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My CPA-REGmodule23

Notecards I made from Wiley's 2012 CPA Exam Review

QuestionAnswer
Who interprets and enforces the AICPA code of conduct? The Professional Ethics Executive Committee (PEEC)
What are the disciplinary actions that may be taken against CPAs by a joint ethics enforcement program (JEEP) board? No violation/Dismissal, admonishment (must publish), corrective action, suspension up to two years, expulsion from AICPA (can practice public accounting with state license. Violate state board, can lose that too)
When may a member of the AICPA be expelled or suspended without a hearing? license to practice revoked by state as disciplinary measure, convicted of crime punishable by >1 year in prison, files or aids in filing a fraudulent tax return, intentionally fails to file his/her tax return
What actions can the SEC take against a CPA? after a hearing SEC revoke/suspend acctant from practicing before SEC if violat fed securities laws or act unethically, w/o a hearing same if convicted felony/misdemeanor morals involved, violate securities laws/regs can fine/mandate to pay profits gained
What disciplinary actions can be taken against a CPA firm? state board bar firm from practice in state, SEC prohibit firm from work for a public company, PCAOB investigates/sanctions firms for violations of standards of performance (violate hearing held, may suspend/revoke firms registration or civil $ penalties)
How often must a registered CPA firm be inspected by the PCAOB staff if have >100 clients? 100 or less? 1. each year 2. every three years
In addition to the disciplinary actions against a CPA firm card, what other remedial actions may be taken by the PCAOB against a firm? force to improve quality control or training, independent monitoring of the audit work of the firm
What is common law? i.e. where is it derived from? court interpretations of what is fair and equitable
What is the relationship between the client and the CPA akin to? when can a CPA be held liable? 1. an employer and an independent contractor 2. accountant fails to preform substantially as agreed under contract (the engagement letter)
What are implied duties? expressed duties? 1. the cpa must preform in a nonnegligent manner 2. cpa must preform the terms of the contract
What is typically expressed in the engagement letter? Nature & scope of engagement, procedures & tests used, engagement not necessarily uncover fraud, defalcations, errors or illegal actions (unless CPA agrees to greater responsibility), signed by at least client -oral contract for audit still enforceable
When is an accountant said to be in privity of contract with a client? When a contract exists between them (client is also in privity of contract with accountant)
When would an accountant be liable for failure to detect fraud? Normal audit would have detected it, accountant took a greater responsibility such as a fraud audit, wording of audit report indicates greater responsibility
If the client interfered or prevents the accountant from preforming, causing the opinion to be issued a few days late, what amount of the fee is the accountant entitled to? The full amount
What amount of the fee is an accountant entitled to if there is a major breach of contract? minor errors? can the client recover damages even if the accountant is not entitled a fee? What about punitive damages? 1. none 2. accountant entitled to some compensation but client can deduct from fees paid any damages caused by the breach 3. Yes 4. No
What elements are needed in order to prove negligence against an accountant? 1.Didnt perform with skill/judgement possessed by avg CPA (guided by statutes, court decisions, GAAS, GAAP) 2.CPA breached duty owed of avg CPA 3.Damages resulted 4.casual relationship exists between fault of CPA and damages and cause must be foreseeab
How is common law fraud of an accountant established? Misrepresentation of material fact or CPA's opinion, Scienter (either intent to mislead or reckless disregard of truth), reasonable reliance by injured party, actual damages -reckless disregard used then called constructive fraud or gross negligence
Can punitive damages be awarded in cases of fraud, constructive fraud, or gross negligence? Yes
Does common law liability to third parties include privity? No, because typically there is no privity of contract between the CPA and a 3rd party. May occur if one entity hires CPA to audit another b/c thinking about acquiring and want financial assured -No privity is typical defense used by CPAs
Define a foreseen party. What is the majority rule? 1. A third party who the accountant knew would rely on financial statements 2. the accountant is liable to foreseen third parties for ordinary negligence
What parties is the accountant liable for in cases of fraud, constructive fraud, or gross negligence? All parties, regardless if they were foreseen or not
