PLR

Question 1

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?

Answer 1

Losses and the financial statements were materially misstated.

Question 2

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

Answer 2

The misstatements were material.

Question 3

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.

Answer 3

Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances.

Question 4

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.

Answer 4

Clark will be subject to the penalty if Clark endorses and cashes the check.

Question 5

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?

Answer 5

Ranch will win because Able intentionally gave an unqualified opinion on Wedge’s materially misstated financial statements.

Question 6

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.

Answer 6

Modify the tax preparer’s declaration on the return before signing the tax return.

Question 7

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.

Answer 7

Money damages.

Question 8

For regulations regarding practice as an accountant before the Internal Revenue Service, CPA should look to

Answer 8

Treasury Department Circular 230.

Question 9

While the AICPA cannot revoke CPA’s right to practice, it is important for CPAs to follow AICPA rules because

Answer 9

Most state boards of accountancy have rules that mirror the AICPA rules.

Question 10

A CPA partnership may, without being lawfully subpoenaed or without the client’s consent, make client workpapers available to

Answer 10

Any surviving partner(s) on the death of a partner.

Question 11

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

Answer 11

It can prove due diligence in the audit of the financial statements of MacLain.

Question 12

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

Answer 12

Negligence on the part of Johnson.

Question 13

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.

Answer 13

Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing.

Question 14

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.

Answer 14

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.

Question 15

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.

Answer 15

I, II, and III

Question 16

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.

Answer 16

Discuss the entire conversation including the illegal acts.

Question 17

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

Answer 17

Take no further action with respect to the 2012 tax return but consider the implications of Smith’s actions upon any future relationship.

Question 18

If an accountant detects that an employee of the audited firm has committed a material illegal act, the accountant should

Answer 18

Report this to the firm’s board of directors or audit committee.

Question 19

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.

Answer 19

In most states, Sanco cannot recover as mere foreseeable third party.

Question 20

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.

Answer 20

The workpapers may be obtained by third parties where they appear to be relevant to issues raised in litigation.

Question 21

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.

Answer 21

Both I and II

Question 22

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.

Answer 22

Common Law.

Question 23

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.

Answer 23

Injunction to be prohibited from acting as tax preparers and General federal criminal prosecution.

Question 24

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.

Answer 24

I only

Question 25

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

Answer 25

Parties in privity and Third-party beneficiaries

Question 26

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.

Answer 26

Revocation of the right to practice.

Question 27

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

Answer 27

The audit was performed by Dex in accordance with generally accepted auditing standards.

Question 28

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

Answer 28

Must be advised by Tint that the documentation exists.

Question 29

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

Answer 29

This opinion is considered a covered opinion.

Question 30

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.

Answer 30

Neither I nor II

Question 31

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

Answer 31

Negligence

Question 32

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

Answer 32

Auditing standards.

Question 33

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.

Answer 33

Either fraud or negligence or both.

Question 34

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.

Answer 34

State board of accountancy.

Question 35

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.

Answer 35

Stewart likely will not be held liable.

Question 36

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

Answer 36

Gross negligence.

Question 37

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.

Answer 37

Intentionally preparing and filing with the SEC a reporting corporation’s incorrect quarterly report.

Question 38

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.

Answer 38

Russ may provide access to Ruben’s information if major shareholder of Ruben Corporation requests the information.

Question 39

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

Answer 39

Invalidate the preparer’s declaration.

Question 40

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.

Answer 40

Discuss the requirements of the IRC with the client and recommend that client amend the return.

Question 41

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

Answer 41

Brings a civil action within I year of the discovery of the omission and within 3 years of the offering date.

Question 42

An auditor is responsible for reviewing for material subsequent events that may affect the financial statements contained in Form S-I filed with the SEC until

Answer 42

The effective date of the registration statement.

Question 43

Lewis & Clark, CPAs, rendered an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a false statement in the financial statements, Lewis & Clark are being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense?

a. The false statement is immaterial in the overall context of the financial statements.
b. The investor did not actually rely upon the false statement.
c. The investor has not met the burden of proving fraud or negligence by Lewis and Clark.
d. Detection of the false statement by Lewis and Clark occurred after their examination date.

