Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

REG > 2 Liability of CPAs > Flashcards

2 Liability of CPAs Flashcards

1
Q

What are the state boards of accountancy?

A

Governmental agencies that license accountants to use the designation Certified Public Accountant.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the AICPA disciplinary mechanisms?

A
  • Professional Ethics Division
  • Joint Ethics Enforcement Program (JEEP)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What does the Professional Ethics Division of the AICPA do?

A

Investigates ethics violations by AICPA members. It imposes sanctions in less serious cases. EX - requiring a member to take additional CPE courses as a remedial measure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does the Joint Ethics Enforcement Program do?

A

Promotes formal cooperation between the ethics committees of the AICPA and of the state societies and handles matters of national concern, those involving two or more states, and those in litigation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What does the SEC have authority to do?

A

The SEC may seek an injunction from a court to prohibit future violations of the securities laws. Moreover, it may conduct administrative proceedings that are quasi-judicial.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What does the SEC have authority to do?

A

The SEC may seek an injunction from a court to prohibit future violations of the securities laws. Moreover, it may conduct administrative proceedings that are quasi-judicial.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

When the SEC conducts administrative proceedings what are the potential results?

A

Such proceedings may result in suspension or permanent revocation of the right to practice before the SEC, including the right to sign any document filed by an SEC registrant. Some proceedings have prohibited not only individuals but also accounting firms from accepting SEC clients. The SEC may impose civil penalties in administrative proceedings or order a violator to account for and surrender any profits from wrongdoing and may issue cease-and-desist orders for violations.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

When does the SEC impose sanctions?

A

Sanctions are imposed if the accountant:

  • does not have the qualifications to represent others
  • lacks character or integrity
  • has engaged in unethical or unprofessional conduct
  • has willfully violated, or willfully aided and abetted the violation of, the federal securities laws or their rules and regulations
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What might suspension by the SEC result from?

A
  • conviction of a felony or a misdemeanor involving moral turpitude
  • revocation or suspension of a license to practice
  • being permanently enjoined from violation of the federal securities acts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Can the SEC initiate administrative proceedings against accounting firms?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What may the IRS do?

A

The IRS may prohibit a CPA from practicing before the IRS if the person is incompetent or disreputable or does not comply with tax rules and regulations. The IRS may also impose fines.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the contractual liability to client (privity of contract)?

A

The contract between an accountant and a client is a personal service contract, so it can be litigated like any other type of contract.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the usual remedy for breach of the contract?

A

compensatory monetary damages

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the legal issues in contract disputes?

A
  • whether the elements of a contract are present
  • the duties of the parties
  • who may enforce the contract
  • who is liable for breach of contract
  • what remedies are available for breach
  • whether the accountant may delegate responsibility for an engagement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is an accountant’s contractual liability to third parties?

A

An accountant potentially may be liable to third-party beneficiaries of the contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the accountant’s duties regarding contractual liability?

A

The accountant is implicitly bound by the contract to perform the engagement with due care (without negligence) and in compliance with professional standards. Moreover, an accountant must comply with the law and is responsible for exercising independent professional judgment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is an engagement letter?

A

An engagement letter puts the contract in writing and helps stablish an understanding regarding what services the accountant is to perform for the client.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What should the engagement letter describe?

A
  • the services agreed upon by the client and the accountant (whether or not required by professional standards)
  • fees to be paid
  • other pertinent details
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What happens if the engagement letter details a service that varies from the professional standards?

A

If the engagement letter provides, for example, positive confirmation of all accounts receivable and professional standards, in the circumstances of the specific engagement, permit negative confirmation of a sample of accounts receivable, the negative confirmation would be allowed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are typical contractual defenses?

A

Typical defenses include the absence of one or more elements of a contract, substantial performance, or the impossibility of the other party to perform. For example, suspension or termination of performance may be justified because of the other party’s prior breach.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is tort liability to client for negligence?

A

An accountant may be liable in tort for losses caused by the accountant’s negligence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is a tort?

