CPA Exam For Dummies with Online Practice

Getting Started with the CPA Exam

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In this part …

Find out what it takes to become a CPA — and why all the work is worth it.

Become familiar with the structure of the exam and what types of skills it tests.

Find out how to register for the exam and what to expect when you arrive on test day.

Put together a study plan that works around your busy life to ensure that you’re as successful as possible on the exam.

Chapter 1

So You Want to Become a CPA

In This Chapter

arrow Considering the benefits of a CPA designation

arrow Mulling over what a CPA does

arrow Weighing the CPA credential with other designations

A certified public accountant, or CPA, is a valuable credential in the world of accounting and finance. To gain the credential, a candidate must pass the CPA exam. Before you put in the work to prepare for the exam, though, make sure you understand the CPA designation.

In this chapter, you discover the added responsibilities that may come with a CPA designation. CPAs have a higher level of expertise and responsibility than non-CPA accounting professionals. As a result, many senior-level accounting positions require a CPA. Next, you go over the type of work that CPAs perform. The designation allows you to work in a variety of accounting positions. Finally, you look at a comparison of the CPA credential to other designations in the accounting profession.

Added Responsibilities with a CPA Designation

A CPA designation can allow you to advance your career beyond those people who simply earn an undergraduate degree. That’s because the CPA exam tests you on a set of skills that are more specific than you find in an undergraduate business program. Also, the sheer amount of information tested makes passing the exam a real accomplishment. In this section, you see some of the additional responsibilities that come with a job that requires a CPA credential.

Many successful people in business, government, and the not-for-profit world started out as CPAs. That may be because CPAs understand how an entire entity works. An accountant has to understand each process within an organization, because he’s responsible for posting the accounting transactions for those processes.

CPAs also generate the financial statements for the entity. To put together the statements, an accountant has to understand how the entire organization operates. It’s the CPA who often must answer to stakeholders regarding the financial statements. Stakeholders include regulators, lenders, and investors, to name a few. Here are some typical issues that a stakeholder may bring up with a CPA:

Balance sheet and debt: A potential lender to the company may want details on the amount of debt a business already owes to creditors. Some lenders compare the company’s total debt to total assets. That ratio indicates the assets a company can sell to pay off debt, assuming that the company can’t make payments of principal and interest.

You can compare this situation to using a car as collateral for a loan. If the car buyer can’t make the payments, the lender can sell the car to recover some (or all) of the amount loaned.

Stockholders and earnings: A common-stock owner may look into the amount of earnings an entity generates. One measurement of earnings is earnings per share (EPS). EPS is defined as the company earnings divided by average common stock shares outstanding. This ratio explains the dollar amount of earnings that a business generates for each common stock share. Average common stock is defined as follows:

Many investors feel that EPS is an indication of a common stock’s value.

Regulatory requirements: Regulators require many financial institutions to maintain a certain amount of equity, which is defined as assets less liabilities. To a regulator, equity represents funds available for investors. If a financial institution violates a rule or regulation, the business can repay investors using its equity.

Considering What a CPA Does

A big advantage of the CPA credential is that it increases the variety of tasks an accountant can perform. Like many professionals, a CPA may specialize in a field or branch out into other areas of the profession.

This section explains what a CPA does and specific types of positions that are staffed by CPAs. Many of the jobs are useful in many industries. Retailers and manufacturers, for example, both need tax returns and financial statements prepared. Although specific industry knowledge is important, CPAs have a set of skills that are largely transferrable.

Many businesses will hire accountants without a CPA to operate in accounting positions with less responsibility. A staff accountant handling accounts receivable or accounts payable may not have a CPA designation. Other positions with more responsibility will require a CPA. The company controller and chief financial officer are typically CPAs.

Accounting work and controller positions

One big distinction between types of accounting work is accounting versus tax. Accounting is thought of as posting transactions and generating financial statements. Tax, on the other hand, refers to tax planning and filing tax returns. This section discusses accounting work.

