Certified Public Accountant Examination cheat sheet

Audit risk model: AR = IR × CR × DR. Detection risk is inversely related to inherent and control risk; the auditor sets DR based on assessed risks.

Materiality: overall materiality often based on a benchmark (e.g., 5% of pre-tax income, 1% of total assets). Performance materiality is set below overall materiality to reduce aggregation risk.

Evidence reliability hierarchy: external > internal; direct > indirect; original > copy; auditor-obtained > client-provided.

Unmodified opinion requires: financial statements prepared per applicable framework, and auditor obtained sufficient appropriate evidence.

Going concern: substantial doubt exists if plans do not mitigate; if doubt remains, add explanatory paragraph with unmodified opinion. If doubt is not adequately disclosed, qualify or adverse.

Sampling: attribute sampling for controls (deviation rate); variables sampling for substantive tests (monetary misstatement). Sample size increases with lower tolerable rate and higher expected deviation rate.

SOC reports: SOC 1 (ICFR relevant to financial reporting), SOC 2 (trust services criteria), SOC 3 (general use). Type 1 = design at a point in time; Type 2 = design and operating effectiveness over a period.

Independence: covered member cannot have direct financial interest or material indirect interest in client; cannot serve as director, officer, or employee. Loans from client are prohibited except normal lending procedures.

Audit documentation: must be sufficient for an experienced auditor with no prior connection to understand nature, timing, extent of procedures, results, and evidence. Retention period typically 5 years from report date.

Contribution margin per unit = Sales price − Variable cost per unit. Breakeven units = Fixed costs ÷ CM per unit. Breakeven sales = Fixed costs ÷ CM ratio.

Target profit volume = (Fixed costs + Target profit) ÷ CM per unit. Margin of safety = (Actual sales − Breakeven sales) ÷ Actual sales.

Relevant costs are future costs that differ among alternatives. Sunk costs are irrelevant. Allocated fixed costs are often irrelevant unless they change.

Make-or-buy: choose buy if avoidable fixed costs + variable costs of making > purchase price. Opportunity cost of using facilities for make option must be included.

Variance analysis: Price variance = (AP − SP) × AQ; Quantity variance = (AQ − SQ) × SP. Favorable if actual price/quantity is less than standard.

Capital budgeting: NPV = PV of cash inflows − Initial investment; accept if NPV > 0. IRR is discount rate making NPV = 0; accept if IRR > cost of capital. Payback ignores time value and cash flows after payback.

WACC = (E/V) × Re + (D/V) × Rd × (1 − Tax rate). Use market values for weights.

CVP assumptions: selling price constant, variable cost per unit constant, fixed costs constant, sales mix constant, units produced equal units sold.

Balanced scorecard perspectives: financial, customer, internal business process, learning and growth. Leads and lags: learning/growth leads to process, which leads to customer, which leads to financial.

Revenue recognition (ASC 606): identify contract, identify performance obligations, determine transaction price, allocate transaction price to performance obligations, recognize revenue when/as each obligation is satisfied.

Variable consideration: use expected value or most likely amount, constrained to amount for which significant reversal is not probable.

Leases (ASC 842): lessee recognizes right-of-use asset and lease liability at present value of lease payments. Short-term lease exemption (≤12 months) allowed.

Inventory: LCM (lower of cost or market) for LIFO/retail method; LCNRV for FIFO/weighted average. Write-downs establish new cost basis; no reversal under U.S. GAAP for inventory.

PP&E: capitalize costs to bring asset to location and condition for intended use. Depreciation methods: straight-line, units-of-production, double-declining balance (ignores salvage until final year).

Impairment: for held-and-used assets, recoverability test (undiscounted cash flows vs. carrying amount); if impaired, measure at fair value. For held-for-sale, measure at lower of carrying amount or fair value less cost to sell; no depreciation.

Bonds: issue price = PV of principal + PV of interest payments at market rate. Premium if coupon > market; discount if coupon < market. Effective interest method amortizes premium/discount.

Stockholders' equity: treasury stock (cost method) reduces equity; no gain/loss on sale, use additional paid-in capital. Small stock dividend (<20-25%) at fair value; large at par.

EPS: basic = (Net income − preferred dividends) ÷ weighted average common shares. Diluted includes dilutive options (treasury stock method) and convertible securities (if-converted method) using ranked order.

Tax basis: substituted basis (gift = carryover; inheritance = fair market value at date of death). Holding period: gift tacks; inheritance starts new.

Like-kind exchanges (real property): no gain recognized except boot received; basis of new property = FMV of new − deferred gain (or old basis + gain recognized − boot received).

Depreciation: MACRS half-year convention, mid-quarter if >40% of personal property placed in service in Q4. §179 expensing limited to taxable income; bonus depreciation percentage per year.

Gross income exclusions: gifts, inheritances, life insurance proceeds, municipal bond interest, compensation for personal injury, welfare benefits.

Filing status: single, MFJ, MFS, HOH (unmarried, dependent, >50% household costs), qualifying surviving spouse (dependent child, ≤2 years after death).

Contract law: offer + acceptance + consideration. UCC Article 2 (goods): firm offer by merchant without consideration if signed and assurance; mirror image rule relaxed.

Securities Act of 1933: registration required for public offerings; exemptions: private placement (Reg D), intrastate (Rule 147), small offerings (Reg A). Section 11 liability for material misstatements in registration statement.

Securities Exchange Act of 1934: continuous reporting (10-K, 10-Q, 8-K), proxy rules, tender offers, insider trading (Rule 10b-5).

Agency: fiduciary duties of loyalty and obedience; termination by act of parties or operation of law. Equal dignities rule: agent authority in writing if contract must be in writing.

Bankruptcy: Chapter 7 liquidation (means test), Chapter 11 reorganization, Chapter 13 wage earner repayment plan. Automatic stay stops collection actions.