ACCY 411 - SU 2.4 MC

The scope and nature of a CPA's contractual obligation to prepare tax returns for a client that is not publicly traded ordinarily is set forth in the

C. Engagement letter.

Under state law, one of the elements necessary to hold a CPA liable to a client for preparing a tax return negligently is that the CPA A. Acted with scienter or guilty knowledge. B. Was a fiduciary of the client. C. Failed to exercise due care. D. Executed an engagement letter.

C. Failed to exercise due care.

Ford & Co., CPAs, prepared Owens Corp.'s tax returns. Relying on these tax returns, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the tax returns 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

C. Justified in relying on the tax returns.

Harriet Harrison, CPA, failed to adhere to standards applicable to tax return preparers when preparing the returns of Lamp Corp. As a result, a material fraud by the company's CFO was not detected. Based on nonstatutory law, to what extent is Harrison liable to Lamp Corp. for losses attributable to the theft?

C. Liable for losses attributable to her negligence.

Which of the following penalties is usually imposed against an accountant who, in the course of preparing a tax return, breaches common law contract duties owed to a client?

C. Money damages.

A CPA firm acts with scienter in all the following circumstances except when the firm

C. Negligently performs a professional service.

Which one of the following, if present, would support a finding of constructive common law fraud on the part of a CPA?

C. Reckless disregard.

A client suing a CPA for negligent preparation of a tax return in a state court must prove each of the following factors except

C. Reliance.

Which of the following is most likely to be effective as a defense in a breach of contract suit brought by a client against a CPA?

C. Suspension or termination of performance justified because of the client's breach.

Under the common law, which of the following statements is generally true regarding the liability of a CPA who negligently prepares a client's tax return?

C. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.

Under state law, which of the following statements most accurately reflects the liability of a CPA who fraudulently prepares a client's tax return?

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

Which of the following is incorrect regarding an engagement letter?

C. The engagement letter need not include specific descriptions of services to be performed.

One of a CPA's major concerns regarding contractual questions resulting from the preparation of a client's tax returns is

C. Whether the parties involved have a clear understanding of the procedures and services to be performed.

Which of the following statements is correct regarding the liability of a CPA for services performed?

A. A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.

One traditional test of whether a third party can recover from an accountant for negligence is the primary benefit test. Which of the following has standing under the primary benefit test?

A. A bank that is considering a loan to the accountant's client and is waiting for the tax returns on which to base its decision.

A CPA most likely will be negligent when the CPA fails to

A. Correct errors discovered in tax returns previously prepared for the client.

Which of the following elements, if present, would support a finding of common law constructive fraud on the part of a CPA who prepared a tax return?

A. Gross negligence.

In a nonstatutory action against a CPA, lack of privity is a viable defense if the plaintiff

A. Is the client's creditor who sues the CPA for negligence.

Ritz Corp. wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale and to prepare its state and federal income tax returns. Based on these documents, Ritz acquired Stale. Within 6 months, it was discovered that Stale's revenues and taxable income had been grossly overstated. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that revenues and taxable income were overstated. Which of the following two common law causes of action provide Ritz with proper bases upon which Ritz will most likely prevail?

A. Negligence and breach of contract.

The firm Meek & Co., CPAs, was engaged by Reed, the president of Sulk Corp, to prepare its federal and state tax returns by March 15, Year 2, for the fiscal year ended December 31, Year 1. Meek's engagement and its fee of $20,000 were approved by Sulk's board of directors. Meek did not deliver the returns until April 15, Year 2, because Sulk did not provide Meek with the necessary information to complete the service. Sulk refuses to pay Meek. If Meek sues Sulk, Meek will

A. Prevail based on the contract.

A CPA who fraudulently performs a professional service will

A. Probably be liable to any person who suffered a loss as a result of the fraud.

Walters & Whitlow, CPAs, failed to discover a fraudulent scheme used by Davis Corporation's head cashier to embezzle corporate funds during the past 5 years. Walters & Whitlow would have discovered the embezzlements promptly if they had not been negligent in their annual preparation of tax returns. The information provided by Davis for this purpose was incorrect on its face, but the CPAs made no inquiries. Under the circumstances, Walters & Whitlow will normally not be liable in a common law action for

A. Punitive damages.

Hark, CPA, failed to follow generally accepted auditing standards in auditing the financial statements of Long Corp., a nonpublic company. Hark also took several tax return positions that were not likely to be sustained on the merits because they were not supported by substantial authority. Long's management had told Hark that the audited statements and tax returns would be submitted to several banks to obtain financing. Relying on these documents, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the traditional common law doctrine, if Third sues Hark, Hark will

A. Win because Hark and Third were not in privity of contract.

Which of the following pairs of elements must a client prove to hold a CPA liable for common law negligence?

