the ability to pay current debts.
Current Assets (inventory and pre-paids) / Total Current Liabilities
✔✔Reserve Ratio - ✔✔Measures liquidity.
Expendable Net Assets / Total Annual Expenses
✔✔Coverage Ratio - ✔✔Projections for interest and principal payments to creditors and
investors.
Can you cover things?
✔✔Net Assets - ✔✔Assets *after* liabilities have been paid.
✔✔Maslow's Hierarchy of Needs - ✔✔A theory of human motivation:
Fulfilled bottom to top:
Self-Actualization
Esteem
Love/Belonging
Safety
Physiological
*SSASS* (survival, safety, affiliation, self-esteem, self-actualization)
✔✔Statement of Purpose - ✔✔The reason for an association's existence.
This is crucial in determining if an association can be a non-profit and tax-exempt
organization.
QUESTIONS SET A+
Segregation of Duty - ✔✔No individual should control all 4 aspects of a financial
transaction.
Initiation (check request)
Authorization (approval to pay)
Asset custody (keeping the checkbook)
Recording transaction (posting)
✔✔Clean Audit - ✔✔An opinion that provides the *highest level of assurance* that the:
-Statement of Financial Position
-Statement of Activities
-Statement of Cash Flows
are all fairly presented.
✔✔Accounting Services Levels - ✔✔Audit (greatest level of assurance)
Review (limited scope - uncovers misstatements)
Compilation (no assurance of accuracy)
✔✔Sarbanes-Oxley - ✔✔The two provisions that impact non-profits are:
1. Whistle-blower protection
2. Prohibition of document destruction upon commencement of a federal investigation
✔✔Management Letter - ✔✔A letter issued by an independent auditor that
communicates what levels that management needs to address in order to come into
compliance with GAAP accounting practices.
✔✔Statement of Activities - ✔✔Shows financial activity by month and on a year-to-date
basis.
Reports:
Revenue generated
Expenses incurred
Results in net income or net loss
, ✔✔Statement of Cash Flows - ✔✔Helps creditors determine ability to generate future
cash flow to meet obligations. Cash flow and ability to convert assets into cash
important to maintain financial flexibility.
✔✔Accrual-basis Accounting - ✔✔Recognizes revenues when earned and expenses
when incurred.
This is a best practice in association accounting. It gives a better picture than cash
accounting.
Allocate dues when earned monthly rather than lump sum when received.
✔✔Chart of Accounts - ✔✔Lists all the line item accounts being used.
✔✔Liquidity Ratio - ✔✔Measures ability to pay *short term obligations*.
✔✔Current Ratio - ✔✔Total Current Assets / Total Current Liabilities
✔✔Profitability Ratio - ✔✔Profits / Losses (over a period of time).
✔✔Quick Ratio - ✔✔Measures the ability to pay current debts.
Current Assets (inventory and pre-paids) / Total Current Liabilities
✔✔Reserve Ratio - ✔✔Measures liquidity.
Expendable Net Assets / Total Annual Expenses
✔✔Coverage Ratio - ✔✔Projections for interest and principal payments to creditors and
investors.
Can you cover things?
✔✔Net Assets - ✔✔Assets *after* liabilities have been paid.
✔✔Maslow's Hierarchy of Needs - ✔✔A theory of human motivation:
Fulfilled bottom to top:
Self-Actualization
Esteem
Love/Belonging
Safety
Physiological
*SSASS* (survival, safety, affiliation, self-esteem, self-actualization)
✔✔Statement of Purpose - ✔✔The reason for an association's existence.
This is crucial in determining if an association can be a non-profit and tax-exempt
organization.