Answer 43

The false statement is immaterial in the overall context of the financial statements.

Question 44

A CPA’s duty of due care to client most likely will be breached when CPA

a. Gives a client an oral instead of written report.
b. Fails to follow generally accepted auditing standards.
c. Gives a client incorrect advice based on an honest error of judgment.
d. Is not efficient in performing an engagement.

Answer 44

Fails to follow generally accepted auditing standards.

Question 45

Sharp & Co., CPAs, was engaged by Radar Corp. to audit its financial statements. Sharp issued an unqualified opinion on Radar’s financial statements. Radar has been accused of making negligent misrepresentations in the financial statements which Wisk relied upon when purchasing Radar stock. Sharp was not aware of the misrepresentations nor was it negligent in performing the audit. If Wisk sues Sharp for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Sharp will

Answer 45

Prevail, since some element of scienter must be proved.

Question 46

A client suing CPA for negligence must pave each of the following factors except:

a. Injury
b. Proximate cause.
c. Reliance.
d. Breach of duty of care.

Answer 46

Reliance.

Question 47

Based on the changes in the Securities Exchange Act of 1934 made by the Private Securities Litigation Reform Act of 1995, auditors of the financial statements of issuers (public companies) are required to design procedures for all of the following objectives, except to:

a. Evaluate the effectiveness of the audit committee of the board of directors.
b. Identify material related-party transactions.
c. Evaluate the ability of the company to continue as going concern.
d. Detect material illegal acts.

Answer 47

Evaluate the effectiveness of the audit committee of the board of directors.

Question 48

If an auditor detects possible illegal activity in the course of an audit, s/he has which duty under the Private Securities Litigation Reform Act?

Answer 48

To inform the audit committee or the board of directors.

Question 49

Mell Corp. engaged Davis & Co., CPAs, to audit Mall’s financial statements. Mall’s management informed Davis it suspected that the accounts receivable were materially overstated. Although the financial statements did include a materially overstated accounts receivable balance, Davis issued an unqualified opinion. Mell relied on the financial statements in deciding to obtain a loan from County Bank to expand its operations. County relied on the financial statements in making the loan to Mall. As a result of the overstated accounts receivable balance, Mell has defaulted on the loan and has incurred a substantial loss. If County sues Davis for fraud, must Davis furnish County with the audit working papers?

Answer 49

Yes, if the working papers are lawfully subpoenaed into court.

Question 50

In common-law action against an accountant, the lack of privity is viable defense if the plaintiff

Answer 50

Is a creditor of the client who sues the accountant for negligence.

Question 51

In accordance with the AICPA Statements on Standards for Tax Services, if after having provided tax advice to client there are legislative changes which affect the advice provided, the CPA

Answer 51

Cannot be expected to notify the client of the change unless the obligation is specifically undertaken by agreement.

Question 52

In preparing a client’s current year individual income tax return, tax practitioner discovers an erar in the prior year’s return. Under the rules of practice prescribed in Treasury Circular 230, the tax practitioner

Answer 52

Must advise the client of the error.

Question 53

The accountant-client privilege is recognized

Answer 53

Where a state statute has been enacted creating such privilege.

Question 54

The Internal Revenue Code provisions dealing with tax return preparation

Answer 54

Apply to a CPA who prepares the tax returns of the president of a corporation the CPA audits, without charging the president.

Question 55

In accordance with the AICPA Statements on Standards for Tax Services, where question on federal income tax return has not been answered, the CPA should sign the preparer’s declaration only if

Answer 55

Reasonable grounds exist for not answering the question.

Question 56

How many public company audits per year does CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?

Answer 56

More than 100 audits.

Question 57

In which of the following statements concerning CPA firm’s action is scienter or its equivalent absent?

Answer 57

Performance of substandard auditing procedures.

Question 58

Which of the following circumstances is a defense to an accountant’s liability under Section Il of the Securities Act of 1933 for misstatements and omissions of material facts contained in a registration statement?

a. The absence of scienter on the part of the accountant.
b. The absence of privity between purchasers and the accountant.
c. Nonreliance by purchasers on the misstatements.
d. Due diligence on the part of the accountant.