A

A private wrong resulting from the breach of a legal duty imposed by society. The duty is not created by contract or other private relationship.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What are the three types of negligence?

A
  1. ordinary negligence
  2. negligent misrepresentation
  3. gross negligence
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is ordinary negligence?

A

Ordinary negligence may result from an accountant’s act or failure to act given a duty to act, for example, failing to observe inventory or confirm receivables.

25
Q

What is negligent misrepresentation?

A

Negligent misrepresentation is a false representation of material fact not known to be false but intended to induce reliance as opposed to intentional misrepresentation (fraud). The plaintiff must have reasonably relied on the misrepresentation and incurred damages.

26
Q

What is gross negligence?

A

Gross negligence is failure to use even slight care.

27
Q

What happens in extreme circumstances of gross negligence?

A

An accountant may be liable for punitive damages if they are grossly (not ordinarily) negligent.

28
Q

What does it mean for an accountant’s duty to exercise reasonable care and diligence?

A
  • the accountant should have the degree of skill commonly possessed by other accountants in the same or similar circumstances, but an accountant is not a guarantor of the work.
  • compliance with professional standards demonstrates that the accountant exercised reasonable care and diligence and is therefore a defense against negligence claims.
  • accountants may be liable for failure to communicate to the client findings or circumstances that indicate misstatements in the accounting records or fraud. They must also communicate deficiencies and material weaknesses in internal control.
29
Q

What are the the 4 elements of negligence a client must prove?

A

A client must prove all four of the elements of negligence:

  1. the accountant owed the plaintiff a duty
  2. the accountant breached this duty
  3. the accountant’s breach actually and proximately caused harm to the plaintiff
  4. the plaintiff incurred damages.
30
Q

What is proximate cause?

A

Proximate cause is a chain of causation that is not interrupted by a new, independent cause.

31
Q

How must proximate cause be proved by the client?

A

It must have caused hard that would not have occurred without the proximate cause. However, actual causation is insufficient. The harm also must have been reasonably foreseeable. Thus, proximate cause is a limit on liability and a possible defense.

32
Q

What is an accountant’s tort liability to third parties for negligence?

A

The majority rule is that the accountant is liable to foreseen (not necessarily identified in the contract) third parties (foreseen users and users within a foreseen class of users). In some states, the accountant is liable o all reasonably foreseeable third parties. They are all members of the class of persons whose reliance on the financial statements the accountant may reasonably anticipate.

33
Q

Who are foreseen third parties?

A

Those to whom the accountant intends to supply the information or knows the client intends to supply the information. They also include persons who use the information in a way the accountant knows it will be used.

34
Q

When is a third party a primary beneficiary?

A

A third party is a primary beneficiary if:

  • the accountant is retained principally to benefit the third party
  • the third party is identified
  • the benefit pertains to a specific transaction. Thus, the accountant knows the particular purpose for which the third party will use and rely upon the work.
35
Q

What is strict liability in tort?

A

Strict liability without fault is not a basis for recovery from an accountant.

36
Q

What is fraud?

A

An intentional misrepresentation. It is a willful and deceitful act.

37
Q

What is an accountant’s liability for fraud?

A

An accountant is liable for losses that result from their commission of fraud. Punitive and compensatory damages are both permitted.

38
Q

What are the 5 elements required to prove fraud?

A
  1. the accountant made a misrepresentation
  2. the misrepresentation was made with scienter, that is with actual knowledge of fraud.
  3. the misrepresentation was of a material fact
  4. the misrepresentation induced reliance
  5. another person justifiably relied on the misstatement to their detriment
39
Q

What is constructive fraud?

A

A fraud claim with the scienter requirement of actual knowledge satisfied by gross negligence. Gross negligence is a reckless disregard for the truth that fraud is implied.

40
Q

Do auditor-accountants have a duty to discover fraud?

A

No, they have no general duty to discover fraud

41
Q

Can an auditor be held liable for failure to discover fraud?

