PLR Flashcards
An investor purchased shares of stock in a stock offering under the Securities Act of 1933. The financial statements included in the registration statement contained material misstatements. As a result, the investor incurred a significant loss on the securities. What must the investor prove to possibly recover losses from the CPA firm that audited the financial statements contained in the registration statement?
Losses and the financial statements were materially misstated.
Petty Corp. made a public offering subject to the Securities Act of 1933. In connection with the offering, Ward & Co., CPAs, rendered an unqualified opinion on Petty’s financial statements included in the SEC registration statement. Huff purchased 500 of the offered shares. Huff has brought an action against Ward under Section 11 of the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. To succeed, Huff must prove that
The misstatements were material.
Which of the following statements best describes whether CPA has met the required standard of care in conducting an audit of client’s financial statements?
a. The accuracy of the financial statements and whether the statements conform to generally accepted accounting principles.
b. Whether the audit was conducted to investigate and discover all acts of fraud.
c. Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances.
d. The expectations of third-party users of the financial statements.
Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances.
Clark, a professional tax return preparer, prepared and signed a client’s 2012 federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client’s refund check?
a. Clark may endorse and cash the check, without penalty, because the check is for less than $1,000.
b. Clark will be subject to the penalty if Clark endorses and cashes the check.
c. Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark’s fee for preparation of the return.
d. Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service.
Clark will be subject to the penalty if Clark endorses and cashes the check.
Able, CPA, was engaged by Wedge Corp. to audit Wedge’s financial statements. Wedge intended to use the audit report to obtain a $10 million loan from Care Sank. Able and Wedge’s president agreed that Able would give an unqualified opinion on Wedge’s financial statements in the audit report even though there were material misstatements in the financial statements. Care refused to make the loan. Wedge then gave the audit report to Ranch to encourage Ranch to purchase $10 million worth of Wedge common stock. Ranch reviewed the audit report and relied on it to purchase the stock. After the purchase, Able’s agreement with Wedge’s president was revealed. As a result, Wedge stock lost half its value and Ranch sued Able for fraud. What will be the result of Ranch’s suit?
Ranch will win because Able intentionally gave an unqualified opinion on Wedge’s materially misstated financial statements.
Which of the following is not an acceptable manner of designating that an estimated figure was used in preparing federal income tax return?
a. Modify the tax preparer’s declaration on the return before signing the tax return.
b. Use a round amount.
c. Use an amount suggested in a treasury department guideline.
d. State expressly that an amount has been estimated.
Modify the tax preparer’s declaration on the return before signing the tax return.
Which of the following penalties is usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to client?
a. Punitive damages.
b. Rescission.
c. Specific performance.
d. Money damages.
Money damages.
For regulations regarding practice as an accountant before the Internal Revenue Service, CPA should look to
Treasury Department Circular 230.
While the AICPA cannot revoke CPA’s right to practice, it is important for CPAs to follow AICPA rules because
Most state boards of accountancy have rules that mirror the AICPA rules.
A CPA partnership may, without being lawfully subpoenaed or without the client’s consent, make client workpapers available to
Any surviving partner(s) on the death of a partner.
Major, Major & Sharpe, CPAs, are the auditors of MacLain Industries. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements and omissions were revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement which included the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if
It can prove due diligence in the audit of the financial statements of MacLain.
Rhodes Corp. desired to acquire the common stock of Harris Corp. and engaged Johnson & Co., CPAs, to audit the financial statements of Harris Corp. Johnson failed to discover a significant liability in performing the audit. In a common law action against Johnson, Rhodes at a minimum must prove
Negligence on the part of Johnson.
Which of the following is required by the Gramm-Leach Bliley (Financial Modernization) Act of 1999?
a. Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing.
b. Accountants are prohibited from providing confidential client information to outsourcing firms.
c. Accountants may provide confidential client information only to outsourcing firms that the accountants have an equity interest in.
d. Accountants may provide confidential client information only to outsourcing firms that are subject to federal laws and regulations regarding confidentiality.
Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing.
Fowler, CPA, was performing a review of the financial statements of Tut Corp., a nonpublic company, when he discovered evidence that the company’s cashier may be embezzling funds. However, since he was not performing an audit of the company, Fowler did not follow up on the matter, nor did he inform management of his suspicions. Which of the following is accurate about Fowler’s liability?
a. Fowler will not be held liable to Tut Corp. because management of Tut Corp. is also negligent for not having adequate controls.
b. Fowler will not be held liable to Tut Corp. because management of Tut Corp. was not relying on the financial statements to make investment decisions.
c. Fowler will not be held liable to Tut Corp. because management of Tut Corp. should have known about the embezzlement.
d. Fowler will be held liable to Tut Corp. because he did not follow up on the matter nor did he inform management of the matter.
