10 Common Mistakes on the CPA Exam
Following are ten areas on the CPA exam that can be challenging. Because these topics are difficult, CPA candidates often make mistakes on these types of exam questions. These concepts are nearly always tested, so make sure you understand them. If you’re able to nail down these concepts, you’ll avoid some pitfalls on the CPA exam.
Skipping your notes when you review your answers
Because the exam is no longer in written form, you’re allowed to use noteboards. Noteboards are a tool to jot down information as you take the exam on a computer. If you need to perform a calculation, write down those numbers on the noteboard. When you review your answer choices, use your noteboard to review. Using the noteboard is a time-saver in your review, and it prevents errors.
Exam candidates sometimes come up with a solution but click on the wrong answer choice. Using a noteboard can help prevent this basic mistake.
Not knowing the language in audit reports
The auditing and attestation (AUD) test has a heavy focus on audit report language. The most common audit opinion (or audit report) is an unqualified opinion. CPA candidates should memorize the exact report language for the unqualified opinion. All the other types of audit reports — and reports for reviews and compilations — take their text from the unqualified opinion and make changes.
Exam candidates who don’t memorize the unqualified opinion miss the opportunity to answer many questions easily. Those candidates also have trouble understanding how the reports relate to each other. Nearly all of the reports share some language.
The last paragraph of an unqualified opinion essentially states that the financial statements are free of material misstatement. A qualified opinion is sometimes referred to as an except for opinion. The qualified opinion adds language to an unqualified opinion template, stating “except for the information in the following paragraph.” If you understand the unqualified opinion language, you can change the language to create a qualified opinion.
Not understanding segregating duties
Fraud, which is on the auditing and attestation (AUD) test as well as the regulatory (REG) test, is defined as willful intent to deceive. The most important strategy to prevent fraud is proper segregation of duties. An effective way to learn segregation of duties is to review and understand scenarios.
When the exam provides a scenario and asks whether it can lead to fraud, mull over who is performing each role in the process.
Another aspect of segregation of duties is the issue of third-party audit evidence. A third party is an entity that’s outside of the company under audit. CPAs always prefer third-party evidence because the third party doesn’t have any bias that would influence the data it provides to an auditor.
When you’re provided with audit evidence, keep in mind that third-party evidence is the most reliable.
Applying accounting policy inconsistently
Some people struggle in applying accounting principles for several reasons. First, exam candidates often don’t recognize an accounting principle when they see it. Second, some people don’t understand that an accounting principle needs to be consistently applied. Otherwise, the company needs to provide additional disclosure.
The difference between cash basis and accrual basis may be the most tested principle on the exam. The accrual basis requires companies to post accounting adjustments for accruals and deferrals. The accrual method drives many of the types of accounts used in financial statements. Many CPA questions ask you to compare the financial impact of using cash basis versus the accrual basis. CPA candidates who are unclear on this difference are not prepared to succeed on the exam.
Another frequently tested accounting policy change relates to inventory valuation. Inventory valuation is an accounting principle. Inventory is often the largest single asset on the balance sheet. A change in the valuation method for inventory can mean a large change in cost of sales and net income.
Not reviewing financial ratios by type
Exam candidates need to understand a variety of financial ratios. This process can be frustrating if you don’t have a method to group the ratios into categories. Some people make the mistake of memorizing the ratios in no particular order.
You’ll have more success with ratios if you group them together by type. For example, some ratios explain liquidity, which is the ability to use current assets to pay for current liabilities. Liquidity ratios are all about short-term cash flow.
Profitability ratios, on the other hand, measure profit. They also explain the rate of return a company earns, such as return on assets or return on equity. Solvency questions address a company’s ability to generate cash and pay debts over the long term.
If you group ratios intro these categories, you’ll have more success pulling the formulas out of your memory.
Forgetting to consider the type of taxation
When most people think about taxes, they consider only income taxes. The CPA exam covers several types of taxation, including gift tax, estate tax, and income taxes. When you’re looking at a tax question, you may make the mistake of not first considering the type of tax that needs to be calculated. Understanding the type of tax will help you identify the information you need to answer the question.
Not memorizing the tax format on Form 1040
Individual taxation is the most heavily tested area of tax. The CPA exam requires candidates to know many rules about individual tax. An effective way to study for this area is to print the two pages of Form 1040, the individual tax return. When you come across an individual taxation topic, consider where that information is located on Form 1040.
Confusing present value and future value
The CPA exam asks questions about the future value of an amount, given a certain investment amount and an interest rate of the investment. You may also have to compute the present value of something, given its value in the future. These questions can be particularly hard to understand.
First determine whether the question is asking about present value or future value. Diving in and starting to compute an answer without answering this basic question for yourself is a mistake. If you’re unclear about which value you’re calculating, you’ll use the wrong data to compute your answer.
Failing to keep the Big Four type of costs straight
The CPA exam asks many questions that address managing costs. It’s a mistake to go over the more-complex cost accounting topics without first understanding direct costs, indirect costs (overhead), fixed costs, and variable costs. You can think of these costs as the Big Four. These cost terms are the building blocks for the other cost accounting topics on the CPA exam.
Don’t start a cost problem without first identifying whether each of the costs is direct or indirect. A direct cost can be tied directly to the product or service produced. Direct costs increase and decrease with production. Indirect costs can’t be directly tied to production. Changes in the level of production don’t directly impact these costs.
Not considering employer responsibilities for individual contractors
Many people study the contract, agency, and sales regulations without fully understanding independent contractors. Exam candidates should keep in mind that independent contractors have a different status from employees. In some cases, an employer’s liability for the actions of an independent contractor is the same as with an employee. In other cases, the employer’s responsibility is different. If you’re unclear about this difference, studying the contract, agency, and sales topics may be difficult.
The IRS website provides a definition of an independent contractor for tax purposes. Here’s that definition:
The payer (the company hiring the contractor) has the right to control or direct only the result of the work.
The payer doesn’t control what will be done and how it will be done.
Keep this definition in mind. It will help you understand some concepts in agency and sales law.