A chief executive officer (CEO) is responsible for hiring senior management, and one of those positions is chief financial officer (CFO). The CFO has overall responsibility for all financial matters of an organization. Here are some specific tasks that a CFO must manage:

Controllership: Controllership refers to maintaining control over the financial transactions of a company. The CFO needs to ensure that the accounting transactions are posted correctly. Controllership also refers to generating accurate and timely financial statements shortly after the end of each month and year.

Treasury: Treasury refers to the cash needs of a company. Businesses use debt and equity in some combination to raise capital, which refers to the cash and other assets the company acquires. The decision on how much debt or equity to raise is in the hands of the CFO. The CFO plans for short-term cash needs to operate the company each month. The CFO also plans for long-term financing needs, such as planning for an expensive purchase (building, equipment, machinery, and the like).

Financial strategy: The CFO has overall responsibility for financial strategy. This includes analyzing company profit by department or product line. A CFO is expected to recommend how each department can make changes to improve profit. Because nearly every company has a limited amount of capital, the CFO needs to analyze how that capital should be used to maximize earnings. That may mean buying a new piece of equipment for Department A and closing the operations of Department B. A CFO works closely with the company’s operations managers to make processes more efficient.

The CFO is both an accountant and a manager. Here are some of the positions the CFO will hire and manage:

Controller and treasurer: The CFO hires a controller to manage the accounting transactions and financial-statement process. He or she also hires a treasurer to manage the treasury activities.

Accounting manager: A CFO, using input from the controller, may hire one or more accounting managers. These managers are responsible for certain areas of the controllership process. One manager, for example, may handle the company’s accounts receivable process. That manager processes sales, receivables, and bad-debt transactions. The position also includes reporting financial results to the controller and CFO.

Staff accountant: Accounting managers, in turn, hire staff accountants. This type of position is responsible for the day-to-day transactions of a company. If the staff accountant works with accounts receivable, he or she reviews incoming customer payments and reduces accounts receivable. That same person analyzes credit sales and posts accounts receivable. A staff accountant position may be the first position you work in as a CPA.

Not all companies have all the accounting positions I explain here. A small company may have a CFO, controller, and a few staff accountants; no accounting managers are needed to manage the company’s accounting work.

Auditing, reviews, and compilations

CPAs fill the role of a third-party auditor. An auditor is a CPA who is independent of the company under audit. Independence means that the only relationship that the CPA has with the business is the fee paid for the audit. An audit occurs when an auditor performs procedures on the company’s financial statements. The auditor uses the procedures to gather evidence about the financial statements. After completing an audit, the CPA provides a written opinion on whether the financial statements are free of material misstatement.

Reviewing jobs in the field

CPA firms perform audits. These organizations are typically partnerships formed by CPAs. Here are some of the positions you find in a CPA firm:

Partner: A partner has an investment in the partnership. The partner is responsible for the management of a particular group of audit clients. Like a CFO, the partner selects an audit staff and manages the audit. Audits involve layers of review. The audit partner is responsible for the final review of the audit work.

Manager: A manager works for the partner. Each manager may be responsible for several audits that are in process at the same time. The manager reviews the work of the audit staff below him or her. A manager is the client contact for most of the audit client’s managers. When a question or concern needs to be discussed with the auditors, the company manager usually goes to the audit manager first.

Senior: A senior has day-to-day responsibility for the audit work performed. This individual is present at the client’s offices during the audit’s fieldwork. Fieldwork refers to when the auditors gather evidence at the client’s offices. The auditor and the client agree on when and how long fieldwork will take place.

Staff accountant: Staff accountants perform the bulk of the audit procedures. This may include testing accounting transactions using company documents or interviewing the client’s staff. If you join a CPA firm’s audit department, you’ll probably start as a staff auditor.

Going over the audit process

When planning an audit, the CPA firm creates an audit program. An audit program documents the procedures that will be performed for each area of the audit. An audit of cash, for example, will include a review of the client’s bank account reconciliations. The auditor will use the bank statement and the client’s cash activity to review the reconciliation of each bank account.

Everyone involved with the CPA firm’s audit will follow the steps in the audit program. After the staff accountant or senior completes a step on the audit program, the manager and the audit partner will review the work. The senior reviews the work of each staff accountant. The multiple layers of review ensure that each step in the audit program is performed and that sufficient audit evidence has been gathered.

