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REG > 10 - Accountant Liability > Flashcards

10 - Accountant Liability Flashcards

1
Q

Can a clients records be provided to a buyer of an accountant’s practice?

A

Yes - if they get permission from the client

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2
Q

Who owns the work papers during an engagement

A

The accountant does

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3
Q

IS a CPA liable to unknown third party users of your audited F/S

A

NO - in general is you make a mistake through negligence ( I didn’t do a good job but not on purpose)

Then you are NOT liable to unknown users

CPA Is LIABLE to anyone the KNOW will rely on the opinion

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4
Q

What is the Ultramares Act

A

This basically says that a CPA’s liability is limited to those party with one you have privity .

Privity is when you have a relationship between parties that is recognized by the law

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5
Q

What is privity

A

Privity is when you have a relationship between parties that is recognized by the law

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6
Q

If you are found negligent - who is A CPA liable to

A

They are liable to the client AND third party users who are known to be relying on the opinion

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7
Q

If the CPA Is accused of negligence - what defense can they prove

A
  • That the negligence the CPA committed was NOT the case of the losses

So - yes there was negligence by the CPA caused by a breach of duty of care (I made a mistake, but didnt due it intentionally)

but the negligence wasn’t the cause of the loss

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8
Q

What if the client is partly to blame for the error

contributorily negligent

A

It will reduce the CPA’s liability, but does not negate the CPA’s liability

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9
Q

What is a required element in common law fraud - example

A

The INTENT to deceive is required.

If you audited F/S for a co. going for a loan that later declared bankruptcy and were sued by the bank - you can defend yourself by saying that you did not intent to deceive

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10
Q

What is common law fraud based on

A

It is the INTENT to deceive

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11
Q

The disclaimer provision in an engagement letter protects a CPA from what

A

It protect the CPA from liability due to fraud committed by company that hired the CPA To do the audit

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12
Q

What is the 1933 Act - what are violations

A

This is outlines what information a company must submit to the SEC as part of an IPO

A CPA being sued here would be when they included materially misstated F/S in the prospectus

The CPA is considered GUILTY until he proves these:

  • the investor KNEW about the errors and therefore did not RELY on the F/S
  • The CPA did their due diligence and therefore are NOT guilty
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13
Q

Under what act does a plaintiff NOT have to prove reliance

A

Section 11 - Securities Act of 1933.

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14
Q

When does a plaintiff HAVE to prove reliance

A
  • 10b 5 1934 ACT

- Gross Negligence / Fraud ( with intention you made the mistake)

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15
Q

Does a CPA have to turn over their work papers to the client

A

NO - they are the property of the CPA

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16
Q

Under 1933 Act - what does the plaintiff have to prove

A
  • they suffered a loss and

- the prospects F/S were materially misstated

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17
Q

What are your best two defenses if you are sued for Common Law negligence ( I made a misstake because I didn’t do a good job)

A

Best defenses:

  • the plaintiff lacks privity ( there is no legally recognized relationship between CPA and suing party)
  • The CPA actually adhered to GAAS during the audit
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18
Q

What is negligence

A

This is the absence of due professional care

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19
Q

If you discover an error - what shock you do first

A

tell the client about the error and suggest a course of action

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20
Q

CAN the IRS make you give them a clients info

A

Only if they have a court order

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21
Q

What if you think there needs to be disclosures in the F/S to be in accordance with GAAP but the client refuses

A

the F/S are the representation of management - so you might need to withdraw from the engagement

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22
Q

Under Ultramares who can hold an accountant liable

A
  • only those with Privy
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23
Q

What is a party that an audio could have reasonable foreseen called

A

forseeable

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24
Q

What must you prove as the plaintiff in the 1934

A
  • It was intentional
  • it was a material misstatement
  • The info was YES relied on
  • there was interstate commerce - because it s federal law
  • there was a loss
  • gross error or fraud sienna
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25
Q

What is scienter

A

Fraud

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26
Q

Under the 1933 act what must a plaintiff prove - 3 things

A
  • a loss was suffered
  • the audited F/S were included in eh prospectus
  • material misstatements or omissions were contained
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27
Q

If you are guilty of gross negligence ( intention misstatements) who can sue

A

anyone - foreseen or unforeseen

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28
Q

What is 1933 and 1934

A

1933 protects the purchasers if loss occur because of material misstatment or omission whether intentional or accidental

1934 protect against loss of when there is a loss and squinter ( fraud ) is present ( intent

29
Q

Can you be liable for both 1933 and 1934 violations st the same time

A

yes - example - a prospectus was issued with intentional error and omission and purchasers suffered a loss

violates both - intentional and during an offering

30
Q

What are the dates for a 10Q, 8K, 10K

A

10K - 60-90 days

10Q 40 -45 days

8-K 4 days only

31
Q

what are the penalties under 1934

A

civil and criminal possible

32
Q

when are you subject to criminal penalties

A

willfully include material misstatements

33
Q

Can a plaintiff recover any loss amount?

A

YEs - no matter how small

34
Q

What are some of the things that a plaintiff has to prove in a common law FRAUD action

A
  • the F/S were justifiably relied on
  • there was intent to deceive
  • the F/S contained misstatements
  • plaintiff suffered a loss

NO NEED to prove privity

35
Q

what can a plaintiff get if they are successful in a 1933 action

A

monetary damages to the extent of actual losses ONLY

no resending the transaction

36
Q

WHAt can an audition due additional to establish that they complied with GAAS - 1933

A

Although it may be a sufficient defense for an auditor to establish that the auditor complied with GAAS, it would support a defense of due diligence if the auditor can also establish that the auditor performed an additional review of the audited statements to ensure that they were accurate as of the effective date of the registration statement.