Answer 58

Due diligence on the part of the accountant.

Question 59

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. Ward’s weakest defense would be that

Answer 59

Ward was not in privity of contract with Huff.

Question 60

A member of the AICPA is convicted of filing fraudulent tax return. What is the likely consequence of this action?

Answer 60

The CPA will likely be expelled or suspended from membership in the AICPA.

Question 61

What defense must an accountant establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the Act?

Answer 61

Good faith and lack of knowledge of the statement’s falsity.

Question 62

A CPA engaged in tax practice

Answer 62

May recommend a position for which there is reasonable basis, so long as the position is adequately disclosed.

Question 63

Krim, President and CEO of United Co., engaged Smith, CPA, to audit United’s financial statements so that United could secure a loan from First Sank. Smith issued an unqualified opinion on May 20, 2010, but the loan was delayed. On August 5, 2010, on inquiry to Smith by First Bank, Smith, relying on Krim’s representation, made assurances that there was no material change in united’s financial status. Krim’s representation was untrue because of a material change Which tock place after May 20, 2010. First relied on Smith’s assurances of no change. Shortly thereafter, United became insolvent. If First sues Smith for negligent misrepresentation, Smith will be found

Answer 63

Liable, because Smith should have undertaken sufficient auditing procedures to verify the status of United.

Question 64

According to Treasury Department Circular 230, practitioner may not

Answer 64

Negotiate a federal tax refund check issued to a client by the government.

Question 65

A CPA firm fails to complete the audit of a publicly traded company because the firm determines that it does not have sufficient competent personnel. As a result, the client’s Form 10-K is not filed on a timely basis. The company will likely be entitled to damages from the firm for

Answer 65

Breach of contract under common law.

Question 66

For a CPA to be liable for damages under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, plaintiff must pave all of the following except that

Answer 66

The CPA violated generally accepted auditing standards.

Question 67

Burt, CPA, issued an unqualified opinion on the financial statements of Midwest Corp. These financial statements were included in Midwest’s annual report and Form 10-K filed with the SEC. As a result of Burt’s reckless disregard for GAAS, material misstatements in the financial statements were not detected. Subsequently, Davis purchased stock in Midwest in the secondary’ market without ever seeing Midwest’s annual report or Form 10-K. Shortly thereafter, Midwest became insolvent and the price of the stock declined drastically. Davis sued Burt for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Burt’s best defense is that

Answer 67

Davis did not rely on the financial statements or Form 10-K.

Question 68

Which of the following terms best describes the relationship between corporation and the CPA it hires to audit corporate books?

a. Employer and independent contractor.
b. Employer and principal.
c. Employer and employee.
d. Master and servant.

Answer 68

Employer and independent contractor.

Question 69

When CPAs fail in their duty to carp,’ out their contracts for services, liability to clients may be based on

a. Breach of contract and Strict liability
b. Breach of contract
c. Neither
d. Strict liability

Answer 69

Breach of contract

Question 70

A member of the CPA may be subject to expulsion or suspension from membership without hearing for any the following, except:

a. The member files a fraudulent tax return.
b. The member’s license to practice is revoked by state board as a disciplinary measure.
c. The member is prohibited from doing any work on audits of issuers by the PCAOB for 3 years.
d. The member is convicted of a crime punishable by imprisonment for 5 years.

Answer 70

The member is prohibited from doing any work on audits of issuers by the PCAOB for 3 years.

Question 71

A CPA while performing tax services for client may learn of a material error in previously filed tax return. In such an instance the CPA should

Answer 71

Advise the client to file a corrected return regardless of whether or not the error resulted in an overstatement or understatement of tax.

Question 72

Which of the following may not result in automatic expulsion from the AICPA?

a. Filing a fraudulent tax return.
b. Revocation of CPA certificate by an authorized body.
c. Failure to exercise due care on an audit.
d. Conviction for a felony.

Answer 72

Failure to exercise due care on an audit.

Question 73

Which one of the following, if present, would support finding of constructive fraud on the part of CPA?

a. Ordinary negligence.
b. Reckless disregard.
d. Intent to deceive.
d. . Privity of contract.

