Chapter 5: Exam Content Overview

Preparing for the Regulation Exam

Regulation is a section of the exam that includes both business law and taxation topics. In preparing for the Regulation exam, you should take a systematic approach such as the one detailed in Chapter 1.

First, in approaching your study, you should become acquainted with the nature of the Regulation exam itself. The content specification outlines are printed below.

Relatedly, you should evaluate your competence by working 10 to 20 multiple-choice questions from each of the modules (23–30). This diagnostic routine will acquaint you with the specific nature of the questions tested on each topic as well as indicate the amount of study required per topic. You should work toward an 80% correct response rate as a minimum on each topic.

Second, study the content of modules 23–39 emphasizing the concepts of each topic such as legal liability of accountants, elements of a contract, and taxable income. You may have to refer to your textbooks, etc., for topics to which you have had no previous exposure.

Third, work the multiple-choice and task-based simulations under examination conditions.

AICPA CONTENT AND SKILLS SPECIFICATIONS

The AICPA Content and Skills Specifications for the Uniform CPA Exam sets forth the coverage of topics on the Regulation exam. This outline was issued by the AICPA and is effective beginning in 2014. The first part of the outline describes the topical coverage of the Regulation exam, and the second part provides some insights into the skills tested on all sections of the Uniform CPA exam.

Content Specification Outlines (CSOs)

The Regulation section tests knowledge and understanding of ethics, professional and legal responsibilities, business law, and federal taxation.

Ethics, Professional and Legal Responsibilities, and Business Law

These topics test knowledge and understanding of professional and legal responsibilities of certified public accountants. Professional ethics questions relate to tax practice issues and are based on the AICPA Code of Professional Conduct, Treasury Department Circular 230, and rules and regulations for tax return preparers. Business law topics test knowledge and understanding of the legal implications of business transactions, particularly as they relate to accounting, auditing, and financial reporting. This section deals with federal and widely adopted uniform state laws or references identified in this CSO.

In addition to demonstrating knowledge and understanding of these topics, candidates are required to demonstrate the skills required to apply that knowledge in performing their responsibilities as certified public accountants. To demonstrate such knowledge and skills, candidates will be expected to perform the following tasks:

• Identify situations that might be unethical or a violation of professional standards, perform research and consultations as appropriate, and determine the appropriate action.
• Recognize potentially unethical behavior of clients and determine the impact on the tax services being performed.
• Demonstrate the importance of identifying and adhering to requirements, rules, and standards that are established by licensing boards within their state, and which may place additional professional requirements specific to their state of practice.
• Apply business law concepts in evaluating the economic substance of client transactions, including purchase agreements, loans and promissory notes, sales contracts, leases, side agreements, commitments, contingencies, and assumption of liabilities.
• Evaluate the legal structure of an entity to determine the implications of applicable laws and regulations on how a business is organized, governed, and operates.

Federal Taxation

These topics test knowledge and understanding of concepts and laws relating to federal taxation (income, gift, and estate). The areas of testing include federal tax process, procedures, accounting, and planning, as well as federal taxation of property transactions, individuals, and entities (which include sole proprietorships, partnerships, limited liability entities, C corporations, S corporations, joint ventures, trusts, estates, and tax-exempt organizations).

In addition to demonstrating knowledge and understanding of these topics, candidates are required to demonstrate the skills required to apply that knowledge in providing tax preparation and advisory services and performing other responsibilities as certified public accountants. To demonstrate such knowledge and skills, candidates will be expected to perform the following tasks:

• Evaluate the tax implications of different legal structures for business entities.
• Apply analytical reasoning tools to assess how taxes affect economic decisions related to the timing of income/expense recognition and property transactions.
• Consider the impact of multijurisdictional tax issues on federal taxes.
• Identify the differences between tax and financial accounting.
• Analyze information and identify data relevant for tax purposes.
• Identify issues, elections, and alternative tax treatments.
• Research issues and alternative tax treatments.
• Formulate conclusions.
• Prepare documentation to support conclusions and tax positions.
• Research relevant professional literature.

The outline below specifies the knowledge in which candidates are required to demonstrate proficiency.

References—Regulation

Ethics, Professional and Legal Responsibilities, and Business Law

• AICPA Statements on Standards for Tax Services
• Revised Model Business Corporation Act
• Revised Uniform Limited Partnership Act
• Revised Uniform Partnership Act
• Securities Act of 1933
• Securities Exchange Act of 1934
• Sarbanes-Oxley Act of 2002
• Uniform Accountancy Act
• Uniform Commercial Code
• Current textbooks covering business law, auditing, accounting, and ethics

Federal Taxation

• Internal Revenue Code of 1986, as amended, and Regulations
• Treasury Department Circular 230
• Other administrative pronouncements
• Case law
• Public Law 86-272
• Uniform Division of Income for Tax Purposes Act (UDITPA)
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Current Federal tax textbooksl Specification Outlines&

Skill Specification Outlines

The Skill Specification Outlines (SSOs) identify the skills to be tested on the Uniform CPA Examination. There are three categories of skills, and the weightings will be implemented through the use of different question formats in the exam. For each of the question formats, a different set of tools will be available as resources to the candidates, who will need to use those tools to demonstrate proficiency in the applicable skills categories.

