Starting preparation for the CPA exam
The CPA exam requires hundreds of hours of preparation and study. To pass the exam, it’s important to have a plan of attack. That plan includes registering with your state board, as well as deciding on a study plan for each of the four tests. Here are some points to consider:
- State boards of accountancy: Each state has a state board of accountancy. The board in your state is responsible for gathering all your registration information so you can take the exam. Check your state board’s website for their CPA requirements. All CPA candidates must register with their state board.
- The four tests: The CPA exam consists for four separate tests. Three core tests are taken by every CPA candidate: financial accounting and reporting (FAR), auditing and attestation (AUD), and taxation and regulation (REG). Candidates then select one of the three discipline tests, based on their areas of interest. You can choose the business analysis and reporting (BAR), information systems and controls (ISC), or the tax compliance and planning (TCP) test. You must pass all four tests to obtain your CPA designation. As you review each area of these tests, make some decisions about the topics that will require the most study time.
- Managing the amount of exam information: The CPA can require 400 hours (or more) of total study time. Some students find the sheer amount of test information overwhelming. One way to address that concern is to create a detailed study plan. Consider which test you will take first and how many hours of study time that test will require. Use your personal calendar to plan study time each week. If you take the exam preparation just one week at a time, you’ll be able to manage the large amount of study material. Pull out a blank calendar and start to create your plan to pass each test of the exam.
CPA exam: the discipline tests
The discipline tests include many topics that concern business management as well as economic concepts and the use of technology. These tests cover the tools needed to succeed as a business manager. You’ll find that these concepts are similar to what you learn in a general study of business.
- Understanding business concepts: The topics on the BAR test are similar to what students learn in general business school classes. For example, this test covers several economic concepts, such as inflation and currency exchange rates. Business concepts are not heavily covered on the ISC or TCP tests.
- Making decisions: One purpose of all three discipline tests is to prepare the CPA to make informed business decisions. Some of these topics require you to think strategically as a business owner, not simply as an accountant. The BAR test, for example, may ask questions about pricing a product to cover all your costs and generate a profit.
- Working with information technology: The use of technology is a growing issue for CPAs. The ISC test covers several areas related to information technology (IT). CPA candidates see questions on how an IT department can generate useful financial reports. The test also includes questions on why IT can create a risk for fraud and theft.
- Tax planning and analysis: The TCP test covers tax planning topics for both businesses and individuals. CPA candidates must know whether or not a particular transaction generates taxable income or a tax deduction. You’ll need to understand how certain types of business income pass through to the owner’s personal tax return. Some of these topics are also tested on the REG test, which is discussed below.
CPA exam: the financial accounting and reporting test
The financial accounting and reporting (FAR) test requires the most number-crunching. This test covers what you’ll spend most of your time on when you start your accounting career. The test requires you to use many types of formulas and to understand the process of accounting. It covers types of accounts, accounting transactions, and accounting principles:
- Using formulas: This test covers many of the day-to-day tasks you’ll encounter as a CPA, such as posting accounting transactions. You’ll need to memorize a list of formulas. A common question on the FAR test requires you to use the formula for ending inventory, which is Beginning inventory + Purchases – Cost of goods sold = Ending inventory. The test question may provide three of the numbers in the formula and then ask you to solve for the missing number.
- Understanding accounts: The FAR test requires you to understand a company’s chart of accounts, which is the list of accounts a firm uses to post accounting transactions. You need to understand how accounts are classified on the balance sheet, income statement, and other financial statements.
- Cash basis versus accrual basis accounting: These two concepts appear on every FAR test. With cash basis, you post revenue when you deposit customer funds. Expenses are recorded when you make payments. The accrual basis, on the other hand, posts revenue when it’s earned. Typically, you earn revenue when you deliver a product or perform a service for a client. Expenses are posted when incurred. Accrual accounting is not driven by cash inflows and outflows.
CPA exam: the auditing and attestation test
The auditing and attestation test (AUD test) requires you to understand the entire process of auditing a company. An audit requires the CPA to provide an opinion. That opinion states whether or not the financial statements are materially correct. This work requires you to assess all of the accounts in both the balance sheet and the income statement. The test covers planning the audit, understanding the client’s business, and evaluating the firm’s internal controls:
-
Unqualified versus qualified audit opinions: A large portion of the AUD test covers audit opinions (or audit reports). The differences between these opinions can be tricky. An unqualified audit opinion means that the financial statements are materially correct. Review and memorize the exact language for an unqualified opinion.
An auditor writes a qualified opinion when they find issues in the audit. For example, if an auditor can’t gather sufficient audit evidence on the inventory account balance, the auditor has a scope limitation, which means that the auditor’s audit work isn’t sufficient for an unqualified opinion on the financial statements. An auditor writes a qualified report for a scope limitation. The qualified report language requires making changes and additions to the unqualified report language. If you memorize the unqualified report language, you have a starting point for writing a qualified report.
-
Segregation of duties: A heavily tested area on the AUD test is segregation of duties. To prevent theft and fraud, a company should segregate three types of duties among three employees:
-
Custody of assets refers to having physical access to the company checkbook or keys to the warehouse.
-
Authorization to move assets means an individual can sign a check or approve a purchase.
-
Recordkeeping refers to posting accounting entries.
If these duties are kept separate, a firm has a better chance of preventing fraud and theft in the business.
-
CPA exam: the taxation and regulation test
You can think of the taxation and regulation (REG) test as having two parts. One part covers business law issues, including rules on selecting a business structure. The second part of the test goes over taxation. This test is technically the most difficult. It requires you to know and apply many rules, facts and figures. You may find that the REG questions require more focus than other types of questions. Here are some tips for understanding the info on this test:
-
Considering your business law courses: A good portion of the REG test involves topics covered in a business law class. This includes agency and contract law as well as sales law. If you’ve had a business law class, you may have a leg up in learning this material. Some of the law topics may be familiar to you.
-
Pulling out tax forms: Some students see the taxation portion of the REG test as a long list of rules, with very little connection between the rules. These students can’t visualize how all the facts fit together. One great way to connect tax information is to print and review the tax forms themselves. To study for personal taxation, take a look at where the information is posted on Form 1040, the individual tax return.
