CPA (ABC) cheat sheet

Reasonable assurance obtains sufficient appropriate evidence to reduce audit risk to an acceptably low level; it is not a guarantee of absolute assurance.

Audit risk model: AR = IR × CR × DR; detection risk is the only component the auditor controls through the nature, timing, and extent of procedures.

Materiality is a matter of professional judgment; performance materiality is set below overall materiality to reduce the probability that uncorrected and undetected misstatements exceed it.

The risk of material misstatement exists at the financial statement level and the assertion level; the assertion level splits into classes of transactions, account balances, and disclosures.

Confirmations are presumptively required for accounts receivable; if the auditor does not confirm, the auditor must document why and perform alternative procedures.

Unmodified opinion is issued when the auditor concludes the financial statements are free of material misstatement; a qualified opinion is issued for a material but not pervasive misstatement.

A going concern uncertainty that is adequately disclosed leads to an unmodified opinion with an emphasis-of-matter or other-matter paragraph, not a disclaimer.

Audit documentation must be sufficient to allow an experienced auditor with no prior connection to the engagement to understand the procedures performed and conclusions reached; retain for at least five years.

Return on equity = net income ÷ average shareholders' equity; DuPont decomposition: ROE = net profit margin × asset turnover × equity multiplier.

Current ratio = current assets ÷ current liabilities; quick ratio excludes inventory and prepaid items from current assets.

Net present value discounts incremental cash flows at the project's required rate of return; accept projects with NPV greater than zero.

Internal rate of return is the discount rate at which NPV equals zero; a project is acceptable when IRR exceeds the hurdle rate.

Operating leverage measures the sensitivity of operating income to sales: degree of operating leverage = contribution margin ÷ operating income.

Capital asset pricing model: required return = risk-free rate + beta × (market return − risk-free rate).

Weighted average cost of capital weights after-tax cost of debt and cost of equity by their market-value proportions.

Under IFRS, segment reporting uses a management approach; reportable segments are those exceeding 10% of combined revenue, profit, or assets.

Revenue under ASC 606 is recognized through five steps: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue when obligations are satisfied.

A performance obligation is satisfied over time if the customer receives and consumes benefits as the entity performs, or at a point in time if control transfers.

Under the equity method, the investor records its share of investee earnings as an increase to the investment and recognizes dividends received as a reduction of the investment.

Goodwill is the excess of consideration transferred over the fair value of identifiable net assets acquired; it is not amortized but tested annually for impairment.

Leases with a term greater than 12 months are recognized on the balance sheet as a right-of-use asset and a lease liability measured at the present value of lease payments.

Under the acquisition method, identifiable assets acquired and liabilities assumed are measured at fair value at the acquisition date.

Deferred tax assets and liabilities arise from temporary differences between the financial statement carrying amount and the tax basis of an asset or liability.

Under IFRS, inventory is measured at the lower of cost and net realizable value; under U.S. GAAP, at the lower of cost and net realizable value (or market for LIFO/retail).

Gross income includes all income from whatever source derived unless specifically excluded; exclusions include gifts, inheritances, and tax-exempt interest.

Capital gains and losses are netted: short-term against long-term; net capital losses are deductible against ordinary income up to $3,000 per year ($1,500 for married filing separately).

The standard deduction for a single filer is a fixed amount indexed annually; itemized deductions include state and local taxes (capped), mortgage interest, and charitable contributions.

Section 179 expensing allows a taxpayer to elect to deduct the cost of qualifying property in the year placed in service, subject to a dollar limit and a phase-out.

MACRS depreciation uses the half-year convention unless more than 40% of property is placed in service in the last quarter, which triggers the mid-quarter convention.

An S corporation may have no more than 100 shareholders, only eligible individuals (and certain trusts and estates), and one class of stock.

A partnership generally does not pay entity-level tax; income, gains, losses, deductions, and credits flow through to partners on Schedule K-1.

Substantial authority is the standard for a tax return position that avoids the accuracy-related penalty; the position must be more likely than not to avoid the penalty for reportable transactions.

The auditor must obtain an understanding of the entity and its environment, including internal control, to identify and assess risks of material misstatement.

Substantive procedures include tests of details and substantive analytical procedures; they are required for all material transaction classes, account balances, and disclosures.

The auditor's report must include a basis for opinion, going concern evaluation, and key audit matters when required by the applicable framework.

A predecessor auditor's communication with a successor auditor is required before acceptance of an engagement under professional standards.

The audit committee must be informed of significant deficiencies and material weaknesses in internal control over financial reporting.

An auditor's opinion on internal control over financial reporting is required for accelerated filers under Section 404(b) of Sarbanes-Oxley.

Audit sampling risk is the risk that the auditor's conclusion based on a sample differs from the conclusion based on the entire population.

