Module 4

A CPA partnership may, without being lawfully subpoenaed or without the client's consent, make client workpapers available to An individual purchasing the entire partnership. The IRS. The SEC. Any surviving partner(s) on the death of a partner.

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

Tribble carelessly filed his taxes four months late. He owed $60,000 in taxes. What is his late filing penalty? $120,000 $60,000 $12,000 $9,500

$12,000

Xina carelessly filed her taxes 10 months late. She owed $100,000 in taxes. What is Xina's late filing penalty? $100,000 $75,000 $50,000 $25,000

$25,000

CPA Dinkel gave reckless tax advice to Milt, causing Milt to have to pay $20,000 more in taxes than he should have. If Milt sues, Dinkel will likely have to pay Mort $20,000 plus punitive damages. True False

True

CPA Jill was contracted to provide tax advice to Simmy. Even if the contract does not expressly require Jill to meet professional standards in providing tax advice, she must do so. True False

True

CPA Kuo forgot to furnish his tax client Madison with a copy of the return that Kuo prepared and filed for Madison. That could get Kuo into trouble with the IRS. True False

True

CPA Mina was found by a jury to have been careless in a way that damaged her client, ABC Corp. ABC will be able to recover from Mina compensatory damages for reasonably foreseeable injuries. True False

True

The IRS requires taxpayers to substantiate mileage expenses. True False

True

The Internal Revenue Code contains provisions to punish the unauthorized disclosure or use of taxpayer information civilly and criminally. True False

True

The key to whether a transaction qualifies as a tax shelter is often whether a significant purpose of the transaction was to avoid or evade taxes. True False

True

The national accounting firm of Bighouse Waterbrand can prove that in its audit of client LMNO, Inc., Bighouse complied with GAAP and GAAS. Given this proof, the chance that a jury would find Bighouse liable for malpractice is slim. True False

True

The only court in which a taxpayer can file a case without first paying the tax liability under consideration is the United States Tax Court. True False

True

The overvaluation of property contributed to charity could result in a 20% substantial overstatement penalty. True False

True

The standard for judging a tax shelter transaction for purposes of the reasonable cause/good faith defense is more likely than not to be sustained. True False

True

The state accountancy board is the only entity that can award a CPA license. True False

True

Willful failure to collect or pay over a tax, threatening an IRS agent, and lying to an IRS agent are all potential criminal offenses. True False

True

Willfully making a document under penalty of perjury that the accountant does not believe to be true in every material matter is an example of criminal tax fraud. True False

True

Which of the following terms best describes the relationship between a corporation and the CPA it hires to audit corporate books? Employer and employee. Employer and independent contractor. Master and servant. Employer and principal.

Employer and independent contractor.

CPA Albert was convicted of bank robbery in federal court. The AICPA will probably hold a hearing to determine whether Albert should be disciplined by the organization. True False

False

CPA Dilberg was careless in preparing a financial statement that did not adequately reflect the questionable collectability of a loan his client had made to a third party. The client later sued Dilberg, who proved that the loan was already uncollectable at the time Dilberg had made his error. Dilberg is probably liable to his client. True False

False

CPA Jindahl recklessly disregarded the tax law when he gave advice to his client Smithers. This is an example of actual fraud. True False

False

CPA Len was contracted to prepare tax returns for a number of clients, but when two of his employees quit at an inopportune time, he was unable to file the returns in a timely manner. This is not a breach of contract if Len tried as hard as he could to file the returns. True False

False

CPA Norm contracted to audit client Cliffmax, Inc. Norm was careless and botched the job. Cliffmax sued Norm for breach of contract. Norm showed that nowhere in his letter of engagement with Cliffmax did he expressly contract to do a careful job. Norm has a good defense. True False

False

CPA Tinsel gave careless tax advice to Mort, causing Mort to have to pay $10,000 more in taxes than he should have. If Mort sues, Tinsel will likely have to pay Mort $10,000 plus punitive damages. True False

False

CPAs are professionals and therefore it is never justifiable for them to breach a contract. True False

False

If a taxpayer appeals a determination from the IRS, the IRS must grant a hearing for the appeal. True False

False

In most instances, the IRS is very specific regarding the type of record that it demands taxpayers use to preserve necessary facts. True False

False

Juan allowed Trace to use his blank forms, his calculator, and his photocopier as Trace prepared his 1040 for filing with the IRS. Juan is a TRP. True False

False

Matt was a salesman at a bike shop. His boss knew that Matt had been an accounting major before he dropped out of college. The boss ordered Matt, as part of his regular responsibilities, to file the bike shop's federal corporate income tax return. Matt is a TRP for purposes of this return. True False

False

No interest is imposed on a tax underpayment if the taxpayer must already pay a delinquency penalty on the tax underpayment. True False

False

One needs a CPA license to prepare federal income tax returns. True False

False

Tax authority that does not come from the Internal Revenue Service is known as secondary authority. True False

False

The IRS expects taxpayers to get things right, and a "good faith" mistake is still a mistake that will be punished. True False

False

The presumption is that absent client objection regarding specific information, a CPA may disclose information that might be deemed confidential. True False

False

The state courts have recognized a common law accountant-client testimonial privilege. True False

False

The burden of proof in civil tax cases is: beyond a reasonable doubt. True False

False, it is preponderance of the evidence True for criminal tax cases

Tax positions that the IRS is unlikely to approve should be disclosed on Form 5522. True False

False. 8275 or 8275R

CPA Norm contracted to audit client Cliffmax, Inc. Norm was careless and botched the job. Cliffmax sued Norm for breach of contract. Norm showed that in his letter of engagement he had placed a provision whereby Cliffmax promised not to sue Norm if Norm was negligent. A court would be reluctant to give effect to this disclaimer. True False

True

CPA Stan may be punished for aiding and abetting another accountant who understates a client's tax liability, even if Stan is not the TRP for the return. True False

True

Which of the following type of regulations cannot be cited as authority to support a tax position? Legislative regulations. Interpretive regulations. Procedural regulations. Proposed regulations.

