CPA Exam AUD, REG, and Finance — Plus Big 4 vs. Regional Firm Career Paths
The Three Remaining CPA Exam Sections
After FAR, three sections directly shape your career direction as a CPA.
75 to pass
AUD
AICPA GAAS + PCAOB standards; attestation and ethics
75 to pass
REG
Federal taxation + business law (UCC, contracts, bankruptcy)
75 to pass
BEC / BAR
Business environment, economics, IT governance, and analytics
Scaled score
Grading Method
Item Response Theory; passing = 75 on 0–99 scale
AUD — Auditing and Attestation
The Audit Risk Model
The core framework of AUD is the Audit Risk Model.
- Inherent Risk (IR): susceptibility of an assertion to material misstatement, absent controls
- Control Risk (CR): risk that internal controls fail to prevent or detect a material misstatement
- Detection Risk (DR): risk that auditor procedures fail to detect a remaining misstatement
The only risk the auditor can control is Detection Risk. If the auditor sets a low tolerable AR, and IR × CR is high, then DR must be very low → more extensive substantive procedures required.
Four Audit Opinion Types
| Opinion | Condition | Reliability of Financial Statements |
|---|---|---|
| Unmodified (Clean) | No material misstatements; no scope limitations | Presented fairly in all material respects |
| Qualified | Material but not pervasive misstatement OR scope limitation | Fair except for the described matter |
| Adverse | Material AND pervasive misstatement | NOT presented fairly |
| Disclaimer of Opinion | Pervasive scope limitation — cannot form an opinion | No opinion expressed |
Emphasis-of-Matter and Key Audit Matters
- Emphasis-of-Matter (EOM): auditor draws attention to properly disclosed information already in the financial statements (e.g., going-concern uncertainty, subsequent event, restatement)
- Key Audit Matters (KAM): required in PCAOB auditor reports for accelerated filers (AS 3101); most significant matters communicated to the audit committee during the audit
Audit Procedure Flow
1
Phase 1: Engagement Acceptance and Planning
Phase 1: Engagement Acceptance and Planning
Assess independence and ethics (AICPA Code / PCAOB Rule 3520). Set materiality. Understand the entity, its environment, and internal control. Develop the overall audit strategy.
2
Phase 2: Risk Assessment
Phase 2: Risk Assessment
Identify and assess risks of material misstatement (RMM) at the financial statement and assertion level. Identify significant risks including fraud risks. Perform preliminary analytical procedures.
3
Phase 3: Internal Control Evaluation
Phase 3: Internal Control Evaluation
For PCAOB integrated audits (public companies): test design AND operating effectiveness of ICFR (PCAOB AS 2201). For AICPA audits: understand controls sufficiently to design substantive procedures.
4
Phase 4: Substantive Procedures
Phase 4: Substantive Procedures
Tests of details (vouch transactions, confirm balances) and substantive analytical procedures. Scope calibrated to assessed DR: lower DR → more extensive procedures.
5
Phase 5: Completion
Phase 5: Completion
Evaluate audit findings. Review for subsequent events (through the report date). Obtain management representations letter. Perform overall analytical review.
6
Phase 6: Reporting
Phase 6: Reporting
Form audit opinion. Draft audit report per AU-C 700 (AICPA) or AS 3101 (PCAOB). Communicate with the audit committee. Issue signed audit report.
REG — Federal Tax Strategy
Key Differences: Individual vs. Corporate Tax
| Feature | Individual (Form 1040) | C-Corporation (Form 1120) |
|---|---|---|
| Income tax | Progressive rates (10–37%) | Flat 21% (TCJA 2017) |
| Self-employment | SE tax on net SE income | Not applicable |
| Dividends received | Qualified dividends at 0/15/20% | DRD deduction (50–100%) |
| Capital gains | Preferential rates (0/15/20%) | Ordinary rates (21%) |
| AMT | AMTI > exemption → 26%/28% on excess | Repealed for corps by TCJA; Corporate AMT 15% (IRA 2022) |
| Pass-through deduction | §199A QBI deduction (up to 20%) | N/A |
Consolidated Tax Return — Key Concept for REG
The CPA REG section tests consolidated returns for affiliated groups (80%+ ownership).
