R5-pt4

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

• Accountant must have had DUTY to perform with due care exercised by an average accountant.
• BREACHED that duty
• Breach CAUSED plaintiff injury
• 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 CPA 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: CPA misrepresents MATERIAL fact(s)
• Scienter: CPA 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

• CPA are not liable to third parties unless the third party was an intended beneficiary of the engagement

&

• the CPA 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 DirectorsIf 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.

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

What are 2 Negligence acts?

Answer 16

• Failure to warn client of known internal control weakness
• Failure to properly supervise/review

Question 17

Who is the Duty owed under a Majority Rule?

Answer 17

• Limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work
• Ex. Investors, Lenders

Question 18

Who is the Duty owed under a Minority Rule?

Answer 18

• Follows the Ultramares decision
• limits CPA Liability in Privity
• Intended for 3rd Party Beneficiaries

Question 19

Actual Fraud has what 5 Elements?

Answer 19

• Misrepresentation of Material Facts
• Intent to deceive
• Actual & Justifiable reliance by plaintiff on misrepresentation
• Intent to Induce plaintiff’s reliance
• Damages “Maids”

Question 20

What kind of Negligence is Constructive Fraud?

Answer 20

• Gross Negligence

Question 21

When a CPA signs off on F/S & can be held Liable when the Plaintiff: Section 11 of 1933 Act:

Answer 21

• Acquires the stock
• Suffered a Loss
• F/S contained Misrepresentation

Question 22

Each Audit required pursuant to the 1934 Act must include:

Answer 22

• Designed to Detect Illegal Acts
• Designed to Identify Related Party Transactions
• Evaluate whether there is substantial doubt about the ability of the issuer to Con’t As A Going Concern

Question 23

If the CPA detects information of illegal Acts, the CPA must?

Answer 23

• Inform the Audit Committee
• If Audit Committee takes no action, report directly to Board of Directors

Question 24

Who does the Board of Directors report information of illegal acts to?

Answer 24

• To SEC within 1 day
• If the CPA doesn’t receive a copy of notice, then CPA sends SEC with a copy of the report within one day
• CPA may Resign

Question 25

When can a CPA be allowed to disclose workpapers without the clients consent?

Answer 25

• Subpoenaed
• Prospective purchaser: not confidential info.
• CPA society voluntary quality control review
• Defense in a lawsuit
• Official Investigation by AICPA/state trail board
• GAAP/GAAS req. disclosure

Question 27

Under which Act does the Plaintiff NOT have to prove Reliance?

Answer 27

• Section 11 of the 1933 Act