Accounting, Financial, Taxation

Becoming a CPA is no easy task. It demands a higher education commitment than most other career paths. To qualify for certification, you must meet the requirements of the state or jurisdiction where you wish to practice. The state requirements are established by the state board of accountancy and vary from state to state. Because of these variations, first determine where you are planning to practice accounting and then review that state’s certification requirements on the web site for the state’s CPA society or board of accountancy.

Becoming a certified public accountant entails the successful completion of the following:

1. 150 credit hours of college-level education, which translates to five years of college and graduate level work;
2. Achievement of passing grades on all four parts of the Uniform Certified Public Accountants Exam (the CPA exam);
3. The requisite amount of accounting work experience as mandated by each country, often two years or so.

Why Should I Become a CPA?

We’ll talk about the requirements for becoming a CPA in more detail later, but first, you might be asking yourself:

Why should I go through all of this? Can’t I be an accountant without being certified?” What you can do without becoming a CPA?

You most certainly can perform accounting functions without being certified, and there are many successful people in the profession who have taken this route. Non-certified accountants are not required to fulfill the five-year requirement, they aren’t even required to have a degree in accounting (although, obviously, it helps). A traditional four-year degree is all that is necessary to be a non-certified accountant. The actual functions of an accountant are not, as the saying goes, rocket science, and complicated mathematics is rarely needed, thus, advanced certification might not seem necessary.

Internal auditors, management accountants and tax personnel may all practice their professions without the CPA or any other professional designation. Furthermore, many accounting professionals (CPAs and otherwise) contend that the CPA exam is nothing more than a rite of passage, an intense exercise in memorization that adds little actual value to your technical development as an accountant. These people generally feel that all of the information you crammed into your brain disappears once the exam is over. Many of them even said that this “brain drain” should happen since much of this information will never be seen in your actual practice; if you ever do need it, you can quickly look it up.

What you can’t do without CPA Status?

However, not being certified has a few significant drawbacks. Foremost among these is that it can be career limiting – most public accounting firms will not promote an auditor above a certain level (senior associate; we will discusse these levels later) without at least passing the exam.

There are a couple of important reasons for this:

First, only a CPA may sign an audit opinion. This signature is crucial, as it signifies that the auditor believes that the financial statements reasonably represent the company’s actual financial position, giving the users of these statements more confidence that they can rely on them to make their decisions. Thus, an auditor without a CPA can not perform one of the most important activities of the profession.

Furthermore, a failure to pursue certification is often interpreted by public accounting firms as a lack of commitment to the profession, and few firms are willing to invest resources in someone who might leave the profession altogether (especially when there are so many others out there who are willing to pursue certification).

Another downside of not having a CPA is that you would miss out on the credibility that the certification carries. As with other advanced professional certifications, the CPA tends to give the stamp of “expert” in the eyes of the public and thus more perceived confidence in the accountant’s abilities. Such credibility could mean the difference to a recruiter who’s deciding between two otherwise comparable job candidates.

One final, ever-so-important downside of not having a CPA: you’ll make less money. According to the staffing agency Robert Half International, the CPA can, on average, increase a candidate’s base salary by 10 percent, with specialized fields (such as forensic accounting) commanding even higher salaries.

Now, this is not meant to scare you into pursuing the CPA, nor is it meant to suggest that you are a slacker if you don’t pursue the CPA. You can still have a successful career in accounting without it. For example, public tax accountants generally do not sign off on audit opinions, and tax returns generally do not require the signature of a CPA. However, pursuing the CPA opens you up to many more opportunities and can only help a career in accounting. Thus, plans for certification should be seriously considered by anyone looking to break into the accounting field.

The 150-Hour Education Requirement

In 1998, the AICPA membership voted to increase the educational credentials required for certification. It implemented this requirement in response to increases in accounting, auditing and tax regulations, the increasing complexity of the business environment, the advance of technology and to improve the overall quality and breadth of work performed by CPAs. Now, in order to sit for the CPA exam in most states, you must have completed 150 credit hours, or five years, of college-level education. The additional year allows for increased development of communication, analytical and interpersonal proficiencies as well as technical competence.

According to some university career services offices, this requirement of a fifth year of education to sit for or practice as a CPA has inhibited the number of students entering the field. However, while the additional education might seem onerous to some, the good news is that starting salaries for accountants are spiking up to accommodate the increased education and skill levels.

How do you fulfill the requirement?

While the education requirement generally does not call for the attainment of a full master’s degree, the most straightforward way of satisfying the requirement (and the way most schools have designed their accounting programs) involves a graduate degree. The 150-hour education requirement may usually be met in the following ways:

1. Combine an undergraduate accounting degree with a master’s degree at the same school or a different one.
2. Combine an undergraduate degree in a non-accounting discipline with a master’s degree in accounting or an MBA with a concentration in accounting.
3. Enroll in an integrated, five-year professional accounting school or program leading to a master’s degree in accounting.

