Ethics Prof Legal Resp-Circ 230

Question 1

When can a CPA can charge a contingent fee?

Answer 1

Only when a

1) judicial proceeding arises under the Internal Revenue Code, or
2) when the IRS is challenging current or past returns.
3) A claim for credit or refund when a client has had interest or penalties assessed by the IRS.

Question 2

A CPA noticed an error made by the client’s former tax preparer. According to Treasury Department Circular 230, what should the CPA do?

Answer 2

Inform the client of the error and insist that the return be amended.

Question 3

Under Treasury Circular 230, how can tax preparer correctly communicate fee information to a taxpayer?

Answer 3

In a number of ways, including in professional lists, telephone directories, print media, radio, mailings, and electronic mail.

Question 4

Which federal agency promulgates standards for audits of federal financial assistance recipients?

Answer 4

Government Accountability Office

Question 5

What is a CPA’s professional responsibility regarding a past non-filed tax return?

Answer 5

The CPA must consider withdrawing from preparation of the income tax return until the error is corrected. (Generally, inform of error and consequences, recommend and withdraw)

Question 6

May a CPA retain client records after the client has demanded them, even it the engagement is terminated prior to its completion?

Answer 6

According to the Acts Discreditable Rule, no.

Question 7

Can individuals who are not CPAs, attorneys, or enrolled agents engage in limited practice before the IRS?

Answer 7

Yes. Especially if they are representing a family member. Circular 230

Question 8

Is a departure from a FASB Accounting Standard allowed if it’s necessary to keep the financial statements from being misleading?

Answer 8

Yes in certain unusual situations it is - could include a change in legislation or evolution of a new form of business transaction.

Question 9

A CPA in public practice cannot accept a _____________ for recommending a product or service to a client where the accountant performs audits or reviews of financial statements according to _______________.

Answer 9

Commission. AICPA Code of Professional Conduct

Question 10

The CPA’s independence is impaired if his or her ______ is employed as the client’s internal auditor.

Answer 10

spouse

Question 11

True or False? A CPA may, in good faith, rely on information furnished by the taxpayer or by third parties without verification. List Source.

Answer 11

True. Statement on Standards for Tax Services

Question 12

Can a CPA be an advocate for the client if the CPA has reason to believe that a tax return position has a realistic possibility of being sustained on its merits at an administrative or judicial level?

Answer 12

Yes, they have a responsibility to advocate for their client

Question 13

Are CPAs are permitted to advise the client’s board of trustees without impairing independence.

Answer 13

Yes

Question 14

According to the AICPA Code of Professional Conduct, name some threat categories that would threaten the independence of an audit.

Answer 14

Self review, advocacy, adverse interest (litigation), familiarity, undue influence, financial self-interest, management participation

Question 15

A loan to a limited partnership in which members have a combined interest exceeding ___% of the total limited partnership interest is considered a loan to those members.

Answer 15

50%

Question 16

To be considered a tax return preparer, one must be compensated and thus allowed to sign the tax return. True or False

Answer 16

True

Question 17

Can a CPA advertise CPA services in public communications such as direct mailers?

Answer 17

No. Because advertising generally are not statements of facts. But they are coersive, etc.

Question 18

What should a CPA consider in choosing whether to provide oral or written advice to a client?

Answer 18

The tax sophistication of the client.

Question 19

Should a CPA inquire about the existence of documentation for deductible travel expenses for a client?

Answer 19

Yes, since documentation is required for a deduction.

Question 20

How long must a CPA keep copies of his/her client’s tax returns that they’ve prepared?

Answer 20

3 years

Question 21

A CPA can advocate on behalf of a client if the CPA has a firm belief that the position has a realistic possibility of being sustained by the IRS or the courts if challenged. What does “Realistic possibility” mean?

Answer 21

The position will more likely than not be upheld

Question 22

A preparer must act in good faith with regards to rules or regulations—not court cases.

Answer 22

True,

Question 23

The PCAOB is required to make an annual inspection of any CPA firm that audits more than ____ companies.

Answer 23

100

Question 24

Where can a candidate find information that will allow him or her to maintain licensure records and view requirements for multiple jurisdictions?