The auditor should document the engagement acceptance and continuance decision, including independence considerations.

Cost-volume-profit analysis: break-even point in units = fixed costs ÷ contribution margin per unit.

Margin of safety = (actual sales − break-even sales) ÷ actual sales; it measures the cushion before losses occur.

Variance analysis: material price variance = (standard price − actual price) × actual quantity purchased.

Relevant costs are future costs that differ among alternatives; sunk costs and allocated fixed costs are irrelevant to a decision.

The time value of money: present value = future value ÷ (1 + r)^n; future value = present value × (1 + r)^n.

Payback period = initial investment ÷ annual net cash inflow; it ignores the time value of money.

A flexible budget adjusts for actual volume, isolating price and efficiency variances from volume variances.

Under IFRS, a discontinued operation is a component of an entity that has been disposed of or is classified as held for sale and represents a separate major line of business or geographic area of operations.

Under the fair value hierarchy, Level 1 inputs are quoted prices in active markets; Level 3 inputs are unobservable and require disclosure of the valuation techniques used.

A change in accounting principle is applied retrospectively; a change in estimate is applied prospectively.

A prior period adjustment corrects an error and is reported as an adjustment to the beginning balance of retained earnings.

Under U.S. GAAP, research and development costs are expensed as incurred; under IFRS, development costs may be capitalized when criteria are met.

A defined benefit pension obligation is measured as the present value of expected future benefit payments attributable to employee service to date.

Under ASC 842, lessees recognize a right-of-use asset and lease liability for operating and finance leases; lessors classify leases as sales-type, direct financing, or operating.

Comprehensive income includes net income plus other comprehensive income items such as foreign currency translation adjustments and unrealized gains on available-for-sale debt securities.

Earnings per share: basic EPS = (net income − preferred dividends) ÷ weighted-average common shares outstanding.

The statute of limitations for assessment of tax is generally three years from the date the return was filed; it is six years if gross income is understated by more than 25%.

The failure-to-file penalty is generally 5% per month of the unpaid tax, up to 25%; the failure-to-pay penalty is 0.5% per month.

A taxpayer may claim a deduction for charitable contributions to qualified organizations; the deduction is limited to a percentage of adjusted gross income depending on the type of property and organization.

Under the uniform capitalization rules, direct and indirect costs allocable to inventory must be capitalized rather than expensed.

The alternative minimum tax applies a separate tax computation with adjustments and preferences added back to taxable income.

An individual retirement account contribution limit is indexed annually; traditional IRA deductions may be limited if the taxpayer or spouse is covered by an employer plan.

A corporation's dividends-received deduction is generally 50% for dividends from less-than-20%-owned domestic corporations and 65% for 20%-or-more-owned corporations (subject to taxable income limitations).

The substantial presence test determines U.S. residency for individuals based on days present in the current and prior two years.

Independence in fact requires the auditor to be unbiased; independence in appearance requires the auditor to avoid relationships that a reasonable third party would perceive as impairing objectivity.

A covered member of an audit team may not have a direct financial interest in the audit client, even if immaterial.

Providing certain non-audit services, such as bookkeeping or management functions, to an audit client impairs independence.

Contingent fees for audit or attest services are prohibited; contingent fees for certain non-attest services are permitted if disclosed.

The auditor must communicate with those charged with governance about the scope and timing of the audit and significant findings.

An auditor may not accept a gift from a client that is more than clearly insignificant in value.

The Code of Professional Conduct requires integrity, objectivity, due care, and confidentiality; confidentiality does not apply to disclosures required by law or professional standards.

An auditor must be independent of the client both during the engagement period and during the period covered by the financial statements.

The debt-to-equity ratio = total liabilities ÷ total shareholders' equity; it measures financial leverage.

The interest coverage ratio = earnings before interest and taxes ÷ interest expense; it measures the ability to meet interest obligations.

The accounts receivable turnover = net credit sales ÷ average accounts receivable; days sales outstanding = 365 ÷ turnover.

The inventory turnover = cost of goods sold ÷ average inventory; days inventory outstanding = 365 ÷ turnover.

The gross profit margin = (net sales − cost of goods sold) ÷ net sales.

Earnings quality is assessed by comparing accrual-based earnings to cash flows from operations.

A common-size income statement expresses each line item as a percentage of net sales.

The price-earnings ratio = market price per share ÷ earnings per share.

A contract with a customer exists when the parties have approved it, each party's rights and payment terms are identifiable, it has commercial substance, and collection is probable.

The transaction price is allocated to performance obligations based on relative standalone selling prices.

Variable consideration is estimated using either the expected value or the most likely amount, subject to a constraint.

A contract modification is treated as a separate contract if it adds distinct goods or services at a price that reflects standalone selling price.

