One of the four components of the Uniform CPA Exam, Regulation (REG) tests your knowledge about accepted principles of professional ethics, standards of business law and your legal responsibilities as an accountant. While named for these regulatory-factors, accounting for federal taxation is the major source of testing.
Breaking It Down
REG is comprised of three testlets, each of 24 multiple-choice questions, and a fourth testlet of six fact-based simulations. Its subject matter concerns the following:
Ethical and legal knowledge of appropriate professional conduct, the responsibilities and liabilities governing accountants’ behaviors, encompassing between 15-19% of the exam.
Business law questions test your competency on matters of agency, contract-law, creditor-debtor interactions, governmental regulations of financial transactions, and the uniform commercial code, encompassing 17-21%.
Federal tax accounting, including accrual/cash transactions, installment sales accounting and methods for inventory assessment (11-15%).
Federal tax accounting for asset-types and property transactions (12-16%).
All matters attendant to federal taxation of individuals (12-19%).
Federal taxation of corporations, partnerships, and sole-proprietorships (18-24%).
REG’s Five Most Difficult Topics
Focus on the REG-concepts and their practical application. More than 60% of the test involves accounting for federal taxation. If you don’t specialize in tax problems, prepare for these issues:
Calculating, presenting and justifying all variety of taxation treatments. These include federal taxation of all types of business entities, individuals and property, as well as the accepted standards processes and procedures of accounting for them. Memorizing tax rates will not be sufficient. Formulating conclusions from assessment of tax implications for a diversity of commercial entities is just the beginning. Practical application of these skills and ideas on the fact-based simulations requires documentation of your conclusions.
REG’s simulations are the most difficult; they demand in-depth and practical demonstrations of your abilities. It requires considerable prior study and substantial concentration during the exam to transform the tax-treatment you may have memorized for multiple-choice responses (e.g., recognize/don’t recognize/partially recognize) into a hands-on and applied explication of these treatments during a simulation. Accurate assessment conclusions for businesses show you have a basic grasp of the required accounting procedures. However, further application of your skills for explicit conditions of federal taxation may involve:
assessing the effect of multi-jurisdictional considerations: municipal, county, state, foreign on federal taxes
devising and justifying alternative tax treatments for a specific commercial development, or determining the tax effect of passive activity gains and losses.
Assuring the timeliness of your information is necessary. In all cases, including:
regulatory matters governing ethical accounting behaviors
the state of business law
uniform commercial code acts affecting the environment of enterprise transactions and procedures, and federal tax guidelines the examinee must display awareness of the most recent statutes and rules, in effect six months prior to the test.
Focus also on professional ethics. This will go beyond simply knowing and reciting the regulations, rules and behavioral standards expected of accountants. Most complex are the CPA’s responsibilities/liabilities to clients AND to the law; recognizing clients’ potentially illegal expectations is equally important.
Familiarize yourself with the IRS audit and appeals process, since it involves a simultaneous combination of ethical, business, legal and taxation issues.
REG’s reputation for exceptional difficulty is well-founded. Pass-rates have risen steadily since 2004 (35%), but as recently as 2012 were still only 45%. Overcome this by taking practice exams and constantly expanding your knowledge by identifying and improving your weaknesses. In this way, you’ll develop a comprehensive-base of relevant resources, and be well prepared for the pleasures of REG.