The accounting section of the CIA exam, what you need to know to pass the exam

The accounting section of the CIA exam, what you need to know to pass the exam

Level of Knowledge

According to the IIA’s 2019 outline for the Certified Internal Auditor program, part 3 of the exam includes accounting topics that are tested at the “basic” level, except for financial statement analysis, which is tested up to “proficiency” level. Before we explore into the accounting content of the exam, we need to understand the difference between “basic” and “proficiency” levels, and what the difference means in application. Here are the definitions and examples provided by the IIA (with minor changes and clarifications):

Proficiency level Basic Level (previously referred to as “Awareness” level)
  • Does NOT test knowledge of a definition.
  • Requires understanding of a definition.
  • The question provides a certain situation.
  • The candidate must apply the knowledge to select what the auditor would do in a given situation.
  • The candidate must make a judgment between two or more alternatives in a scenario.
  • The question provides examples where the candidate would have to apply the knowledge to choose the correct answer; such as best or most appropriate option.
  • The question may have a paragraph to illustrate a scenario with 2-4 questions that follow (not a page, but a paragraph).
  • Tests understanding of basic concepts.
  • Tests definition related knowledge.
  • Tests general knowledge of the Standards, versus application
Example question

Which of the following actions would be a violation of auditor objectivity?

  1. Continuing on an audit assignment at a division for which the auditor will soon be responsible as the result of a promotion.
  2. Reducing the scope of an engagement due to budget restrictions.
  3. Participating on a task force which recommends standards of control for a new distribution system.
  4. Reviewing a purchasing agent’s contract drafts prior to their execution.

Solution: Answer (a) is correct. An auditor who has been promoted to an operating department should not continue on an audit of that department. According to Practice Advisory 1130-A.1, the chief audit executive should reassign auditors if a conflict of interest or bias may be reasonably inferred.

Example question

Which of the following is a basic philosophy underlying facilitated workshop approaches to CSA(Control Self-Assessment)?

  1. Effective control should be a shared responsibility involving all employees.
  2. Internal control should be solely the responsibility of senior management.
  3. Operational personnel should be independently assessing internal control.
  4. The internal audit department should be primarily responsible for internal control evaluations.

Solution: Answer (a) is correct. Employees at all levels are responsible for internal control and getting together to discuss it in a facilitated workshop reinforces employees’ responsibility.

 

Accounting Topics

Now, in light of the above definitions and examples, let’s review the accounting domain of the CIA Part 3 exam outline:

​​1. Financial Accounting and Finance Cognitive Level
A​ ​Identify concepts and underlying principles of financial accounting (types of financial statements and terminologies such as bonds, leases, pensions, intangible assets, research and development, etc.) Basic
​B ​Recognize advanced and emerging financial accounting concepts (consolidation, investments, fair value, partnerships, foreign currency transactions, etc.) Basic
C​ ​​Interpret financial analysis (horizontal and vertical analysis and ratios related to activity, profitability, liquidity, leverage, etc.) Proficient
D​ ​​Describe revenue cycle, current asset management activities and accounting, and supply chain management (including inventory valuation and accounts payable) Basic
​E ​​Describe capital budgeting, capital structure, basic taxation, and transfer pricing Basic
2. Managerial Accounting  Cognitive Level
A ​Explain general concepts of managerial accounting (cost-volume-profit analysis, budgeting, expense allocation, cost- benefit analysis, etc.) Basic
​B ​Differentiate costing systems (absorption, variable, fixed, activity-based, standard, etc.) Basic
​C ​Distinguish various costs (relevant and irrelevant costs, incremental costs, etc.) and their use in decision making Basic

At first sight, the outline looks frightening, but on further analysis, it’s not as scary as it looks.   We need to pay attention to keywords in each line: identify, recognize, interpret, describe, explain, differentiate, and distinguish. Let’s take some examples: Under topic A of financial accounting and finance, you are required to “identify concepts and underlying principles of financial accounting (types of financial statements and terminologies such as bonds, leases, pensions, intangible assets, research and development, etc.)”. This means that, for example, you are not expected to know every detail about pension funds; you are only required to know what a pension fund is, and the main types of pension funds. You will not be asked on the exam about the pros and cons of each type of a pension fund. Here you can find more info about College of English Language. Under topic E of the same section, you are required to ​​“Describe capital budgeting, capital structure, basic taxation, and transfer pricing”. You are not expected to be an expert on tax accounting; you are only required to know basic definition and concepts.

How to study for the accounting section of the exam?

Most review course providers will assume that you have accounting knowledge. They will assume that you have studied business at a university level degree and have at least had 1 or 2 accounting subjects during the first and second years of your degree. Otherwise, Part 3’s textbook would be thousands of pages. If you have some accounting background your review course should have sufficient coverage of the accounting section of the exam.  If you do not have that accounting background, you can take the following approach:

  • Try to understand the accounting concepts based on the textbook provided by your review course. Mark any concepts that you don’t understand and look for resources to cover those topics (more details later).
  • If the above approach doesn’t work, it might be beneficial if you study accounting principles while you prepare for the CIA exams. Since the exam does not require comprehensive advanced knowledge, you will probably gain enough knowledge just by reading.

The IIA’s website lists the following book as a reference for part 3: Accounting Principles, by Jerry Weygandt, Paul Kimmel, and Donald Kieso. It is in fact a very good resource that will provide valuable knowledge, but it also covers topics that are beyond the scope of the CIA exam. If you are interested in the topic, and have the time, you can read the whole book, or you can highlight the chapters covered by the CIA exam and focus on them. Another similar (and free) resource is the following website: https://www.principlesofaccounting.com/. Just like the textbook mentioned earlier, the website covers topics outside the scope of the CIA exam that you might want to study or skip. The website also offers practice questions that will help you evaluate your understanding.

Conclusion

If you have a good accounting background, the accounting section should be a guaranteed easy 20 marks on the exam since the exam will only cover basic concepts. If you don’t have the accounting background, the CIA exam might be a good chance to get basic knowledge that will help you pass the exam, and will also help you throughout your audit career. Although the outline is wide in coverage but it is at the same time very shallow. An investment of few extra study hours should at least get you 15 out of the 20 accounting questions on the exam. Since accounting is such a broad subject, you might need to set a longer preparation period for part 3. The new information needs to “sink in” and get absorbed quite well before you are ready to use it. In such cases, it is highly advised to start studying accounting as soon as you start preparing for the CIA program. By the time you finish part 1 and 2 you will have covered a lot of ground.