The Regulation (REG) section of the CPA Exam can seem intimidating at a first glance. That’s because it covers a wide range of topics, which will dramatically increase the number of concepts you need to memorize. Despite that, you can make the process a little easier on yourself with a couple of testing strategies.
Listed below are the most effective tips for passing the CPA REG exam on your first try. We’ve also included info on the specific subject matter and format of this CPA exam section— you’ll need to know this if you want to earn a passing score!
Regulation (REG) Section of The CPA Exam – Format
- Exam Time Limit: 4 hours
- Multiple Choice Test: 76 Questions, 50% of total score
- Task Based Simulations (TBSs): 8 TBSs, 50% of total score
- Test Segment #1: 38 MCQs
- Test Segment #2: 38 MCQs
- Test Segment #3: 2 TBSs
- Test Segment #4: 3 TBSs
- Test Segment #5: 3 TBSs
Reg CPA Exam Topics
- Ethics, Professional Responsibilities and Federal Tax Procedures: 10–20%
- Business Law: 10–20%
- Federal Taxation of Property Transactions: 12–22%
- Federal Taxation of Individuals: 15–25%
- Federal Taxation of Entities: 28–38%
As you can see, the test is based entirely on multiple choice questions and task based simulations (TBS). If you prepare for those, you should have a much easier time. But as I said earlier, it’s important to know what the most important topics are too. That’s why I’ve gone ahead and broken down what you need to know below:
Required REG Exam Skills
- Analysis: 25–35%
- Application: 35–45%
- Remembering and Understanding: 25–35%
Concept of Agency
First off, the REG CPA exam will have a series of business law questions about the relationship between an agent and principal. As an example, let’s say an agent named Bob runs a work crew under the employ of a tree company owned by a principal named Steve. In this example, there are several different ways where Bob can use his authority as an agent.
- Actual authority: Actual authority is when an agent gains authority due to the words or actions of a principal. An example of this would be if Steve tells Bob the exact trees to take down at a specific location. Bob would then have actual authority to take down those trees.
- Apparent authority: Next, apparent authority is when the actions or words of a principal give an agent reasonable belief that they have the authority to do something. A scenario that can grant apparent authority would be if Steve met with a client that asked for trees to be removed along a set of power lines. Bob would then have apparent authority to select the individual trees that need to be removed.
- Implied authority: Lastly, implied authority is when an agent performs duties as an extension of their actual authority. If Bob needed to unhook a chain link fence in order to reach a tree he’s been tasked to cut down, he would have the implied authority to do so. Of course, he would also have the authority to reattach the fence afterward.
If you keep these examples in mind, you should be able to remember each type of authority.
Contracts are when a party agrees to give something up in order for a good or service from another party. Payment types can be very broad, such as a promise to help with something or just exchanging money.
The REG test covers three different types of legal contracts. These are as follows:
- Express contract: In an express contract, two different parties make an oral or written agreement with each other. Doing so forms an official legal contract.
- Implied-in-fact contract: An implied-in-fact contract is created due to the actions or conduct of one of the parties involved. An example of this would be making an appointment with a plumbing company. Since you’ve made an appointment and a plumber will be visiting your home, they can reasonably assume that you will pay them for their services.
- Quasi-contract: Unlike the other types, quasi-contracts are not actual contracts. Instead, these are used if a court rules that a party has taken damages due to the lack of a contract. For instance, say you receive a package meant for someone else. If you keep the contents of the package you will have been unjustly enriched. As a result, a quasi-contract will be formed and you’ll have to pay for what you’ve received.
Contract law is fairly straightforward, as it accounts for what a person would reasonably think about an event or transaction. In a similar vein, quasi-contracts are used to stop people from taking advantage of each other.
In addition to contracts, the REG exam will also cover situations that are defenses against contract formation. Should someone attempt to form a contract under these circumstances, it will be considered improperly created and void.
- Fraud: Fraud is when one party intentionally deceives the other when forming a contract. A party may sue the other one for damages if they suspect fraud has occurred.
- Innocent misrepresentation: Innocent misrepresentation is when someone makes a false statement that they honestly believe is true. An example of this is someone selling a used item as brand new because they were unaware it had been used before.
- Duress: A contract made under duress is one where a party is being threatened by unlawful harm. Because a party under duress isn’t capable of making reasonable decisions, they can’t form a contract.
If any of these cases can be proven, then the contracts they’re attached to are considered void.
Independence and Objectivity
Working as a CPA requires a certain set of professional character traits. The most important of these is the ability to remain unbiased in your work. Failure to do so leads to mistakes that will cause serious financial harm to your clients. Because of that, you need to know these professional standards when taking the REG exam.
- Objectivity: A CPA can’t have any biases when working with their clients. Doing so would compromise their work and threaten their objectivity. As you’re taking the exam, always consider whether a business situation financially benefits the CPA working on it. If it does, then the CPA can’t be considered objective while working on it.