The CPA Exam

The CPA exam is a four-part exam — the accountant’s version of running the gauntlet. As the AICPA requires that all four parts of the exam be passed, this represents the crucial step in becoming a certified public accountant, the culmination of those 150 credit hours of education.

Administered over two days, the Uniform Certified Public Accountants Exam is a grueling test designed to assess a candidate’s knowledge of the following four areas:

1. Business Environment and Concepts (BEC) – CPA’s professional responsibilities and the legal implications of business transactions, particularly as they relate to accounting and auditing.
2. Auditing and Attestation (AUDIT) – Generally accepted auditing standards and procedures, and other standards related to attest engagements.
3. Regulation – Your national taxation, ethics, professional and legal responsibilities and business law.
4. Financial Accounting and Reporting (FAR) – Generally accepted accounting principles for business enterprises, not-for-profit organizations and government entities.

The exam is written by the Board of Examiners of the American Institute of Certified Public Accountants (AICPA). In May 1996, the exam became non disclosed, which means that only selected questions from the exam are released to the public by the examiners. And as of 2004, the exam was given in an exclusively computerized format. This new version of the exam is also slightly shorter.

Preparing for the CPA Exam

Most CPAs recommend taking some sort of review course in preparing for the CPA exam. While many people have successfully passed the exam by studying on their own, such a feat requires a high level of self-discipline. The revised exam’s new format does make it easier to prepare for and take the exam, since most states now allow candidates to take one part of the exam at a time, but the exam’s modified form and content reflects an expanded range of business topics and requires a more analytical approach to problem solving. So candidates must take extra care to ensure they understand the material and are adequately prepared for the test.

CPA review courses are a great way to impose this discipline, and they often provide their own little tricks to help you study certain parts of the exam. There are many different organizations that provide CPA review services. Some public accounting firms will subsidize your preparation costs or otherwise facilitate your preparations in some manner. Some of the more well-known CPA review courses are as follows:

Becker Convisor CPA Review - This is the most recognized review course among current CPAs. It was one of the first CPA review courses established, with over 40 years of experience. According to Becker, students who complete their course pass the exam at double the rate of non-Becker students and approximately one-third of all new CPAs are Becker CPA Review alumni. Becker offers four options to prepare for the exam: 1) interactive live instruction in Becker’s multimedia classrooms (classes begin 4 months before the exam), 2) online instruction, 3) a self-paced CD ROM course, or 4) a 5-week intensive course. For schedules and registration, go to www[dot]beckerconvisor[dot]com

Kaplan CPA Review - Provides an online CPA course, providing students with flexibility, unlimited access and allows you to study at your own pace. For details, go to www[dot]kaptest[dot]com.

Micro Mash CPA Review - They Provides you with a CPA course tailored to your weaknesses using “The Micro Mash Way.” The course provides online tools and printed review textbooks for additional study. Micro Mash simulates the exam, with full-text answers and remedial help for all questions. The Homework Help Hotline provides staff CPAs and professors to answer questions promptly. Micro Mash guarantees you will pass the exam next time you sit. This is the course of choice of most of the large accounting firms. For information, go to www[dot]passmatrix[dot]com.

There are a few key factors in taking the exam:

1. Make sure that you get the testing site that you want for the exam. To do this, register early, especially if you live in a highly populated area, so you can take the exam as soon as possible after completing your chosen method of review.
2. The week of the exam, get lots of rest, take a day off from studying, eat well. Pretend the morning of the exam is like any other morning and don’t get too stressed out.
3. Another interesting recommendation we heard quite often: “Go for the Pass.” In other words, while your competitive nature might lead you to try to get a high grade, your focus should be on simply passing. As one Big Four auditor explains, “There is no difference between a 75 and a 95 – the 75 certifies you just as well as the 95 does. It is one of the only exams you’ll ever take where a 75 is just as satisfying as a 95, if not more so since you know you didn’t over-study and go overboard.” The gist of this suggestion is that the exam is difficult enough without killing yourself trying to cram every last bit of information into your head. On the CPA exam, grades don’t matter – passing is the only thing that matters, and you should plan your preparation accordingly.

Required Work Experience

Most states or jurisdictions require two years of public accounting audit experience for certification. The two years is a general guideline and is based on the number of hours worked on audits you’ve performed. For auditors, the work experience requirement is fulfilled rather quickly as they spend virtually all of their work time on audits. For public accounting tax professionals, certification can take five years or longer since not all of their activities represent qualifying audit hours (for example, preparing a tax return is generally not considered audit work and does not count toward the CPA requirement). Many countries and states will also accept non-public accounting experience, but the number of years required is typically much higher, in some states as long as 15 years. It should be noted that some states, do not have any work experience requirement and only require the fulfillment of education guidelines and the passing of the CPA exam. You should check with the board of accountancy of the country and state in which you’ll be practicing to find out that state’s exact work experience requirements.

