Professional Responsibilities

Question 1

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

Answer 1

Express: Contract specifies what accountant will do
Implied: Accountant performs without negligence

Question 2

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

Answer 2

DUTY - BREACH - 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 3

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

Answer 3

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

Question 4

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

Answer 4

Normal audit following GAAS would have detected the fraud.

Accountant agrees to take on more responsibility than what is required under a normal audit.

Accountant words the audit report to indicate this greater responsibility.

Question 5

When has an accountant committed fraud?

Answer 5

Misrepresentation - Accountant misrepresents MATERIAL fact(s)
Scienter - Accountant commits scienter
Damages - Client has actual damages.
Reasonable Reliance - Client reasonably relied on the misinformation.

Question 6

What is Scienter?

Answer 6

To report something knowing it is false.

Characterized by reckless disregard for truth

Intentionally conceal facts

Question 7

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

Answer 7

Lack of privity defends against contract breach and negligence. NOT a defense against fraud.

Question 8

The definition of Ultramares Decision:

Answer 8

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 9

What is Common Law Fraud?

Answer 9

Regular fraud 
Misrepresentation of Material Fact 
Scienter 
Damages
Reasonable 
Reliance

Question 10

What is Constructive Fraud?

Answer 10

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 11

What are the required actions with Discovery of Illegal Activity?

Answer 11

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 12

What is the Accountant-Client Privilege?

Answer 12

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 13

Accountant’s Workpapers - Confidentiality Requirements

Answer 13

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 14

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

Answer 14

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 15

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

Answer 15

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 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

How long must a return prepare retain copy of a tax return?

Answer 17

A return preparer is required to retain a completed copy of each return or claim prepared for 3 years after the close of the return period or a list with related information.

Question 18

What is a frivolous return?

Answer 18

A frivolous return is one that omits information necessary to determine the taxpayer’s tax liability, shows a substantially incorrect tax, is based upon a frivolous position (e.g., that wages are not income), or is based upon the taxpayer’s desire to impede the collection of tax.

Question 19

What agency has the authority to suspend or revoke a CPA’s license for acts discreditable to the profession?

Answer 19

State Board of Accountancy