After the audit evidence is gathered during fieldwork, the senior and manager work on the audited financial statements. Each number in the financial statements is audited to some extent. The auditors compare their audit results with the company’s financials. If differences exist, the auditor may propose an adjustment.

An adjustment is a proposed accounting entry to correct the financial statements. That correction may be to fix an error or to clarify an accounting issue. Adjustments are also posted based on judgments and estimates. A bank, for example, estimates the dollar amount of loans that won’t be repaid. The bank then posts an entry to account for bad debt expense. An auditor may propose that the bad debt expense be increased or decreased.

The client can accept the adjustment and post the accounting entry. A client may also reject posting the adjustment. If the client rejects the proposed adjustment, that decision may impact the auditor’s decision on the audit opinion. For example, an auditor may feel that the dollar amount of the adjustment requires disclosure to the financial-statement reader. The auditor may add language to the audit opinion about this area of concern.

CPA firms perform other projects that aren’t considered audits, such as reviews and compilations. In these instances, the auditor isn’t giving an opinion as to whether the financial statements are presented fairly. Instead, the CPA reviews the financials for proper formatting and reasonableness. If you work for a CPA firm, you’ll probably work on several types of engagements.

Preparing tax returns

Besides auditing, the other large area of business for a CPA firm is tax preparation. You’ll find that larger CPA firms provide both audit and tax services. Smaller firms may provide only tax services. Given the complexity of the tax code, many CPAs who specialize in tax issues work in the field year-round.

Depending on the size of the firm, you may see the same partner, manager, senior, and staff structure that I discuss in the earlier section "Reviewing jobs in the field." If you’re interested in pursuing a CPA career by opening your own small business, preparing tax returns may be a way to start.

When you consider a career in either audit or tax, keep these thoughts in mind:

Seasonality of tax: Working in tax requires a tremendous number of hours between January 1 and April 15. That’s because corporate and other business tax returns as well as personal tax returns are due in the March and April timeframe. To succeed as a tax preparer, you need the ability to maintain a focus on detail while working long hours.

Audit work includes heavy hours during the same timeframe. Most companies have a December 31 year-end, so the first quarter of the following year is a busy time. However, auditors can plan work and perform some procedures before December 31. In addition, some companies have fiscal year-ends that are at different points during the year. As a result, the work of an auditor can be more spread out during the year than tax work.

Less interaction: Generally, tax preparers spend more time in the office working on technical issues. Audit, on the other hand, requires time at the client location. Fieldwork represents time at the client’s offices performing work and talking to client personnel. If you’re more outgoing and prefer more human interaction, audit may be a better choice than a career in tax.

Travel: Auditors need to travel to client locations. Sometimes that travel may be difficult to plan and predict. If fieldwork takes longer than expected, an auditor may need to stay out of town longer. Generally, auditors try to work heavy hours while out of town. This approach allows them to finish the fieldwork as soon as possible. Tax accountants, on the other hand, generally travel much less.

Both audit and tax work require you to spend time on continuing education. As you see later in this chapter, some continuing education is required by the CPA industry. You’ll need to spend even more time learning about your field. If you’re an auditor, you’ll learn about the industries of the clients you audit. Tax specialists need to stay on top of changes in the tax code.

Larger CPA firms have auditors specialize in particular industries. They might, for example, develop an expertise in financial service audits. Most of the audits you work on will be in that area. As you learn more, you’ll be able to complete audit procedures more quickly. You’ll also be better prepared to ask the client intelligent questions.

Audit clients want the CPA firm to staff the audit with accountants who know their industry. That knowledge means that the auditor can minimize the time that they need with client personnel. The audit process goes faster, and the CPA firm can spend less time on fieldwork.

Branching out into other careers

CPAs often become successful leaders in a variety of fields. One reason is that accountants work with a company’s entire operation. CPAs see how each department operates and how it contributes to company profit. It naturally follows that a CPA can move into company management, because he or she knows how everything works.

