Ethics

Question 1

Describe the Federal Unemployment Tax Act

Answer 1

An employer-paid tax. Must file return and pay even if only one employee works there. Deductible to company - Not deductible by the employee. Allows employers to credit the FUTA liability by the amount of State Unemployment Tax (SUTA) they pay.

Question 2

What are the major aspects of FICA and Social Security taxes?

Answer 2

Paid by Employer AND Employee - Employer withholds from employee’s paycheck and must pay tax matching employee’s withholding

If employer under-withholds; they are required to make up the difference

Self-employed individuals must pay both the employer and the employee share; which is Self Employment Tax

People drawing Social Security may have their benefits reduced if they go back to work and earn an income

Question 3

When is an employee covered by Workman’s Compensation?

Answer 3

Employees injured on the job get protection; even if they messed up and caused the injury themselves

Exception: If the employee intentionally harmed themselves; there is no Workman’s Compensation

Question 4

What age group is protected under Age Discrimination Laws?

Answer 4

They protect people ages 40 and above at companies where at least 20 people are employed

Question 5

What are the tenets of the Occupational Safety and Health Act (OSHA)?

Answer 5

Employers should promote a safe workplace and environment for their employees to work in

Injury records must be kept
Penalties can be both
o Civil - $1;000 fine per day
o Criminal - Could include imprisonment

Employer can require a search warrant for OSHA to investigate their facilities

Question 6

What types of discrimination are prohibited for employers based on civil rights laws?

Answer 6

Sex

Race

Religion

National Origin

Question 7

What are the powers granted under the Environmental Protection Act?

Answer 7

EPA has the power to assess civil penalties for violating environmental laws like the Clean Air Act
The EPA can sue violators
Citizens can sue violators
States can sue violators
Citizens can even sue the EPA to force enforcement
For hazardous waste sites: owners; operators; transporters; and lenders associated with the site can
be held liable

Question 8

What is the revenue limit for an Emerging Growth Company IPO?

Answer 8

$1 Billion

Question 9

For an Emerging Growth Company IPO, how many years of audited financial statements are required?

Answer 9

2 years

Question 10

How did Reg D, Rule 506 change under the JOBS Act?

Answer 10

General Solicitation and Advertising now allowed

Question 11

Under the JOBS Act, what is the capital ceiling under Regulation A?

Answer 11

Reg. A Capital ceiling raised from $5M to $50M

Question 12

Under the JOBS Act Title V - Private Company Flexibility and Growth, what is the shareholder limit if there are less than 500 non-accredited shareholders?

Answer 12

2,000

Question 13

What is the purpose of a Consulting Engagement?

Answer 13

This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.

Question 14

What is required by the Statements on Standards for Consulting Services (SSCS)?

Answer 14

Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity

NOT REQUIRED: Independence

Question 15

What is the difference between Express versus Implied duties of an accountant under contract?

Answer 15

Express: Contract specifies what accountant will do

Implied: Accountant performs without negligence

Question 16

Accountant’s liability for negligence - What are the requirements?

Answer 16

DUTY - DAMAGES - RESULT

Duty - Accountant must have had duty to perform with due care exercised by an average accountant.

Damages - The client experienced actual damages.

Result/Causation - The damages were as a result of the negligence.

Question 17

What is an Accountant’s Liability for Detecting Fraud
(Under Normal Circumstances)?

Answer 17

It is not the accountant’s job to find fraud and they are not normally liable for not detecting it

Question 18

When can a client be sued for failing to detect fraud?

Answer 18

When a normal audit following GAAS would have detected the fraud.

When an accountant agrees to take on more responsibility than what is required under a normal audit.

When accountant words the audit report to indicate this greater responsibility.

Question 19

When has an accountant committed fraud?

Answer 19

Misrepresentation - Accountant misrepresents MATERIAL fact(s)

Scienter - Accountant commits scienter

Damages - Client has actual damages.

Reasonable Reliance - Client reasonably relied on the misinformation.

Question 20

What is Scienter?

Answer 20

To report something knowing it is false.

Characterized by reckless disregard for truth

Intentionally conceal facts

Question 21

What is the Accountant’s Liability to Third Parties - Privity Defense?

Answer 21

Lack of privity defends against contract breach and negligence.

NOT a defense against fraud.

Question 22

The definition of Ultramares Decision:

Answer 22

Accountants are not liable to third parties unless the third party was an
intended beneficiary of the engagement AND the accountant knew they
would be relying on the financial statements.

Question 23

What is Common Law Fraud?

Answer 23

Regular fraud

Misrepresentation of Material Fact
Scienter
Damages
Reasonable Reliance

Question 24

What is Constructive Fraud?

Answer 24

Gross Negligence - reckless disregard for truth

CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.

Question 25

What are the required actions with Discovery of Illegal Activity?

Answer 25

Accountant must report discovered illegal activity to Audit Committee or Board of Directors

If material in public company; BOD has 1 DAY to notify SEC.

Question 26

What is the Accountant-Client Privilege?

Answer 26

NO Federal Accountant-Client privilege for non-disclosure of private
conversations to a court unless a particular state recognizes such a privilege.

If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.

Question 27

Accountant’s Workpapers - Confidentiality Requirements

Answer 27

1. Can be subpoenaed
2. Can be looked at by another CPA doing peer review
3. Property of the accountant who created them

Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.

Question 28

True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.

Answer 28

Accountants have no way of auditing individual’s personal finances and are not required to do so when preparing a return

Question 29

When a past error is found in a client’s tax return; what should an accountant do?

Answer 29

If a past error is found; accountant should inform client of this error.

Contacting the IRS is NOT required.

If client won’t fix it; then the accountant should reconsider whether they want to do business with the client

Question 30

Name the key responsibilities of an accountant when preparing a tax return.

Answer 30

Accountant must prepare the return in good faith and ask for more information if something is missing

When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court