For further reading, you may want to read: CPA Exam - Frequently Asked Questions (FAQ)

When should I take a CPA exam?

The recommendation of virtually everyone in the business – is to begin preparing for the exam as soon as you graduate from college. You generally have the summer after graduation free, and the longer you wait, the harder it will be to motivate yourself to study. When you graduate, all of your accounting friends will be studying, too. If you do it together, it will most likely be a lot less painful. So, if you graduate in June, you might want to begin taking a preparation class (see below) in July. If you’re working in public accounting, the firm will likely expect you to take the exam the first time it’s offered after you start.

Will I get hired without it?

Firms will hire you without your CPA, but the public accounting firms will expect you to pass the CPA before you can get promoted to manager, which typically comes around five years.

What happens if I fail?

The exam is designed to be a rigorous challenge. Most people will tell you that, while the content of the exam is not unreasonably complicated, the sheer volume of knowledge that is tested makes the exam quite an ordeal. The numbers back this up: historically, only approximately 10 percent pass all four parts on the first try. Approximately 50 percent of the people who are sitting for the exam have taken it before. In other words, at least half the people who take the exam will fail at least one part of the exam on their first try. If you don’t pass all four parts on the first try, don’t worry; it’s not the end of the world. Take a look at your score and figure out what areas are your weaknesses. Focus your additional studying for the next exam on those areas. But no matter what, never give up. Each time you take the exam, you’ll be able to identify areas of weakness, and if you take the time to brush up on those areas, without losing your existing strengths, you’ll be more likely to pass.

When is the exam given?

The exam is offered up to six days a week during January, February, April, May, July, August, October and November each year. Each two month testing period is called a window. Candidates make appointments for specific dates and times during a window at a regional testing center. After the state board determines a candidate is eligible to sit for specific sections of the CPA Examination, the candidate will receive a Notice to Schedule (NTS). The candidate can then register directly with their local test center.

What is the format?

The exam is a combination of multiple-choice questions with four options, and condensed case studies called simulations. The format of each of the sections is as follows:

The content of the exam is governed by the Content Specification Outlines.

A summary of each section is as follows:

Business Environment and Concepts:

1. Business structure (17-23%)
2. Economic concepts (8-12%)
3. Financial management (17-23%)
4. Information technology (22-28%)
5. Planning and measurement (22-28%)

Auditing and Attestation:

1. Planning the engagement (22-28%)
2. Internal controls (12-18%)
3. Obtain and document information (32-35%)
4. Review engagement and evaluate information (8-12%)
5. Prepare communications (12-18%)

Regulation:

1. Your national taxation entities (22-28%)
2. Your national taxation of property transactions (8-12%)
3. Your national procedures and accounting issue (8-12%)
4. Ethics and professional responsibilities (15-20%)
5. Business law (20-25%)

Financial Accounting & Reporting – Business Enterprises:

1. Concepts and standards for financial statements (17-23%)
2. Typical items in financial statements (27-33%)
3. Specific types of transactions and events (27-33%)
4. Accounting and reporting for governmental entities (8-12%)
5. Accounting and reporting for non-governmental entities and not–for–profit organizations (8-12%)

How are the written sections evaluated?

In place of essays, an assessment of written communication skills will be incorporated into the simulation portion of the revised examination. According to the CPA exam’s website, the testing of written communication skills was identified by the most recent accounting practice analysis and supported by a special task force consisting of CPAs, psychometricians, and writing experts. In this portion of the exam, candidates must read a situation description and then write an appropriate document (”constructed response”) relating to the situation. The instructions will state what form the document should take (such as a memo or letter) and its focus. The candidate’s response should provide the correct information in writing that is clear, complete and professional. Constructed responses will be scored holistically, based on three general writing criteria: organization, development, and expression.

Is there an ethics component to the test?

Some states require an ethics exam prior to certification, but this is an area of the test that is continuing to evolve. The regulation section of the CPA exam (formerly known as “Accounting and Reporting”) now includes material on ethics and professional responsibility. And some states are adding a separate section on ethics to the CPA exam. Check the board of accountancy of your country in which you’ll practice for ethics exam requirements.

Should I bring a calculator?

You will be able to use the online calculator to perform standard financial calculations. Be sure you understand how to move the calculator on the screen.

How is the exam graded?

The exam is graded on a scale from 0 to 99, and the passing standard remains 75. Conditional status may be granted to candidates who receive a passing grade on some but not all sections. Grades are released to the state boards after each two-month window of testing, and it is up to the state boards when to release those grades to the people who took the exam. You can sit for each section of the computerized exam individually, and in any order. You must pass all four sections within a rolling, 18-month period, which begins the day the first section is passed.