Define foreseeable a party. What is the majority rule here? 1. any party party the accountant could reasonably foresee would receive financial statements and use them 2. the accountant is not liable to foreseeable parties for negligence
What must a third party prove to be awarded damages against an accountant? 1. Losses (damages) 2. Negligence by the CPA 3. Proximate cause (reliance on CPA work caused the loss)
What happens in a state where joint liability is applied? Several liability? Both? 1.CPA&mgmt liable up to full amt of obligation (one has no funds may collect entire amt from other) 2.CPA&mgmt obligated to pay their share of damages based on degree responsible 3.each party responsible full amt, may seek reimbursement from other parti
What is the ultramares decision? case where accountants were held liable for ordinary negligence only to parties who primarily benefit from the audit or audited financial statement
In regards to statutory liability to third parties and the securities act of 1933, what parties may sue? 1. Any purchaser of registered securities (no need to be initial purchaser, must prove security was offered for sale w/ registration statement. Exchange/issuance stock on merger counts as sale) 2.third parties w/o privity under federal securities act
What is the registration statement for a sale of securities? What is included in it? 1. document that is used to sell securities 2. description of companies properties/business, description of security offered for sale, information about management of company, financial statements certified by auditor
What does liability under section 11 of the 1933 act mean to auditors? imposes liability on auditors for misstatement or omissions of material fact (means avg prudent investor should be informed of) in financial statements or information provided in registration statements
What must the purchaser of securities (plaintiff) prove to be awarded damages against the accountant? Securities act of 1933 1.Damages 2.material misstatement omission in financial statements or registration statement -1 and 2 proven, burden of proof shifts to CPA -need not prove reliance on statements (unless security purchased 12 months after) nor negligence or fraud
What defenses does a CPA have against liability when being sued over the purchase of securities? 1.Due diligence- CPA had reasonable grounds to believe/did believe statements were not misstated 2.plaintiff knew financial statements were incorrect when buy security 3.lack of causation(loss not do to misstatement) 4.Followed GAAP
In a liability case based on the purchase of securities, how are damages calculated? Difference between amount paid and market value at time of suit, if sold diff between amount paid and sale price -Damages cannot exceed price security was offered to public -suit starts value decreases, plaintiff no get. value increases CPA get benefit
What are the statue of limitations of a statutory liability to 3rd parties based on the securities act of 1933? Action brought against CPA within one year from discovery (or discovery should've been made) of false statement. If happen before IPO have 3 years to bring action
Can a statutory liability to 3rd parties based on the securities act of 1933 be brought against a CPA after the date of certified balance sheet but before the effective date of the registration statement? Yes, CPA must conduct S-1 review (review material events that occur in this time period) made for registration statement under securities regulation
What is the difference between what the Securities Act of 1933 and the Securities Exchange act of 1934 regulate? 33-initial sales of securities registered under 1933 act (no include periodic/annual reports to SEC-34) 34-securities sold on national stock exchanges (include trades corporation has >10 million assets, and held by >/=500 people at the end fiscal year)
What does section 10 of the securities exchange act of 1934 make unlawful? Section 18? 1.employ device/scheme/artifice to defraud. Omit/make untrue statement of material fact. engage in business to commit fraud or deceit in connection w/purchase/sale of security 2.make false/misleading statement on material statement unless done good faith
Who may sue under the act of 1934? act of 1933? 34-purchasers and sellers of registered securities 33-purchasers only
Under the act of 1934, section 10 what must the plaintiff prove? damages resulted with purchase/sale of security, material misstatement.omission in info released by company, justifiable reliance on financial info, existence of scienter(intent to deceive,manipulate,defraud)
Under the act of 1934, can the plaintiff still recover if he or she is reckless or fraudulent? No way jóse
Under the act of 1934, section 18 what must the plaintiff prove? If the burden of proof shifts to the account, what are his defenses? 1.damages incurred, material misstatement/omission on report filled with SEC, plaintiff read and relied on defective report 2.acted in good faith, negligence still prove good faith. Gross negligence ur screwed
