So you’ve decided you want to become a certified public accountant. If you've taken all the undergraduate and graduate-level classes in accounting, business law, and general studies that your state requires, and have logged some work experienced (as required in all but a few states), you’re ready to take the Uniform CPA Examination. This is a substantial undertaking. Let’s review what’s involved.
CPA Exam Structure
The CPA exam has 324 multiple-choice questions, 20 task-based simulation questions, and three writing portions. These are divided into four main sections: Auditing and Attestation (AUD), Financial Accounting and Reporting (FAR), Regulation (REG), and Business Environment and Concepts (BEC). Each part is taken individually, and candidates can choose the order in which they take them. Once a candidate passes his or her first exam section, the remaining three must be passed within 18 months.
The American Institute of CPAs (AICPA) administers and scores the test, grading each part on a scale of zero to 99. You must score at least 75 to pass each section. Multiple-choice questions count for 70% of the total score, simulations are 20% and written communication is 10% of the final score. Each question is weighted based on difficulty, so acing the multiple choice questions and flunking the simulations and written parts will result in a failing score. The total time for the test is 14 hours.
The exam sections employ multi-stage testlets. The first testlet is always of medium difficulty. Candidates who do well on that part are sent to a harder follow-up testlet. Candidates who don't do as well are sent to another medium-difficult testlet.
Let's look at what each section covers.
Financial Accounting and Reporting
The FAR section tests knowledge and understanding of the financial reporting framework used by business enterprises, not-for-profit organizations, and government entities. It includes 90 multiple-choice questions as well as seven task-based simulations that use real-life work situations to test your skill.
This section deals with standards for financial statements, what needs to be included in statements, and how to account and report for government agencies, non-profits, and other types of organizations. Test takers are expected to prepare financial statements, including balance sheets, income statements, statements of retained earnings, equity, comprehensive income, and cash flows. They also must review source documents and enter data into subsidiary and general ledgers.
Test takers must show they understand the process by which accounting standards are set and the roles of various governmental and industry groups such as the U.S. Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB), and the Governmental Accounting Standards Board (GASB).
For most people, FAR is the toughest section of the overall CPA exam. You have up to four fours to take it.
Auditing and Attestation
The other four-hour segment, AUD, is a bit easier, especially so if you’ve tackled FAR first. It too has 90 multiple-choice questions and seven task-based simulations. It covers the planning and reviewing of engagements, internal controls, obtaining and documenting information, and communications preparation.
As with FAR, test-takers need to demonstrate knowledge of international accounting standards, in particular, the difference between International Standards on Auditing (ISAs) and U.S. auditing standards. They must identify situations that might be unethical or a violation of professional standards and determine the appropriate action to these situations. In addition, they must identify key risks in a financial information technology environment.
AUD also covers standards for preparing reports on audited financial statements, government auditing standards, compliance with laws, regulations, and internal control, along with other communication standards accountants must know. This section will also test your knowledge of the ethics and independence required by the AICPA, the Sarbanes-Oxley Act of 2002, the Government Accountability Office, and the Department of Labor.
You’re allowed up to three hours to take REG. It covers ethics and professional responsibility, business law, tax procedures and accounting, and federal taxation for individuals, entities, and property transactions. This section has 72 multiple-choice questions and six task-based simulations.
Test-takers must show that they understand the professional and legal responsibilities of certified public accountants, as well as the legal implications of business transactions as they relate to accounting, auditing, and financial reporting. This section deals with federal and widely adopted state laws. You must show you understand the rights, duties, and liabilities of debtors, creditors, and guarantors as well as the audit and appeals process employed by the Internal Revenue Service (IRS). This section also covers the alternative minimum tax and both estate and gift taxation.
Business Environment and Concepts
BEC is arguably the easiest section, and most candidates pass it on their first attempt. The BEC section has 72 multiple-choice questions and three written communication elements, wherein test takers must respond in a letter or memo format to a work scenario. This is used to assess candidates’ writing skills as well as their organization, clarity, and conciseness.
This three-hour section addresses business structures, economic concepts, financial management, and information technology. You must show you understand corporate governance, financial risk management, financial management processes, strategic planning, and operations management. This section also tests your understanding of the economic concepts of global business and how they impact an entity’s business strategy.
Expect to be tested on the rights, duties, and ethics of an entity’s board of directors, officers, and other employees. Questions will also cover information systems and technology risks, the Committee of Sponsoring Organizations of the Treadway Commission (COSO), as well as corporate responsibility and financial disclosures necessitated by the Sarbanes-Oxley Act of 2002.
The Bottom Line
Even without the required schooling and work experience, CPA test takers have their work cut out for them. But the reward is a respected professional designation that most often comes with a significantly higher rate of pay.