- Eligibility: parent must own 80%+ of voting stock AND 80%+ of total value of each subsidiary
- Intercompany transactions: deferred until recognized in a transaction with an outside party
- Consolidated NOL: losses of one group member offset income of another
- Separate return limitation year (SRLY): limits use of pre-affiliation losses
Financial Management: Key CPA Exam Calculations
CAPM and Beta
Capital Asset Pricing Model (CAPM)
E(Ri) = Rf + βi × [E(Rm) − Rf]
-
E(Ri): expected return of the asset
-
Rf: risk-free rate
-
βi: beta (systematic risk relative to market)
-
E(Rm) − Rf: market risk premium
-
Beta > 1: more volatile than the market (aggressive asset)
-
Beta < 1: less volatile than the market (defensive asset)
-
Beta = 0: risk-free asset level of volatility
DCF Valuation
Free Cash Flow to the Firm (FCFF) Approach
FCFF = EBIT × (1 − tax rate) + D&A − CapEx − ΔNWC
Firm Value = FCFF / (WACC − g) [Gordon Growth / perpetuity model]
WACC = Wd × Kd × (1 − t) + We × Ke
Capital Structure: Modigliani-Miller Theory
| Theory | Key Assumptions | Conclusion |
|---|---|---|
| MM (1958) — no taxes | Perfect capital markets | Capital structure irrelevant; leverage doesn’t change firm value |
| MM (1963) — with taxes | Corporate taxes exist | Debt creates tax shield; optimal = 100% debt (theoretical) |
| Trade-off Theory | Taxes + bankruptcy costs | Optimal structure balances tax shield vs. financial distress costs |
Options Fundamentals
CPA exam tests put-call parity and the binomial model directly.
Put-Call Parity
- C: call option price
- P: put option price
- S: current price of underlying asset
- PV(X): present value of exercise price
Career Paths After Passing the CPA Exam
| Path | Starting Salary | 10-Year Compensation | Work-Life Balance | Key Characteristics |
|---|---|---|---|---|
| Big 4 Audit | $65,000–$80,000 | $120,000–$200,000 (Senior Manager) | Poor at first; improves post-senior | Audit experience = strong credential for exits |
| Big 4 Tax | $65,000–$80,000 | $150,000–$250,000 | Better than audit outside busy season | Tax specialization: M&A tax, transfer pricing |
| Deal Advisory (M&A) | $75,000–$95,000 | $250,000+ (Director/Partner) | Extremely demanding | Financial due diligence on M&A transactions |
| Corporate Controller/CFO Track | $70,000–$100,000 | $180,000–$400,000 (Fortune 500 CFO) | Varies by industry | Stability + strategic business involvement |
| Financial Services (IB/PE) | $80,000–$110,000 | Variable + significant bonus | Highly variable | CFA adds significant value |
Big 4 Promotion Timeline and Compensation
1
Staff (Years 1–3)
Staff (Years 1–3)
Salary: $65,000–$80,000. Execute audit fieldwork, prepare workpapers. Heavy busy-season hours (Jan–April for calendar-year clients). CPA license expected within 2 years.
2
Senior (Years 3–6)
Senior (Years 3–6)
Salary: $85,000–$120,000. Lead audit sections, manage staff, direct client interaction. Key inflection point: stay for promotion or exit to industry/regional firm.
3
Manager (Years 6–10)
Manager (Years 6–10)
Salary: $130,000–$180,000. Own client relationships, manage team quality. Enter the partner-track candidate pool.
4
Senior Manager / Director
Senior Manager / Director
Salary: $180,000–$260,000. Technical expertise and business development become paramount.
5
Partner
Partner
Compensation: $300,000–$1,000,000+ (equity partner). Co-owner of the firm. Average 15–20 years from staff. Client portfolio largely determines earnings.
CPA vs. JD vs. MD — Professional Comparison
| Factor | CPA | Attorney (JD) | Physician (MD) |
|---|---|---|---|
| Exam difficulty | Very high (4 sections, 18-month window) | High (bar exam after 3-year JD) | Very high (USMLE Steps + residency) |
| Time to credential | 3–5 years post-graduation | 7–9 years (undergrad + JD + bar) | 11–15 years (college + med school + residency) |
| Starting compensation | $65,000–$80,000 | $70,000–$200,000 (varies widely) | Resident: ~$60,000 |
| 10-year compensation | $120,000–$250,000 | $120,000–$500,000 (partner track) | $300,000–$700,000 (specialist) |
| Work-life balance (early career) | Poor (busy season) | Poor (litigation season) | Very poor (call schedule) |
| Career mobility | Very high (industry, advisory, finance) | Medium (specialty-dependent) | Low (medical field) |
Study Checklist
- AUD — Memorize Audit Risk Model (AR = IR × CR × DR) and DR adjustment logic
- AUD — Know all four opinion types and when each applies
- AUD — Walk through the 6-phase audit procedure flow
- AUD — Define KAM (Key Audit Matters) and when required (PCAOB accelerated filers)
- REG — Understand consolidated return 80% ownership threshold and SRLY rules
- REG — Practice individual vs. corporate tax rate structure and key preference items
- Finance — Memorize CAPM formula and interpret beta values
- Finance — Calculate FCFF-based DCF firm value using WACC
- Finance — Explain MM three-stage capital structure theory (1958, 1963, trade-off)
- Finance — Apply put-call parity to solve for missing option price
- Career — Research specific Big 4 / regional firm / industry roles aligned with your goals
- Career — Prepare resume and CPA license application timeline
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