Given this concept, many people obtain their CPA credential with the intention of moving into a non-accounting career. Here are just a few examples of careers that are staffed by CPAs:

Company management: Broad knowledge of a company’s business allows a CPA to move into management positions. The controller of the furniture manufacturing division, for example, may be a candidate for the vice president of operations. The controller must understand operations to handle the division’s accounting properly.

Financial analyst: Financial analysts perform work for company senior management. Analysts also work for investment companies that recommend stocks and bonds of other businesses as investments for their clients. Many of the skills you learn and use as a CPA are transferrable to this career.

Bankers and other lenders: Bankers and other lenders make decisions about a company’s ability to generate sufficient earnings to make loan payments. Lenders analyze the balance sheet to determine whether a business has sufficient assets to serve as collateral for a loan. This work requires many of the skills used by CPAs.

Comparing a CPA to Other Credentials

Two credentials are similar to the CPA designation: chartered financial analyst (CFA) and certified valuation analyst (CVA). As you move forward in your career, you may consider getting one of these other credentials, along with your CPA designation. Many people who work in these two fields have experience as CPAs.

Checking out the chartered financial analyst (CFA) credential

A chartered financial analyst (CFA) uses several skill sets to perform analysis on both companies and investment opportunities. You can find out details about the designation at www.cfainstitute.org. To obtain this credential, an individual must pass three exams, which are referred to as levels 1, 2, and 3. Here are some of the topics tested on the CFA exams:

Quantitative methods: Many of these concepts are taught in statistics classes, which you’ve likely taken if you’ve completed an undergraduate business or accounting degree. Quantitative methods include time value of money, probability, and other types of analysis.

Economics: This area includes the study of supply and demand, business cycles, inflation, and foreign currency exchange rates.

Corporate finance: Corporate finance goes over the decision-making process of raising capital and investing capital in a business.

Portfolio management: This area covers the concept of portfolio management and wealth planning. These areas refer to decisions about the types of investments a money manager selects. CFA exams cover many types of investments, including derivatives.

tip.eps If you’re more interested in analysis than generating financial statements, you may prefer working as a CFA.

Mulling over the certified valuation analyst (CVA) credential

A valuation places a dollar value on assets that may be difficult to value. A good example is an intangible asset, such as a patent, customer list, or trademark. A CVA takes a set of financial statements and performs additional work to compute company valuations.

A business may need to obtain a valuation in several circumstances. When a buyer and seller are negotiating the sale of a company, the parties may hire a CVA to compute the company’s value. The price paid for the business may be very different from the book value of the assets, which is defined as assets less liabilities.

Most industries have valuation benchmarks that drive the price paid for companies in that industry. Say, for example, that clothing manufacturers typically have a sale price based on three times the annual sales in dollars. In that case, the buyer and seller will compute three times sales and include that amount in their negotiation of a price for the company. CVAs explain and provide this type of analysis.

CVAs may also be involved when the value of a company must be determined in a legal matter. If two partners are in a legal dispute over their share of the company’s value, a CVA may be retained to determine the value of the partnership.

You can find out more on the CVA designation at www.nacva.com.

Understanding the CPA Licensing Requirements

The Uniform CPA Examination is developed and graded by the American Institute of CPAs, or AICPA, which is the world’s largest member association for the accounting profession. The AICPA exists to set accounting standards and to support and expand the accounting profession. You can find lots of great information at their website (www.aicpa.org).

The purpose of the CPA exam is to fulfill one of several requirements for a license to practice public accounting. Passing the exam qualifies you to be certified by a state. Although the exam is the same in every state, you obtain a license to practice from a State Board of Accountancy.

Knowing what you need for a license to practice public accounting

A certified public accountant is someone who has earned a license in his or her state. Check out www.thiswaytocpa.com to find out the requirements for your state. Each state has requirements that address three specific areas: education, experience, and ethics.

Going over education requirements

Most states require a bachelor’s degree to meet the education requirement. However, a growing number of states require 150 semester hours of college credit.

Many states are adding to the education requirement because they feel that a bachelor’s degree doesn’t cover all the skills sets needed for the CPA profession. The accounting industry adds rules and regulations each year. These added requirements mean that the CPA candidate needs a larger body of knowledge. As technology becomes more complex, the CPA must learn more to use technology effectively.