Answer 73

Reckless disregard.

Question 74

The preparer of federal income tax return signs preparer’s declaration which states:

Under penalties of perjury, i declare that i have examined this return and accompanying to the best of my knowledge and belief, they are true, correct, and complete.

A CPA who signs this declaration as preparer for client’s tax return warrants that

Answer 74

Information furnished by the client was relied upon in preparing the tax return unless it appeared incorrect or incomplete.

Question 75

Hall purchased Eon Corp. bonds in a public offering subject to the Securities Act of 1933. Kasson and Co., CPAs, rendered an unqualified opinion on Eon’s financial statements, Which were included in Eon’s registration statement. Kasson is being sued by Hall based upon misstatements contained in the financial statements. In order to be successful, Hall must prove

a. Damages, Materiality, and Kosson’s scienter
b. Damages and Materiality
c. Damages
d. Materiality and Kosson’s scienter

Answer 75

Damages and Materiality

Question 76

According to Treasury Department Circular 230, tax practitioner must promptly submit records or information in any matter before the IRS unless:

a. The practitioner believes the client would not want the records or information provided.
b. The practitioner believes that the records or information would be incriminating to the client.
c. The practitioner believes the records and information may not be relevant.
d. The practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

Answer 76

The practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

Question 77

Dexter and Co., CPAs, issued an unqualified opinion on the 2012 financial statements of Bart Corp. Late in 2010, Bart determined that its treasurer had embezzled over Dexter was unaware of the embezzlement. Bart has decided to sue Dexter to recover the Bart’s suit is based upon Dexter’s failure to discover the missing money while performing the audit. Which of the following is Dexter’s best defense?

a. That the audit was performed in accordance with GAAS.
b. Dexter had no knowledge of the embezzlement.
c. The financial statements were presented in conformity with GAAP.
d. The treasurer was Bart’s agent and as such had designed the internal controls which facilitated the embezzlement.

Answer 77

That the audit was performed in accordance with GAAS.

Question 78

Alex Stone, CPA, prepared Ray Pym’s 2012 federal income tax return. Pym advised Stone that he had paid doctors’ bills of $15,000 during 2012, When in fact Pym had paid only $3,000 of bills. Based on representations, Stone properly computed the medical expense deduction, with consequent understatement of tax liability of more than $5,000. total tax liability shown on the return was $40,000. Stone had no reason to doubt the accuracy of figures, although Stone did not request documentation for the expenses claimed; but he was assured by Pym that sufficient corroborative evidence of these expenses existed. In connection with Stone’s preparation of Pym’s 2012 return, Stone is

Answer 78

Not subject to any IRS penalty or interest.

Question 79

In an action for negligence against a CPA, “the custom of the profession” standard is used at least to some extent in determining whether the CPA is negligent. Which of the following statements describes how this standard is applied?

a. Despite CPA’s adherence to the custom of the profession, negligence may nevertheless be present.
b. The custom of the profession argument may only be raised by the defendant.
c. Failure to satisfy the custom of the profession is equivalent to gross negligence.
d. If the CPA proves he literally followed GAAP and GAAS, it will be conclusively presumed that the CPA was not negligent.

Answer 79

Despite CPA’s adherence to the custom of the profession, negligence may nevertheless be present.

Question 80

Which of the following statements is(are) true of the Private Securities Litigation Reform Act?

I. The Act amends the Federal Securities Act of 1933.

II> The Act amends the Federal Securities Exchange Act of 1934.

Answer 80

Both I and II

Question 81

Under the Private Securities Litigation Reform Act, the defendants have what type of liability?

Answer 81

Proportionate to their degree of fault for unknowing conduct.

Question 82

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?

Answer 82

The tax preparer is responsible for disclosing both penalties to the company.