Proposed regulations

What is the purpose of tax Form 870-AD

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

For a private letter ruling to be issued by the IRS, the transaction being addressed cannot have yet been completed by the taxpayer. True False

True

If a treaty exists with a foreign country, the provisions of the treaty control the tax consequences of a transaction. True False

True

In states that statutorily recognize an accountant-client testimonial privilege, the privilege may be invoked only by the client. True False

True

Joe helped Sam sell tax shelters to clients who wanted to minimize their tax liabilities. In so doing, Joe valued the property of which the clients wished to deduct the value at three times the property's actual worth. Joe may well be punished for promoting abusive tax shelters. True False

True

Knowing and voluntary client consent to disclosure effectively removes the confidentiality duty regarding the relevant information. True False

True

Mort prepared tax returns for individuals. If his clients were entitled to sizeable refunds, he sold their names to a local car dealership that would then attempt to sell the client new cars. This activity could get Mort in trouble with the IRS. True False

True

No penalty can be imposed on failing to remit estimated taxes for this year if an individual with AGI of $100,000 remitted 100% of tax imposed for last year. True False

True

In preparing a client's current year individual income tax return, a tax practitioner discovers an error in the prior year's return. Under the rules of practice prescribed in Treasury Circular 230, the tax practitioner Is barred from preparing the current year's return until the prior year error is rectified. Must advise the client of the error. Is required to notify the IRS of the error. Must file an amended return to correct the error.

Must advise the client of the error.

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

Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.

A C corporation had a federal income tax liability of $40,000 for each of the last five years, each covering a 12-month period. The tax for the current year is $48,000. What is the lowest amount that must have been paid as estimated taxes for the current year so that no penalty for underpayment is applicable? $40,000 $44,000 $48,000 $52,800

$40,000

Tera filed her tax return on time but did not pay her taxes until four months after they were due. She owed $20,000. What is her late payment penalty amount? $400 $600 $4,000 $60,000

$400

A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be computed? $0 $5,000 $45,000 $50,000

$5,000

Penalty for late paying.

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

A taxpayer has had one issue under audit by the Internal Revenue Service for several years. Unless the taxpayer agrees otherwise, the IRS has at most how many years to assess taxes after the taxpayer's return was filed? Three. Four. Five. Seven.

3

Penalty for late filing.

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

List the various nonfiling penalties a taxpayer may face

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 $135 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.

What is the penalty for fraudulent understatement?

75% of understatement

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission? A CPA firm may disclose this information if the practice is limited to bankruptcy matters, so that prospective clients with similar concerns will be able to contact current clients. A CPA firm may disclose this information if the practice is limited to performing asset valuations in anticipation of mergers and acquisitions. A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties. A CPA firm may not disclose this information because the identity of its clients is confidential information.

A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.

A CPA is researching a tax issue and is attempting to understand the intent of Congress. Which of the following would generally be least useful for that purpose? Committee Report of the House Ways and Means Committee A Notice of Proposed Rulemaking A Senate Finance Committee Report The Congressional Record

A Notice of Proposed Rulemaking

A CPA who has agreed to prepare a corporation's taxes and to provide tax advice will generally be liable for breaching: Promises made in the written engagement letter. Promises made orally. A and B. None of the above.

A and B

CPA Crane agreed to audit Banner Co. The audit did not go well, especially because Crane did not audit Banner's subsidiary, which created various problems for Banner. Banner sued Crane for breach of contract, because Crane allegedly did not comply with the engagement letter. Which of the following might Crane successfully raise in defense? Evidence that Banner did not provide Crane with all the records needed to successfully complete the audit. A provision in the engagement letter that provided that Crane would audit Banner, but not its subsidiaries. A provision in the engagement letter that provided that Crane would not be liable for any errors it made in the audit. A and B.

A and B

Girard gave tax advice to Frontenac Corporation. The Department of Justice and IRS are now investigating certain tax shelter transactions that Frontenac Corp. entered into. Girard is resisting their requests for information by citing the tax practitioner's privilege of §7525 of the I.R.C. To which of the following would that privilege be inapplicable? Criminal proceedings. Written advice in connection with promotion of a tax shelter. A and B. None of the above.

A and B

Jetmore was surprised to learn how much income his tax client, Quantilco, Inc., was making. He thought that Quantilco's competitors might be interested in the information, so he sold it to one of them. When Quantilco found this out, it started investigating what consequences it might visit upon Jetmore. Which of the following is true? He may be sued civilly by the IRS. He may be prosecuted criminally by the Department of Justice. A and B. None of the above.

A and B

Trego is a CPA. Under which of the following circumstances would it be permissible for Trego to share confidential client information? He has been hospitalized on April 14 and needs to share information with his partner, Tandy, who will complete a client's tax return before the April 15 deadline. A client has filed a complaint with the State Board of Accountancy about Trego's work, and he needs to show the Board confidential information to prove that he acted professionally throughout the engagement. None of the above. A and B.

A and B

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct? A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client. A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member. A member whose practice is primarily bankruptcy discloses a client's name. A member uses a records retention agency to store clients' records that contain confidential client information.

A member whose practice is primarily bankruptcy discloses a client's name.

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? The SEC. The AICPA. A state CPA society. A state board of accountancy

A state board of accountancy

Which of the following can grant a CPA license? A state board of accountancy. The AICPA. The Securities Exchange Commission. All of the above.

A state board of accountancy

When an ethics complaint carrying national implications arises, which entity typically handles it? SEC. PCAOB. State CPA society. AICPA.

AICPA

Accountants that prepare tax returns should be familiar with federal laws and regulations with respect to the privacy of client information. These laws and regulations include all of the following provisions except: Accountants are prohibited from disclosing to a nonaffiliated third party any nonpublic personal information about their clients. Accountants are required to develop, implement, and maintain a comprehensive information security program that outlines the ways in which they protect client information. Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing. Accountants are required to notify their clients that the accountants are providing their confidential information to outsourcing firms for processing.

Accountants are required to notify their clients that the accountants are providing their confidential information to outsourcing firms for processing.

hich of the following is required by the Gramm-Leach Bliley (Financial Modernization) Act of 1999? Accountants are prohibited from providing confidential client information to outsourcing firms. Accountants may provide confidential client information only to outsourcing firms that the accountants have an equity interest in. Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing. Accountants may provide confidential client information only to outsourcing firms that are subject to federal laws and regulations regarding confidentiality.

Accountants are responsible for maintaining the confidentiality of information that is outsourced for processing.

While reviewing a new client's prior-year tax returns, a CPA became aware that the client did not properly file all required federal income tax returns. Under Treasury Circular 230, what should the CPA do in this situation? Notify the AICPA of the situation and request a ruling of continuance. Notify the Internal Revenue Service of the client's noncompliance. Resign from the engagement. Advise the client of the consequences of the noncompliance.

Advise the client of the consequences of the noncompliance.

Cherokee wants to know which of the following is a requirement to earn a CPA license: 150 hours of college education. Passing the CPA examination. One year of work experience. All of the above.