Under the act of 1934, how are damages calculated? difference between amount paid by the plaintiff and market value at time of suit. If sold calculate difference between amount paid and sale price
What defenses available to auditors are allowed in both 1934 and 1933 act? 1934 act only? 1933? 1.performed with due care, misstatement was immaterial, plaintiff had prior knowledge of misstatement, misstatement was not cause of loss 2.plaintiff did not rely on information 3.Due diligence
What do an accountants working papers consist of? Who owns them? Why is the ownership only custodial in nature? 1.evidence, notes, computations (accumulate during work) 2.accountant unless other agreement 3.preserve confidentiality of client
Are privileged communications between accountant and client allowed for in state or federal law? How does an accountant-client communication be considered privileged? 1.Only few states, not federal law 2.Be located in jurisdiction where privileged communication is recognized, have been intended to be confidential at time of communication, not have privilege waived by client
If accountant-client communication was considered privileged can account refuse to testify in court over these matters? Yes, privilege may be waived by client, if part of privilege is waived all of privilege is lost
Under AICPA, when would the disclosure of confidential client date be allowed? client consents (partnership needs both), comply with GAAS/GAAP, comply with subpoena, disclosure made in conjunction with a quality review of the CPA firms practice, AICPA ethics division/trial board is conduction an investigation
For a CPA to provide confidential client information to a third party service provider without the clients permission, what must be done? CPA must enter into contractual agreement with service provider to maintain confidentiality and be reasonably sure 3rd party can prevent unauthorized release to others
Are tax accrual files protected by accountant client privilege? Not according to the US Supreme Court
What are the provisions of Gramm-Leach Bliley Act of 1999 (Financial Modernization) in respect to privacy of individual tax returns or financial advice? 1.CPAs prohibited from disclosing non public info to nonaffiliated 3rd parties 2.FTC require CPAs develop, implement, maintain infor security programs, outline ways protect client info 3.CPAs responsible for confidentiality outsourced info for processin
What does the accountants professional liability insurance protect the accountant from? clients fidelity bond? 1.Negligence 2.accountants fraud
When a client insurance company is subrogated to clients rights, what does that mean? If an accountant declares bankruptcy, what happens to the portion of debts incurred in violation of securities laws that were not covered by insurance? 1.insurance company has same rights of recovery of loss against accountant that client had 2.Not dischargeable by accountant
If the principal auditor relied on another auditors work, is the principal auditor still liable? yes unless the audit report clearly indicates divided responsibility
Is the auditor liable for the effect of events that occur after the date of the audit report? What if the facts discovered after indicating the report was misleading existed at report date? If CPA assures there are no material changes after report date? 1. No 2. Yes unless an immediate investigation is conducted, prompt revision of statements is possible, or the SEC and persons known to rely on statements are notified by client/accountant 3.Yes liable
When would a CPA be liable from preparation of unaudited financial statements for non public companies? failure to: mark each page unaudited/see accountants x report, issue a disclaimer of option, follow appropriate AICPA statements, or inform client of any indications of major issues
When can an accountant be held criminally liable under the acts of 33&34? What are the punishments? 1.for willful illegal conduct. -intentional misleading omission of material facts -putting false information in registration statement 2. fine up to 10,00 and/or 5 years in prison
What are the criminal violations of the Internal Revenue Code? -willfully preparing false return (prejury) -willfully assisting others to evade taxes (tax evasion)
What is an accountants liability under RICO? -if affiliated with accounting firm/business involved in racketeering, then subject to criminal penalty (need at least two acts of racketeering in past 10 years) -RICO also can be used in a civil suit by private parties (allow treble damages)
Auditors who audit financial statements under the act of 34 are required to establish procedure to accomplish what? detect material illegal acts, identify material related-party transactions, evaluate ability of firm to continue as going concern