Question 83

Management of Tyler Company, a nonpublic company, materially misstated the company’s financial statements that were audited by Ted & Ted, CPAs. Ted & Ted was negligent in the performance of the audit and failed to detect the misstatements. In reliance on the audited financial statements, Second Bank extended a loan in the amount of $500,000, and Tyler Company went bankrupt and was unable to repay any of the loan. Assume that Ted & Ted is determined to be responsible for Second Bank’s losses and management of Tyler Company is determined to be liable. Which of the following is not true regarding this situation?

a. In a state that has adopted joint liability, Ted & Ted may be required to pay the entire $500,000 in damages.
b. In a state that has adopted several liability, Ted & Ted will likely be required to pay only $200,000 in damages.
c. In a state that has adopted several liability, Ted & Ted will likely be required to pay the entire $500,000 but would be able to recover $300,000 from management.
d. In a state that has adopted joint and several liability, Ted & Ted may be required to pay the entire $500,000 in damages.

Answer 83

In a state that has adopted several liability, Ted & Ted will likely be required to pay the entire $500,000 but would be able to recover $300,000 from management.

Question 84

Dun & Dun, CPAs, were negligent in the performance of the subsequent events review in conjunction with the filing of Form S-1 for the initial public offering of Forrest Corporation bonds. What is critical for Dun & Dun to prove to avoid the possibility of liability?

Answer 84

Due diligence.

Question 85

Under the liability provisions of Section Il of the Securities Act of 1933, CPA who certifies financial statements included in registration statement generally will not be liable to a purchaser of the security

Answer 85

If the CPA can prove due diligence.

Question 86

In jurisdiction having an accountant-client privilege statute, to whom may CPA turn over workpapers without client’s permission?

Answer 86

State CPA society quality control panel.

Question 87

Which organization developed the Uniform Accountancy Act (UAA) for use by state jurisdictions to develop state laws to regulate CPAs?

Answer 87

The American Institute of Certified Public Accountants.

Question 88

The Joint Ethics Enforcement Pagram involves joint enforcement of the ethics rules of

Answer 88

The AICPA and state societies.

Question 89

The Ultramares decision is a leading case that helps define when a CPA is liable to different parties. If CPA has committed negligence,

I. The client.

II. Third-party beneficiaries.

III. Foreseeable third parties.

Answer 89

I and II only

Question 90

An accounting firm was hired by a company to perform an audit. The company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor’s report. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company. Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank

a. Cannot sue the accounting firm because there was no privity of contract.
b. Cannot sue the accounting firm because of the statute of limitations.
c. Can sue the accounting firm for the loss of the loan because of the rule of privilege.
d. Can sue the accounting firm for the loss of the loan because of negligence.

Answer 90

Can sue the accounting firm for the loss of the loan because of negligence.

Question 91

Ritz Corp. wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition Ritz hired Fein, CPA, to audit the financial statements of Stale. Based on the audited financial statements and Fein’s unqualified opinion, Ritz acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by $500,000. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that the inventory was overstated. Which of the following two causes of action would provide Ritz with paper bases upon which Ritz would most likely prevail?

a. Gross negligence and breach of contract.
b. Negligence and fraud.
c. Negligence and gross negligence.
d. Negligence and breach of contract.

Answer 91

Negligence and breach of contract.

Question 92

While preparing a client’s individual federal tax return, the CPA noticed that there was an erar in the previous year’s tax return that was prepared by another CPA. The CPA has which of the following responsibilities to this client?

a. Inform the client and the previous CPA in writing, and leave it to their discretion whether correction should be made.
b. Notify the IRS if the error could be considered fraudulent or could involve other taxpayers.
c. Inform the client and recommend corrective action.
d. Discuss the matter verbally with the former CPA and suggest that corrective action be taken for the client.

Answer 92

Inform the client and recommend corrective action.

Question 93

A member would be in violation of the Standards for Tax Services if the member recommends return position under which of the following circumstances?

a. It does not meet the realistic possibility standard but the member feels the return has a minimal likelihood for examination by the IRS.
b. It does not meet the realistic possibility standard but there is a reasonable basis for the position and it is disclosed on the return.
c. It might result in penalties and the member advises the taxpayer and discusses avoiding such penalties through disclosing the position.
d. It meets the realistic possibility standard based on the well-reasoned opinion of the taxpayer’s attorney.

Answer 93

It does not meet the realistic possibility standard but the member feels the return has a minimal likelihood for examination by the IRS.

