Professional Responsibilities

Question 1

What are the 4 requirements a plantiff must prove to sue an accountant? (Accountant Liability)

Answer 1

“MILE”
M- Material misstatement (or omission of a material fact)
I - Information must have been relied on by the plaintiff
L - Loss (financial) must have occurred
E - Error was made by the accountant

Question 2

What are the 4 requirements a plantiff must prove to sue an accountant for “negligence”?

Answer 2

“MIL-E”
M- Material misstatement (or omission of a material fact)
I - Information must have been relied on by the plaintiff
L - Loss (financial) must have occurred
E - No due professional care (NEGligent): Nondisclosure of information to client; Errors previously discovered and not corrected, GAAS/GAAP was NOT followed

Question 3

What must a plantiff prove to be successful in a case based on negligence?

Answer 3

“CAMPS”

• Casual relationship (behavior of accountant caused it)
• Absence of Due Care (careless auditor)
• Material Misstatement
• Privity or equivalent (allowed to sue)
• Suffered financial loss

Question 4

Two forms of fraud:

Answer 4

Actual Fraud - making false statements with knowledge of their falsity

Constructive Fraud (Gross Negligence) - making false statements with disregard for truth (no knowledge on if true or false)

Question 5

What must a platiff prove to be successful in a case based on fraud?

Answer 5

“RIMS”

• Reliance (plantiff relied on F/S)
• Intent to deceive (auditor had knowledge that opinion was inappropriate)
• Material Misstatement
• Suffered financial loss

Question 6

Securities Act of 1933

Answer 6

Law that requires the audited F/S to be included in the prospectus and registration statement required when public offers fall within the law

Question 7

Securities Act of 1933 Section 11

Answer 7

Makes anyone who signs a registration statement liable for all damages caused by any misstatement of material fact in the registration statement

Question 8

What must a plantiff prove to file a case under the Securities Act of 1933 - Section 11?

Answer 8

“SAM”

• Suffered Loss (must have sustained a loss in connection with their purchase of securities)
• Audited F/S must have been included in the prospectus provided to plantiff
• Material misstatement/Misrep of Facts
• No obligation to prove reliance
• No privity requirement

Question 9

To avoid liability under Securities Act of 1933 and 1934 Act, an auditor must prove what?

Answer 9

“DK”

• Due diligence was conducted (in conformity with GAAS)
• Knowledge of plantiff (plantiff knew of the misstatements before making the purchase)

Question 10

Securities Exchange Act of 1934

Answer 10

All audits of companies involved in interstate commerce are covered by the Securities Exchange Act of 1934

Question 11

What is the difference between common law fraud and fraud under the Rule 10(b)5 of the 1934 Act?

Answer 11

Common law fraud cases are heard in state court, and 1934 fraud is heard in a federal court

Common law “fraud”
1934 Act “scienter”

Question 12

What must a plantiff prove in a liability under the 1934 Act?

Answer 12

MILE (Identical to common law fraud)

Question 13

1995 Private Securities Litigation Reform Act

Answer 13

CPA must follow when auditing publicly traded companies that report to the SEC under the 1934 Act. Additional responsibilities are added to the code.

Question 14

What are the additional responsbilities added to the code under the 1995 Private Securities Litigation Reform Act?

Answer 14

Identify:

• Illegal Acts, including management fraud
• Significant related party transactions
• Substantial doubt related to continue as a going concern

Question 15

How many days before the board must file information to the SEC related to fraud?

Answer 15

1 Day; if auditor doesn’t receive proof of this, auditor is given one day to 1) resign from engagement; 2) notify SEC of failure

Question 16

Responsibilities under the SOX Act for audits of public companies?

Answer 16

• maintain workpapers for 7 years
• it is considered a felony to destroy or create documents
• statute of limitations on securities fraud claims is extended to 5 years
• Employees of CPA firms are extended whistleblower protection (also remedy of special damages and attorney fees)
• Securities fraud by CPAs is punishable up to 10 years

Question 17

A penalty may be assessed by the IRS against a federal income tax preparer who:

Answer 17

• Fails to sign the return and provide the appropriate federal ID #
• Fails to provide a copy of the return to the client and retain a copy for the time specified by law
• Negotiates or endorses a client’s tax refund check

Question 18

Exceptions to the confidentiality requirement of an accountant:

Answer 18

• Valid subponea
• Court order
• Quality control peer review
• Where disclosure is in compliance with GAAP or GAAS

Question 19

Statements on Responsibilities in Tax Practice state a member in the performance of tax services may:

Answer 19

“RAMEN”

• Rely on info provided by a client without verification unless it is clearly incorrect or incomplete
• A tax position that lacks merit may not be recommended
• Must make a reasonable effort to answer applicable questions on the return
• Estimates may be used
• No fee based on results

Question 20

Who may represent the taxpayer before appeals offices?

Answer 20

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

Question 21

When does accountant-client privilege exist?

Answer 21

Where a state statute has been enacted creating such a privilege because the accountant-client privilege does not exist at common law and thus must be enacted by state statute in order to exist.

Question 22

What is the statute of limitations of the Securities Exchange Act of 1933 Section 11?

Answer 22

1 year from the discovery of the omission and 3 years from the offering date

Question 23

Which of the professional bodies has the authority to revoke a CPA’s license to practice public accounting?

Answer 23

State board of accountancy

Question 24

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

Answer 24

Treasury Department Circular 230

Question 25

What must a platiff prove to be successful in a case based on Securities Exchange Act of 1934>

Answer 25

“RIMS”

• Reliance (plantiff relied on F/S)
• Intent to deceive (scienter exists)
• Material Misstatement
• Suffered financial loss

Question 26

What terms best describes the relationship between a corporation and the CPA it hires to audit corporate books?

Answer 26

Employer and independent contractor