Regulations

Question 1

Scienter

Answer 1

Scienter means that the party acted with evil intent or deliberate motive.

Question 2

SSTS

Answer 2

Statements on Standards for Taxation Services

Question 3

Actual Fraud

Answer 3

requires the professional to intentionally misstate a material fact or otherwise mislead the client.

Question 4

Constructive Fraud

Answer 4

Results when a professional is grossly negligent in performance of their duties. A very common corollary of gross negligence includes the professional intentionally disregarding the consequences of a failure to perform their professional duties. onstructive fraud does not require the CPA (or any professional) to act with fraudulent intent

Question 5

Common Law Fraud

Answer 5

requires an intent to deceive

Question 6

AICPA Code of Professional Conduct

Answer 6

1. self-review (auditing the auditor’s own work),
2. advocacy (promoting a client’s interests),
3. adverse interest (taking action against the attest client such as litigation),
4. familiarity (having a close or long-standing relationship with the attest client),
5. undue influence (client attempting to coerce the auditor),
6. financial self-interest (directly benefiting due to a financial interest in the client), and
7. management participation (taking on the role of management).

Question 7

Section 11, the Securities Act of 1933

Answer 7

requires that the accountant show that the accountant had “after reasonable investigation, reasonable grounds to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission of a material fact required to be stated therein or necessary to make the statements therein not misleading.” Notice that in no part of this section is there a requirement to perform an additional review at the time the registration statement becomes effective. However, there is nothing to preclude an accountant from pursuing this additional effort and logic dictates that such an effort certainly would be noted favorably in any litigation.

Question 8

Section 18 Securities and Exchange act 1934

Answer 8

provides for liability in the case of an intentional misrepresentation or omission of a material fact in connection with the purchase or sale of any security

Question 9

GAAS

Answer 9

Generally accepted auditing standards (GAAS) are the Statements on Auditing Standards issued by the Auditing Standards Board (ASB), the senior committee of the AICPA designated to issue pronouncements on auditing matter for nonissuers. The Compliance with Standards Rule (ET 1.310.001) of the AICPA Code of Professional Conduct requires any AICPA member who performs an audit of a nonissuer to comply with the standards promulgated by the ASB.

Question 10

Section 11 of Securities act 1933

Answer 10

deals with the civil liability for damages related to registration statements that are filed with the SEC. Generally, the accountant will be liable if the accountant prepared any financial statements that “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading

Question 11

Privity

Answer 11

the existence of a contractual relationship between two parties. It is the relationship of direct involvement between the parties to a contract. When privity exists, the plaintiff need only prove simple negligence in a lawsuit for breach of contract.
privity is not required if the accountant has been guilty of fraud or gross negligence

Question 12

Regulatory Agency

Answer 12

Is one established by legislation that promulgates rules and regulations that professional adhered too.

Question 13

Government Accountability Office

Answer 13

is a federal agency and has power by law to promulgate standards for audits of federal financial assistance recipients. Because of its position, the GAO is also active in releasing reports concerning audits, Congressional testimony, and the like.

Question 14

Acts Discreditable Rule

Answer 14

prohibits the retention of client records after the client has demanded them, even if the engagement is terminated prior to its completion

Question 15

Consulting Services

Answer 15

Advisory, Implementation, Product services

Question 16

Section 10(b) of the Securities Exchange Act of 1934

Answer 16

a CPA may be liable if it can be proven that the CPA was guilty of “scienter” (an intent to defraud). This would include actions on the part of the CPA indicating that he or she acted without good faith. Mere negligence is not enough to impose liability on the CPA under this statute.

Question 17

Established Negligence a Client must show

Answer 17

the CPA owed a legal duty,
the CPA breached that duty,
the CPA’s action was the proximate cause of the resulting injury to the client, and
the CPA’s actions caused the damage or loss.

Question 18

SSTS3

Answer 18

states that a CPA may generally rely on information furnished by the client or third parties unless the information appears to be incorrect, incomplete, or inconsistent with information known by the CPA. SSTS 3 would require the CPA to make additional inquiries if the information appears to be incorrect, incomplete, or inconsistent with known facts or if information from third parties contradicts the information. There is no prohibition against looking at prior tax returns. Section 10.34(d) of Treasury Department Circular 230 contains similar requirements.

Question 19

Statements on Standards for Tax Services (SSTS) 6

Answer 19

states that when preparing a return, the CPA should inform the client promptly upon becoming aware of an error in a previously filed return. The CPA should recommend the measures to be taken. If corrective measures are not taken, or if the CPA is requested to prepare the current year’s return and the client has not taken appropriate action to correct an error in a prior year’s return, the CPA should consider whether to withdraw from preparing the return and whether to continue a professional relationship with the client. If the CPA does prepare such current year’s return, the CPA should take reasonable steps to ensure that the error is not repeated.

Question 20

Treasury Circular 230, Section 10.20(a),

Answer 20

A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.”

In addition, “Where the requested records or information are not in the possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting Internal Revenue Service officer or employee and the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information.”

Hence, the CPA must notify the IRS of the identity of any person who, according to the CPA’s belief, could have the records.

Question 21

ET Section 0.300.030

Answer 21

(“The Public Interest”) provides that those who accept membership will do so only as long as they honor the public trust.

Question 22

ET Section 191.034

Answer 22

indicates that if membership in a client social club, such as a country club, is basically only for social purposes and the CPA does not serve on the board of directors, then independence would not be violated.

Question 23

IRS Publication 552

Answer 23

F you… THEN the period is…

1. Owe additional tax and (2), (3), and (4)
   do not apply to you 3 years
2. Do not report income that you should and
   it is more than 25% of the gross income
   shown on your return 6 years
3. File a fraudulent return No limit
4. Do not file a return No limit
5. File a claim for credit or refund after Later of 3 years or 2
   you filed your return years after tax was
   paid
6. File a claim for a loss from worthless
   securities 7 years

Question 24

Negligence

Answer 24

defined as the failure to do what an ordinary, reasonable, prudent CPA would do in similar circumstances

Question 25

Federal Reporting entities

Answer 25

will be required to follow the rules established by the Federal Accounting Standards Advisory Board (FASAB) when reporting to the public or other agencies.

Question 26

AICPA

Answer 26

American Institute of Certified Public Accounts

Question 27

Section 10(b) and Rule Sections/Rules 10b-5 of the Securities Exchange Act of 1934

Answer 27

he professional’s intentional material misstatement coupled with reasonable reliance by the purchaser results in liability. Jay’s liability under these sections/rules requires more than mere negligence (carelessness) and a misstatement or omission of material fact. Furthermore, the amount of the loss is irrelevant

Question 28

Government Accountability Office (GAO)

Answer 28

is a federal agency and has power by law to promulgate standards for audits of federal financial assistance recipients. Because of its position, the GAO is also active in releasing reports concerning audits, Congressional testimony, and the like.

Question 29

Ultramares doctrine

Answer 29

a CPA is not liable to third parties for mere negligence, but may be held liable to any party who suffered a loss as a result of fraud or gross negligence. These third parties need not be in privity of contract with the CPA and need not be specifically known to the CPA.

If the client was aware of the fraud and did not rely on the opinion, the client would not be successful in holding the CPA liable, even for fraud.

Question 30

ET 1.240.010.01

Answer 30

, the auditor would not be independent if the auditor had any direct financial interest in the client. Therefore, materiality is not considered because any interest in the client’s ownership violates independence.