A

Yes, when the auditor’s negligence prevented discovery.

42
Q

What happens if an auditor fails to follow professional standards and therefore does not discover fraud?

A

They will provably be liable if compliance with professional standards would have detected the fraud.

43
Q

What is an auditors duty to discover fraud per U.S. GAAS and PCAOB standards?

A

U.S. GAAS and PCAOB standards require an auditor to plan and perform the audit to provide reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. An auditor must:

  1. Identify risks of material misstatement due to fraud
  2. Assess the identified risks
  3. Respond by changing the nature, timing, and extent of audit procedures
44
Q

What is an accountant’s liability to third parties for fraud?

A

An auditor has liability to all reasonably foreseeable users of the work product. A foreseeable user is any person that the accountant should have reasonably foreseen would be injured by justifiable reliance on the misrepresentation.

45
Q

Is contract privity required in liability to third parties for fraud?

A

No, the accountant can be sued by others who rely on the work product. The plaintiff does not have to be the person or entity that entered into the contract with the accountant. A foreseeable user has the right to sue.

46
Q

What are defenses to fraud?

A

A plaintiff must prove each element of fraud with particularity. Credible evidence that disproves one of the elements tends to negate liability.

47
Q

What does the federal law provide regarding accountant-client privilege?

A

Federal law does not recognize a broad privilege of confidentiality for accountant-client communications.

48
Q

When does confidentiality privilege - federal law apply?

A

Confidentiality privilege covers most tax advice provided to a current or prospective client by any individual qualified under federal law to practice before the IRS (CPA, attorney, enrolled agent, or enrolled actuary).

49
Q

When confidentiality privilege - federal law applies to tax advice, what are the restrictions?

A
  • the privilege is available only in matters brought before the IRS or in proceedings in federal court in which the U.S. is a party.
  • the privilege applies only to advice on legal issues
  • the privilege does not apply to criminal tax matters, private civil matters, disclosures to other federal regulatory bodies, or state and local tax matters.
50
Q

What does state law provide regarding accountant-client privilege?

A

State law does not recognize a privilege for accountant-client communications except in a minority of states.

51
Q

If accountant-client privilege - state law does exist, who owns the privilege?

A

If the privilege exists, it belongs to the client. If any part of the privileged communication is disclosed by either the client or the accountant, the privilege is lost completely.

52
Q

If an attorney retains an accountant to aid in litigation, is communication privileged?

A

Yes, client communications with accountants retained by attorneys to aid in litigation are protected by the attorney-client privilege. This privilege is recognized in federal and state courts.

53
Q

What are working papers?

A

Confidential records of an accountant’s performance of an engagement. They document the procedures performed, evidence obtained, and conclusions reached.

54
Q

How does accountant-client privilege apply to working papers?

A

Working papers may be subpoenaed by a third party for use in litigation in the many states that do not recognize a privilege for accountant-client communications. Without a court order or client consent, third parties have no right of access to working papers.

55
Q

Can an accountant disclose working papers to another CPA partner of the accounting firm without the client’s consent?

A

Yes, because such information has not been communicated to outsiders.

56
Q

What is the confidential client information rule?

A

A member of the AICPA in public practice must not disclose confidential client information without the client’s consent.

57
Q

When does the confidential client information rule not apply?

A
  • Professional obligations under the Compliance with Standards Rule and the Accounting Principles Rule
  • The duty to comply with a valid subpoena or summons or with applicable laws and regulations
  • An official review of the member’s professional practice - if part of a purchase, sale, or merger a written agreement should prevent disclosures by a prospective buyer
  • The member’s right to initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body.
58
Q

How long should an accountant not in public practice retain working papers?

A

At a minimum, an accountant who does not audit public companies should retain working papers until the state statute of limitations on legal action has lapsed. The limitations period varies by state and according to the type of claim.

59
Q

How long should an accountant in public practice retain working papers?

A

Auditors of public companies must retain working papers for at least 7 years.

REG (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions