Test Bank

Question 1

At a confidential meeting, an audit client informed a CPA about the client’s illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to the meeting between the CPA and the client. After receiving immunity, the CPA should do which of the following?

Answer 1

Discuss the entire conversation including the illegal acts.

Question 2

A CPA partnership may, without being lawfully subpoenaed or without the client’s consent, make client workpapers available to

Answer 2

Any surviving partner(s) on the death of a partner

Question 3

With respect to any given tax return, which of the following statements is correct?

Answer 3

More than one person may be deemed to be a preparer of a tax return.

Question 4

In which of the following statements concerning a CPA firm’s action is scienter or its equivalent absent?

Answer 4

Performance of substandard auditing procedures.

Question 5

According to Treasury Department Circular 230, a practitioner may

Answer 5

Charge a contingent fee for representing a client in connection with a judicial proceeding.

Question 6

If a stockholder sues a CPA for common-law fraud based upon false statements contained in the financial statements audited by the CPA, which of the following is the CPA’s best defense?

Answer 6

The false statements were immaterial.

Question 7

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs?

Answer 7

The board of accountancy for the state in which the licensed CPA practices

Question 8

Which of the following burdens of proof must be met when a disclosed position regarding a particular individual deduction is evaluated to determine whether it was taken in good faith.

Answer 8

≥ 20% chance of being sustained

Question 9

According to Treasury Department Circular 230, a tax practitioner must promptly submit records or information in any matter before the IRS unless:

Answer 9

The practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

Question 10

An accountant compiled the unaudited financial statements for Taylor Company, a nonissuer company. The financial statements contained a material misstatement that was not discovered in the compilation. The accountant issued a report that stated that the financial statements were fairly stated based on the limited evidence that he collected. Which of the following is true about the accountant’s liability to a third party who relies on the financial statements?

Answer 10

The accountant will likely be held liable because an appropriately worded report was not issued.

Question 11

What are the requirements for obtaining a CPA license in most states?

Answer 11

Education (Bachelors + 30 hours of college credit) and CPE
Pass CPA Exam
Experience (2,000 hours)

Question 12

What are the requirements for obtaining a CPA license in most states?

Answer 12

Audit or other SAS engagement
SSARS review of F/S
SSAE examination of prospective F/S
Any engagement meeting PCAOB standards

Question 13

List the items that can cause an automatic expulsion from the AICPA.

Answer 13

Adverse judgment for:
Felony
Failure to file tax return
Filing fraudulent tax return
Aiding fraudulent tax return

Question 14

What does the acronym JEEP stand for?

Answer 14

The AICPA’s Joint Ethics Enforcement Program.

Question 15

What document describes the rules that one must meet to be eligible to practice before the Internal Revenue Service (IRS)?

Answer 15

Circular 230

Question 16

Describe the concept of offer in compromise.

Answer 16

Allows a taxpayer to settle a tax liability for less than the actual amount owed

Question 17

A “substantial understatement” for a C corporation’s tax return exceeds:

Answer 17

The lesser of 10% of the tax (or, if greater, $10,000), or $10 million.

Question 18

What is the purpose of tax Form 870-AD?

Answer 18

Provides the settlement of the appellate conference related to a tax dispute

Question 19

Form used to disclose a tax position

Answer 19

Form 8275 or 8275-R.

Question 20

What is the penalty for fraudulent understatement?

Answer 20

75% of understatement

Question 21

Penalty for late filing.

Answer 21

5% of net tax due per month (capped at 25%).

Question 22

List the scenarios in which no underpayment penalty is charged for underpayment of taxes owed for individuals.

Answer 22

No penalty is imposed if the tax due with the return is less than $1,000.
No penalty is imposed if the tax payments during the year were at least 90% of current-year taxes or 100% of last year’s taxes. (Watch over $150,000 adjusted gross income exception.)

Question 23

Penalty for late paying.

Answer 23

0.5% of net tax due per month (capped at 25%)

Question 24

A “substantial understatement” on an individual return exceeds:

Answer 24

The greater of 10% of the tax, or $5,000.

Question 25

What is the purpose of a 90-day letter?

Answer 25

The time that the taxpayer has to file a petition with the Tax Court once this letter is received

Question 26

List the various nonfiling penalties a taxpayer may face.

Answer 26

5% per month of the tax due with the return
The maximum penalty is 25% of the tax due. The minimum penalty for returns not filed within 60 days of the due date is the lesser of $215 or the amount of the tax due.
If the failure to file is fraudulent (intentional), the penalty is increased to 15% per month up to a maximum of 75% of the tax due with the return.

Question 27

How to avoid tax penalty for corporations

Answer 27

A penalty for the underpayment of estimated taxes can be avoided if a corporation’s quarterly estimated payments are at least equal to the least of (1) 100% of the tax shown on the current year’s tax return, (2) 100% of the tax that would be due by placing the current year’s income for specified monthly periods on an annualized basis, or (3) 100% of the tax shown on the corporation’s return for the preceding year.

Question 28

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs?

Answer 28

The board of accountancy for the state in which the licensed CPA practices

Question 29

When an ethics complaint carrying national implications arises, which entity typically handles it?

Answer 29

AICPA

Question 30

Which of the following may not result in automatic expulsion from the AICPA?

Answer 30

Conviction for a felony or a misdemeanor.

Question 31

How many public company audits per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?

Answer 31

More than 100 audits.

Question 32

A member of the AICPA is convicted of filing a fraudulent tax return. What is the likely consequence of this action?

Answer 32

The CPA will likely be expelled or suspended from membership in the AICPA.

The requirement is to identify the likely result of a member of the AICPA being convicted of filing a fraudulent tax return. This is one of the situations that can result in suspension or expulsion without a hearing.

Question 33

A member of the AICPA may be subject to expulsion or suspension from membership without hearing for any the following, except:

Answer 33

The member is prohibited from doing any work on audits of issuers by the PCAOB for 3 years.