Sometimes, important information isn’t easy to spot, and that’s true of the CPA exam. If you can go into each test with some key pieces of information, you can get better results, and that’s the secret to passing the CPA exam. Use these tips to improve your test scores.
Multiple-choice answers don’t provide hints
I wrote 25 multiple-choice questions for the auditing and attestation (AUD) test in 2003, and the process of writing CPA exam questions is very demanding. The hardest part is to write answer choices that don’t give anything away to the CPA candidate. Each answer choice, for example, has to be the same length, and answer choices cannot use “absolutes”, such as “always” or “never”. If you don’t know the concept that the question is asking about, skip the question, because a well-written CPA question will not give you any hints about the right answer.
Using judgment: the principles of conservatism and consistency
The financial accounting and reporting (FAR) section of the exam is the accounting transactions and reporting part of the exam, and these tasks require a CPA to use judgment. When you’re asked to use judgment, the principles of conservatism and consistency drive many of your accounting decisions. Conservatism means that, when in doubt, post an entry that recognizes expenses immediately and delays revenue recognition, because net income will be lower in both cases.
On the other hand, consistency means that accounting policies must be consistently applied from one year to the next, or the financial statements will not be comparable. If a company changes its inventory valuation method from first in, first out (FIFO) method to the weighted average method, for example, the financial impact of the change must be disclosed in the financial statements.
Keep these two principles in mind as you work FAR questions.
Independence and segregation of duties
The auditing and attestation (AUD) addresses audit, review, and compilation engagements, as well as the process of auditing. A CPA’s independence from the client is now so important that just about any relationship other than the accounting work is not allowed. If you’re unsure about an independence question and have to choose between two answers, pick the one that says that the CPA is not independent. Also, segregation of duties is a huge issue that affects many internal controls tested by an auditor. Make sure that you’re clear about this concept, because you’ll see it throughout the AUD test.
Past (sunk) costs are not relevant
Past costs, or sunk costs, is a topic that you’ll see throughout the business environment and concepts (BEC) test. The important test point is that past costs are not relevant when making a business decision. Assume, for example, that you’re considering closing one of your five retail store locations. The revenue you lose by closing is relevant to your decision, along with the payroll costs you’ll save by not staffing the store. The 10-year lease, however, isn’t relevant, because you have to make those lease payments by contract. It doesn’t matter if the store is open or not, you still make the payments. Keep an eye out for questions that involve past costs.
The secret to passing the CPA exam is to remember the key concepts that appear the most often, and applying each concept to exam questions. Use these tips to succeed on the CPA exam.