Fowler will be held liable to Tut Corp. because he did not follow up on the matter nor did he inform management of the matter.
Sharp, an accountant, is auditing XYZ Corporation pursuant to the Federal Securities Exchange Act of 1934. Under the Private Securities Litigation Reform Act, she is required to establish procedures to accomplish which of the following?
I. Identify material related party transactions.
II. Detect material illegal acts
III. Evaluate the ability of the firm to continue as a going conern.
I, II, and III
At a confidential meeting, an audit client informed a CPA about the client’s illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to the meeting between the CPA and the client. After receiving immunity, the CPA should do which of the following?
a. Discuss only the items that have a direct connection to those items the CPA worked on for the client in the past.
b. Take the Fifth Amendment and not discuss the meeting.
c. Discuss the entire conversation including the illegal acts.
d. Cite the privileged communications aspect of being CPA.
Discuss the entire conversation including the illegal acts.
Jones, CPA, prepared Smith’s 2012 federal income tax return and appropriately signed the preparer’s declaration. Several months later Jones learned that Smith improperly altered several figures before mailing the tax return to the IRS. Jones should communicate disapproval of this action to Smith and
Take no further action with respect to the 2012 tax return but consider the implications of Smith’s actions upon any future relationship.
If an accountant detects that an employee of the audited firm has committed a material illegal act, the accountant should
Report this to the firm’s board of directors or audit committee.
A CPA audited the financial statements of Dodd Company. The CPA was negligent in the audit. Sanco, a supplier of Dodd, is upset because Sanco had extended Shelly a high credit limit based on the financial statements which were incorrect. Which of the following statements is the most correct?
a. In most states, Sanco cannot recover as mere foreseeable third party.
b. States that use the Ultramar-es decision will allow both Dodd and Sanco to recover.
c. Generally, Sancc can recover but Dodd cannot.
d. In most states, both Dodd and Sanco can recover from the CPA for damages due to the negligence.
In most states, Sanco cannot recover as mere foreseeable third party.
In general, which of the following statements is correct with respect to ownership, possession, or access to workpapers prepared by CPA firm in connection with an audit?
a. The workpapers must be retained by the CPA firm for period of 10 years.
b. The workpapers are the property of the client after the client pays the fee.
c. The workpapers are subject to the privileged communication rule which, in majority of jurisdictions, prevents third-party access to the workpapers.
d. The workpapers may be obtained by third parties where they appear to be relevant to issues raised in litigation.
The workpapers may be obtained by third parties where they appear to be relevant to issues raised in litigation.
If an accountant is auditing a corporation whose securities are covered under the Securities Exchange Act of 1934, the accountant must establish procedures to
I. Evaluate the ability of the corporation to continue as going concern.
II. Detect material illegal acts.
Both I and II
Which of the following laws does not have provisions for criminal liability by auditors?
a. Common Law.
b. The Securities Exchange Act of 1934.
c. The Securities Act of 1933.
d. The Racketeer Influenced and Corrupt Organization Act.
Common Law.
Tax preparers who aid and abet federal tax evasion are subject to
a. Neither
b. Injunction to be prohibited from acting as tax preparers
c. General federal criminal prosecution
d. Injunction to be prohibited from acting as tax preparers and General federal criminal prosecution.
Injunction to be prohibited from acting as tax preparers and General federal criminal prosecution.
Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following must plaintiff pave to hold CPA liable?
I. The misstatements contained in the financial statements certified by the CPA were material.
Il. The plaintiff relied on the CPA’s unqualified opinion.
I only
Under the Ultramares rule, to which of the following parties will an accountant be liable for negligence?
a. Parties in privity and Third-party beneficiaries
b. Parties in privity
c. Third-party beneficiaries
d. Neither
Parties in privity and Third-party beneficiaries
Which of the following is not possible result of an AICPA investigation of member for an ethics violation?
a. Revocation of the right to practice.
b. Admonishment.
c. Expulsion
d. Corrective action.
Revocation of the right to practice.
Mead Corp. orally engaged Dex & Co., CPAs, to audit its financial statements. The management of Mead informed Dex that it suspected that the accounts receivable were materially overstated. Although the financial statements audited by Dex did, in fact, include a materially overstated accounts receivable balance, Dex issued an unqualified opinion. Mead relied on the financial statements in deciding to obtain a loan from City Bank to expand its operations. City relied on the financial statements in making the loan to Mead. As a result of the overstated accounts receivable balance, Mead has defaulted on the loan and has incurred a substantial loss. If Mead sues Dex for negligence in failing to discover the overstatement, Dex’s best defense would be that
The audit was performed by Dex in accordance with generally accepted auditing standards.