Answer 24

NASBA tools for accounting compliance

National Assoc of State Boards of Accountancy

Question 25

What are the requirements to become an AICPA member?

Answer 25

Must pass the CPA exam

Question 26

Name 4 national accounting regulatory agencies

Answer 26

FASB
GASB
IASB
SEC

Question 27

If a CPA negligently gives an opinion on an audit of a client’s financial statements. Is the CPA liable to anyone in a class of third parties who the CPA knows will rely on the opinion?

Answer 27

Yes

Question 28

For a CPA to be held liable for certifying materially misstated financial statements that are available to a purchaser of a security, the purchaser must prove the CPA committed fraud, and prove the purchaser relied on those financial statements? True or false.

Answer 28

False. Section 11 of the Securities Act of 1933 shifts the burden of proof from the plaintiff to the defendant—the CPA must prove innocence by establishing one of the permitted defenses (due diligence, followed GAAS, damage does not relate to misstatement).

Question 29

What is the standard that CPAs are held to in performing audits?

Answer 29

A CPA must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances (the standard of care defined by the tort of negligence.

Question 30

A CPA’s best defense in a liability suit for issuing an unmodified statement for materially misstated accounts during an audit is:

Answer 30

Exercise of due care while adhering to GAAS - Generally accepted auditing standards.

Question 31

In the landmark case of Ultramares Corporation v. Touche (common law), what did the court rule?

Answer 31

That the accountants had no liability to third parties for ordinary negligence even though liability to third parties could be imposed for fraud or gross negligence or privity of contract.

Question 32

Define scienter

Answer 32

Intent or knowledge of wrongdoing

Question 33

A CPA may disclose confidential client information only pursuant to:

Answer 33

• a subpoena (court order), or applicable laws or government regulations.
• AICPA or state CPA Society or Board of Accountancy authorization.
• inquiry made by a recognized investigatory or disciplinary body.

Question 34

Under the provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, what must be proven by a stock purchaser in a suit against a CPA?

Answer 34

Fraud: Scienter, Reliance on statements, damages, material misstatements.

Question 35

In a Section 10(b) and Rule 10b-5 law suit (1934) involving a materially misstated audit that was known by the audit CPA, would a winning plaintiff be entitled to punitive damages?

Answer 35

No.

A plaintiff would only be entitled to the actual losses incurred by the fraud.

Question 36

Under common-law negligence, liability to third parties could be imposed for fraud or gross negligence (not for simple negligence). But liability to an injured third party at minimum must prove gross negligence by establishing ______?

Answer 36

Failure to exercise due care.

Question 37

Under the Securities Exchange Act of 1934, could a CPA could be held liable to an injured third party for negligence?
Ex. - filing an incorrect quarterly report.

Answer 37

No. Misrepresentation must be intentional. 
Must prove Scienter or Fraud
o Damages
o Material Misstatements
o Reliance on financial statements

Question 38

Under common-law, can a CPA be held liable for simple negligence to an injured third party?

Answer 38

No. Only for fraud or gross negligence.

Question 39

Under common-law, what can a CPA be held liable for to an injured third party?

Answer 39

Fraud or gross negligence

Question 40

Constructive fraud =

Answer 40

Gross negligence

Question 41

Explain the ruling of the of Ultramares Corporation v. Touche (N.Y. 1931).

Answer 41

The court held that a CPA’s liability for negligent acts extended only to those parties with whom the CPA was in privity of contract. So 3rd parties cannot hold a CPA liable for simple negligence because they weren’t in privity of contract (ONLY if they can prove gross negligence or fraud).

Question 42

Security Act of 1933

Who can sue?

Liability is proved by?

Who has burden of proof?

CPA defenses?

Answer 42

Only purchasers of security can sue (investors).

Liability is proved by simple negligence - (1) inclusion of Material misstatements, (2) damages were suffered that can be traced to registration.

CPA has burden of proof - must prove innocence.

Defenses: Due diligence, followed GAAS, damage does not relate to misstatement.

Question 43

Security Act of 1934

Who can sue?

Liability is proved by?

Burden of proof?

Recovery amt?

