CPA (CPA Exam) cheat sheet

Audit risk = inherent risk × control risk × detection risk; detection risk is the only component the auditor sets directly, by adjusting the nature, timing, and extent of substantive procedures.

Performance materiality is set below overall materiality (commonly 50%–75% of it) to reduce the probability that uncorrected plus undetected misstatements together exceed materiality.

Type I subsequent event: a condition existed at the balance sheet date and becomes known before the report date - adjust the statements. Type II: a condition arose after the balance sheet date - disclose only.

Misstatement material and pervasive → adverse opinion. Scope limitation material and pervasive → disclaimer. Either type material but not pervasive → qualified opinion.

A covered member may not hold a direct financial interest in an audit client regardless of materiality; indirect interests held through diversified mutual funds are generally permissible.

Lowering tolerable misstatement, or raising expected misstatement, increases the required sample size in attribute and monetary-unit sampling.

Going concern: when substantial doubt remains after management's plans are evaluated and disclosure is adequate, the auditor issues an unmodified opinion with a separate Going Concern section.

Management representations are obtained in writing, dated at or near the auditor's report date, and are required even when the auditor holds corroborating evidence.

Before accepting an engagement, the successor auditor requests client permission to communicate with the predecessor auditor about disagreements, fraud, and integrity matters.

Revenue: identify the contract → identify performance obligations → determine transaction price → allocate price to obligations → recognize revenue when (or as) each obligation is satisfied.

Inventory is at lower of cost or net realizable value, except under LIFO or the retail method, which use lower of cost or market with market bounded by a ceiling (NRV) and floor (NRV less normal profit).

Lessee finance lease if any one criterion holds: ownership transfer, bargain purchase option, term ≥ 75% of economic life, PV of payments ≥ 90% of fair value, or the asset is specialized with no alternative use.

Bond carrying amount = face − unamortized discount (or + premium). Interest expense = beginning carrying amount × effective rate; amortization = expense − cash interest.

A deferred tax asset is reduced by a valuation allowance when it is more likely than not (more than 50%) that some or all of the benefit will not be realized.

Diluted EPS applies the treasury stock method to in-the-money options and the if-converted method to convertible securities, and only when the effect is dilutive.

Goodwill = consideration transferred + fair value of noncontrolling interest + previously held interest − fair value of identifiable net assets acquired; it is not amortized but tested at least annually for impairment.

Intercompany sales and the profit remaining in ending inventory are eliminated in consolidation; noncontrolling interest is reported within consolidated equity.

OCI includes foreign currency translation adjustments, certain pension and postretirement adjustments, unrealized holding gains and losses on available-for-sale debt securities, and effective cash flow hedges.

Assessment statute of limitations: three years generally, six years when omitted gross income exceeds 25% of reported gross income, and no limit when no return is filed or fraud is involved.

Excluded from gross income: gifts, inheritances, life insurance proceeds paid by reason of death, and interest on state and municipal bond obligations.

Basis of property acquired from a decedent equals fair market value at the date of death, or the alternate valuation date if elected, rather than the decedent's carryover basis.

Current law defers gain only on like-kind exchanges of real property held for productive use or investment; boot received is recognized as gain up to the amount realized.

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

Partnership income and separately stated items flow through to partners; losses are deductible only to the extent of outside basis, and special allocations require substantial economic effect under §704(b).

Circular 230 prohibits a practitioner from giving written tax advice based on unreasonable factual or legal assumptions or that unreasonably relies on others.

Accuracy-related penalty is 20% of the underpayment for negligence or substantial understatement and 25% for a gross valuation misstatement; the civil fraud penalty is 75%.

Under §351, no gain or loss is recognized on a transfer of property to a corporation for stock if the transferors control at least 80% of the corporation immediately after the exchange.

BAR liquidity ratios: current ratio = current assets / current liabilities; quick ratio = (cash + marketable securities + receivables) / current liabilities.

DuPont decomposition: ROE = net profit margin × total asset turnover × equity multiplier (leverage).

CVP: breakeven units = fixed costs / unit contribution margin; breakeven sales dollars = fixed costs / contribution margin ratio.

Capital budgeting: accept a project when NPV is positive; IRR greater than the hurdle rate is equivalent only for conventional, independent projects, not for mutually exclusive projects differing in scale or timing.

SOC 1 reports address controls relevant to user entities' financial reporting (Type 1 = design at a date; Type 2 = operating effectiveness over a period); SOC 2 reports use the Trust Services Criteria and are restricted to specified parties.

ISC: IT general controls span access provisioning and de-provisioning, program change management, program development, and computer operations such as backups and job scheduling.

TCP: the 2025 gift tax annual exclusion is $19,000 per donee; amounts above it consume the lifetime basic exclusion amount and are reported on Form 709.

Grantor trust income is taxed directly to the grantor; a complex trust is a separate taxable entity whose distribution deduction is driven by distributable net income.

Fiduciary accounting income governs what a trustee may distribute, while trust taxable income is computed separately and reduced by the distribution deduction.