All of the above

Colby is the managing partner of a small accounting firm. He has heard of the Generally Accepted Privacy Principles (GAPP) and wants to know what his responsibilities are regarding client information. Among others, Colby's firm must: Provide its clients notice of its privacy policies and procedures. Collect information only in compliance with its policies and procedures. Provide clients with access to their personal information for review and update. All of the above.

All of the above

Fitely hired a tax accountant whom his attorney recommended. The accountant, Tilder, recommended that Fitely take a particular tax position that resulted in an understatement of taxes and the IRS is now seeking to penalize Fitely. In order to establish a good faith defense against the 20% understatement penalty, which of the following does Fitely need to establish: That Tilder was a competent professional. That Fitely gave Tilder all necessary and accurate information. That Fitely actually relied in good faith on Tilder's judgment. All of the above.

All of the above

Iola has had a few serious professional problems. Which of the following will probably cause a state board of accountancy to revoke her license or order a lesser punishment? Failing to complete required continuing professional education. Failing to pay her own income tax. Violating professional standards. All of the above.

All of the above

Powhattan was surprised to learn how much income his tax client, Absurdco, Inc., was making. He thought that Absurdco's competitors might be interested in the information, so he sold it to one of them. When Absurdco found this out, it started investigating what consequences it might visit upon Powhattan. Which of the following is true? Powhattan may lose his CPA license. Powhattan may be sued civilly by the IRS. Powhattan may be prosecuted criminally by the Department of Justice. All of the above.

All of the above

Which of the following are recognized exceptions that allow disclosure of confidential information? An enforceable subpoena has been served on the CPA. An ethical examination is being conducted regarding the CPA's conduct. A peer review is occurring. All of the above.

All of the above

Describe the concept of offer in compromise.

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

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client's financial report be liable? Only those third parties in privity of contract with the accountant. All third parties who relied on the report and sustained injury. Any foreseen or known third party who relied on the report. Any third party whose reliance on the report was reasonably foreseeable.

Any foreseen or known third party who relied on the report.

Which of these statements is incorrect about practice before the IRS? All paid tax return preparers must register with the IRS. Merely preparing tax returns for others does not constitute practice before the IRS. Practice before the IRS is generally limited to CPAs, attorneys, and enrolled agents. Any individual who prepares and signs a return as a preparer may represent the taxpayer before appeals offices.

Any individual who prepares and signs a return as a preparer may represent the taxpayer before appeals offices.

The Internal Revenue Code provisions dealing with tax return preparation Require tax return preparers who are neither attorneys nor CPAs to pass a basic qualifying examination. Apply to all tax return preparers whether they are compensated or uncompensated. Apply to a CPA who prepares the tax returns of the president of a corporation the CPA audits, without charging the president. Only apply to preparers of individual tax returns.

Apply to a CPA who prepares the tax returns of the president of a corporation the CPA audits, without charging the president.

Martinsen, a calendar-year individual, files a year 1 tax return on March 31, year 2. Martinsen reports $20,000 of gross income and he inadvertently omits $500 interest income. The IRS may assess additional tax up until which of the following dates? March 31, year 5. April 15, year 5. March 31, year 8. April 15, year 8.

April 15, year 5

Larson's unqualified opinion was included with the financial statements in a registration statement and 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 Audit was conducted in accordance with generally accepted auditing standards. Client was aware of the misstatements. Purchaser was not in privity of contract with Larson. Identity of the purchaser was not known to Larson at the time of the audit.

Audit was conducted in accordance with generally accepted auditing standards.

Salina wants to know which of the following recognizes an accountant-client testimonial privilege: Federal courts creating procedural rules. Congress for very limited purposes when tax practitioners are involved. Approximately 15 state legislatures. B and C.

B and C

A tax return preparer may disclose or use tax return information without the taxpayer's consent to Facilitate a supplier's or lender's credit evaluation of the taxpayer. Accommodate the request of a financial institution that needs to determine the amount of taxpayer's debt to it, to be forgiven. Be evaluated by a quality or peer review. Solicit additional nontax business.

Be evaluated by a quality or peer review

Bosco Corporation had a very complicated tax situation. It hired CPA Arnold to prepare its corporate income tax return. Arnold made an error that caused Bosco to overpay its taxes by $3,000. The payment could have been avoided had Arnold advised Bosco to structure a particular transaction in a slightly different way. Bosco paid $233,000 rather than the $230,000 that it might have paid. Upset with Arnold's error, Bosco refused to pay the $20,000 fee specified in the engagement letter on grounds that Arnold had breached the contract by giving inaccurate advice. Which of the following is true regarding Arnold's fee? Because he breached the contract by giving defective advice, Arnold cannot recover his fee. Because he substantially performed the contract, Arnold will recover his fee minus the damages his breach caused Bosco ($20,000 - $3,000 = $17,000). A and B. None of the above.

Because he substantially performed the contract, Arnold will recover his fee minus the damages his breach caused Bosco ($20,000 - $3,000 = $17,000).

Which, if any, of the following could result in penalties against an income tax return preparer? I. Knowing or reckless disclosure or use of tax information obtained in preparing a return. II. A willful attempt to understate any client's tax liability on a return or claim for refund. Neither I nor II. I only. II only. Both I and II

Both I and II

An accuracy-related penalty applies to the portion of tax underpayment attributable to I. Negligence or a disregard of the tax rules or regulations. II. Any substantial understatement of income tax. I only. II only. Both I and II. Neither I nor II.

Both I and II.

A CPA firm fails to complete the audit of a publicly traded company because the firm determines that it does not have sufficient competent personnel. As a result, the client's Form 10-K is not filed on a timely basis. The company will likely be entitled to damages from the firm for Breach of contract under common law. Negligence under the Securities Exchange Act of 1934. Breach of contract under the Securities Exchange Act of 1934. Negligence under the appropriate state securities act.

Breach of contract under common law.

An accounting firm was hired by a company to perform an audit. The company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor's report. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company. Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank Cannot sue the accounting firm because of the statute of limitations. Can sue the accounting firm for the loss of the loan because of negligence. Cannot sue the accounting firm because there was no privity of contact. Can sue the accounting firm for the loss of the loan because of the rule of privilege.

Can sue the accounting firm for the loss of the loan because of negligence

An accounting firm was hired by a company to perform an audit. The company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor's report. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company. Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank Cannot sue the accounting firm because of the statute of limitations. Can sue the accounting firm for the loss of the loan because of negligence. Cannot sue the accounting firm because there was no privity of contract. Can sue the accounting firm for the loss of the loan because of the rule of privilege.

Can sue the accounting firm for the loss of the loan because of negligence.

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

Circular 230

A preparer of a tax return may incur penalties under the Internal Revenue Code in all of the following cases except where the taxpayer Substantially overvalues property donated to a charitable organization. Claims a substantial deduction for unpaid expenses incurred by a cash basis taxpayer. Claims a substantial deduction for a loss resulting from an accidental fire. Takes a position at variance with the Internal Revenue Code and a US Supreme Court decision on the specific point.

Claims a substantial deduction for a loss resulting from an accidental fire.

Clark, a professional tax return preparer, prepared and signed a client's 2012 federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client's refund check? Clark will be subject to the penalty if Clark endorses and cashes the check. Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service. Clark may endorse and cash the check, without penalty, because the check is for less than $1,000. Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark's fee for preparation of the return.

Clark will be subject to the penalty if Clark endorses and cashes the check

List the six conditions under which disclosure of client information is acceptable.

Client consents GAAP calls for disclosure Enforceable summons Ethical examination Peer review To others in firm on "need to know" basis

All of the following are administrative sources of the tax law except: Private letter rulings. Technical advice memoranda. Revenue rulings. Committee reports.

Committee Reports

List the exceptions to a practitioner's privilege as outlined in the Internal Revenue Code §7525.

Criminal matters; U.S. matters not before IRS or federal courts; State or local tax matters; Written tax shelter advice.

A CPA will most likely be negligent when the CPA fails to Correct errors discovered in the CPA's previously issued audit reports. Detect all of a client's fraudulent activities. Include a negligence disclaimer in the CPA's engagement letter. Warn a client's customers of embezzlement by the client's employees.

Correct errors discovered in the CPA's previously issued audit reports.

The intent, or scienter, element necessary to establish a cause of action for fraud will be met if the plaintiff can show that the Defendant made a misrepresentation with a reckless disregard for the truth. Defendant made a false representation of fact. Plaintiff actually relied on the defendant's misrepresentation. Plaintiff justifiably relied on the defendant's misrepresentation.

Defendant made a misrepresentation with a reckless disregard for the truth.

In an action for negligence against a CPA, "the custom of the profession" standard is used at least to some extent in determining whether the CPA is negligent. Which of the following statements describes how this standard is applied? If the CPA proves he literally followed GAAP and GAAS, it will be conclusively presumed that the CPA was not negligent. The custom of the profession argument may only be raised by the defendant. Despite a CPA's adherence to the custom of the profession, negligence may nevertheless be present. Failure to satisfy the custom of the profession is equivalent to gross negligence.

Despite a CPA's adherence to the custom of the profession, negligence may nevertheless be present.

Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following except Sign a tax return as a preparer. Disclose a conflict of interest. Provide a client with a copy of the tax return. Keep a record of Returns prepared.

Disclose a conflict of interest.

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? Take the Fifth Amendment and not discuss the meeting. Cite the privileged communications aspect of being a CPA. Discuss the entire conversation including the illegal acts. Discuss only the items that have a direct connection to those items the CPA worked on for the client in the past.

Discuss the entire conversation including the illegal acts

Pak's mother died, leaving him a big house and some stocks which he wished to sell. Pak hired a tax accountant, Dix, who advised him to sell the house right away, but wait for a while to sell the stocks because he could use the later sale date as the "valuation date" for tax purposes, which would be advantageous given that the stock market was declining. This turned on a particular IRS provision that the IRS later held would not permit the later valuation date. This cost Pak a lot of money and he sued Dix for negligence. Dix admitted that the position he advised was rejected by the IRS, but showed that other tax accountants and tax attorneys in his area advised clients the same as he did and that no court case in the country had rejected his view at the time he gave the advice. Which of the following is true? Dix is liable to Pak for negligence. Dix is not liable because he did not owe Pak a duty of care. Dix is not liable because he did not breach the duty of care. Dix is not liable because Pak suffered no recognizable damages.

Dix is not liable because he did not breach the duty of care.

An accountant performed an audit and later performed a review of events subsequent to the balance sheet date (S-1 Review). The accountant performed the audit without negligence or fraud. For which of the following, if any, can the accountant be held liable in the S-1 Review? Fraud but not negligence. Negligence but not fraud. Either fraud or negligence or both. Neither fraud nor negligence.

Either fraud or negligence or both.

Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice? Requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors. Recommending to the client that the advisor's tax advice be made orally instead of in a written memorandum. Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum. Requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum.

Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum.

Bollix Co. thought it had an embezzler, and hired CPA Dingus to find that embezzler. In the contract, Dingus promised to determine whether or not there was an embezzler and how much had been embezzled. Dingus found no embezzler and so informed Bollix. However, six months later, an embezzler was caught that Dingus had missed. Bollix sued Dingus for breach of contract. Dingus explained the notion of an "expectations gap" to Bollix and that perfectly fine audits sometimes don't turn up embezzlers. Dingus will probably avoid liability here. True False

False

A CPA's duty of due care to a client most likely will be breached when a CPA Gives a client an oral instead of written report. Gives a client incorrect advice based on an honest error of judgment. Fails to give tax advice that saves the client money. Fails to follow generally accepted auditing standards.

Fails to follow generally accepted auditing standards.

Which of the following will not get CPA Sandy in trouble with the IRS? Failing to furnish copies of returns to her clients. Failing to sign returns she prepares and files. Failure to furnish her preparer's identifying number to her clients. Failure to keep copies of the returns she prepares.

Failure to furnish her preparer's identifying number to her clients.

A CPA can be held liable for actual fraud only. True False

False

A person who is not a party to a contract can never sue for breach of that contract. True False

False

A plaintiff's contributory negligence is often a good defense in fraud cases. True False

False

After researching a tax position of her client, Consuela concluded that there was a 25% chance that the IRS would accept the position. Consuela may prepare and sign a tax return taking this position without disclosing it to the IRS. True False

False

An auditor will definitely be held liable for malpractice if she fails to detect all instances of client fraud. True False

False

Tia, a CPA working for the IRS, was closely involved in the IRS's investigation of Mastodon. Mastodon just had several of its key internal tax people retire or resign. Given her intimate knowledge of the corporation's tax situation, Mastodon wishes to hire Tia right away to take over its tax unit. This would be permissible under Circular 230.

False

To electronically file a married file jointly return, only one spouse must submit a PIN. True False

False

All tax bills must originate in the Senate Finance Committee. True False

False: House and Ways committee

If Congress authorizes Treasury to develop regulations dealing with a specific issue, the regulations are known as interpretive regulations. True False

False: legislative regulations

Which Senate committee considers new tax legislation? Budget. Finance. Appropriations. Rules and Administration.

Finance

Form used to disclose a tax position

Form 8275 or 8275A.

Fowler, CPA, was performing a review of the financial statements of Tut Corp., a nonpublic company, when he discovered evidence that the company's cashier may be embezzling funds. However, since he was not performing an audit of the company, Fowler did not follow up on the matter, nor did he inform management of his suspicions. Which of the following is accurate about Fowler's liability? Fowler will not be held liable to Tut Corp. because management of Tut Corp. was not relying on the financial statements to make investment decisions. Fowler will be held liable to Tut Corp. because he did not follow up on the matter nor did he inform management of the matter. Fowler will not be held liable to Tut Corp. because management of Tut Corp. is also negligent for not having adequate controls. Fowler will not be held liable to Tut Corp. because management of Tut Corp. should have known about the embezzlement.

Fowler will be held liable to Tut Corp. because he did not follow up on the matter nor did he inform management of the matter

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA? Gross negligence in applying generally accepted auditing standards. Ordinary negligence in applying generally accepted accounting principles. Identified third party users. Scienter.

Gross negligence in applying generally accepted auditing standards.

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who were unknown to the CPA based on Strict liability. Gross negligence. Negligence. Breach of contract

Gross negligence.

Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because: He is a member of the board of directors. The return does not contain a claim for a tax refund. He is not compensated. Returns for nonprofit organizations are exempt from the preparer rules.

He is not compensated.

Which committee must tax bills begin with?

House Ways and Means Committee

The Ultramares decision is a leading case that helps define when a CPA is liable to different parties. If a CPA has committed negligence, under this decision the CPA is liable to which of the following parties? I. The client. II. Third-party beneficiaries. III. Foreseeable third parties. I only. I and II only. I and III only. I, II, and III.

I and II only

A CPA's adjusted gross income (AGI) for the preceding twelve-month tax year exceeds $150,000. Which of the following methods is (are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I. The annualization method II. The seasonal method I only. II only. Both I and II. Neither I nor II.

I only

Chris Baker's adjusted gross income on her 2016 tax return was $160,000. The amount covered a 12-month period. For the 2017 tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of I. 90% of the tax on the return for the current year paid in four equal installments. II. 100% of prior year's tax liability paid in four equal installments. I only. II only. Both I and II. Neither I nor II.

I only

Jarovsky Corp., an accrual-basis, calendar-year corporation, carried back a net operating loss for the tax year ended December 31, 2016. Jarovsky's gross revenues have been under $500,000 since inception. Jarovsky expects to have profits for the tax year ending December 31, 2017. Which method(s) of estimated tax payment can Jarovsky use for its quarterly payments during the 2017 tax year to avoid a penalty for the underpayment of federal estimated taxes? I. 100% of the preceding tax year method II. Annualized income method I only. II only. Both I and II. Neither I nor II.

II only

A corporation's tax year can be reopened after all statutes of limitations have expired if I. The tax return has a 50% nonfraudulent omission from gross income. II. The corporation prevails in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year. I only. II only. Both I and II. Neither I nor II.

II only.

Which of the following is NOT considered a primary authoritative source when conducting tax research? Internal Revenue Code. Tax Court cases. IRS publications. Treasury regulations.

IRS publications

CPA Smithers has had some professional difficulties. Which of the following is true? If the state board of accountancy revokes Smithers' CPA license, s/he will be automatically expulsed from the AICPA. If the state society of CPAs expulses Smithers, the state board of accountancy will automatically revoke his/her CPA license. Both A and B. Neither A nor B.

If the state board of accountancy revokes Smithers' CPA license, s/he will be automatically expulsed from the AICPA.

Lakin is a CPA whose client, Sublette, is being sued by a state government in state court for evasion of state income taxes. Sublette does not want Lakin to testify against him regarding information that Sublette communicated to Lakin. Which of the following is true in a state with a statutory version of the accountant-client testimonial privilege? Only Lakin can invoke the testimonial privilege. Sublette can invoke the privilege as to parts of the communications he had with Lakin, while asking Lakin to testify as to other parts. If the suit was in federal court, the state privilege would not apply even though the communication took place in the state. A and B.

If the suit was in federal court, the state privilege would not apply even though the communication took place in the state.

Management of Tyler Company, a nonpublic company, materially misstated the company's financial statements that were audited by Ted & Ted, CPAs. Ted & Ted was negligent in the performance of the audit and failed to detect the misstatements. In reliance on the audited financial statements, Second Bank extended a loan in the amount of $500,000, and Tyler Company went bankrupt and was unable to repay any of the loan. Assume that Ted & Ted is determined to be 40% responsible for Second Bank's losses and management of Tyler Company is determined to be 60% liable. Which of the following is not true regarding this situation? In a state that has adopted joint and several liability, Ted & Ted may be required to pay the entire $500,000 in damages. In a state that has adopted joint liability, Ted & Ted may be required to pay the entire $500,000 in damages. In a state that has adopted several liability, Ted & Ted will likely be required to pay only $200,000 in damages. In a state that has adopted several liability, Ted & Ted will likely be required to pay the entire $500,000 but would be able to try to recover $300,000 from management.

In a state that has adopted several liability, Ted & Ted will likely be required to pay the entire $500,000 but would be able to try to recover $300,000 from management.

While preparing a tax return for a new client and reviewing the client's prior-year return, a CPA noticed an error made by the client's former tax preparer. According to Treasury Department Circular 230, which of the following is the CPA specifically required to do in this case? Contact the tax preparer who made the error and suggest that an amended return be prepared for the client. Inform the client of the error and insist that the return be amended. Inform the client of the error and advise of the consequences. Advise the client to contact the tax preparer of the prior-year return.

Inform the client of the error and advise of the consequences.

In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions? Internal Revenue Code. IRS regulations. Tax court decisions. IRS agents' reports.

Internal Revenue Code

Which of the following documents does NOT govern the conduct of a CPA who is engaged in providing tax services? AICPA's Code of Professional Conduct AICPA's Statements on Standards for Tax Services Circular 230 Internal Revenue Service Audit Guides

Internal Revenue Service Audit Guides

In a common-law action against an accountant, the lack of privity is a viable defense if the plaintiff Bases his action upon fraud. Is the accountant's client. Is a creditor of the client who sues the accountant for negligence. Can prove the presence of gross negligence which amounts to a reckless disregard for the truth.

Is a creditor of the client who sues the accountant for negligence.

Accountants should be familiar with Treasury Department Circular 230 because: It provides regulations regarding practice before the Internal Revenue Service. It provides additional regulations regarding the determination of personal income. It provides additional resources that may be useful in preparing tax returns. It provides guidance on appropriate advertising by accountants.

It provides regulations regarding practice before the Internal Revenue Service.

What is JEEP? Joint Energy Equity Program. Junior Emergency Enforcement Program. Joint Ethics Enforcement Program. None of the above.

Joint Ethics Enforcement Program

What types of regulations are specifically authorized by Congress?

Legislative regulations

Krim, President and CEO of United Co., engaged Smith, CPA, to audit United's financial statements so that United could secure a loan from First Bank. Smith issued an unqualified opinion on May 20, 2010, but the loan was delayed. On August 5, 2010, on inquiry to Smith by First Bank, Smith, relying on Krim's representation, made assurances that there was no material change in United's financial status. Krim's representation was untrue because of a material change which took place after May 20, 2010. First relied on Smith's assurances of no change. Shortly thereafter, United became insolvent. If First sues Smith for negligent misrepresentation, Smith will be found Not liable, because Krim misled Smith, and a CPA is not responsible for a client's untrue representations. Liable, because Smith should have undertaken sufficient auditing procedures to verify the status of United. Not liable, because Smith's opinion only covers the period up to May 20. Liable, because Smith should have contacted the chief financial officer rather than the chief executive officer.

Liable, because Smith should have undertaken sufficient auditing procedures to verify the status of United.

A civil fraud penalty can be imposed on a corporation that underpays tax by Omitting income as a result of inadequate recordkeeping. Failing to report income it erroneously considered not to be part of corporate profits. Filing an incomplete return with an appended statement, making clear that the return is incomplete. Maintaining false records and reporting fictitious transactions to minimize corporate tax liability.

Maintaining false records and reporting fictitious transactions to minimize corporate tax liability.

A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to Audit the corporate records. Examine business operations. Copy all underlying documents. Make reasonable inquiries when taxpayer information appears incorrect.

Make reasonable inquiries when taxpayer information appears incorrect

If a taxpayer receives a 30-day letter from the Internal Revenue Service, the taxpayer: Must pay the tax deficiency or respond to the issues raised through written correspondence to the IRS within 30 days of the date of the letter. May ignore the letter and take no action. Must pay the tax deficiency or file a petition with the Tax Court within 30 days of the date of the letter. Must pay the tax deficiency and file a petition with the District Court within 30 days of the date of the letter.

May ignore the letter and take no action.

Which of the following penalties is usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to a client? Specific performance. Punitive damages. Money damages. Rescission.

Money damages.

CPA Monrew induced several rich tax clients to invest in a domesticated beaver tax shelter device. When the IRS sought to audit one of Monrew's clients, he realized that among other difficulties, he had not had the client sign proper documentation. While an IRS agent sat in the waiting room of one of his clients, Monrew slipped in a back door and had the client sign a backdated document. When the government discovered all this, Monrew was indicted for tax fraud in violation of Section 7206. Which of the following is true? Monrew is probably guilty. Monrew is probably not guilty, because the client bears the blame here. Monrew is probably not guilty because his actions, while not praiseworthy, do not violate the statute. B and C.

Monrew is probably guilty.

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? One audit. More than 10 audits. More than 50 audits. More than 100 audits.

More than 100 audits.

With respect to any given tax return, which of the following statements is correct? More than one person may be deemed to be a preparer of a tax return. The final reviewer of a tax return is automatically considered the preparer of the return. Only one person may be deemed to be a preparer of a tax return. The two individuals who have done the most work in preparing the return will be deemed to be the only preparers.

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

While the AICPA cannot revoke a CPA's right to practice, it is important for CPAs to follow AICPA rules because A CPA must be a member of the AICPA to practice in more than one state. Most state boards of accountancy have rules that mirror the AICPA rules. The AICPA investigates ethics violations for most accounting regulatory bodies. PCAOB standards and rules are the same as AICPA rules.

Most state boards of accountancy have rules that mirror the AICPA rules.

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. Based on the audited financial statements and Fein's unqualified opinion, Ritz acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by $500,000. 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 the inventory was overstated. Which of the following two causes of action would provide Ritz with proper bases upon which Ritz would most likely prevail? Negligence and breach of contract. Negligence and gross negligence. Negligence and fraud. Gross negligence and breach of contract

Negligence and breach of contract.

Rhodes Corp. desired to acquire the common stock of Harris Corp. and engaged Johnson & Co., CPAs, to audit the financial statements of Harris Corp. Johnson failed to discover a significant liability in performing the audit. In a common law action against Johnson, Rhodes at a minimum must prove Gross negligence on the part of Johnson. Negligence on the part of Johnson. Fraud on the part of Johnson. Johnson knew that the liability existed

Negligence on the part of Johnson.

According to Treasury Department Circular 230, a practitioner may not Inform a client of how to avoid penalties by making disclosures to the IRS. Rely on good faith without verification of information furnished by the client. Negotiate a federal tax refund check issued to a client by the government. Inform a client of any penalties that are likely to apply to a position taken on a return.

Negotiate a federal tax refund check issued to a client by the government.

Taxpayer Clark hired CPA Spanx to do his income tax return. After it was too late to seek a refund, Clark learned that Spanx had failed to claim several rather obvious exemptions and deductions, causing Clark to pay way too much. Clark sued Spanx for negligence. Which of the following is true? This claim will fail unless the engagement letter contained a provision by which Spanx explicitly promised to meet professional standards. This claim will fail if the engagement letter contained a provision disclaiming any liability for negligent errors I. II. Both I and II. Neither I nor II.

Neither I nor II.

Which of the following is(are) true concerning internal auditors? I. Internal auditors must be independent from the entire corporation or entity they are auditing. II Internal auditors must have a CPA license. I only. II only. Neither I nor II. Both I and II.

Neither I nor II.

In general, the third-party (primary) beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA? Fraud Constructive fraud Negligence Yes Yes No Yes No No No Yes Yes No No Yes

No No Yes

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

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.)

CPA Lurie placed a disclaimer in his engagement letter with tax client Wert. The disclaimer essentially stated that Wert promised not to sue Lurie for any errors Lurie might make. If problems arise and Wert seeks to sue Lurie, which of the following types of claims will be barred by the disclaimer? Breach of contract Negligence Fraud None of the above.