37
Q

WHAt is constructive fraud

A

IT does not require the intent to defraud to be proven

Only that the degree of a practitioner’s reckless disregard for truth or gross negligence was sufficient to have had the effect and character of intentional acts of fraud.

38
Q

WHAt is the difference between scienter an constructive fraud

A

scienter - knowledge of guilt

constructive fraud - only the degree of reckless disregard for truth

39
Q

when an auditor is found liable what damages are they commonly awarded

A

generally they are limited to compensatory damages

punitive damages are rare

40
Q

1933, 1934, both, none

Material misstatements were included in a filed document.

A

both

41
Q

1933, 1934, both, none

A monetary loss occurred.

A

both

42
Q

1933, 1934, both, none

Lack of due diligence by the CPA.

A

Neither

A plaintiff does not have to prove a lack of due diligence in order to hold an accountant liable under Section 11 of the Securities Act of 1933 or under Rule 10b-5 of the Securities Exchange Act of 1934. The accountant may be able to escape liability, however, if the accountant can demonstrate that due diligence was applied.

43
Q

1933, 1934, both, none

Privity with the CPA.

A

Nether

44
Q

1933, 1934, both, none

Reliance on the document.

A

1934

45
Q

1933, 1934, both, none

THE CPA has squinter

A

1934

46
Q

Hoe can fees be communicated for a tax preparer

A

Fee information can be communicated in many different ways including

- professional lists
telephone directories
print media
mailings
email
fax
hand delivered fliers
radio
TV
47
Q

WHEn can you charge a contingent fee

A

YOU can ONLY for services related to a claim for credit or a refund in connection to a penalty or statutory interest.

This is the only exception to the rule that you can’t charge a contingent for matter before the IRS

48
Q

What is the CPA’s responsibility for informing their client about penalties

A

YOU MUST always inform your client for any penalties that are reasonably likely to apply to the client

Even if there is a 75% likely possibility that they wont get the penalty - you still need to inform them of the penalty

49
Q

When must a tax preparer have a PTIN number

A

You must get one if you are preparing returns for compensation - regardless if it is explicit or implicit ( in exchange for services for example) or monetary or non monetary

50
Q

Can you prepare returns for family and friends without charging a fee?

A

Yep - no problem - do not need a PTIN number

51
Q

Who developing auditing standards for non public companies

A

AISCP of the ASB

52
Q

What are the rules with regards to a clients records

A
  • tax preparer must return ll the records to comply, but they may retain copies of the records
53
Q

What if you are in a dispute over fees

A

You must still return the records to the client

54
Q

IS the IRS anchorage of these taxes

Gift tax
Excise Tax
Estate Tax
Sales Tax

A

yes to all but sales tax - this is a state tax

55
Q

If you uncover illegal acts what MUST you do

A

Inform Audit committee and BoD within 1 business day

If they do not tell the SEC and report to you that they have then you have 1 business day to:

withdraw
or
Tell the SEC

56
Q

WHO governs the rules of CPE

A

The state board of accountancy

57
Q

Who does Circular 230 provide rules for

A

attorneys
CPAs
enrolled agents

58
Q

If you discover an error in a filed tax return do you need to correct it?

A

NO you are required to tell you client about it, and suggest how to fix it, but not to actually fix it

59
Q

What must you have to PRACTICE before the IRS and what myst you have to provide WITTEN tax advice

A

To Practive:

1 - not under suspension
2 - must file a written declaration with IRS saying you are a CPA and are qualified and authorized to represent the taxpayer

To provide written advise:
1- not under suspension

you can provide written advice without filing a written declaration

60
Q

what act require you to disclose to the audit committee when you see illegal acts

A

Private Securities Litigation Reform Act - 1995

61
Q

who can issue monetary sanctions

AICPA
State board of Accountancy
PCAOB

A

State Board
PCAOB

NOT AICPA - they can refer the matter to the state and only can suspend your member ship

62
Q

Who alone can revoke a CPA’s license to practice

A

The state board of accountancy ONLY

63
Q

What are the rules on using unverified info from a client

A

Section 10.34 of Treasury Circular 230 and SSTS No. 3 provide that a practitioner may, in good faith, rely on information obtained from a client without verification.

If information furnished by the client appears incorrect, incomplete, or otherwise unsatisfactory based on information known by, or furnished to the practitioner, that fact may not be ignored by the practitioner.

64
Q

what do you do if the IRS wants records and you do not have them - what are you required to do

A

When NOT in your custody - you are required to

  • notify IRS
  • Make inquiry of the client to submit the records to IRS

NO need to withdraw of it
CANT make client submit them
CANT get them yourself to submit them
NOT requires to talk to third party, but must tell IRS who they think has the records if you know

65
Q

which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

A

Under Treasury Circular 230, a practitioner must exercise due diligence in preparing the client’s tax returns. Due diligence includes establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts.

66
Q

In which of the following cases is a CPA not subject to a penalty stemming from an undisclosed position taken on a tax return?

The position had a “reasonable chance of being sustained.”

The position had a “realistic possibility” of being sustained.

The position was “more likely than not” to be sustained.

A

more likely than not - 50% chance

the minimum threshold for avoiding penalties is 40% -
“substantial authority

NOT sufficient is you have:

1/3 likely - realistic possibility

of 20% reasonable basis

67
Q

When must you comply with the private Securities Litigation Reform Act

A

Issuers

Under the 1934 securities Exchange act

68
Q

What is required to practice Public Accountancy?

A CPA license
A CPA certificate

A

CPA certificate is what you get when you pass the exam and have a certain amount of experience

IN some states you must also get a license to practice

In many states you need both to practice

69
Q

DO you need to be enrolled to practice before the IRS

A

NO

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