In preparing Tint’s 2012 individual income tax return, ace, CPA, tock a $3,000 deduction for unreimbursed travel and entertainment expenses, which Tint stated he paid in 2012. Boe had no reason to believe that documentation of the travel and entertainment expenses was inadequate or nonexistent. In order to avoid the preparer’s negligence penalty, Boe
Must be advised by Tint that the documentation exists.
According to Treasury Department Hugh, CPA, has developed an opinion for which tax avoidance is significant purpose that is marketed to potential investors. Circular 230
This opinion is considered a covered opinion.
Which of the following is(are) true concerning internal auditors?
I. Internal auditors must be independent from the entire corporation or entity they are auditing.
II. Internal auditors must have a CPA license.
Neither I nor II
In general, the third-party (primary) beneficiary rule as applied to CPA’s legal liability in conducting an audit is relevant to which of the following causes of action against a CPA?
a. Fraud and Negligence
b. Fraud
c. Constructive fraud and Negligence
d. Negligence
Negligence
All of the following are aspects of the AICPA Uniform Accountancy Act (I-IAA), except:
a. Requirements regarding substantial equivalency to facilitate practice acass state lines.
b. Ethical rules.
c. Auditing standards.
d. Continuing education requirements for licensure
Auditing standards.
An accountant performed an audit and later performed a review of events subsequent to the balance sheet date (5-I Review). The accountant performed the audit without negligence or fraud. For which of the following, if any, can the accountant be held liable in the 5-I Review?
a. Fraud but not negligence.
b. Neither fraud nor negligence.
c. Either fraud or negligence or both.
d. Negligence but not fraud.
Either fraud or negligence or both.
Which of the following professional bodies has the authority to revoke CPA’s license to practice public accounting?
a. National Association of State Boards of Accountancy.
b. State board of accountancy.
c. Professional Ethics Division of AICPA.
d. CPA Society Ethics Committee.
State board of accountancy.
Stewart, CPA, was engaged to complete the audit of Wilson Company. In performing the audit Stewart made a mistake in judgment regarding some evidence. As a result an embezzlement of funds by an employee was not discovered. The mistake did not rise to the level of negligence. Which of the following statements is true regarding Stewart’s liability in this case?
a. Stewart likely will be held liable for making an untrue statement.
b. Stewart likely will not be held liable.
c. Stewart likely will be held liable for failure to use due care.
d. Stewart likely will be held liable for breach of contract.
Stewart likely will not be held liable.
If CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who were unknown to the CPA based on
Gross negligence.
Under the liability provisions of Section 18 of the Securities Exchange Act of 1934, for which of the following actions would an accountant generally be liable?
a. Negligently filing a reporting corporation’s tax return with the IRS.
b. Intentionally failing to notify a reporting corporation’s audit committee of defects in the verification of accounts receivable.
c. Negligently approving a reporting corporation’s incorrect internal financial forecasts.
d. Intentionally preparing and filing with the SEC a reporting corporation’s incorrect quarterly report.
Intentionally preparing and filing with the SEC a reporting corporation’s incorrect quarterly report.
Russ, CPA, is auditing the financial statements of Ruben Corporation and has not received consent from management regarding the disclosure of confidential information. Which of the following is not true regarding confidentiality of Ruben Corporation’s information under the AICPA rules?
a. Russ may provide access to Ruben’s information if major shareholder of Ruben Corporation requests the information.
b. Russ may provide access to Ruben’s information in conjunction with a peer review of the CPA’s practice.
c. Russ may provide access to Ruben’s information to another CPA that is negotiating to purchase his practice.
d. Russ may provide access to Ruben’s information as result of valid court subpoena.
Russ may provide access to Ruben’s information if major shareholder of Ruben Corporation requests the information.
Even in circumstances where disclosure on tax return is not required, the CPA may choose to make disclosure. Such choice may not be made if the intent is to
Invalidate the preparer’s declaration.
Lawson, a CPA, discovers material noncompliance with specific Internal Revenue Code (IRC) requirement in the prior year return of new client. Which of the following actions should Lawson take?
a. Discuss the requirements of the IRC with the client and recommend that client amend the return.
b. Wait for the statute of limitations to expire.
c. Contact the prior CPA and discuss the client’s exposure.
d. Contact the IRS and discuss courses of action.
Discuss the requirements of the IRC with the client and recommend that client amend the return.
Holly Corp. engaged Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly was required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover the omission of a fact material to the statements. A purchaser of Holly’s securities may recover from Yost under Section Il of the Securities Act of 1933 only if the purchaser
Brings a civil action within I year of the discovery of the omission and within 3 years of the offering date.