Professional Responsibilities Flashcards
What is the purpose of a Consulting Engagement?
This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.
What is required by the Statements on Standards for Consulting Services (SSCS)?
Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity
NOT REQUIRED: Independence
What is the difference between Express versus Implied duties of an accountant under contract?
Express: Contract specifies what accountant will do
Implied: Accountant performs without negligence
Accountant’s liability for negligence - What are the requirements?
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.
What is an Accountant’s Liability for Detecting Fraud
(Under Normal Circumstances)?
It is not the accountant’s job to find fraud and they are not normally liable for not detecting it
When can a client be sued for failing to detect fraud?
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.
When has an accountant committed fraud?
Misrepresentation - Accountant misrepresents MATERIAL fact(s)
Scienter - Accountant commits scienter
Damages - Client has actual damages.
Reasonable Reliance - Client reasonably relied on the misinformation.
What is Scienter?
To report something knowing it is false.
Characterized by reckless disregard for truth
Intentionally conceal facts
What is the Accountant’s Liability to Third Parties - Privity Defense?
Lack of privity defends against contract breach and negligence.
NOT a defense against fraud.
The definition of Ultramares Decision:
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.
What is Common Law Fraud?
Regular fraud
Misrepresentation of Material Fact
Scienter
Damages
Reasonable Reliance
What is Constructive Fraud?
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.
What are the required actions with Discovery of Illegal Activity?
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.
What is the Accountant-Client Privilege?
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.
Accountant’s Workpapers - Confidentiality Requirements
- Can be subpoenaed
- Can be looked at by another CPA doing peer review
- 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.
True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.
Accountants have no way of auditing individual’s personal finances and are not required to do so when preparing a return
When a past error is found in a client’s tax return; what should an accountant do?
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
Name the key responsibilities of an accountant when preparing a tax return.
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
Listed Transaction
A reportable transaction or a transaction identified as a tax avoidance transaction.
More likely than not
Standard met when there is a greater than 50 percent likelihood of a tax position being upheld by the courts.
Negligence
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.
Reasonable basis
20% chance a tax return position will be upheld
Tax avoidance
The legal use and application of the tax laws and cases in order to reduce the amount of tax due
Tax evasion
Efforts by illegal means to not pay taxes
Substantial authority
At least 33% chance but less than 50% chance tax position will be upheld.
Tax preparer vs Tax practitioner
Tax practitioner practice before the IRS
Tax shelter
An entity or arrangement set up to avoid or evade federal income tax.
A tax position is unreasonable
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.
Willful and reckless conduct
A willful attempt to understate the tax liability or reckless or intentional disregard of tax rules and regulations.
Tax Preparer Penalty - understatement of taxpayer liability
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.
Tax Preparer Fees
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.
Circular 230
Publications addressing regulations of practitioners practicing before the IRS.
Tax practioner
May never charge a unconscionable fee and may only charge a contingent fee in an IRS exam or audit, refund purposes, judicial proceeding.
Covered Opinion
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.
Reliance opinion
Written advice concluding at a confidence level of at least more likely than not chance it would resolved in the taxpayer favor.
Marketed opinion
Advice that will be used to promote, market, or sell a partnership, investment plan, or arrangement.
Cpa penalties for misconduct
Suspension or revocation of license, monetary fine, reprimand or censure, probation, cpe courses.
Cpa can disclose tax return only
If there is a subpoena or for quality review purposes.