What happens if an auditor detects possible illegal activity, what should the auditor do? inform the audit committee or board of directors. Board has one day to notify SEC of the report. If not done, auditor must give copy of report to SEC and/or resign from audit
What does the private securities litigation reform act accomplish with respect to forward looking statements? as long as include cautions and identify assumptions and conditions that may cause variances on projections of income/revenues/EPS/company plans for products/services then CPA not legally liable
Under Sarbanes-Oxley, what are the new rules involving nonretention of audit and review work papers? hold for 5 years (sometimes 7), destruction or falsification of records is illegal, can be fined and/or held in prison for up to 20 years, applies to auditor of a public company, requires SEC to issue new rules and update its rules on retainment
The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board, what is the PCAOB? nonprofit corporation, violation of its rules treated as violation of 1934 act -5 members (2current/former CPAs,3non,all no pay from CPA firm)
What are the main functions of the PCAOB? 1register/conduct inspections of public accounting firms 2set standards on auditing,quality control, independence, preparation of reports 3regulate nature/extent nonaudit services provided to client 4enforce compliance standards 5investigate/hold hear
What additional responsibilities did the sarbanes-oxley act add? -disclose code of ethics for primary executive/accountant/financier if not must disclose why -officials liable fraud cant use bankruptcy law to discharge -reportable event deadlines shortened to 4 day -disclosure director resigned/new executive appoint
What can a public accounting firm no longer legally do under Sarbanes-Oxley Act? bookkeeping, financial info system design/implementation, appraisal, internal audit outsourcing services, mgmt functions, actuarial services, investment services, tax PLANNING
What is the length an auditor can audit/ audit partner who reviews the audits, can serve the same company? What if a company hired an employee of the audit firm to be its CEO,CFO,or CAO? 1. no more than 5 consecutive years 2. company can not use the audit firm to audit them in the same year
Under S-O act, can public companies make personal loans to officers or directors? No, with few exceptions
Under S-O act, what is done with material corrections noted by CPA firms for annual reports? Must be included in the report
Under S-O act, why may the SEC censure, temporarily bar, or permanently bar a professional practicing before it? lack of qualifications needed, improper professional conduct, willful violation of helping another violate security laws or regulations
Under S-O act, what must CEO and CFOs of large companies listed on public stock exchanges now do to certify financial statements? sign report meaning the officer reviewed, the report doesn't contain any untrue statements of material facts nor omit facts to best of his/her knowledge, and company has internal control system in place to allow honest certification of statements
Who is defined as a tax return preparer? person who prepares or employees someone to prepare a federal tax return or substantial portion of one for compensation -Compensation must be received, can be implied (auditor do president of company personal taxes as part of prior agreement) or explicit
What borderline cases do not define a person as a tax return preparer? -prepare return for friend/relative/neighbor free of charge but given gift of gratitude -furnishing of typing,reproducing, mechanical assistance in preparing return -preparation by person of a return for someone who regularly employees them
What is the percentage needed to achieve a realistic possibility of success? 1/3rd likelihood of success
What are reasonable grounds for omitting an answer? Does the CPA have to provide an explanation on the return for this omission? 1.info not available and answer not significant, uncertainty to meaning of question, answer is voluminous and return says data supplied on examination 2. No
May a CPA rely without verification upon information furnished by the client or a 3rd party without audit books to verify the info? Yes they can in good faith, but should not ignore source and should make reasonable inquires if info appears incorrect/incomplete/inconsistent
Can a CPA use estimates on a tax return? Yes, when data is missing (fire/cpu crash), or it is impracticable to obtain exact data and estimated amounts are reasonable. -should not imply greater accuracy than exists (don't use cents in estimate when not that accurate)
If a CPA learns of an error after sending the tax return in, when should the CPA inform the client? The IRS? 1.promptly upon becoming aware of a MATERIAL (affects tax liability) error 2.not obligated to inform the IRS, may NOT do so without clients permission, except if required by law