- When is independence required: Typically independence is necessary during an audit of financial statements. If a CPA is too close to the situation then they’re incapable of giving an objective financial opinion. Other types of work may not require independence, such as consulting or tax jobs.
- Due care: Due care is when a CPA supports their client’s work by gathering relevant information and maintaining professional standards. All accounting positions have a due care requirement. In fact, most jobs have a similar requirement. That’s because they can be sued if a lack of due care in their work proves to be detrimental to their clients.
Independence and objectivity are key aspects of accounting. Without them, CPAs could not effectively do their jobs.
Individual Income Taxes
The REG section of the CPA exam contains a large portion dedicated to individual income taxes paid via Form 1040. Because of that, it’s important to study this area heavily. I recommend printing out a copy of Form 1040 and referencing it as you study; this should help you visualize the form down the line.
As you study each exam topic, make sure to match it with the relevant lines on the form. An example of this would be referencing the income section when learning about dividends, or reading the payment lines when studying estimated tax payments.
Studying in this manner will help you associate concepts with the form early on. As a result, you’ll be familiar with both the concepts and structure of Form 1040.
During the REG CPA exam, you’ll be asked to complete questions on business formation. This includes a section on pass-through entities. These businesses manifest their losses and profits through the personal tax returns of whoever owns them. Essentially, this means that a pass-through entity doesn’t pay taxes on profit.
A partnership serves as a great example of a pass-through entity. That’s because both partners share their losses and profits on a Schedule K-1. Once they’ve done so, each partner includes that information on their tax return. They will not have to pay taxes through a partnership return.
This may seem exploitable, but there are some caveats to it.
Corporations are not considered pass-through entities. That’s because they’re required to file a tax return and pay taxes based on profit. Any money that a shareholder makes is considered income and taxed as such on their personal returns.
Realized vs. Recognized Gains
A realized gain is when you make a buy and sell transaction that results in a profit. An example of this would be buying stocks. If you were to purchase a stock for $50 then sell it later that year for $80, then you’d have a realized gain of $30.
However, keep in mind that certain gains aren’t taxable:
If your transaction happens as a part of a retirement plan, it is not considered a realized gain. Because of that, it is untaxed. Instead, taxation of that gain will be delayed until retirement, if it is taxed at all.
Retirement plans are a way to save earnings and investments without being taxed. Instead, any gains and interest are reinvested back into your retirement plan. Consequently, you’ll only be taxed on the funds that you withdraw after retiring.
Retirement plans can work differently from each other. Certain plans make you invest dollars after being taxed, whereas others let you invest tax-free.
Securities Acts of 1933 and 1934
After the stock market crash of 1929, there needed to be a way to limit abuse of the system. That led to the creation of the Securities Act of 1933 and the Securities Act of 1934. Both of these closed loopholes in different areas. The Act of 1933 does so by requiring that investment issuers register with the SEC. In a similar vein, the Act of 1934 created exchanges exclusively to trade securities.
Essentially, the 1933 Act created regulations for registration with the SEC, while the 1934 act gave oversight to securities that had been issued and began circulation.
Taxes on Income, Gifts, and an Estate
It’s important to note that taxes are not only paid on personal income. You’ll also need to remember that the REG exam includes sections about the taxation of gifts and the tax liability of someone’s estate. Each type of taxation comes with its own set of rules and regulations. Make sure you know which taxation type each question is asking about; this will greatly increase your chances of passing the REG exam!
UCC: Offer and Acceptance
The final thing to remember for this CPA exam section is the Uniform Commercial Code (UCC). This is applied during business transactions and is different from contract law. An example of this would be if a lumber company sold materials to a manufacturing company. UCC requirements could apply in several different ways:
- Merchant’s firm offer: When a merchant makes a firm offer, it can’t be taken back. That’s because the operation of companies relies heavily on vendors and suppliers. For instance, if the lumber company offers to sell the manufacturer a set amount of wood, the offer can be considered reliable.
- Acceptance: Contract terms can be changed during a sale based on the situation. If the lumber company realizes they don’t have enough material for the manufacturer’s order, both companies can agree to change the sale to a smaller amount. This is done so the manufacturer can keep production going.
- Consideration: The consideration for goods must be included in the contract. However, this can be modified if both companies agree and are acting in good faith. Because of this, the lumber company must include the cost of the materials they’re selling in the contract with the manufacturer.
UCC laws are important because they regulate transactions between separate businesses.
The REG section of the CPA exam is much more detail focused than the others. That’s why it’s important that you study hard before taking it. Make sure you’ve given yourself enough time to memorize the important rules and regulations included in the exam.Personally, I believe that the best way to prepare for the exam is by completing practice questions. These get you used to the testing process and ensure that you remember key concepts. If you’re not sure about where to find good questions, check out our list of the best CPA review courses to find thousands of MCQs and task based simulations.