Contract costs that are incremental to obtaining a contract are capitalized if expected to be recovered.

Revenue is recognized over time using an input or output method that faithfully depicts the transfer of control.

A right of return creates a refund liability and a return asset; revenue is recognized only to the extent it is probable there will not be a significant reversal.

Bill-and-hold arrangements require the customer to obtain control even though the entity retains physical possession of the product.

A contract requires offer, acceptance, consideration, capacity, and legality to be enforceable.

Under the UCC, a sale of goods over $500 must be evidenced by a writing to be enforceable, subject to exceptions such as specially manufactured goods or admission in pleadings.

An agent owes the principal duties of loyalty, obedience, and care; the principal owes the agent compensation, reimbursement, and indemnification.

A partnership is a separate legal entity; general partners have unlimited liability, while limited partners have liability limited to their investment.

A corporation is a separate legal entity; shareholders generally have limited liability and are not personally liable for corporate debts.

A security under federal law includes an investment contract, which requires an investment of money in a common enterprise with an expectation of profits from the efforts of others.

The business judgment rule protects directors from liability for decisions made in good faith and with reasonable care.

A negotiable instrument must be in writing, signed by the maker, contain an unconditional promise or order to pay a fixed amount, be payable on demand or at a definite time, and be payable to order or bearer.

Inspection of tangible assets provides evidence of existence but not necessarily of rights and obligations or valuation.

Observation provides evidence of the performance of a process but is limited to the point in time observed.

Inquiry alone is generally not sufficient to detect material misstatement; it must be corroborated by other procedures.

External confirmation is more reliable evidence than internal documentation.

Analytical procedures are required during the risk assessment phase and during the overall review near the end of the audit.

The auditor should perform procedures to obtain evidence about the completeness of liabilities, including searching for unrecorded liabilities.

A representation letter from management is required at the conclusion of the audit and is dated as of the date of the auditor's report.

The auditor should evaluate subsequent events through the date of the auditor's report.

A static budget is prepared for a single level of activity; a flexible budget adjusts for actual activity.

A favorable variance occurs when actual revenue exceeds budget or actual cost is below budget.

A standard cost system sets predetermined costs for materials, labor, and overhead.

Responsibility accounting assigns revenues and costs to the managers responsible for them.

The balanced scorecard measures performance across financial, customer, internal process, and learning and growth perspectives.

Residual income = operating income − (required rate of return × invested capital).

Economic value added adjusts accounting income for capital charges and invested capital.

A transfer price is the price charged between divisions of the same company; it affects divisional performance measurement.

A bond issued at a discount has a stated rate below the market rate; the discount is amortized to interest expense over the bond's life.

Under the effective interest method, interest expense = carrying amount × market rate at issuance.

A gain or loss on extinguishment of debt is the difference between the reacquisition price and the carrying amount of the debt.

Treasury stock is recorded at cost and reduces total shareholders' equity; it is not an asset.

Stock dividends and stock splits do not change total shareholders' equity.

A liability is classified as current if it is due within one year or the operating cycle, whichever is longer.

A contingent liability is recognized when it is probable and reasonably estimable; a gain contingency is not recognized until realized.

Under IFRS, a provision is recognized when there is a present obligation from a past event, a probable outflow, and a reliable estimate.

Amount realized = cash received + fair market value of property received + liabilities assumed by the buyer − selling expenses.

Adjusted basis = original cost + capital improvements − depreciation allowed or allowable.

Realized gain or loss = amount realized − adjusted basis; recognized gain is the lesser of realized gain or boot received in a like-kind exchange.

Under Section 1031, like-kind exchanges of real property held for productive use or investment defer gain to the extent no boot is received.

A capital asset is property held for investment or personal use; inventory and depreciable business property are not capital assets.

The holding period for a capital asset begins the day after acquisition; long-term treatment applies to assets held more than one year.

A gift of appreciated property carries over the donor's basis; inherited property generally receives a stepped-up basis to fair market value at death.

The Section 121 exclusion allows a taxpayer to exclude up to $250,000 ($500,000 for married filing jointly) of gain on the sale of a principal residence.

The auditor obtains an understanding of internal control to assess the risks of material misstatement and to design the nature, timing, and extent of further audit procedures.

A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement will not be prevented or detected timely.

A significant deficiency is less severe than a material weakness but important enough to merit attention by those charged with governance.

The auditor must test the operating effectiveness of controls when relying on them to reduce substantive testing.

The auditor's opinion on internal control over financial reporting is an opinion on the effectiveness of controls, not on the financial statements.

A control deficiency exists when the design or operation of a control does not allow management or employees to prevent or detect misstatements timely.

The auditor should evaluate the design of controls and determine whether they have been implemented.

Walkthroughs are used to confirm the auditor's understanding of the control environment and the flow of transactions.