Weights

The percentage range assigned to each skill category will be used to determine the quantity of each type of question, as described below. The percentage range assigned to each skill category represents the approximate percentage to which that category of skills will be used in the different sections of the CPA Examination to assess proficiency. The ranges are designed to provide flexibility in building the examination, and the midpoints of the ranges for each section total 100%. No percentages are given for the bulleted descriptions included in these definitions. The presence of several groups within an area or several topics within a group does not imply equal importance or weight will be given to these bullets on an examination.

Knowledge and Understanding. Multiple-choice questions will be used as the proxy for assessing knowledge and understanding, and will be based upon the content topics as outlined in the CSOs. Candidates will not have access to the authoritative literature, spreadsheets, or database tools while answering these questions. A calculator will be accessible for the candidates to use in performing calculations to demonstrate their understanding of the principles or subject matter.

Application of the Body of Knowledge. Task-based simulations will be used as the proxy for assessing application of the body of knowledge and will be based upon the content topics as outlined in the CSOs. Candidates will have access to the authoritative literature, a calculator, spreadsheets, and other resources and tools which they will use to demonstrate proficiency in applying the body of knowledge.

Written Communication (BEC section only) will be assessed through the use of responses to essay questions, which will be based upon the content topics as outlined in the CSOs. Candidates will have access to a word processor, which includes a spell-check feature.

Outlines

The outlines below provide additional descriptions of the skills that are represented in each category.

Knowledge and Understanding. Expertise and skills developed through learning processes, recall, and reading comprehension. Knowledge is acquired through experience or education and is the theoretical or practical understanding of a subject; knowledge is also represented through awareness or familiarity with information gained by experience of a fact or situation. Understanding represents a higher level than simple knowledge and is the process of using concepts to deal adequately with given situations, facts, or circumstances. Understanding is the ability to recognize and comprehend the meaning of a particular concept.

Application of the Body of Knowledge, including Analysis, Judgment, Synthesis, Evaluation, and Research. Higher-level cognitive skills that require individuals to act or transform knowledge in some fashion. These skills are inextricably intertwined and thus are grouped into this single skill area.

