R5 - Professional Responsibilities and Securities Regulation

Question 1

What are the IRS “Due Diligence” requirements for Earned Income Credit?

Answer 1

Eligibility checklist, computation worksheet, record retention, as well as reasonable inquiry of taxpayer.

Question 2

With respect to a penalty for aiding and abetting understatements of tax liability?

Answer 2

Burden of proof shifts to the IRS from taxpayer

Question 3

Circular 230 has many ethical requirements, including:

Answer 3

Prohibits a tax practitioner from ENDORSING or NEGOTIATING refund checks, which the IRS has issued to the tax practitioner’s client.

• Make reasonable inquiries
• Establishing relevant facts, evaluating reasonableness of assumptions, arriving at conclusions supported by facts / tax memoranda
• Don’t need to disclose conflicts of interest
• Tax shelter=”more likely than not” upheld
• CPA must notify IRS of WHO Has the records

Question 4

What are accuracy-related penalties for?

(Also called negligence penalty).

Answer 4

1) Substantial understatements of income tax, as well as negligence and disregard

Question 5

More Tax Law

Answer 5

• Avoid penalties for tax if TP was relying on a CPA
• only one judge at US district court
• presidential veto overridden by 2/3 house and senate
• Form 870 after an audit
• Inventory audits: must have gross inc. in excess of 100K

Order of tax law legislation:
originates in house Ways and Means committee, then House approval, then Senate approval, then Joint Conference committee consideration, then President

Question 6

What court has jurisdiction over most money damages in the US? (INCL. IRS disputes)

Answer 6

US Court of Federal Claims

Question 7

What division of Senate considers new tax legislation?

Answer 7

Finance

Question 8

Can you ever take client file with you?

Answer 8

No. Property of CPA firm.

Question 9

Who can a CPA show client workpapers to WITHOUT client permission?

Answer 9

1) Lawful subpoena
2) surviving members of CPA firm
3) QC Panel
4) AICPA/State Trial Board
5) Court proceedings

Question 10

Elements of Reckless Departure from Standards of Care on part of CPA?
Also known as the Duty to Refrain from Fraud.

Answer 10

1) Misrepresentations of material fact
2) Gross Negligence (also known as Constructive Fraud)
3) Intent to induce plaintiff reliance
4) Actual justifiable reliance by plaintiff
5) Damages

Question 11

Ultramares Rule

Answer 11

Limits accountant liability for negligence to:

1) Parties in privity
2) Intended third party beneficiaries .. NOT FORSEEN.. just intended

Question 12

CPA Liable to whom?

Answer 12

Anyone in a class of third parties whom the CPA knows will rely on the opinion.

ALSO: By majority position of courts, the CPA will be liable to any foreseen or known third party who will rely on the (negligently prepared financial report)

Question 13

Accountant-client privilege exemption?

Answer 13

Only valid in certain states

Question 14

What accurately reflects the liability of a CPA who gives fraudulent opinion on client financial statement?

Answer 14

CPA is probably liable to any person who suffered a loss as result of fraud.

Question 15

When is a defendant liable under 10b-5? Defendant must either:

Answer 15

1) Intentionally make a misstatement in connection with purchase and sale of stock
2) Recklessly disregards the truth w/r/t a statement in connection with purchase/sale, and plaintiff justifiably relies on the misstatement

Think about it - you WILL be liable to purchaser if, as a CPA, you issue an unqualified opinion while knowing abt material misstatements.

Question 16

What is the cause of action you can take when trying to find someone Liable under common law for negligence?

Answer 16

Failure to exercise due care

EG - if you notice errors in your own previously issued audit report and don’t correct them

Question 17

What are the 4 elements of negligence?

Answer 17

1) Duty of Care
2) Breach (AKA = Lack of due care)
3) Causality
4) Injury (aka Loss)

Question 18

What penalty is usually imposed on an accountant who breaches contract duties owed to a client?

Answer 18

Money Damages

Question 19

Who owns workpapers, CPA firm or client?

Answer 19

CPA firm

Question 20

More About Constructive Fraud

Answer 20

1) Does not require intent
2) Approximates “Gross Negligence”
3) Constructive fraud only requires reckless disregard for Truth or Falsity

ACTUAL FRAUD requires INTENT in making material misstatements upon which the plaintiff justifiably relies (And plaintiff suffers damages.)

Question 21

SOX rectified inadequate board oversight with what measure?

Answer 21

Audit Committee

Question 22

Stuff about financial reports under SOX

Answer 22

• reason if there is NO audit committee financial expert, must be disclosed
• Board members should not receive personal loans
• Mgmt. report on internal control should NOT discuss disagreements bw management and auditor

Question 23

In common law action against an accountant, lack of privity is a viable defense against the plaintiff, When??

Answer 23

When the plaintiff is the CLIENT’S CREDITOR, who sues accountant for negligence.

Question 24

Under rule 10-b5, defendant must prove Scienter. What is Scienter?

Answer 24

Guilty mind. Either:

1) Intent to Deceive
2) Gross Negligence