What is the standard format required in communicating written or oral advice to a client? When should written be used? 1.there is none 2.important, unusual, or complicated transactions
Who may practice before the IRS? CPA, attorney, enrolled agents(EAs), and for limited purposes actuaries, retirement plan agents, and registered tax return preparers -limited purpose may not represent taxpayer -former IRS agents may be granted right as EA based on service/experience
What must all paid tax return prepares do in regards to certification with the IRS? Must register with IRS, pay annual fee, and obtain Preparer Tax Identification Pin (PTIN)
Can an individual appear on their own behalf before the IRS? What about 3rd party non accounting practitioners? 1.Yes 2.Yes limited situations. Taxpayers immediate family, full time employees rep employer, trustees/receivers/guardians/executors for trusts/receiverships/guardianships/estates
If the tax practitioner believes in good faith and on reasonable grounds that the records/info are privileged, do they still have to promptly submit records/info in any matter to the IRS? No
If a tax practitioner is in control of a client's records and a fee dispute arises, causing the client to request its records back. Does the practitioner have to return them? Yes they are the CLIENTs records, not accountants working papers
What level of care must a practitioner have in preparing returns and documents to the IRS? Can they rely on the work or product of another person? 1.Due diligence 2.yes if practitioner used reasonable care in engaging, supervising, training, and evaluating the person
When can a practitioner charge a contingent fee? in connection to the IRS's examination of an original tax return, an amended return or claim for a refund/credit, or services rendered in connection with a judicial proceeding
If a practitioner published their fees, when can they charge more than the published amount? not until 30 days have passed since the last date the fee schedule was published
What is the definition of a frivolous position? (which the tax practitioner may not advise a client to take on paper submitted to IRS) A position without basis in fact or law, or espouses (agrees) with a position that courts have previously held to be frivolous
When is written advice considered to be a covered option? Why is this distinction made? 1.involves a listed transaction, principal purpose is tax avoidance, or a plan where tax avoidance is a significant purpose 2.held to stronger standards then all other written advice
What written advice is considered a reliance opinion? Wh do most practitioners include a standard disclaimer with written correspondence? 1.if advice concludes there is a >50% likelihood that the significant tax issues in question would be resolved in the taxpayers favor 2.so advice is no treated as a reliance opinion and helps to avoid possible penalties
What penalty does a tax preparer face if there is an understatement of liability due to an undisclosed position on the return where there is not substantial authority? What is substantial authority? 1. greater of $1,000 or 50% of the income derived 2.the weight of authorities supporting the position is substantial in relation to the weight of the contrary position
Ho can a tax preparer avoid possible penalties? 1.adequate disclosure of the questionable position on the return 2.showing there was a reasonable basis for the position (requires 20%probability of being sustained on merits) 3.show reasonable cause for understatement, and acted in good faith
What penalty does a tax preparer face if the the understatement of liability is due to a willful attempt to do so or reckless or intentional disregard of rules/regulations? greater of $5,000 or 50% of income derived -penalty reduced by any penalty given as a result of understatement where there is no substantial authority
If a tax preparer prepares a clients federal income tax returns for a fee, how long must they keep a copy of each return? Minimum of 3 years
If the IRS issues a 30 day letter to a taxpayer who wishes to dispute the assessment, what options does the taxpayer have? 1.request conference with appeals officer or file written protest letter 2.do nothing, await 90 day letter, then have 90 days file petition w/tax court 3.may pay additional taxes and file refund claim. If refund is disallowed may go to fed district cour
What must a taxpayer who wishes to dispute an assessment wait for before they file a petition in Tax Court? After receiving 30 day letter, how long does a tax payer have to file a written petition? 1.90 day letter 2.30 days
If a tax prepare understates a clients tax liability as a result of an error in calculation, can he/she be penalized by the IRS? No section imposes a penalty for an error in calculation
Created by: Bsantoro on 2012-03-15



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