None of the above.

Pak worked for EPS marketing trusts and other asset protection devices through a nationwide multi-level marketing network of financial planners. The IRS labeled the trusts illicit tax shelters. EPS then started calling the trusts by new names but continued to market them. Pak was EPS's executive vice president, spoke at its public events, and received sales overrides from agents he recruited as sales representatives for EPS. As Pak explained them, the trusts allowed clients to transfer all their income to a "donor-directed" trust from which they could spend the money on anything they wanted, without paying taxes on it. The IRS brought an action against Pak, seeking to fine him for promoting an abusive tax shelter in violation of 26 U.S.C. 6700. Which of the following is true? Pak is probably liable. Pak is probably not liable, because he did not organize or participate in sale of the shelters. Pak is probably not liable, because he did not make any materially false statements that affect tax liability. B and C.

Pak is probably liable.

In which of the following statements concerning a CPA firm's action is scienter or its equivalent absent? Reckless disregard for the truth. Actual knowledge of fraud. Intent to gain monetarily by concealing fraud. Performance of substandard auditing procedures.

Performance of substandard auditing procedures.

Pittsburg does not have a CPA license. Which of the following activities may he properly perform? Auditing. Preparing tax returns. Examining prospective financial information in accordance with SSAE. All of the above.

Preparing tax returns

A CPA who fraudulently performs an audit of a corporation's financial statements will Probably be liable to any person who suffered a loss as a result of the fraud. Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements. Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements. Be liable only to third parties in privity of contract with the CPA.

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

If you learn that the tax return that you prepared for your client last year contained a material error, you should: Promptly inform your client. Inform the IRS even before informing your client. A and B. None of the above.

Promptly inform your client.

Able, CPA, was engaged by Wedge Corp. to audit Wedge's financial statements. Wedge intended to use the audit report to obtain a $10 million loan from Care Bank. Able and Wedge's president agreed that Able would give an unqualified opinion on Wedge's financial statements in the audit report even though there were material misstatements in the financial statements. Care refused to make the loan. Wedge then gave the audit report to Ranch to encourage Ranch to purchase $10 million worth of Wedge common stock. Ranch reviewed the audit report and relied on it to purchase the stock. After the purchase, Able's agreement with Wedge's president was revealed. As a result, Wedge stock lost half its value and Ranch sued Able for fraud. What will be the result of Ranch's suit? Ranch will win because Able intentionally gave an unqualified opinion on Wedge's materially misstated financial statements. Ranch will win because Able is strictly liable for errors made in auditing Wedge's financial statements. Ranch will lose because Ranch is not a foreseen user of Able's audit report. Ranch will lose because Ranch is not in privity with Able.

Ranch will win because Able intentionally gave an unqualified opinion on Wedge's materially misstated financial statements.

A tax return preparer with a client possessing foreign bank accounts must be concerned with foreign bank account reporting (FBAR) obligations. True False

True

Which one of the following, if present, would support a finding of constructive fraud on the part of a CPA? Privity of contract. Intent to deceive. Reckless disregard. Ordinary negligence.

Reckless disregard

A client suing a CPA for negligence must prove each of the following factors except: Breach of duty of care. Proximate cause. Reliance. Injury.

Reliance

Russ, CPA, is auditing the financial statements of Ruben Corporation and has not received consent from management regarding the disclosure of confidential information. Which of the following is not true regarding confidentiality of Ruben Corporation's information under the AICPA rules? Russ may provide access to Ruben's information as a result of a valid court subpoena. Russ may provide access to Ruben's information in conjunction with a peer review of the CPA's practice. Russ may provide access to Ruben's information if a major shareholder of Ruben Corporation requests the information. Russ may provide access to Ruben's information to another CPA that is negotiating to purchase his practice

Russ may provide access to Ruben's information if a major shareholder of Ruben Corporation requests the information.

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? The stockholder lacks privity to sue. The CPA disclaimed liability to all third parties in the engagement letter. The contributory negligence of the client. The false statements were immaterial.

The false statements were immaterial.

An accountant who is a specialist in a given area may be held to a higher standard of care than a generalist who dabbles in that area. True False

True

An affirmative act constituting an attempt to evade or defeat payment of a tax, willfulness, and the existence of a tax deficiency are all elements of criminal tax evasion. True False

True

In a jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over workpapers without a client's permission? Purchaser of the CPA's practice. State tax authorities. State court. State CPA society quality control panel.

State CPA society quality control panel.

Which of the following professional bodies has the authority to revoke a CPA's license to practice public accounting? National Association of State Boards of Accountancy. State board of accountancy. CPA Society Ethics Committee. Professional Ethics Division of AICPA.

State board of accountancy.

Stewart, CPA, was engaged to complete the audit of Wilson Company. In performing the audit Stewart made a mistake in judgment regarding some evidence. As a result an embezzlement of funds by an employee was not discovered. The mistake did not rise to the level of negligence. Which of the following statements is true regarding Stewart's liability in this case? Stewart likely will not be held liable. Stewart likely will be held liable for breach of contract. Stewart likely will be held liable for making an untrue statement. Stewart likely will be held liable for failure to use due care.

Stewart likely will not be held liable.

CPA Fatjo agreed to prepare Tacko's individual tax return. However, two months before the return was due, Fatjo had the opportunity to take an around-the-world cruise with a rich uncle. Fatjo called up Tacko and said: "Keep your fee and find yourself another accountant. I'm going to cruise the world." Tacko found another accountant who would prepare his tax return, but would charge $300 more than Fatjo. Tacko was extraordinarily upset that Fatjo intentionally breached a signed contract contained in their engagement letter and added a punitive damages claim for $5,000. Tacko sued Fatjo for breach of contract. Which of the following is true? Tacko will probably lose. Tacko will probably win $300. Tacko will probably win $10,000. Tacko will probably win $10,300.

Tacko will probably win $300.

Taxpayer Clegg would certainly like to take a particular deduction that is barred by an IRS regulation. However, after considerable research Clegg's tax attorney believes that there is a one-third chance that a court would overturn the regulation as invalidly promulgated by the IRS. What should Clegg do? Take the deduction without disclosure. Take the deduction, but disclose it. Not take the deduction. All of the above.

Take the deduction, but disclose it.

Slim is considering taking an aggressive tax position on his income tax return. His experienced tax CPA has evaluated the position carefully and determined that there is a one in four chance that it will, if challenged, be sustained. What should Slim do? Take the position but not disclose it. Take the position and disclose it. Not take the position. All of the choices.

