Combo with REG CPA and 21 others

840 terms by amanda_amr 

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Disclosure of taxpayer information to other is permissible under 3 ways:

1. computer processing 2. peer review process 3. Through an administrative order.

Itemized deductions not limited to limitation: GIMIC

Gambling losses (to the extent of gambling winnings) 2. Investment Interest expense 3. Medical Expenses 4. Casualt Losses (non-business)

non-deductible taxes

Federal Income Taxes 2. Inheritance tax 3. Business Taxes (deductible on Sch. E)

Altertrnative Minimum Tax: Adjustments (+/-) PANIC TIME

Passive activity Losses, Acc. Dep., NOL's, Installment Income of a Dealer, Contracts (% complet vs. completed) Tax deductions, Mtg. Interest not used 4 house, Medical(limited to 10% of AGI) Misc. deductions are NOT allowed, Exemptions (personal) and standard deduction

Tax Preferences

Always ADD BACK PPP Private activity bond interest income Percentage depletion the excess over adj. basis of property, pre- 1987 acceleateraed depreciation

Organizational & Start-up expenses

Tax: 5000 expense maximum remainder amortized over 180 months GAAP- expensed when incurred

Capital Losses for corportations

Corps can only use to offset Cap gains. Carryback/over= 3/5 applied only to cap gains. carryback/forwards are always treated as a S/T Cap. LOSS

NOL for Corps

carryback/forward= 2/20 No Charitable contribution deduction or DRD allowed before calculatiting a NOL

Rule 504 under 1933:

1. Exempts issuance up to $1 million 2. General solicittion is ok 3. must be sold w/in 12 mnths 4. sold to any # of investors (seed capital) 5. resell is ok

Rule 506 under 1933:

1. Private placement of unlimited dollar amount 2. 35 non-accredited sales to unlimited accredited

Rule 505 under 1933:

1. Exempts issuances of up t

Punitive Damages

intended to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit. Although the purpose of punitive damages is not to compensate the plaintiff, the plaintiff will in fact receive all or some portion of the punitive damage award. Not available UCC.

suing for NEGLIGENCE- MUST PROVE 4 THINGS: DBCI

dUTY OF CARE, BREACH (Lack of Due Care), CASUALITY AND INJURY

Prefrential Transfer

The transfor of debtors property made fro the benefit of a creditor on account of an antecedent debt while the debtor was insolvent. 1 yr for an insider and 90 days for others.

Chapter 7

provides for liquidation of a debtor's estate. n a liquidation proceeding, after the petition is filed, a trustee will be appointed and an automatic stay against creditor collection proceedings goes into effect.

Chapter 11

is for debt reorganization and is available to family farmers with regular income.

Co Insurance

[FV of Policy / (co-ins. % x FMV of Property)] Loss

For TAX purposes Amortized Goodwill is:

Amortized over 15 years

Life Ins. Prem on Key Employee:

NOT DEDUCTIBLE when directorly or indirectorly is bene

The Accrual Method for tax purposes must be used for:

1) accounting for the purchase and sales of A/R & Inv. 2) Tax Shelters 3) Certain Farming 4) C-corps that have over $5M in avg. Gross receipts for last 3 yrs.

AMT exemption amount for Corps:

40,000 less 25% if AMTI in excess of $150,000

Corp. Distributes Property as a Div: The treatement:

It is a gain as if the prop was sold. FMV- NBV = GAIN to E&P The gain increases E&P

Losses on sales/exchanges are not recognized for tax purposes with:

Related parties: Brothers, sisters, husband, wife and lineal decendents & entities that are more than 50% owned by indiv. trusts and pships and corps.

Is the DRD includable in calculating a NOL for a co?

YES. The DRD is allowed to be deducted before calculating the NOL.

Partnership basis and capital account- Basis=

Capital Account + Partners share of liabilities

3 types of IRREVOCABLE offers: UFO

Unilateral Contracts where performance has been commenced. Firm offers by merchants, Option Contractons where consideration has been paid to keep offer open.

Under the Statute of Frauds what 6 contracts MUST be in writing: MY LEGS

Marriage, Contracts that cant be performed with-in a YEAR, Land,Executors to pay estate debts out of personal funds, Sale of GOODS over $500, Contracts to act as a SURETY.

4 exceptions to contracts that must be evidenced in writing SWAP

Specially mfg. goods, Writen confirmation of a contract by if no objection w/in reasonable time, Admission in court, Performance of work under the contract to the extent of performance.

To be Negotiable within UCC 3 the instrument must (7)

Be in WRITING, SIGNED by the maker or drawer, Contain an UNCONDITIONAL PROMISE to pay, For a FIXED amount, Payable on DEMAND or at a definite time, Be payable to order or to bearer, Contain no additional instruction not authorized by the UCC.

An HDC takes a negotiable instrument subject to which of the following (Real or Personal) defenses?

REAL only. FAIDS- Forgery, Fraud in the execution, Alteration, Adjudicated insanity, Infancy, Illegality, Duress, Discharge in BK, Sureyship, Statute of limitations has run (3 on drafts, 6 on Notes)

A PMSI creditor:

1) Sells the collateral to the debtor on credit & retains a secuirty interest. 2) Advances the funds used by debtor to buy the collateral. NOTE: Did debtor receive collateral w/ Creditors $ or via Credit? If yes then PMSI exists

Who has priority when conflicts in collateral interest arise?

1) buyers in the ordinary course of business inventory 2) PMSI 3) The holder of a perfected secuiry interest in or a judicial lian that has attached to the collateral 4) The holder of an unperfected sec. interest 5) The debtor

What 3 elements must exist for a security agreement to ATTACH:

1. Be an AGREEMENT 2. Secured party must give value 3. Debtor must have rights in the Collateral.

Charitable contributions on Ind. T/R:

Limited to 50% of AGI for L/T Cap Gain Property the limitation is 30%

DNI formula

Estate (TRust) GI-Expenses= Adj. Total Income + Tax Exempt income - Cap Gains= DNI Trusts deduct the lesser of the amt. distributed or DNI (the bene pays the tax).

Cash & Property bequeathed to an individual through a will or estat is valued at:

FMV & holding period is L/T

An Revocation of an Offer is effective when?

RECEIVED

Capital assets include:

· Investment prop. & prop held for personal use. ex: Personal auto, furniture and fixtures, stock and bonds,Real and personal property not used in business, Interest in a partnership,Goodwill of a corporation.
· Purchased (as opposed to created) copyrights, literary, musical, or artistic compositions.
· Musical compositions held by the original artist and sold after 5/17/06.
· Other assets held for investment.

The amount REALIZED on the sale of a PSHIP interest =

CASH received + % of liabilities assumed

A GENERAL Warranty deed

The Grantor warrents against defects by himself and all prior title holders.

Section 179

$250,000 reduced dollar for dollar on amts purchased in excess $800,000.

Refunds from IRS may be claimed (timeframe)

The later of 3 yrs from date of return or 2 yrs from date payed.

In a race notice jurisdiction:

a subsequent bona fide purchaser for value is protected only if records before the prior grantee records AND has NO notice of the prior transfer.

The time period for IRS to assess additional tax is normally 3 yrs from the date the return is due except:

When 25% or more of gross income is omitted the timeframe extends to 6 yrs.

In distributing a BK estate- the order of claims:

1. Secured claims 2. BK expenses and Priority Claims 3. Remaining assets are split proportionaly among Unsecured creditors who have filed a claim.

Exonaration by a surety

The surety to requrie the debtor to pay if he is able before surety pays.

What will prevent a debtor from getting a d/c in bk? DRAWING

Discharge w/in 8 yrs, Records (failure 2 keep), Assets (failure to explain whereabouts), Willfuly conceeling assets, Indiv- not one, Not obeying ct. orders, Guilty of a bk crime.

What debts are not discharged in bk? WAFTED

Willful injury, Alimony, Fraud, Taxes, Educational loans, Debts undisclosed in BK petioion

Distribution of the debtors estate:

Security claimitns, Priority claimants (9 categories), General creditors who filed a timely claim (Bottom of the Barrel)

Priority claimaints (9) SAG-WEG-CTI

Support obligations, Admin expenses, Gap creditors, Wages, Emp. Benefits, Grain Farmers, Consumers deposits, Consumer deposits 2,425, Taxes, Injury claims caused by DUI

Notice

Recording Statute that permits a subsequent bona fide purcherser to prevail over a prior grantee who failed to record.

Race

whoever records first, even w/ prior knowledg of prior conveyences to have greater rights.

Race Notice

Permits a subsequesnt Bona Fide Purcherser for value better rights than others if RECORDED First and NO NOTICE of prior grantees,

Order of Priority in Security Interest

The first to file or perfect has priority.

Majority Rule for CPA liability

liable to client, 3rd party beneficiaries and any forseeable class of 3rd parties.

A negotioable bill of lading:

Is negotiable if goods are to be delivered to bearer or to a named party

Novation

a New Contract substitutes a New Party.

The general rule for CPA liability

a CPA is liabile to client, 3rd party bene's and forseeable class.

The Minority Ultra Mares rule for CPA liability:

limits CPA liability to client and intended 3rd party beneficiarys

Compliance with the code of conduct is set by (4)

1 Word of the code
2 Reinforcement by peers
3 Public opinion
4 Disciplinary Proceedings

Independence is impaired if

1 Member has a direct or material indirect financial interest in client
2 Member is trustee or executor of something with ....financial interest
3 Member has any loan from client, officer...
4 Member or family or big wig of company owns >5% of client

A covered member is

1 Anyone on the attest engagement team
2 Anyone in a situation to influence the attest engagement
3 A partner or manager who performs nonattest services for client

CPA may perform nonattest services for a client w/o comprising independence...

1 CPA must not perform management functions or make management decisions
2 Must establish written agreement about
a) engagement objectives
b) services to be performed
c) Client's responsibilities
d) CPA's responsibilities
e) any limitations

Things that definitely impair independence

1 Authorizing, executing or consummating transactions
2 Preparing source documents
3 Having custody of assets
4 Supervising employees
5 Determining recommendations to be implemented
6 Reporting to the board of directors on management's behalf
7 Serving as stock transfer agent, registrar or general counsel
8 Appraisal, valuation or actuarial services
9 Performing internal audit (unless client understands its responsibility)

Loans to CPA by client's company generally impairs independence. T or F

False -

Competence to complete the engagement includes (5)

1 Technical qualifications of CPA and staff
2 Ability to supervise and evaluate work
3 Knowledge of technical subject matter
4 Capability to exercise judgment in its application
5 Ability to research subject matter and consult with others

When can CPA depart from GAAP or SFAS (4)

1 When compliance with GAAP would be misleading (disclosure required in report)
2 New legislation
3 New form of business transaction

Differences between attest and consultation

Attest evaluates the reliability of information
Consulting develops the findings, conclusions and recommendations for use internally by the client
performance of both does not necessarily impair independence

Types of consulation services

consultations services
advisory services
implementation services
transaction services
staff and support services
product services

Requirements for consulting services

Professional competence
Due professional care
Planning and supervision
Sufficient relevant data
Must serve client interest
Understanding with client
Communication with client

Personal financial planning services must involve

Defining engagement objectives
Planning specific procedures appropriate to engagement
developing basis for recommendations
Communicating recommendations for client
Identifying Tasks for taking action on planning decisions

Personal financial planning services

Compiling personal financial statement
Projecting future taxes
Tax compliance (preparation of tax returns)
Tax advice or consultations

Automatic expulsion from the AICPA happens when

CPA certificate is revoked by state board of accountancy
Member convicted of felony
Member files or helps to prepare a fraudulent tax return for client or self
Member intentionally fails to file tax return that was required

Elements needed to prove negligence

Accountant breached duty owed of average reasonable accountant
Damage or loss results
Casual relationship must must exist between fault and damages

Elements needed to prove fraud

Misrepresentation of material fact or expert opinion
Scienter or reckless disregard of truth
Reasonable or justified reliance by injured party
Actual damages

Which actions against an accountant are defensible by lack of privity of contract

Negligence
Breach of contract

What scenarios can merit punitive damages

fraud
constructive fraud
gross negligence

What is the Ultramares rule

Accountants should be held liable only to persons in privity or near privity

What is the Restatement of Torts Rule

Accountants should be liable to foreseen, or known, users of their reports or financial statements

What is a foreseen party

A third party who accountant knew would rely on financial statements, or member of limited class that accountant knew would rely on financial statements, for specified transaction

What is Majority Rule

An accountant is liable to foreseen third parties for negligence
but not liable to foreseeable parties for negligence

When is an accountant liable to third parties foreseen or not

Fraud, Constructive fraud and gross negligence

Who may sue under Securities of 1933

Any purchaser of securities (even if not initial purchaser)
3rd parties with no privity of contract

Proof requirements for liability under 1933 act

Damages to plaintiff
Material misstatement or omission

Possible defenses for liability under the 1933 Act

Due diligence was performed
Plaintiff knew financial statements were incorrect
Lack of causation
GAAS was followed

Requirements of Securities Act of 1934

Applies to securities sold on national stock exchange
Corporations must have >$10 mil in assets and held by >500 people
Requires each company to furnish to SEC an annual report (form 10K)

Biggest difference between 1933 & 1934 acts

Purchaser and seller of security may sue

Proof requirements for section 10 & 18 of act of 1934

Damages as result of sale/purchase
Material misstatement exists
Plaintiff justifiably relied on statements
(Section 10 only) scienter by accountant

Acceptable defenses for Act of 1934

Due care/diligence was exercised
Misstatement was immaterial
Plaintiff was aware of misstatement
Plaintiff did not rely on information
Misstatement was not cause of loss

When is accountant client info privileged

Located in a jurisdiction where privilege is recognized (few states)
Was intended to be confidential at time of communication
Not waived by client

When does code of professional conduct allow disclosure of confidential client info

Client consents
In order to comply with GAAP
To comply with enforceable subpoena (where privilege is not recognized)
Quality review under AICPA authorization
Responding to AICPA or state trial board

Situations in which there is a duty to notify parties outside the client

Form 8-K disclosures (change of auditors)
Disclosure to successor auditors
Disclosure in response to subpoena
Disclosure to funding agency for entities receiving government financial assistance

Criminal liability under acts of '33 & '34

Can be found guilty for willful illegal conduct (misleading or false info in registration statements)
Punishable by fines of $10,000 & 5 years
Examples : CPA is in on a fraudulent scheme
CPA covers up prior year financial statement misstatements

Criminal violations of Internal Revenue Code

Willfully preparing false return
willfully assisting others to evade taxes

Criminal liability under RICO

Covers CPAs involved in racketeering
Recently broadened to allow civil suits
Treble damages allowed (to encourage private enforcement)
Has been used against accountants even w/o criminal indictment

Act of 1934 requires auditors to establish procedures to... (3)

Detect material illegal acts
Identify material related-party transactions
Evaluate ability of firm to continue as going concern

New federal crimes involving willful nonretention of audit and review workpapers

Retention required for five years (in some cases seven)
Destroying or falsifying records to impede investigations
Provides for fines or imprisonment up to twenty years or both
Applies to accountant who audits issuer of securities

Main functions of PCAOB

Register and conduct inspections of public accounting firms
Set standards on auditing, quality control, independence, or preparation of audit report
May regulate nonaudit services CPS firms perform for clients
Enforce compliance with professional standards, securities laws relating to accountants and audits
Perform investigations and disciplinary hearings on registered public accounting firms

According to SOX, a public issuer's accounting firm cannot

Bookkeep or other similar service
Financial information systems design and or implementation
Appraisal services
Internal audit outsourcing services
management functions
actuarial services
investment or broker-dealer services
certain tax services (planning for potentially abusive tax shelters

How many consecutive years can an audit partner audit the same firm

5

What are the disciplinary powers of the SEC

Can subpoena witnesses
cam obtain injunction preventing sale of securities
Cannot assess monetary penalties without court proceedings
Cannot prosecute criminal acts

SEC's functions

Regulate securities markets
maintain fair markets
protect investors
review corporate financial statements
enforce securities laws
provide guidance for accounting rules

What is a security

Any note, stock, bond certificate of interest, debenture, investment contract

Registration statement

Includes financial statement and all other relevant information
It's against the law to sell or offer securities

Prospectus

Any notice, circular

1. Which of the following best describes what is meant by the term generally accepted auditing principles?
A) Rules acknowledged by the accounting profession because of their universal application
B) Pronouncements issued by the auditing standards board
C) Measures of the quality of the auditors performance
D) Procedures to be used to gather evidence to support financial statements

C) GAAS deal with measures of the quality of the performance of audit. D relates to acts to be performed, not standards
B GAAS have been issued by groups prior to the ASB
A There may or may not be universal compliance

2. For which of the following can a member of the AICPA receive an automatic expulsion from the AICPA?
a. Member convicted of a felony
b. Member files his own fraudulent tax return
c. Member files a fraudulent tax return for a client knowing it is fraudulent

All can result in expulsion

3. Which of the following is an example of a safeguard implemented by the client that might mitigate a threat to independence
a. Required continuing education for all attest engagement team members
b. An effective corporate governance structure
c. Required second partner review of an attest engagement
d. Management selection of the CPA firm

B) An effective corporate governance structure is a control that an be implemented by a client that increases independence of the attest team
A is a safegaurd implemented by regulation or CPA firm
C is a safeguard required by CPA firm
D Represents a threat rather than a safeguard

4. Which of the following is a "self review" threat to member independence
a. An engagement team member has a spouse that serves as CFO of the attest client
b. A second partner review is required on all attest engagements
c. An engagement team member prepares invoices for the attest client
d. An engagement team member has a direct financial interest in the attest client

C) The team member would be reviewing his or her own work
A is an example of a familiarity threat
B is a safewguard threat to independence
D is a financial self interest threat to independence

5. According to the standards of the procession, which of the following circumstances will prevent CPA performing audit engagements from being independent
a. Obtaining a collateralized automobile loan from a financial institution client
b. Litigation with a client relating to billing for consulting services for which the amount is immaterial
c. Employment of the CPA's spouse as a client's director of internal audit
d. Acting as a honorary trustee for a not-for-profit organization client

C) according to the Code of Professional Conduct, a spouse may be employed by a client is she does not exert significant influence over the client's financial statements.

6. The profession's ethical standards most likely would be considered to have been violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the
a. Actual fee would be substantially higher
b. Actual fee would be substantially lower than the fees charged but other CPAs for compatible services
c. CPA would not be independent
d. Fee was a competitive bid

A) According to rule 102 of the Code of Professional Conduct, in perfoming any professional services, a member shall maintain objectivity and integrity, avoid conflicts of interest, and not knowingly misrepresent the facts
B and D are not intentional mistakes
C one must remain objective, Independence is ot required unless CPA is performing attest services

7. According to the ethical standards of the profession, which of the following acts is generally prohibited?
a. Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client
b. Revealing confidential client information during a quality review of a profesional practice by a team from the state CPA society
c. Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent
d. Retaining client records after an engagement is terminated prior to completion and the client has demanded their return

D) "If an engagement is terminated prior to completion, the member is required to return only client records

8. According to the profession's ethical standards, which of the following events may justify a departure from a statement of financial accounting standards
a. New Legislation
b. Evolution of a new form of business transactions

Both are acceptable

9. May a COA hire for the CPA's public accounting firm a non-CPA systems analyst who specializes in developing computer systems
a. Yes, provided the CPA is qualified to perform each of the specialists tasks
b. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist's end product
c. No, because non-CPA professionals are not permitted to be associated with CPA firms in public practice
d. No, because developing computer systems is not recognized as a service performed by public accounting

b) Such a situation is allowed when the CPA is qualified to supervise and evaluate the work of the specialist.
A the CPA need not be qualified to perform the specialist's tasks
C Non CPA pros are permitted to be associated with CPA firms in public practice
D nonprofessionals may be hired and because developing computer systems is recognized as a service performed by public accountants

10. Stephanie Seals is a CPA who is working as a controller for Brentwood Corporation. She is not in public practice. Which statement is true?
a. She may use the CPA designation on her business cards if she also puts her employment title on them
b. She may use the CPA designation on her business cards as long as she does not mention Brentwood Corporation or her title as controller
c. She may use the CPA designation on company transmittals but not on her business cards
d. She may not use the CPA designation because she is not in public practice

A) she may use the CPA designation on her business cards when she does not imply independence, but shows her title and her employer
C she may use the CPA designation on her business cards or business transmittals if she does not imply independence

11. According to the standards of the profession, which of the following activities would most likely not impair a CPA's independence
a. Providing advisory services for a client
b. Contracting with a client to supervise the client's office personnel
c. Signing a client's checks in emergency situations
d. Accepting a luxurious gift from a client

A) Accounting and consulting services do not normally impair independence because the member's role is advisory in nature

12. Which of the following reports maybe issued only by an accountant who is independent of a client?
a. Standard report on an examination of a financial forecast
b. Report on consulting services
c. Compilation report on historical financial statements
d. Compilation report on a financial projection

A) AT 101 requires an accountant be independent for all attest engagements. An attest engagement is one which the accountant expresses a conclusion about the reliability of assertions which are the responsibility of another party. A standard report on an examination of a financial forecast requires an accountant to express an opinion, which requires an accountant to be independent

13. According to the standards of the profession, which of the following activities may be required in exercising due care?
a. Consulting with experts?
b. Obtaining specialty accreditation

A) Consulting with experts

14. Larry Simpson is a CPA and is serving as an expert witness in a trial concerning a corporation's financial statements. Which of the following is true
a. Simpson's status as an expert witness is based upon his specialized knowledge, expertise and training
b. Simpson is required by AICPA ruling to present his position objectively
c. Simpson may regard himself as acting as an advocate

A) and B) When a CPA is an expert witness, he should not act as an advocate, but should give his/her position based on objectivity. The expert witness does this based on specialized knowledge, training and experience

15. According to the ethical standards of the profession, which of the following acts is generally prohibited
a. Purchasing a product from a third party and reselling it to a client
b. Writing a financial management newsletter promoted and sold by a publishing company
c. Accepting a commission for recommending a product to an audit client
d. Accepting engagements obtained through the efforts of third parties

C) Amember in public practice shall not for a commission recommend or refer to a client any profuct or service or for a commission recommend or refer any profuctor service to be supplied by a client or receive a commission when the member of the member's firm perform for that client and audit of a compilation when the member expects that a third party will use the financial statement and the member's compilation report does not disclose a lack of independence

16. To exercise due professional care an auditor should
a. Critically review the judgment exercised by those assisting in the audit
b. Examine all available corroborating evidence supporting management's assertions
c. Design the audit to detect all instances of illegal acts
d. Attain the proper balance of professional experience and formal education

A) the principle of due care requires the member to observe the profession's technical and ethical standards, strive continuallly to improve competence and the quality of services, and discharge responsibility to the best of the member's abilities

17. Kar, CPA is a staff auditor participating in the audit engagement of Fort Inc. Which of the following circumstances impairs Kar's independence?
a. During the period of the professional engagement, Fort gives Kar tickets to a football game worth $75
b. Kar owns stock in a corporation that Fort's 401K plan also invests in
c. Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns
d. Kar's sibling is director of internal audit at Fort

D) The fact that a close relative of Kar works for Fortimpairs Kar's independence.