Answer 43

Purchasers & sellers, and third parties can sue.

Liability is proved by Fraud: Scienter, reliance on statements, damages suffered, material misstatements.

Investor has burden of proof.

Not a defense - lack of privity (because 3rd parties can sue)

Recovery amt limited to actual losses related to fraud

Question 44

Common-Law:
Who can sue?
Liability is proved by?
Who has burden of proof?

Answer 44

Third parties can sue.
Liability is proved by gross negligence or fraud (UltraMares Ruling prevents simple negligence for no privity of contract).
Prosecution has burden of proof.

Question 45

What is Treasury Circular 230?

Answer 45

A publication of U.S. Treasury regulations containing the rules governing practice before the U.S. Internal Revenue Service (IRS).

Question 46

If taxpayer is being audited, is a CPA required to furnish client documents to the IRS if they’ve requested them?

Answer 46

Yes, UNLESS the CPA understands the records to be privileged information.

Question 47

What is a CPA’s responsibility if a client has an error or omission in their prior year’s return, or document?
Who’s responsibility is it to correct the error?

Answer 47

CPA must:
1) Advise of the FACT of the error
2) Advise of the CONSEQUENCES of the error.
It is the client’s responsibility to correct the error.
CPA should consider withdrawing until error is corrected.

Question 48

Can a CPA charge an unconscionable fee?

Answer 48

No

Question 49

Can a CPA represent 2 parties whereby there might be a conflict of interest to represent both?

Answer 49

Yes, but only if both parties waive their conflict of interest in writing.

Question 50

What is the standard for a tax return?

Answer 50

Must be reasonable and must NOT be a willful attempt to understate a tax liability.

Question 51

Can a CPA retain copies of a client’s tax return?

Answer 51

Yes

Question 52

Is there a statute of limitations if a client failed to file a tax return 4 years ago?

Answer 52

No, there is never a statute of limitations for failing to file a return.

Question 53

Difference between negligence and gross negligence?

Answer 53

Simple negligence is failure to exercise due care.

Gross negligence is reckless departure from the standard due care.

Question 54

Difference between gross negligence and fraud?

Answer 54

For fraud there is intent to deceive.

Gross negligence is reckless departure from the standard due care.

Question 55

What is IRC 7701? (Code section 7701)

Answer 55

Defines what a tax preparer is - a person who prepares taxes for compensation.

Question 56

If a person is a fiduciary of a trust and they prepare the trust’s tax return, are they considered a preparer? What about an employee of a company who prepares the company’s return?

Answer 56

No

Question 57

There are confidentiality privileges between a practitioner and a client that involve criminal tax matters. True or False?

Answer 57

False. Only if non-criminal.

Question 58

What does “practice before the IRS” mean?

Answer 58

Communicating with the IRS on behalf of a taxpayer regarding the taxpayer’s rights, privileges, or liabilities under laws and regulations administered by the IRS.

Question 59

Who can practice before the IRS?

Answer 59

CPA’s, attorneys, enrolled agents, enrolled actuaries, enrolled retirement plan agents.

Question 60

If a individual has IRS power of attorney, the individual can perform all tax matters that the taxpayer can perform. True or False?

Answer 60

True.

Question 61

A tax return preparer is subject to tax return penalties. What are the situations in which a preparer is subject to penalties?

Answer 61

If they fail to 1) sign the return, 2) furnish a copy to the taxpayer, 3) keep copies for 3 years, 4) Fullfill the due dilligence requirement for a taxpayer entitled to the EIC (Earned Income Credit).

Question 62

What Client fees is CPA not allowed to charge?

Answer 62

Unconscionable fees

Question 63

What is a contingent fee?

Answer 63

A fee arrangement in which the amount of the fee is dependent on the attainment of a specific result for the client. For Ex - a fee contingent on the amount of a tax refund.

Question 64

What are the Standards for Tax Returns?

Answer 64

1) must be reasonable

2) must not willfully attempt to understate tax liability

Question 65

Yes or No
Does a CPA have to advise a client of penalties that are reasonably likely to apply to the client with respect to a position taken on a tax return, if the practitioner advised the client.

Answer 65

Yes

Disclosure is key