CPA (CPA Exam) flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Detection risk

The risk that the auditor's procedures will not detect a material misstatement that exists in an assertion. The auditor controls it by adjusting the nature, timing, and extent of substantive testing.

Adverse opinion

Issued when the auditor concludes that misstatements are both material and pervasive to the financial statements, so the statements as a whole are not presented fairly under the applicable framework.

Disclaimer of opinion

Issued when the auditor cannot obtain sufficient appropriate evidence and the possible effects of undetected misstatements are material and pervasive, so no opinion is expressed on the statements.

Type I subsequent event

An event or condition that existed at the balance sheet date and becomes known before the report date; the financial statements are adjusted to reflect it, such as a lawsuit settled at a different amount.

Performance materiality

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed materiality for the financial statements as a whole.

Management representation letter

A required written letter from management, dated at or near the audit report date, confirming its responsibilities and the completeness of the financial statements and information provided to the auditor.

Control risk

The risk that a material misstatement will not be prevented or detected timely by the entity's internal control, assessed by the auditor before considering the results of any tests of controls.

Review engagement (SSARS)

A service providing limited assurance through inquiry and analytical procedures, in which the accountant expresses negative assurance that no material modifications are needed for the statements to conform to the framework.

Five-step revenue model

Identify the contract, identify the performance obligations, determine the transaction price, allocate the price to the obligations, and recognize revenue when or as each obligation is satisfied.

Lower of cost or NRV

Measurement rule for inventory under US GAAP for entities not using LIFO or the retail method: inventory is written down to net realizable value, with the loss recognized in income.

Lessee finance lease criteria

A lease is a finance lease if any of five criteria is met: ownership transfer, bargain purchase option, term of at least 75% of asset life, present value of payments at least 90% of fair value, or specialized asset.

Effective interest method

Bond interest expense equals the carrying amount multiplied by the market rate at issuance; the difference between that amount and cash interest amortizes the discount or premium each period.

Deferred tax valuation allowance

A contra deferred tax asset recognized when it is more likely than not, meaning greater than 50% likely, that some or all of a deferred tax asset will not be realized.

Treasury stock method

Method for diluted EPS in which assumed exercise proceeds from in-the-money options hypothetically repurchase shares at the average market price, adding only the net incremental shares to the denominator.

Goodwill impairment testing

Goodwill is not amortized; it is tested at least annually by comparing each reporting unit's fair value with its carrying amount, recognizing any excess carrying amount as an impairment loss.

Other comprehensive income

Items that bypass net income, including foreign currency translation adjustments, certain pension adjustments, unrealized gains and losses on available-for-sale debt securities, and effective cash flow hedges.

Like-kind exchange

Under current law, gain is deferred only when real property is exchanged for real property held for productive use or investment; boot received is recognized as taxable gain.

Inherited property basis

Basis of property acquired from a decedent is generally fair market value at the date of death, or the alternate valuation date if elected, giving heirs a step-up or step-down in basis.

Circular 230

Treasury regulations governing practice before the IRS; they prohibit practitioners from giving written advice based on unreasonable factual or legal assumptions or unreasonably relying on others.

Six-year assessment period

The IRS generally has six years to assess tax when a taxpayer omits more than 25% of the gross income reported; the normal period is three years, and fraud has no time limit.

S corporation eligibility

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

Partnership outside basis

A partner's outside basis equals contributions plus the distributive share of income and liabilities, reduced by distributions and losses, and it limits the losses the partner may deduct.

Section 179 expensing

An election allowing immediate deduction of the cost of qualifying tangible personal property placed in service during the year, limited to taxable business income and reduced by a phase-out threshold.

Accuracy-related penalty

A 20% penalty on an underpayment attributable to negligence, a substantial understatement, or a valuation misstatement; the rate rises to 25% for a gross valuation misstatement.

SOC 1 report

A report on controls at a service organization relevant to user entities' internal control over financial reporting, covering either design at a date (Type 1) or operating effectiveness over a period (Type 2).

SOC 2 report

A report based on the AICPA Trust Services Criteria of security, availability, processing integrity, confidentiality, and privacy, addressing controls relevant to operations and compliance and restricted to specified parties.

DuPont analysis

A technique decomposing return on equity into net profit margin times total asset turnover times the equity multiplier, isolating the drivers of profitability, efficiency, and capital structure.

Contribution margin ratio

Contribution margin divided by sales, where contribution margin equals sales minus variable costs; it shows how much of each sales dollar covers fixed costs and contributes to profit.

Net present value rule

Accept a project when the present value of expected after-tax cash flows, discounted at the cost of capital, exceeds the initial investment; NPV and IRR may rank competing projects differently.

IT change management controls

Controls ensuring system changes are authorized, tested, and approved before implementation, with documentation, segregation of duties between developers and production, and defined fallback procedures.

Annual gift tax exclusion

An indexed per-donee amount a donor may give each year without consuming lifetime exemption or filing a gift tax return, subject to present-interest rules; the 2025 amount is $19,000.

Grantor trust

A trust whose income, deductions, and credits are taxed directly to the grantor because the grantor retains certain prohibited powers or interests, even though the trust files an information return.