B. Breach of the accountant's duty of care and loss.

A CPA firm was hired by a company to prepare tax returns it needed to obtain a loan from a bank. The bank lent $500,000 to the company based on the CPA's work. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the CPA firm failed to discover a material overstatement of taxable income by the company. Which of the following statements is correct regarding a state court suit by the bank against the CPA firm? The bank

B. Can sue the CPA firm for the loss of the loan because of negligence.

Sun Corp. approved a merger plan with Cord Corp. Factors in approving the merger were the tax returns of Cord prepared by Frank & Co., CPAs. Sun had required Cord to disclose its tax returns and audited financial statements as a condition of the merger. Frank knew of this condition before it prepared returns that contained irregularities that later caused Sun to suffer substantial losses. For Frank to be liable for common law negligence, Sun, at a minimum, must prove that Frank

B. Failed to exercise due care.

If a CPA recklessly departs from the standards of due care when preparing a tax return, the CPA will be liable to third parties who are unknown to the CPA based on common law

B. Gross negligence.

Mary Martinson is a CPA. One of her clients is suing her for common law negligence, alleging that she failed to follow federal tax law when preparing the current year's tax return. Which of the following statements is true?

B. Martinson's failure to follow federal law results in tort liability.

ABC Construction Company enters into a personal service contract to hire Brown, CPAs, to perform services as an independent contractor. Brown's status as an independent contractor is inconsistent with

B. Outsourcing tax return preparation services to Green, CPAs, a well-respected local firm. Brown did not consult ABC about this decision.

If a shareholder sues a CPA in state court for nonstatutory fraud based on false information contained in a tax return prepared by the CPA, which of the following, if present, would be the CPA's best defense?

B. The false information is immaterial.

Which of the following facts must be proven for a lender to prevail in a state-law negligent misrepresentation action against a CPA who prepared a borrower's tax return that was disclosed to the lender?

B. The plaintiff justifiably relied on the misrepresentations.

When CPAs fail in their duty to carry out their contracts to prepare tax returns, common law liability to clients may be based on Breach of Contract (Yes/No?) Strict Liability (Yes/No?)

B.Breach of Contract (Yes) Strict Liability (No)

Which of the following statements, if any, are true regarding the state law elements that must be proven to support a finding of constructive fraud against a CPA in the preparation of a tax return? I.The plaintiff has justifiably relied on the CPA's misrepresentation. II.The CPA has acted in a grossly negligent manner.

C. Both I and II.

Under the position taken by a majority of state courts, to which third parties will a CPA who negligently prepares a client's tax return be liable?

C. Any foreseen or known third party who relied on the tax return.

Beckler & Associates, CPAs, audits the financial statements and prepares the tax returns of Queen Co. The financial statements contained material misstatements, but an unmodified opinion was expressed. Furthermore, the CPA preparer made no inquiries about material return information regarding deductions that was inaccurate and incomplete on its face. Queen provided the tax returns and audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew the documents would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Under the common law, which of the following must Mac prove to recover? I. Beckler was negligent in conducting the audit and preparing the tax returns. II. Mac relied on the financial statements and tax returns.

C. Both I and II.

A CPA's common law duty of due care when preparing a tax return for a client most likely will be breached when the CPA

D. Fails to follow professional standards.

The traditional nonstatutory rules regarding accountant's liability to third parties for negligence A. Remain substantially unchanged since their inception. B. Were more stringent than the rules currently applicable. C. Are of relatively minor importance to the accountant. D. Have been substantially changed at both the federal and state levels.

D. Have been substantially changed at both the federal and state levels.

Fact Pattern: Brown & Co., CPAs, prepared tax returns for its client, King Corp. Based on the strength of King's tax returns, Safe Bank lent King $500,000. Brown was unaware that Safe would receive a copy of the tax returns or that they would be used in obtaining a loan by King. King defaulted on the loan. If Safe commences an action for common law fraud against Brown, Safe must prove, in addition to other elements, that it A. Was in privity of contract with Brown. B. Was not contributorily negligent. C. Was in privity of contract with King. D. Justifiably relied on the financial statements.

D. Justifiably relied on the financial statements.

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?

D. Lack of scienter.

Fact Pattern: Brown & Co., CPAs, prepared tax returns for its client, King Corp. Based on the strength of King's tax returns, Safe Bank lent King $500,000. Brown was unaware that Safe would receive a copy of the tax returns or that they would be used in obtaining a loan by King. King defaulted on the loan. Safe commences an action for common law negligence against Brown. If Brown is able to prove that it prepared the returns in accordance with standards applicable to preparers, Brown will

D. Not be liable because Safe was not a foreseen user.

Magnus Enterprises engaged a CPA firm to prepare its annual federal income tax return. Which of the following is a true statement with respect to the CPA firm's liability to Magnus for common law negligence?

D. The CPA firm must not only exercise reasonable care in what it does but also must possess at least that degree of accounting knowledge and skill expected of a CPA.

Under the common law, which of the following defenses, if used by a CPA, would best avoid liability in an action for negligence brought by a client?

D. The CPA's negligence was not the proximate cause of the client's losses.

Under the traditional doctrine rule, to which of the following parties will a CPA be liable for common law negligence? Parties in Privity (Yes/No?) Foreseen Parties (Yes/No?)

Parties in Privity (Yes) Foreseen Parties (No)