Meeting the experience requirement

Most states require at least two years of experience in the accounting profession. The type of experience required also varies by state. In some cases, the work must be with a public accounting firm. Many firms will hire accountants who are not yet CPAs. These accountants work lower level accounting positions until they pass the CPA exam. At that point, they may be promoted into positions with more responsibility.

tip.eps Some companies will help an employee pay for the CPA exam and a review course. Ask potential employers whether they offer this type of benefit.

Addressing ethics

State Boards view ethics as very important because CPAs have a great deal of responsibility. CPAs fill most of the senior accounting positions at companies. One primary responsibility is to generate financial statements. If an unethical CPA produces financial statements that are intentionally incorrect, the impact can be enormous.

Because the CPA’s potential impact on stakeholders is so great, nearly all State Boards of Accountancy require an ethics exam, known as Rules of Professional Conduct. Many also require continuing education for CPAs in the field of ethics.

Walking through CPA exam topics

To pass the CPA exam, you must pass each of these four exams:

Auditing and attestation (AUD): This test covers the process of planning and implementing an audit. The test requires you to know a great deal of the language that’s used to write audit opinions. Reviews, compilations, and other engagements are on the AUD test.

Financial accounting and reporting (FAR): The FAR test covers the nuts and bolts of working as an accountant. You need to know how to account for a variety of accounting transactions, including accrual entries. This test also covers financial-statement presentation.

Business environment and concepts (BEC): This test addresses subjects that are closer to those covered in a broad business school curriculum. The BEC test covers many decision-making tools. BEC also covers some economic topics.

Regulation (REG): REG covers many issues you may see in a business law class, including agency and sales law concepts. A large portion of the REG test addresses taxation of businesses, trusts, and estates as well as individual taxation.

Chapter 2

Getting Acquainted with the CPA Exam

In This Chapter

arrow Understanding what the CPA exam tests

arrow Going over how the exam is administered

arrow Walking through the specific skills outline

arrow Looking at scoring

After you decide to get the CPA credential, you need to become familiar with the CPA exam. In this chapter, you do just that. You find out about the four tests that make up the exam. From there, you move on to understanding the exam format. The format section goes over the different ways the exam tests your knowledge and skills. Some questions require problem-solving skills, and others focus on written communication. Finally, you gain an understanding of how the exam is graded.

Knowing What’s on the Exam

The CPA exam consists of four separate tests, which mirror the types of tasks a CPA may have to perform. For example, some accountants perform audits and other third-party reviews of financial statements, and those tasks are tested in the auditing and attestation (AUD) test. The following sections provide an overview of each of the four tests.

tip.eps The AICPA’s document Content and Skill Specifications for the Uniform CPA Examination explains the tests in detail, listing the percentage of test questions for each particular topic. For example, the document explains that engagement acceptance and understanding the assignment questions make up 12 to 16 percent of the AUD test. Knowing which areas have the most questions can help you study effectively. You can schedule each test individually, and you can take the tests in any order. To search for and download the document, visit the AICPA website, www.aicpa.org.

remember.eps You register for each test individually, and you can decide the order in which to take the tests. Each test takes 3 or 4 hours, so you don’t take all four tests in the same day.

Financial accounting and reporting

One test covers financial accounting and reporting (FAR). Accountants have guidelines on how to record accounting transactions and present financial statements. The process of creating financial statements is called financial reporting. For example, suppose you have a bank loan. The loan requires you to repay a part of the $10,000 of the principal amount (the original amount borrowed) each year. Financial reporting requires you to separate the amount due within a year (a current liability) from the remaining loan balance (a long-term liability). Now the financial-statement reader can make a more informed decision about the company’s debt position. If a large amount of the principal is due within a year, that might put a strain on the company’s available cash.

