Professional Responsibilities

Question 1

What is the purpose of a Consulting Engagement?

Answer 1

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

Question 2

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

Answer 2

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

NOT REQUIRED: Independence

Question 3

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

Answer 3

Express: Contract specifies what accountant will do

Implied: Accountant performs without negligence

Question 4

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

Answer 4

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 5

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

Answer 5

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

Question 6

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

Answer 6

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 7

When has an accountant committed fraud?

Answer 7

Misrepresentation - Accountant misrepresents MATERIAL fact(s)

Scienter - Accountant commits scienter

Damages - Client has actual damages.

Reasonable Reliance - Client reasonably relied on the misinformation.

Question 8

What is Scienter?

Answer 8

To report something knowing it is false.

Characterized by reckless disregard for truth

Intentionally conceal facts

Question 9

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

Answer 9

Lack of privity defends against contract breach and negligence.

NOT a defense against fraud.

Question 10

The definition of Ultramares Decision:

Answer 10

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 11

What is Common Law Fraud?

Answer 11

Regular fraud

Misrepresentation of Material Fact
Scienter
Damages
Reasonable Reliance

Question 12

What is Constructive Fraud?

Answer 12

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 13

What are the required actions with Discovery of Illegal Activity?

Answer 13

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 14

What is the Accountant-Client Privilege?

Answer 14

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 15

Accountant’s Workpapers - Confidentiality Requirements

Answer 15

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 16

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

Answer 16

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

Question 17

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

Answer 17

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 18

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

Answer 18

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

Question 19

Listed Transaction

Answer 19

A reportable transaction or a transaction identified as a tax avoidance transaction.

Question 20

More likely than not

Answer 20

Standard met when there is a greater than 50 percent likelihood of a tax position being upheld by the courts.

Question 21

Negligence

Answer 21

Any failure to make a reasonable attempt to comply with the provisions of the law or to exercise ordinary and reasonable care, failure to keep adequate books and records.

Question 22

Reasonable basis

Answer 22

20% chance a tax return position will be upheld

Question 23

Tax avoidance

Answer 23

The legal use and application of the tax laws and cases in order to reduce the amount of tax due

Question 24

Tax evasion

Answer 24

Efforts by illegal means to not pay taxes

Question 25

Substantial authority

Answer 25

At least 33% chance but less than 50% chance tax position will be upheld.

Question 26

Tax preparer vs Tax practitioner

Answer 26

Tax practitioner practice before the IRS

Question 27

Tax shelter

Answer 27

An entity or arrangement set up to avoid or evade federal income tax.

Question 28

A tax position is unreasonable

Answer 28

Unless there is substantial authority for the position - whether or not the position is disclosed - and the position does not involve either a tax shelter or a reportable transaction; the position is disclosed and there is a reasonable basis for the position; if a tax shelter or reportable transaction, then the position will more likely than not be sustained.

Question 29

Willful and reckless conduct

Answer 29

A willful attempt to understate the tax liability or reckless or intentional disregard of tax rules and regulations.

Question 30

Tax Preparer Penalty - understatement of taxpayer liability

Answer 30

Due to unreasonable position: the greater of $1k or 50% of income recited of prepping tax return; Due to willful or reckless conduct: greater of $5k or 50% of income of prepping the tax return.

Question 31

Tax Preparer Fees

Answer 31

Failure to give copy of tax return, sign tax return, give tax ID, retain records properly, file correct information return - $50 per failure.
Negotiating refund check, deligent in determine EIC; aiding and abetting understatement of tax liability, wrongful disclosure and use of tax return info - $250 to $1000.

Question 32

Circular 230

Answer 32

Publications addressing regulations of practitioners practicing before the IRS.

Question 33

Tax practioner

Answer 33

May never charge a unconscionable fee and may only charge a contingent fee in an IRS exam or audit, refund purposes, judicial proceeding.

Question 34

Covered Opinion

Answer 34

Any written or electronic tonic advice by a practitioner concerning one or more federal tax issues and from a transaction that is deemed to be a listed transacton, tax evasion or avoidance arrangement.

Question 35

Reliance opinion

Answer 35

Written advice concluding at a confidence level of at least more likely than not chance it would resolved in the taxpayer favor.

Question 36

Marketed opinion

Answer 36

Advice that will be used to promote, market, or sell a partnership, investment plan, or arrangement.

Question 37

Cpa penalties for misconduct

Answer 37

Suspension or revocation of license, monetary fine, reprimand or censure, probation, cpe courses.

Question 38

Cpa can disclose tax return only

Answer 38

If there is a subpoena or for quality review purposes.