18. On June 1, 2006, A CPA obtained a 100K personal loan from a financial institution client for whom the CPA provided compilation services, The loan was fully secured and considered material to the CPA's net worth. The CPA paid the loan in full on December 31st 2007. On April 3rd 2007, the client asked the CPA to audit the client's financial statements for the year ended December 31 2007. Is the CPA considered independent with respect to the audit of the client's December 31 2007 financial statements
a. Yes, because the loan was fully secured
b. Yes, because the CPA was not required to be independent at the time the loan was granted
c. No, because the CPA had a loan with the client during the period of a professional engagement
d. No, because the CPA had a loan with the client during the period covered by the financial statements

B) Independence is not required for the performance of a compilation engagement.

19. Which of the following statements are correct regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm?
A) A CPA leaving a firm may take copies of information contained in client files to assist another firm in serving that client
B) A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical expertise

Both statements are incorrect, either would violate rule 301 on confidential client information

20. Which of thew following statements is correct regarding an accountant's working papers
A) The accountant owns the working papers and generally may disclose them as the accountant sees fit
B) The client owns the working papers but the accountant has custody of them until the accountant's bill is paid in full
C) The accountant owns the working papers but generally may not disclose them without the client's consent or a court order
D) The client owns the working papers but, in the absence of the accountant's consent, may not disclose them without a court order

C) information in the CPA's working papers is confidential and may not be disclosed except with the client's consent or by court order

21. According to the profession's standards, which of the following would be considered consulting services?
A) Advisory services
B) Implementation services
C) Product services

All are consulting services. Included are consultations, advisory services, implementation services, transaction services, staff and support services and product services

22. According to the standards of the profession, which of the following events would require a CPA performing a consulting services engagement for a nonaudit client to withdraw from the engagement?
A) The CPA has a conflict of interest that is disclosed to the client and the client consents to the CPA continuing the service
B) The CPA fails to obtain a written understanding from the client concerning the scope of the engagement

Neither. Independence is not required and the understanding can be written or oral

23. Which of the following services may a CPA perform in carrying out a consulting service for a client?
A) Analyst of the client's accounting system
B) Review of the client's prepared business plan
C) Preparation of the information for obtaining financing

All are acceptable. CS 100 indicates that the nature and scope of consulting services is determined solely by the practitioner and the client, typically in which the practitioner develops findings, conclusions and recommendations for the client.

24. Under the statements on Standards for Consulting Services, which of the following statements best reflects a CPA's responsibility when undertaking a consulting services engagement? The CPA must
A) Not seek to modify any agreement made with the client
B) Not perform any attest services for the client
C) Inform the client of significant reservations concerning the benefits of the engagement
D) obtain a written understanding with the client concerning the time for completion of the engagement

C) The AICPA statement on standards for consulting services, section 100 describes general standards for all consulting services, in addition to those established under the AICPA code of professional conduct. Section 100 addresses the areas of client interest, understanding with the client and communication with the client. Specifically, this section states that the accountant should inform the client of significant reservations concerning the scope or benefits of the engagement

25. Which of the following services is a CPA generally required to perform when conducting a personal financial planning engagement
A) Assisting the client to identify tasks that are essential in order to act on planning decisions
B) Assisting the client to take action on planning decisions
C) Monitoring progress in achieving goals
D) Updating recommendations and revising planning decisions

A) Personal financial planning engagements are those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals. It involves all the following:
Defining engagement objectives
Planning specific procedures appropriate to engagement
Developing basis for recommendations
Communicating recommendations to client
Identifying tasks for taking action on planning decisions

26. Cable Corp orally engaged Drake & Co CPAs to audit its financial statements. Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a significant loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not:
A) Have privity of contract with Cable
B) Sign an engagement letter
C) Perform the audit recklessly or with an intent ot deceive
D) Violate the GAAS in performing the audit

D) A CPA is not automatically liable for failure to discover a materially overstated account. The CPA can be liable if the failure to discover was due to the CPA'a negligence. Performing the audit in accordance with GAAS is usually a good defense