The FAR part of the exam frequently tests your ability to

Prepare and review source documents and post activity in the accounting records (source documents are the original records that support an accounting transaction, such as an invoice from a client or a shipping document)

Identify which financial accounting and reporting methods are appropriate for a given situation

Perform financial analysis, including variance and trend analysis

Produce financial reports to meet regulatory requirements

Auditing and attestation

The auditing and attestation (AUD) test involves concepts that are related to auditing financial statements and other engagements. An engagement is the work that a client hires an accountant to perform. An audit takes place when a CPA firm performs procedures on a company’s financial statements. Based on those procedures, the auditing firm provides an audit opinion.

Here are some of the frequently tested areas in the AUD part of the exam:

Accepting the audit or attestation engagement

Understanding the entity and the entity’s controls over accounting procedures

Performing audit procedures and assessing audit evidence

Evaluating audit findings and writing the audit report

Regulation

The regulation (REG) test covers the ethics and professional responsibilities of a CPA. It also addresses business law and federal taxation.

Here, the exam describes business situations and asks whether the accountant’s behavior is ethical, based on professional standards. For example, suppose a CPA who is performing an audit of Acme Company also owns a business that sells raw materials to Acme. Professional standards require that a CPA performing an audit be independent of the client. Independence means that the CPA’s only business relationship with the company is the audit work being performed. Because the CPA has an additional business relationship with Acme Company, the CPA is not independent. The accountant should resign from the audit.

The REG test also addresses the behavior of clients. Say that Timberrr Lumber has a policy that sales revenue is posted to the accounting records when goods are shipped to a customer. Timberrr is having a poor sales month and wants to post as many sales in the last few days of the month as possible. On the 29th day of the month, the lumber company receives a $5,000 order from a customer and posts that amount as sales revenue. Because that transaction isn’t consistent with Timberrr’s revenue recognition policy (the $5,000 order hasn’t been shipped yet), a CPA performing an audit on Timberrr should insist that the $5,000 sales revenue be removed from the accounting records.

remember.eps Financial statements are the responsibility of company management. A company accountant or outside CPA firm can recommend changes to the accounting records. However, management is ultimately responsible for generating financial statements that fairly present the company’s financial position.

Completing the tax portion of the REG test is similar to the process of preparing tax returns. The candidate needs to know many of the rules for both individual and corporate taxation. The exam provides details about a tax client, and you have to calculate the tax impact of those details.

Finally, the REG test covers your basic knowledge of business law. It includes topics such as contracts, the relationship between agents and principals, and the Uniform Commercial Code (UCC).

Business environment and concepts

The business environment and concepts (BEC) test focuses on general topics that a college business major learns in undergraduate coursework. This section is less about specific accounting and more about the skills needed to manage a business.

One area tested is corporate governance, which deals with the duties and responsibilities of company executives. This includes corporate officers, such as the chief financial officer, as well as company employees (those workers who are not in management). Corporate governance also covers the responsibilities of the board of directors. For example, a majority of the firm’s board of directors should be independent. In this case, independence means that the board member’s only relationship with the company is the fee he or she receives as a board member. The individual isn’t a company employee or supplier.

The BEC test also tests economic concepts and analysis. You may see questions on the impact of globalization, including the risk of converting from one type of currency to another. You’re also tested on the concept of business cycles as well as interest risk.

Another area of emphasis is financial decision-making. For example, companies often have to consider whether to lease a piece of machinery or buy it. To make an intelligent decision, potential purchasers consider the cash required to buy the machine — and they consider the source of that cash.

If the firm borrows funds for the purchase, the borrowers need to consider the interest expense on the loan. When a company issues stock, they need to consider how much ownership is being sold to outside investors. Those investors will now have a say in major company decisions. To succeed on this part of the exam, you need to understand the financial tools needed to make business decisions.

Understanding the Exam Format

Many people have more success on an exam if they can visualize what will happen after they walk into the room to take the test. In this section, you find out about the technology aspects of the CPA exam and the types of questions you encounter.

Navigating the online tests

You take the CPA exam by computer. Here are some important features of the exam software:

Toolbar: The toolbar displays the test and the testlet you’re currently taking. A testlet is a section of a test; the regulation test, for example, contains three testlets of multiple-choice questions.

The toolbar also displays the amount of time remaining to complete the exam and provides a calculator and exit button. For more-complex portions of