Question 94

If a stockholder sues CPA for common-law fraud based upon false statements contained in the financial statements audited by the CPA, which of the following is the CPA’s best defense?

a. The stockholder lacks privity to sue.
b. The contributory negligence of the client.
c. The false statements were immaterial.
d. The CPA disclaimed liability to all third parties in the engagement letter.

Answer 94

The false statements were immaterial.

Question 95

Which of the following elements, if present, would support finding of constructive fraud on the part of CPA?

a. Ordinary negligence in applying generally accepted accounting principles.
b. Losses of a third party.
c. Scienter.
d. Gross negligence in applying generally accepted auditing standards.

Answer 95

Gross negligence in applying generally accepted auditing standards.

Question 96

Doe and Co., CPAs, issued an unqualified opinion on the 2012 financial statements of Marx Corp. These financial statements were included in Marx’s annual report and Form 10K filed with the SEC. Doe did not detect material misstatements in the financial statements as a result of negligence in the performance of the audit. Based upon the financial statements, Fitch purchased stock in Marx. Shortly thereafter, Marx became insolvent, causing the price of the stock to decline drastically. Fitch has commenced legal action against Doe for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Doe’s best defense to such an action would be that

Answer 96

There is no proof of scienter.

Question 97

Jay, CPA, gave an unqualified opinion on Nast Power Co.’s financial statements. Larkin bought Nast bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included Nest’s financial statements. Larkin sued Jay for misstatements contained in the financial statements under the provisions of Section 11 of the Securities Act of 1933. To prevail, Larkin must prove

a. Scienter
b. Scienter and Reliance
c. Neither
d. Reliance

Answer 97

Neither

Question 98

A CPA firm performs a negligent audit of financial statements included in an initial public offering of stock (Form S-I) filed with the SEC. An investor who loses money as a result of purchasing the stock will likely have a case to recover damages under

Answer 98

The Securities Act of 1933.

Question 99

A CPA owes duty to

Answer 99

Advise client of erars contained in previously filed tax return.

Question 100

A CPA firm was negligent in the audit of financial statements contained in Form 10-K filed with the SEC. If an injured third party decided to file suit against the CPA it would most likely be filed under

Answer 100

The Securities Exchange Act of 1934.

Question 101

An accountant compiled the unaudited financial statements for Taylor Company, a nonissuer company. The financial statements contained a material misstatement that was not discovered in the compilation. The accountant issued a report that stated that the financial statements were fairly stated based on the limited evidence that he collected. Which of the following is true about the accountant’s liability to a third party who relies on the financial statements?

a. The accountant will likely be held liable because in compiling the financial statements he should have detected the misstatement.
b. The accountant will not likely be held liable because the report indicated that limited evidence was collected.
c. The accountant will likely be held liable because an appropriately worded report was not issued.
d. The accountant will not likely be held liable because he only compiled the financial statements.

Answer 101

The accountant will likely be held liable because an appropriately worded report was not issued.

Question 102

Accountants that prepare tax returns should be familiar with federal laws and regulations with respect to the privacy of client information. These laws and regulations include all of the following provisions except:

a. Accountants are required to develop, implement, and maintain comprehensive information security pagram that outlines the ways in which they protect client information.
b. Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing.
c. Accountants are required to notify their clients that the accountants are providing their confidential information to outsourcing firms for processing.
d. Accountants are prohibited from disclosing to a nonaffiliated third party any nonpublic personal information about their clients.

Answer 102

Accountants are required to notify their clients that the accountants are providing their confidential information to outsourcing firms for processing.

Question 103

Accountants should be familiar with Treasury Department Circular 230 because:

Answer 103

It provides regulations regarding practice before the Internal Revenue Service.

Question 104

Which of these statements is incorrect about practice before the IRS?

a. Any individual who prepares and signs a return as a preparer may represent the taxpayer before appeals offices.
b. Merely preparing tax returns for others does not constitute practice before the IRS.
c. Practice before the IRS is generally limited to CPAs, attorneys, and enrolled agents.
d. All paid tax return preparers must register with the IRS.

Answer 104

Any individual who prepares and signs a return as a preparer may represent the taxpayer before appeals offices.