Ch10. CPA Exam Final Comprehensive Review — All Sections, Key Numbers, and Top Traps

CPA Exam Section Structure

Exam format:
  Four core sections (all candidates must pass all four):

  FAR — Financial Accounting and Reporting
    US GAAP, IFRS overview, governmental (GASB), nonprofit
    ~66 MCQs + ~8 TBSs; 4 hours

  AUD — Auditing and Attestation
    AICPA GAAS, PCAOB standards, ethics, internal controls
    ~72 MCQs + ~8 TBSs; 4 hours

  REG — Regulation
    Federal taxation (individual, corporate, pass-through) + business law
    ~76 MCQs + ~8 TBSs; 4 hours

  BEC / BAR (discipline section):
    BEC (retiring): corporate governance, economics, IT, finance
    BAR (new 2024): business analysis, financial reporting, analytics
    ~62 MCQs + TBSs + written communication; 4 hours

Passing threshold:
  75 (scaled score, 0–99) on each section
  18-month rolling window: all four sections must be passed
  within 18 months of passing the first section
  Minimum passing candidates per testing window (AICPA policy)

Financial Reporting — Key Comparison Table

┌──────────────────┬──────────────────────┬──────────────────────┐
│ Feature          │ Contingent Liability │ Contingent Asset     │
├──────────────────┼──────────────────────┼──────────────────────┤
│ Present obligation│ Yes, probable        │ Possible/probable    │
│ Outflow probable │ Probable (>75%ish)   │ Inflow virtually     │
│                  │                      │ certain to recognize │
│ Estimable        │ Required to accrue   │ N/A for disclosure   │
│ Treatment        │ Accrue or disclose   │ Virtually certain:   │
│                  │ in footnotes         │ accrue; probable:    │
│                  │                      │ disclose only        │
└──────────────────┴──────────────────────┴──────────────────────┘

High-Value Numbers to Memorize

US GAAP financial statements: 5 (BS, IS, SE, CF, Notes)
PP&E impairment: undiscounted future CF < carrying amount → write to FV
No impairment reversal under US GAAP (unlike IFRS)

Individual income tax brackets: 7 (10% – 37%)
Long-term capital gains / qualified dividends: 0% / 15% / 20%
Corporate income tax rate: flat 21% (TCJA 2017 — TCJA permanent provisions)
SALT deduction cap: $10,000 per return

Audit opinions: 4 types (unmodified, qualified, adverse, disclaimer)
BEP = Fixed costs ÷ Contribution margin per unit
CM = Sales revenue − Variable costs

Sales tax economic nexus threshold (Wayfair): $100,000 sales
  OR 200 transactions in most states
CPA exam 18-month window: pass all 4 sections within 18 months
  of first pass date

Top-Ten Most Commonly Missed Points

① Contingent liability: accrue when BOTH probable AND estimable
   → NOT just probable alone

② PP&E impairment Step 1 uses UNDISCOUNTED cash flows
   → NOT fair value; fair value used only in Step 2

③ AFS unrealized gains/losses → OCI, NOT net income
   → Trading securities' unrealized G/L → net income

④ Sales tax zero-rate analog: in US context, exempt sales
   do NOT generate a refund; no federal sales tax

⑤ Absorption costing: production > sales → HIGHER income than variable
   → Not the reverse

⑥ CM = Sales − Variable costs (fixed costs excluded)
   → BEP = Fixed costs ÷ CM per unit

⑦ Adverse opinion = misstatement found (material + pervasive)
   → Disclaimer = scope limitation (couldn't get evidence)
   → These are OPPOSITES of each other

⑧ Consolidated statements: eliminate ALL intercompany
   → Intercompany sales, loans, dividends, management fees

⑨ §199A QBI deduction: up to 20% of QBI for pass-through owners
   → Not available to C-corporations or employees

⑩ Long-term capital gains held >12 months: 0/15/20% rates
   → Short-term (≤12 months): ordinary income rates

Key Concept Cards

Five Financial Statements (US GAAP) ★★★★★ : Balance Sheet, Income Statement, Statement of Stockholders’ Equity, Statement of Cash Flows, Notes. Memory hook: BS–IS–SE–CF–Notes

Four Audit Opinion Types ★★★★★ : Unmodified (clean), Qualified (except for), Adverse (not fairly presented), Disclaimer (no opinion). Memory hook: clean → qualified → adverse → disclaimer

Sales Tax — No Federal Component ★★★★★ : US has no federal sales tax. State + local only. Wayfair economic nexus = $100K or 200 transactions. Use tax = buyer self-remits if seller did not collect. Memory hook: sales tax = state only; Wayfair threshold

Practice Quiz (Comprehensive)

Q. Why is auditor independence essential to the integrity of an audit?

An audit’s value rests on the independence of the auditor from the client. An auditor who has a financial interest in, or personal relationship with, the client cannot objectively evaluate the client’s financial statements. Both independence in fact (the auditor is actually unbiased) and independence in appearance (a reasonable, informed third party would conclude the auditor is unbiased) are required under the AICPA Code of Professional Conduct and PCAOB Rule 3520. Compromised independence undermines investor confidence in the capital markets, which depend on reliable financial reporting.

Q. How should a CPA candidate simultaneously study FAR and REG without losing focus on either?

FAR and REG share an important connection: financial accounting is the foundation upon which tax rules operate (book-tax differences, deferred taxes). A productive approach: (1) build FAR’s GAAP framework first — financial statements, recognition rules, measurement; (2) then layer in REG tax rules as adjustments to book income (M-1 bridge, temporary vs. permanent differences, deferred tax under ASC 740). For REG’s business law content (contracts, UCC, bankruptcy), treat it as a standalone memorization block separate from the accounting material. Integrate timed practice exams for each section independently.