• Assess the Business Environment
  • Business Process Evaluation: Assess and integrate information regarding a business’s operational structure, functions, processes, and procedures to develop a broad operational perspective; identify the need for new systems or changes to existing systems and/or processes.
  • Contextual Evaluation: Assess and integrate information regarding client’s type of business or industry.
  • Strategic Analysis—Understand the Business: Obtain, assess, and integrate information on the entity’s strategic objectives, strategic management process, business environment, the nature of and value to customers, its products and services, extent of competition within its market space, etc.).
  • Business Risk Assessment: Obtain, assess, and integrate information on conditions and events that could impede the entity’s ability to achieve strategic objectives.
  • Visualize Abstract Descriptions: Organize and process symbols, pictures, graphs, objects, and other information.
• Research
  • Identify the appropriate research question.
  • Identify key search terms for use in performing electronic searches through large volumes of data.
  • Search through large volumes of electronic data to find required information.
  • Organize information or data from multiple sources.
  • Integrate diverse sources of information to reach conclusions or make decisions.
  • Identify the appropriate authoritative guidance in applicable financial reporting frameworks and auditing standards for the accounting issue being evaluated.
• Application of Technology
  • Use electronic spreadsheets to perform calculations, financial analysis, or other functions to analyze data.
  • Integrate technological applications and resources into work processes.
  • Use a variety of computer software and hardware systems to structure, utilize, and manage data.
• Analysis
  • Review information to determine compliance with specified standards or criteria.
  • Use expectations, empirical data, and analytical methods to determine trends and variances.
  • Perform appropriate calculations on financial and nonfinancial data.
  • Recognize patterns of activity when reviewing large amounts of data or recognize breaks in patterns.
  • Interpret financial statement data for a given evaluation purpose.
  • Forecast future financial statement data from historical financial statement data and other information.
  • Integrate primary financial statements: using data from all primary financial statements to uncover financial transactions, inconsistencies, or other information.
• Complex Problem Solving and Judgment
  • Develop and understand goals, objectives, and strategies for dealing with potential issues, obstacles, or opportunities.
  • Analyze patterns of information and contextual factors to identify potential problems and their implications.
  • Devise and implement a plan of action appropriate for a given problem.
  • Apply professional skepticism, which is an attitude that includes a questioning mind and a critical assessment of information or evidence obtained.
  • Adapt strategies or planned actions in response to changing circumstances.
  • Identify and solve unstructured problems.
  • Develop reasonable hypotheses to answer a question or resolve a problem.
  • Formulate and examine alternative solutions in terms of their relative strengths and weaknesses, level of risk, and appropriateness for a given situation.
  • Develop creative ways of thinking about situations, problems, and opportunities to create insightful and sound solutions.
  • Develop logical conclusions through the use of inductive and deductive reasoning.
  • Apply knowledge of professional standards and laws, as well as legal, ethical, and regulatory issues.
  • Assess the need for consultations with other professionals when gray areas, or areas requiring specialized knowledge, are encountered.
• Decision Making
  • Specify goals and constraints.
  • Generate alternatives.
  • Consider risks.
  • Evaluate and select the best alternative.
• Organization, Efficiency, and Effectiveness
  • Use time effectively and efficiently.
  • Develop detailed work plans, schedule tasks and meetings, and delegate assignments and tasks.
  • Set priorities by determining the relevant urgency or importance of tasks and deciding the order in which they should be performed.
  • File and store information so that it can be found easily and used effectively.
  Written Communication (BEC section only). The various skills involved in preparing written communication, including
  • Basic writing mechanics, such as grammar, spelling, word usage, punctuation, and sentence structure.
  • Effective business writing principles, including organization, clarity, and conciseness.
  • Exchange technical information and ideas with coworkers and other professionals to meet goals of job assignment.
  • Documentation
    • Prepare documents and presentations that are concise, accurate, and supportive of the subject matter.
    • Document and cross-reference work performed and conclusions reached in a complete and accurate manner.
  • Assist client to recognize and understand implications of critical business issues by providing recommendations and informed opinions.
  • Persuade others to take recommended courses of action.
  • Follow directions.

RESEARCHING INCOME TAX ISSUES1

Research components of the Regulation section will involve a research database that includes the Internal Revenue Code (IRC) or the Statements of Standards for Tax Services (TS).

The Internal Revenue Code of 1986, as Amended (commonly called IRC, or simple the Code) is the most important source of federal income tax law. The IRC is actually Title 26 of the United States Code. The US Code is the complete set of laws passed by Congress. All laws dealing with one topic are consolidated under one title of the US Code. For example, Title 10 of the US Code contains all of the military laws of the United States.

Any changes when Congress passes a new tax law are integrated in the Code. The Code has been amended almost every year since it was reformed in 1986. Prior to that, the Code was reorganized in 1954, and from then until 1986, it was known as the Internal Revenue Code of 1954, as Amended. Before the IRC of 1954, the tax law was contained in the Internal Revenue Code of 1939, the first IRC. Before 1939, the tax law was an unorganized series of tax acts.

Code Organization

There are many different subdivision to the Code, each with a different purpose and name. The Code is divided into subtitles, chapters, parts, subparts, and sections. Some common subtitles of the Code are

Each Subtitle is divided into chapters. The chapters contained in Subtitle A are

The chapters are again subdivided into numerous subchapters. Some of the notable subchapters of Chapter 1 are

Each subchapter may be further divided into parts and subparts, as needed.

The smallest unique part of the Code is the section. The section is normally the basic reference when citing a provision of the Internal Revenue Code. In day-to-day tax practice, reference to larger divisions of the Code such as subtitles and chapters is generally disregarded. Currently, the sections in the Code are numbered from 1 to over 9,000, albeit many numbers are skipped to allow for future expansion of the tax law. Each Code section may be further subdivided into subsections, paragraphs, subparagraphs, and clauses. As an example, the following Code section reference is to the definition of the term medical for purposes of the medical care deduction:

Citation: Section 213(d)(1)(A), where

The tax practitioner can be assured that there is only one Section 213 in the Code and that this is a specific tax reference that cannot be confused with any other provision of the Code.

Database Searching

Searching a database consists of the following five steps:

Advanced Searches

On the Regulation exam you can also perform advanced searches, including

The advanced search also allows you to select options for the search. One alternative allows you to retrieve alternative word terms. For example, using this approach with a search on the word “cost” would also retrieve sections containing the word “costing.” A synonyms option allows you to retrieve sections that contain words that mean the same as the specified word. You also have the option to search only on the selected sections of the literature.

1This section was prepared by Gerald E. Whittenburg, Ph.D., CPA. For more information about tax research refer to West’s Federal Tax Research, 6th Edition (Thomson South-Western)