27. Which of the following statements best describes whether a CPS has met the required standard of care in conducting an audit of a client's financial statements?
A) The client's expectations with regard to the accuracy of the audited financial statements
B) The accuracy of the financial statements and whether the statements conform to GAAP
C) Whether the CPA conducted the audit with the same skill and care expected of an ordinary prudent CPA under the circumstances
D) Whether the audit was conducted to investigate and discover all acts of fraud

C) In order to meet the required standard of due care in conducting an audit of a client's financial statements, a CPA has the duty to perform with the same degree of skill and judgment expected of an ordinary prudent CPA under the circumstances

28. Ford & co CPAs issued an unqualified opinion on Owen's corp's financial statements. Relying on these financial statements, Century Bank lent Owens $750K. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common law fraud action against Ford, Century must prove in addition to other elements that Century was:
A) Free from contributory negligence
B) In privity of contract with Ford
C) Justified in relying on financial statements
D) In privity of contract with Owens

C) The following elements are needed to establish fraud against an accountant:
1) Misrepresentation of the accountant's expert opinion
2) Scienter shown by either the accountant's knowledge of falsity or reckless disregard of the truth
3) Reasonable reliance by injured party
4) Actual damages

29. When performing an audit, a CPA
A) Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances
B) Must strictly adhere to generally accepted accounting principles
C) Is strictly liable for failing to discover client fraud
D) Is not liable unless the CPA commits gross negligence or intentionally disregards GAAS

A) In the performance of an audit, a CPA has the duty to exercise the level of care, skill and judgment expected of a reasonably prudent CPA under the circumstances

30. When performing an audit, a CPA will most likely be considered negligent when he CPA fails to
A) detect all of a client's fraudulent activities
B) Include a negligence disclaimer in the client engagement letter
C) Warn a client of a known internal control weakness
D) Warn a client's customers of embezzlement by the client's employees

C) A CPA will be liable for negligence when he fails to exercise due care. The standard for due care is guided by state and federal statutes, court decisions, contracts with clients, conformity with GAAS & GAAP and standards of the professions. AU 325 requires that if the auditor becomes aware of weaknesses in the design or operation of the internal control structure, these weaknesses,, termed reportable conditions, be communicated to the audit committee of the client

31. A CPAs duty of due care to a client most likely will be breached when a CPA
A) Gives a client an oral instead of written report
B) Gives a client incorrect advice based on an honest error of judgment
C) Fails to give tax advice that saves the client money
D) Fails to follow GAAS

D) A CPA's duty of due care is guided by the following standards:
1) federal state statutes
2) Court decisions
3) contract with the client
4) GAAS and GAAP
5) customs of the profession.
Therefore failure to follow GAAS constitutes a breach of the CPAs duty of due care

32. Which of the following elements if present would support a finding of constructive fraud on the part of a CPA?
A) Gross negligence in applying GAAS
B) Ordinary negligence in applying GAAS
C) Identified third party users
D) Scienter

A) A CPA's liability for constructive fraud is established by the following elements:
1) Misrepresentation of a material fact
2) Reckless disregard of the truth
3) Reasonable reliance of the by the injured party
4) Actual damages
Gross negligence constitutes a reckless disregard for the truth.

33. If a CPA recklessly departs from the standards of due carte when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on
A) Negligence
B) Gross Negligence
C) Strict liability
D) Criminal deceit

B) A foreseeable third party is someone not identified to the CPA, but who may be expected to receive the accountant's audit report and rely upon it. Even though this party is unknown the the CPA, the CPA is liable for gross negligence or fraud

34. In a common law action against an accountant, lack of privity is a viable defense if the plaintiff
A) Is the client's creditor who sues the accountant for negligence
B) Can prove the presence of gross negligence that amounts to a reckless disregard for the truth
C) Is the accountant's client
D) Based upon fraud

A) Lack of privity can be a viable defense against third parties in a common law case of negligence or breach of contract. A client's creditor is not in privity of contract with the accountant

35. A CPA audited the financial statements of Shelly Company. The CPA was negligent in the audit, Sanco, a supplier of Shelly, is upset because Sanco has extended Shelly a high credit limit based on the financial statements which were incorrect. Which of the following statements is the most correct.
A) In most states, both Shelly and Sanco can recover from the CPA for damages due to the negligence
B) States that use the Ultramares decision will allow both Shelly and Sanco to recover,
C) In most states, Sanco cannot recover as a mere foreseeable third party
D) Generally, Sanco can recover, but Shelly cannot

C) Since Sanco was a foreseeable third party instead of an actually foreseen third party but he CPA, Sanco in most states cannot recover

36. Under the Ultramares rule, to which of the following parties will an accountant be liable for negligence?
A) Parties in privity
B) Foreseen parties

A) Under the Ultramares rule, the accountant is held liable only to parties whose primary benefit the financial statements are intended. This generally means only the client or third party beneficiaries who are in privity of contract with the accountant. Many courts have more recently departed from the Ultramares decision to allow foreseen third parties to recover from the accountant