Consolidated financial statements present the parent and subsidiaries as a single economic entity.

Noncontrolling interest is presented in the equity section of the consolidated balance sheet.

Intercompany transactions are eliminated in consolidation to avoid double counting.

Goodwill is tested for impairment at the reporting unit level under U.S. GAAP.

A variable interest entity is consolidated by the primary beneficiary.

Under IFRS, control exists when the investor has power over the investee, exposure to variable returns, and the ability to use its power to affect returns.

A change in ownership that results in loss of control requires remeasurement of any retained interest at fair value.

Translation of foreign currency financial statements uses the current rate for assets and liabilities and the average rate for income statement items.

Governmental funds use the modified accrual basis; proprietary and fiduciary funds use the accrual basis.

The general fund is the primary operating fund of a governmental entity.

Fund financial statements report governmental funds using the current financial resources measurement focus.

The government-wide financial statements report governmental activities and business-type activities using the accrual basis.

Unrestricted net position is the residual after net investment in capital assets and restricted net position.

A special revenue fund accounts for resources restricted or committed for specific purposes.

A capital projects fund accounts for resources used to acquire or construct major capital facilities.

A debt service fund accounts for resources used to pay principal and interest on long-term debt.

A taxpayer may request an extension to file, generally six months, but the extension does not extend the time to pay.

The accuracy-related penalty is 20% of the underpayment attributable to negligence or substantial understatement of income tax.

The fraud penalty is 75% of the underpayment attributable to fraud.

The failure-to-file penalty is generally 5% per month of the unpaid tax, up to 25%.

The failure-to-pay penalty is 0.5% per month of the unpaid tax, up to 25%.

The statute of limitations for a refund claim is generally three years from the date the return was filed or two years from the date the tax was paid, whichever is later.

The IRS may assess tax within three years after the return is filed; the period is six years if gross income is understated by more than 25%.

A taxpayer may appeal an IRS determination to the U.S. Tax Court, the U.S. Court of Federal Claims, or a U.S. District Court.

An unmodified opinion states that the financial statements present fairly, in all material respects, the financial position in accordance with the applicable framework.

A qualified opinion is issued when the auditor concludes that misstatements are material but not pervasive, or when the auditor is unable to obtain sufficient appropriate evidence but the possible effects are not pervasive.

An adverse opinion is issued when misstatements are both material and pervasive.

A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate evidence and the possible effects are both material and pervasive.

An emphasis-of-matter paragraph is used to draw attention to a matter appropriately presented in the financial statements, such as a subsequent event or a going concern uncertainty.

An other-matter paragraph is used to draw attention to a matter not presented in the financial statements that is relevant to users' understanding of the audit.

The auditor's report must be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence.

Key audit matters are communicated in the auditor's report for listed entities under ISA 701.

Expected return of a portfolio is the weighted average of the expected returns of its components.

Portfolio risk is reduced through diversification when assets are not perfectly positively correlated.

Systematic risk is measured by beta and cannot be diversified away.

Unsystematic risk is firm-specific and can be eliminated through diversification.

The security market line plots expected return against beta; assets above the line are undervalued.

The coefficient of variation = standard deviation ÷ expected return; it measures risk per unit of return.

The capital asset pricing model assumes investors hold diversified portfolios and can borrow and lend at the risk-free rate.

A higher beta indicates greater sensitivity to market movements.

Trading securities are measured at fair value with unrealized gains and losses reported in net income.

Available-for-sale debt securities are measured at fair value with unrealized gains and losses reported in other comprehensive income.

Held-to-maturity debt securities are measured at amortized cost.

Under the equity method, the investor recognizes its share of investee income and adjusts the investment for dividends.

An investment in a subsidiary is consolidated when the parent controls the subsidiary.

Under IFRS 9, financial assets are classified as amortized cost, fair value through other comprehensive income, or fair value through profit or loss.

An impairment loss on an investment is recognized when the decline in fair value is other than temporary.

The fair value option allows an entity to measure certain financial instruments at fair value with changes in fair value reported in earnings.

Gross income includes wages, salaries, tips, interest, dividends, and gains from the sale of property.

Adjustments to gross income include contributions to traditional IRAs, student loan interest, and alimony paid under pre-2019 agreements.

The standard deduction is a fixed amount that varies by filing status and is indexed for inflation.

Itemized deductions include state and local taxes (capped at $10,000), mortgage interest, charitable contributions, and medical expenses above 7.5% of AGI.

A capital loss may be deducted against ordinary income up to $3,000 per year; excess losses carry forward.

The child tax credit is available for qualifying children under age 17.

The earned income tax credit is available to low- and moderate-income workers.

The alternative minimum tax applies a separate computation with adjustments and preferences.