An auditor’s working papers include the narrative description below of the cash receipts and billing portions of internal control of Rural Building Supplies, Inc. Rural is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of Rural’s sales are to construction contractors on account. Rural employs 12 salaried sales associates, a credit manager, three full-time clerical workers, and several part-time cash register clerks and assistant bookkeepers. The full-time clerical workers perform such tasks as cash receipts, billing, and accounting and are adequately bonded. They are referred to in the narrative as “accounts receivable supervisor”, “cashier”, and “bookkeeper”.

Background (Narrative)

Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account if approved by the credit manager based only on the manager’s familiarity with the contractor’s reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable (AR) supervisor to set up the receivable. The AR supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorized price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The AR supervisor electronically posts the details of the invoice in the AR subsidiary ledger; simultaneously, the transaction’s details are transmitted to the bookkeeper. The AR supervisor also prepares a monthly computer-generated AR subsidiary ledger without a reconciliation with the AR control account and a monthly report of overdue accounts.

The cash receipts functions are performed by the cashier who also supervises the cash register clerks. The cashier opens the mail, compares each check with the enclosed remittance advice, stamps each check “for deposit only,” and lists checks for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the checks daily separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers. The bookkeeper receives the details of transactions from the AR supervisor and the cashier for journalizing and posting to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the AR supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the AR supervisor. The bookkeeper authorizes the AR supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

Required

1. Based only on the information in the narrative, describe the internal control weaknesses in Rural’s internal control over the cash receipts and billing functions.
2. Organize the weaknesses by employee job function: Credit manager, AR supervisor, Cashier, and Bookkeeper.
3. Do not describe how to correct the weaknesses.

Solution

Internal control weaknesses in Rural’s cash receipts and billing functions include:

Credit manager:

1. Ability to approve credit without external credit check or reference to established credit limits.

AR supervisor:

1. Billing without independent manual or computer verification.
2. Ability to alter details of charge forms and to use altered details in preparing invoices.
3. No check that daily totals of charge forms equal daily totals of invoices.
4. May write off accounts because there is no independent verification of the AR subsidiary ledger or reconciliation of it with the control account.
5. Long overdue accounts may remain on books and additional credit granted by omitting them from monthly report.

Cashier:

1. Incompatible duties of receiving cash receipts, depositing cash, and recording receipts on remittance advices.
2. No independent verification of cash receipts with deposit slip or list of checks.
3. Reconciling bank statements is incompatible with receiving and depositing cash.

Bookkeeper:

1. Authorizes write-offs without investigating reasons for them.
2. Established criterion for write-offs is too inflexible and does not prevent granting additional credit at earlier date.
3. Can indirectly grant additional credit by not notifying credit manager of write-off.Incompatible duties of authorizing and recording write-offs.

Un-Official Answer

The internal control weaknesses in Rural’s internal control concerning the cash receipts and billing functions include the following:

The credit manager has the ability to approve credit without an external credit check from a rating agency such as Dun & Bradstreet or without reference to established credit limits.

The accounts receivable (AR) supervisor performs the billing process without any independent manual or computer verification. The AR supervisor has the ability to alter the details of the charge forms prepared by the sales associates and use the altered details in preparing invoices. Additionally, there is no control to assure that the daily totals of the charge forms equal the daily totals of the invoices.

The AR supervisor also has the ability to cause accounts to be written off as uncollectible because there is no independent verification of the AR subsidiary ledger and because here is no reconciliation of the AR subsidiary ledger with the AR control account in the general ledger that is maintained by the bookkeeper. The AR supervisor can simply include collectible accounts in the monthly report of overdue accounts to the bookkeeper. Likewise, accounts can remain on the books long after they are overdue and additional credit can be granted if the AR supervisor omits them from the monthly notification to the bookkeeper.

The cashier processes receipts from cash and credit sales by performing three incompatible duties: initially receiving cash receipts, depositing cash in bank, and recording the receipts. Although the bookkeeper actually records the cash receipts, the cashier supplies the information (remittance advices), which may be delayed, altered, or incomplete. Without the verified deposit slip or the list of checks, there is no independent verification of the accuracy or completeness of cash receipts. Additionally, the cashier reconciles the monthly bank statements, which is also incompatible with handling cash receipts and depositing cash in bank.

The bookkeeper authorizes the write-off of uncollectible accounts without an investigation into the reasons and details of each overdue account. The established criterion for writing off overdue accounts (six months) is too inflexible and does not provide for the prevention of granting additional credit at an earlier date, such as when an account first becomes overdue. The bookkeeper also can indirectly grant additional credit by not notifying the credit manager when a contractor’s account has been written off. Additionally, the bookkeeper has the incompatible duties of authorizing write-offs and recording journal entries.