The regulation (REG) test covers three broad areas of the CPA exam. This test covers the professional responsibilities and ethics required of a CPA. The REG test also goes over business law topics and taxation. Studying for this test requires you to read and understand lots of detail. Use these REG exam tips to prepare for your test.
Ethics and professional responsibilities
The Enron and WorldCom accounting scandals of the early 2000s changed the ethics responsibilities for CPAs. Today, CPAs are held to a much higher standard.
Independence is an important concept on the test. In most situations, the CPA’s only business relationship with a client is the fee charged for accounting work. Any other business arrangement is considered a conflict of interest. If another relationship exists, the CPA should not perform most types of accounting work.
The CPA should also avoid the appearance of a conflict. Now, I think you can apply some common sense to many of these independence questions. Say, for example, that a CPA’s firm performs the client’s audit. The CPA’s wife owns a business that is a major supplier to the same client. Common sense should tell you that the CPA has a conflict and should not perform the audit. That CPA is not independent.
Reliable financial statements
Many ethics guidelines were recently put in place to ensure that the financial statements generated by CPAs are reliable. CPAs must be independent to generate reliable financial statements. By reliable, I mean that the financial statements are free of material misstatement- that’s the language you’ll see in an audit opinion.
Who, exactly, cares about the need for reliable financials? Here are several stakeholders who rely on this information:
- Investors: Investors need accurate data to decide whether or not that should buy the company’s stock.
- Creditors: Lenders need reliable information to determine if they should lend money to the business.
- Regulators: Regulators require a variety of disclosures to protect the public interest. This group cannot inform and protect the public, if the financial statements are not accurate.
Keep these stakeholders in mind as you study for the REG test. The interests of these groups drive many of the ethical requirements for CPAs.
Your state dictates the courses you must take to earn your CPA credential. Most states require CPA candidates to take a business law course. If you’ve taken a law course recently, that will help you with the business law questions.
Agency law is a frequently tested area. Every business that hires employees gives those workers a certain amount of authority. Because employers give workers authority, the company may have liability for the worker’s actions. In agency law, the worker is the agent and the company is the principal.
Some CPA candidates find it hard to distinguish between the different types of authority. Think about these concepts from the point of view of the customer. Generally, if an employee doesn’t do their job- or harms that customer in some way- what is the fair outcome for that customer? Should the customer be compensated in some way?
As you study, you’ll find that either the employee or the company (or both parties) is usually responsible for compensating the customer who is harmed in some way. Taking that point of view can help you answer the agency questions.
If you don’t work as a tax preparer, you may be dreading this part of the REG test. This section requires you to memorize a lot of facts and figures. Here are two tips to help you with the tax questions.
When a question asks about income, consider the type of income. Different types of income may be reported on different tax returns. When most people think of income, they think of income earned from working. However, you can also have income from an estate that is reported on an estate tax return. A taxpayer may have taxable income from a gift, or income from a trust.
Understanding the source of a particular amount of income can help you answer tax questions.
Personal income taxes make up a large portion of the tax questions. To keep things straight, print out a copy of the individual tax return, Form 1040. As you study for these questions, take a look at the 1040 and see where the income tax activity is posted. If you have a question about dividends, for example, the tax is reported toward the top of page 1 of Form 1040.
If you can picture where a particular item is posted on the 1040 form, it can really help you pull things together.
Try using each of these tips as you study for REG test. They can help you simplify the information and perform well on the CPA exam.