Kevin Stevens - Wiley CPA Examination Review Focus Notes

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Table of Contents

Preface

This publication is a comprehensive, yet simplified study program. It provides a review of all the basic skills and concepts tested on the CPA exam, and teaches important strategies to take the exam faster and more accurately. This tool allows you to take control of the CPA exam.

This simplified and focused approach to studying for the CPA exam can be used:

As a handy and convenient reference manual

To solve exam questions

To reinforce material being studied

Included is all of the information necessary to obtain a passing score on the CPA exam in a concise and easy-to-use format. Due to the wide variety of information covered on the exam, a number of techniques are included:

Acronyms and mnemonics to help candidates learn and remember a variety of rules and checklists

Formulas and equations that simplify complex calculations required on the exam

Simplified outlines of key concepts without the details that encumber or distract from learning the essential elements

Techniques that can be applied to problem solving or essay writing, such as preparing a multiple-step income statement, determining who will prevail in a legal conflict, or developing an audit program

Pro forma statements, reports, and schedules that make it easy to prepare these items by simply filling in the blanks

Proven techniques to help you become a smarter, sharper, and more accurate test taker

This publication may also be useful to university students enrolled in Intermediate, Advanced and Cost Accounting; Auditing, Business Law, and Federal Income Tax classes; Economics, and Finance classes.

Good Luck on the Exam,
Kevin Stevens, DBA, CPA

About the Authors

Kevin Stevens, DBA, CPA, is the director of the School of Accountancy and Management Information Systems at DePaul University. He is a full professor of accountancy and is a registered certified public account in Illinois. He has taught for many years in DePauls CPA review program and at both the graduate and undergraduate levels. He holds a doctoral degree in business administration (accountancy) from the University of Kentucky, a masters in taxation from DePaul, a masters in accounting from the University of Illinois at Urbana and a bachelors degree in Political Science from Loyola University, Chicago.

Corporate Governance and Enterprise Risk Management

Corporate Governance: Establish Incentives and Monitoring

Owners separate from management

Agency problem: Will managers act in owners interest?

Incentives to defeat agency problem

Forms of Executive Compensation

Base salary and profit: usually based on accounting measure

May lead to earnings manipulation or management

Stock options: align shareholders and managers interest in increasing share prices

Differences in timing horizons (management short-term?)

Underwater options provide no incentive

Restricted stock: force managers to think long-term

Monitoring Devices

Boards of directors

Independent nominating/corporate governance committee

Independent audit committee (AC) under Sarbanes-Oxley (SOX)

At least one financial expert

External auditors must report directly to AC

AC appoints, determines compensation, and oversees external auditor

Listed companies

Majority independent directors

Provide information to investors as to who is independent

Have and make available code of conduct

Have an independent AC

Internal auditors

Provide assurance on risk management and internal control

Should report to AC

Independent and competent

Chief IC officer report directly to CEO

External auditors

Help assure users that financials are accurate and not fraudulent

Must attest to managements assessment of effective internal control as required by SOX

SEC and SOX

CEO and CFO certify accuracy and truthfulness with criminal penalties

Fraud in sale or purchase of securities punishable by fine and/or prison

Destruction or other damage to documentation to hinder investigation punishable by fine and/or prison

Retaliation on whistle-blowers punishable by fine and/or prison

Internal Controls

COS): Internal Control Integrated Framework

1. Control environment

a. Integrity and ethical values (tone at the top)

b. Competence

c. Effective BOD or AC

d. Management philosophy operating style

e. Effective organizational structure

f. Clear assignment of authority and responsibility

g. Effective human resource policies (e.g., training)

2. Control activities

a. Performance reviews

b. Segregation of duties, IT controls

c. Physical controls (e.g. over inventory)

3. Information and communication

a. Employees understand role and responsibilities

b. Capture information on a timely basis

4. Monitoring of controls: Are they working?

Enterprise Risk Management: Eight Components

1. Internal environment (tone of the organization)

a. Effective board

b. Ethical management

c. Risk appetite: How much risk is organization willing to accept to achieve a goal?

d. Risk tolerance: how far above or below meeting objective is allowable?

2. Objective setting

a. Well-defined mission

b. Process to set objectives that align with goals

3. Event identification

a. Internal

1. Loss of key personnel

2. Damage to infrastructure (e.g., IS crash)

3. Key product/process becomes obsolete

b. External

1. Establish Trigger points (e.g., competition increases market share above x amount)

2. Process to assess demographic and economic changes

c. Black swan analysis: Evaluate negative events that were unforeseen to determine why

4. Risk assessment: what are the risks?

a. Inherent risk: what if management does nothing in response to identified risk?

b. Residual risk: residual after managements response

5. Risk responses

a. Avoidance

b. Reduction

c. Sharing

d. Acceptance

6. Control activities: policies and procedures to insure that risk responses are implemented

7. Information and communication throughout organization

a. Organizations objectives

b. Risk appetite and tolerance

c. Role of ERM in managing risk

8. Monitoring: Effective process to oversee ERM

Enterprise Risk Management: Limitations

1. The future is uncertain

2. No absolute assurances

a. Human failure

b. System breakdown

c. Collusion across ERM

d. Management override

Information Technology

Attributes of Paper vs Electronic Systems

Difficulty of alteration It is easier to change electronic data without detection

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