37. While conducting an audit, Larson Associates CPAAs, failed to detect material misstatements included with the prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common law negligence, Larson's best defense would be that the
A) audit was conducted in accordance with GAAS
B) client was aware of the misstatements
C) Purchaser was not in privity of contract
D) Identity of the purchaser was not known to Larson at the time of the audit

A) in order to establish common law liability against an accountant based upon negligence , it must be proven that
!) The accountant had the duty to exercise due care
2) The accountant breached the duty of due care
3) Damage or loss resulted
4) A casual relationship between the fault of the accountant and the resulting damages

The accountant may escape liability if due care can be established.

38. While conducting an audit, Larson Associates CPAAs, failed to detect material misstatements included with the prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common law fraud, Larson's best defense would be that
A) Larson did not have actual or constructive knowledge of the misstatements
B) Larson's client knew or should have known of the misstatements
C) Larson did not did have actual knowledge that the purchaser was an intended beneficiary of the audit
D) Larson was not in privity of contract with its client

A) To establish a CPA's liability for common law fraud, the following elements must be present:
1) Misrepresentation of a material fact or the accountant's expert opinion
2) Scienter, shown either by an intent to mislead or reckless disregard of the truth
3) Reasonable or justified reliance by injured parties
4) Actual damages resulted

Larson did not have actual or constructive knowledge of the misstatements, the scienter element would not be present and Larson would not be liable

39. Quincy bought Teal Corp common stock in an offering registered under the securities act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that
A) There was fraudulent activity by worth
B) There was a material misstatement in the financial statements
C) Quincy relied on Worth's opinion
D) Quincy was in privity with Worth

B) The securities act of 1933 requires that a plaintiff need only prove that damages were incurred and that there was a material misstatement or omission in order to establish a prima facie case against a CPA. The act does not require that the plaintiff prove that he relied on the financial information or that there was negligence or fraud present. Securities Act of 1933 eliminates the necessity for privity of contract

40. Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Bckler to recover the losses associated with Queen's default. Which of the following must Mac prove in order to recover?
A) Beckler was negligent in conducting the audit
B) Mac Relied on the financial statements

Both) Mac is a third party that the accountant knew would rely on the financial statements. Queen's financial statements contained material misstatements. Mac can recover by showing that the accountant was negligent in the audit. Mac also needs to establish that it did rely on the financial statements in order to recover from the accountant for the losses on Queen.

41. Dart corp, engaged Jay Associates, CPSs to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion despite knowing that the financial statements contained misstatements. Jay's opinion was was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. In a suit against Jay and Dart under the section 11 liability provisions of the securities act of 1933, Larson must prove that:
A) Jay knew of the misstatements
B) Jay was negligent
C) The misstatements contained in Dart's were material
D) The unqualified opinion contained in the registration statement was relied on by Larson

C) Under the SEC act of 1933, a CPA is liable to any third party purchaser of of registered securities for losses resulting from misstatements in the financial statements included in the registration statement. The plaintiff must establish that damages were incurred and that the misstatements were material misstatements of facts.

42. Dart corp, engaged Jay Associates, CPSs to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion despite knowing that the financial statements contained misstatements. Jay's opinion was was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Larson succeeds in the section 11 suit against Dart, Larson would be entitled to
A) Damages of 3x the original public offering price
B) Rescind the transaction
C) Monetary damages only
D) Damages, but only if the shares were resold before the suit was started

C) In a section 11 suit under the 1933 act, the plaintiff may recover damages equal to the difference between the amount paid and the market value of the stock at the time of the suit. If the stock has been sold, then the damages are the difference between the amount paid and the sale price.

43. Under the liability provisions of Section 11 of the securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under section 11, a CPA usually will not be liable to the purchaser:
A) If the purchaser is contributorily negligent
B) If the CPA can prove due diligence
C) Unless the purchaser can prove privity with the CPA
D) Unless the purchaser can prove scienter on the part of the CPA

B) Under section 11 of the 1933 act, if the plaintiff proves damages and the existence of a material misstatement or omission in the financial statements included in the registration statement, these are sufficient to win against the CPA unless the CPA can prove one of the applicable defenses. Due diligence is one of the defenses.

44. Under the liability provisions of Section 11 of the securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under section 11, which of the following must be proven by a purchaser of the security?
A) Reliance on the financial statements
B) Fraud by the CPA

Neither) To impose liability under section 11 of the SEC Act of 1933 for a misleading registration statement, the plaintiff must prove the following:
1) Damages were incurred
2) A material misstatement or omission was present in financial statements included in the registration statement.

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