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

Negligence

Answer 4

Negligence occurs when an accountant violates the duty to perform professional services in competent manner ** **

→Non-disclosure of info to the client

→Error previously discovered not corrected

→GAAS/GAAP not followed

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

What is Scienter?

Answer 7

• To report something knowing it is false
• Characterized by reckless disregard for truth
• Intentionally conceal facts

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

Ultramares rules **do not expand liability for foreseen parties **

Question 9

What is Constructive and Actual Fraud?

Answer 9

• Actual Fraud – intent to deceive- Scienter
• Constructive Fraud - reckless disregard of the truth / Gross negligence
• CPAs usually not liable for simple negligence; but Gross Negligence opens the CPA up to be liable to third parties

Question 10

What are the required actions with discovery of Related party transaction/ Illegal activity/Going concern (RIG)?

Answer 10

• Auditor must report discovered illegal activity to audit committee and Board of Directors as soon as possible
• BOD must notify the SEC within 1 business day and provide the auditor with a copy of report to SEC
• If the auditor does not receive a proof - the auditor resign from the engagement and notify the SEC of the failure of the BOD
• Auditor who fails to comply with the reporting provision may be held **civil liable **

Question 11

What is the Accountant-Client Privilege?

Answer 11

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 12

Accountant’s Workpapers - Confidentiality Requirements

Answer 12

• Can be subpoenaed (no exception for IRS or FASB)
• 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. ♦ Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing

Question 13

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

Answer 13

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

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 c_lient 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

**Common Law Liability **

Answer 16

• Breach of Contract
• Negligence Law (Tort)
• Fraud/Gross Negligence/1934

Question 17

**Breach of Contrcact **

Answer 17

Who can sue?
♦ Privity (party to a contract)
♦ Intended 3rd party beneficiary by the client

Plaintiff Prove
MILE
♦ Material Misrepresentation/Omission
♦ Information Caused harm
♦ Lost money (damage)
♦ Error : breach of Contract ; non performance

Defense
Didn’t breach

Question 18

**Negligence Law (Tort) **

Answer 18

Who can sue?
♦ Privity (party to a contract)
♦ Known and foreseen by CPA
♦ Ultramares act – only if in privity

Plaintiff Prove
MILE
♦ Material Misrep/Omission
♦ Information caused harm
♦ Lost money (damage)
♦ **E**rror : **Lack of Due diligence/Negligence (standard of due care) – NEG →Non-disclosure of info to the client →Error previously discovered not corrected →G**AAS/GAAP not followed

Defense
♦ Adhere to GAAS (not NEG)
♦ Lack of Privity

Question 19

Fraud/Gross Negligencen/1934 (Tort)

Answer 19

Who can sue?
♦ Anyone
♦ Unforeseen/foreseeable

Plaintiff Prove
MILE
♦ Material Misrep/Omission
**♦ **Information was relied upon
♦ Lost money (damage)
♦ Error : Reckless or Intentional misconduct
Actual Fraud – intent to deceive- Scienter
Constructive Fraud - reckless disregard

Defense
♦ Not Gross Negligent ♦ No intent to deceivet ♦ Not material

Question 20

**Liability under Federal Security Regulation 1933 (section11) **

Answer 20

Who can sue?
Anyone – no Privity

Purchaser must prove
M & L
♦ Material Misrep/Omission
**♦ **Lost money (damage)

Auditor is guilty until he prove either
♦ Investor knew of the error (prove he did not rely) OR
♦ Due Diligence – without Negligence ♦ conformity to GAAS/due care ♦ NOTE due diligence is a defense for 1933 Act only ♦ Misstatement was immaterial ♦ Plaintiff’s had prior knowledge of the mistatement ♦ Misstatement was not cause of loss

the statute of limitations for this civil action is 1 year from the discovery of the omission and 3 years from the offering date.

Question 21

**Liability Federal Security Regulation 1934 (section10b-5) **

Answer 21

Who can sue?
♦ Anyone - no Privity

Purchaser must prove
MILE
♦ Material Misrep/Omission
♦ Information was relied upon
♦ Lost money (damage)
♦ Error : Scienter = Fraud

Auditor defense
♦ conformity to GAAS/due care ♦Audit was performed in due care NOTE due diligence is a defense for 1933 Act only ♦ Misstatement was immaterial ♦ Plaintiff’s had prior knowledge of the mistatement ♦ Plaintiff did not rely on the information ♦ Misstatement was not cause of loss

Question 22

Duty of Due Care - standards

Answer 22

Duty of Due Care is guided by the following standards:
►State and Federal status
► Court decision
►Contract with the client
► GAAS and GAPP
► Customs of the profession

Question 23

What does the Private Security Litigation Act of 1995 covers?

Answer 23

RIG
• To identify material Related-party transactions
• To detect material Illegal acts
• To evaluate the ability of the firm to continue as a Going concern

Private Security Litigation Act of 1995 amends both Security Act of 1933 and 1934

Question 24

When reasonable grounds for omitting an answer exist?

Answer 24

When reasonable grounds for omitting an answer exist, the CPA is not required to provide an explanation on the return of the reason for omission.

Reasonable grounds for omitting an answer include

• *(1)** Information is not readily available and the answer is not significant in terms of taxable income or tax liability.
• *(2)** Uncertainty as to meaning of question.
• *(3) **Answer is voluminous and return states that data will be supplied upon examination.

Question 25

Preparer

Answer 25

Preparer—an individual who prepares for compensation, or who employs one or more persons to prepare for compensation, an income tax return, or a substantial portion of return.

1. Preparer need not be enrolled to practice before the Internal Revenue Service.
2. Compensation—must be received and can be implied or explicit (e.g., a person who does neighbor’s return and receives a gift has not been compensated. Accountant who prepares individual return of the president of a company, for which he performs the audit, for no additional fee as part of a prior agreement has been compensated [implied])

Question 26

The provisions of the Gramm-Leach Bliley (Financial Modernization) Act of 1999

Answer 26

(1) Accountants are prohibited from disclosing to a nonaffiliated third party any nonpublic personal information about their clients.
(2) Related FTC regulations require accountants to develop, implement, and maintain a comprehensive information security program that outlines the ways in which they protect client information.
(3) Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing, e.g., outsourced tax return preparation to a firm in a foreign country.