Take the position and disclose it

A tax preparer filed a return for a taxpayer and used the taxpayer's detailed check register containing both business and personal expenses. If the tax preparer knowingly included personal expenses as deductible business expenses on the taxpayer's business, then the Tax preparer will be liable only for penalties for taking an unreasonable position that led to an understatement. Taxpayer will be liable for penalties for taking an unreasonable position that led to an understatement. Tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct. Taxpayer will be liable for penalties attributable to transactions lacking economic substance.

Tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct.

Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared? An unrelated party compliance statement. Taxpayer's name and identification number or a copy of the tax return. Workpapers associated with the preparation of each tax return. A power of attorney.

Taxpayer's name and identification number or a copy of the tax return.

What types of regulations have the weight of law for only three years?

Temporary regulations

Dexter and Co., CPAs, issued an unqualified opinion on the 2012 financial statements of Bart Corp. Late in 2010, Bart determined that its treasurer had embezzled over $1,000,000. Dexter was unaware of the embezzlement. Bart has decided to sue Dexter to recover the $1,000,000. Bart's suit is based upon Dexter's failure to discover the missing money while performing the audit. Which of the following is Dexter's best defense? That the audit was performed in accordance with GAAS. Dexter had no knowledge of the embezzlement. The financial statements were presented in conformity with GAAP. The treasurer was Bart's agent and as such had designed the internal controls which facilitated the embezzlement.

That the audit was performed in accordance with GAAS

The Joint Ethics Enforcement Program involves joint enforcement of the ethics rules of The AICPA and state societies. The AICPA and the PCAOB. The SEC and the PCAOB. The AICPA and the SEC.

The AICPA and state societies.

Under Circular 230, which of the following describes improper activity by a CPA giving federal tax advice? The CPA takes into account the possibility that a tax return will not be audited. The CPA reasonably relies upon representations of the client. The CPA considers all relevant facts that are known. The CPA takes into consideration assumptions about future events related to the relevant facts.

The CPA takes into account the possibility that a tax return will not be audited.

A company engaged a CPA to perform the annual audit of its financial statements. The audit failed to reveal an embezzlement scheme by one of the employees. Which of the following statements best describes the CPA's potential liability for this failure? The CPA's adherence to generally accepted auditing standards (GAAS) may prevent liability. The CPA will not be liable if care and skill of an ordinary reasonable person was exercised. The CPA may be liable for punitive damages if due care was not exercised. The CPA is liable for any embezzlement losses that occurred before the scheme should have been detected.

The CPA's adherence to generally accepted auditing standards (GAAS) may prevent liability.

A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her tax return as married filing separately and asked the CPA not to disclose the information to anyone. The CPA was not retained by the husband for any tax work. The husband believed that his wife's tax return was negligently prepared and that he was financially harmed. He hired an attorney, without his wife's consent, to pursue a negligence claim against the CPA. The CPA hired an attorney to defend against the negligence claim. To which party, if any, may the CPA disclose the wife's tax return information without the wife's consent? The husband, for the evaluation of the negligence claim The CPA's attorney, for the evaluation of the negligence claim The husband's attorney, for the evaluation of the negligence claim No one, because all disclosures must be made with the wife's consent

The CPA's attorney, for the evaluation of the negligence claim

An IRS agent has just completed an examination of a corporation and issued a "no change" report. Which of the following statements about that situation is correct? The taxpayer may not amend the tax return for that taxable year. The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation. The IRS may not reopen the examination. The IRS may not examine any other tax return of the corporation for a period of one year.

The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.

Which of the following is a list of courts that are referred to as courts of original jurisdiction, or trial courts, for tax matters? The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims. The Tax Court, the U.S. District Court, and the U.S. Bankruptcy Court. The Tax Court, the U.S. Court of Federal Claims, and the U.S. Court of Appeals. The U.S. District Court, the U.S. Court of Federal Claims, and the U.S. Court of Appeals.

The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.

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? The accountant will not likely be held liable because the report indicated that limited evidence was collected. The accountant will not likely be held liable because he only compiled the financial statements. The accountant will likely be held liable because an appropriately worded report was not issued. The accountant will likely be held liable because in compiling the financial statements he should have detected the misstatement.

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

Mead Corp. orally engaged Dex & Co., CPAs, to audit its financial statements. The management of Mead informed Dex that it suspected that the accounts receivable were materially overstated. Although the financial statements audited by Dex did, in fact, include a materially overstated accounts receivable balance, Dex issued an unqualified opinion. Mead relied on the financial statements in deciding to obtain a loan from City Bank to expand its operations. City relied on the financial statements in making the loan to Mead. As a result of the overstated accounts receivable balance, Mead has defaulted on the loan and has incurred a substantial loss. If Mead sues Dex for negligence in failing to discover the overstatement, Dex's best defense would be that No engagement letter had been signed by Dex. The audit was performed by Dex in accordance with generally accepted auditing standards. Dex was not in privity of contract with Mead. Dex did not perform the audit recklessly or with an intent to deceive.

The audit was performed by Dex in accordance with generally accepted auditing standards.

Mix and Associates, CPAs, issued an unqualified opinion on the financial statements of Glass Corp. for the year ended December 31, 2005. It was determined later that Glass's treasurer had embezzled $300,000 from Glass during 2005. Glass sued Mix because of Mix's failure to discover the embezzlement. Mix was unaware of the embezzlement. Which of the following is Mix's best defense? The audit was performed in accordance with GAAS. The treasurer was Glass's agent and, therefore, Glass was responsible for preventing the embezzlement. The financial statements were presented in conformity with GAAP. Mix had no actual knowledge of the embezzlement.

The audit was performed in accordance with GAAS.

A "substantial understatement" on an individual return exceeds:

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

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs? The Securities and Exchange Commission The board of accountancy for the state in which the licensed CPA practices The American Institute of Certified Public Accountants The National Association of State Boards of Accountancy

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

A "substantial understatement" for a C corporation's tax return exceeds:

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

A member of the AICPA may be subject to expulsion or suspension from membership without hearing for any the following, except: The member's license to practice is revoked by a state board as a disciplinary measure. The member files a fraudulent tax return. The member is convicted of a crime punishable by imprisonment for 5 years. The member is prohibited from doing any work on audits of issuers by the PCAOB for 3 years.

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

A plaintiff who proves that a CPA has committed fraud may recover both compensatory damages and punitive damages. True False

True

Lee died, leaving all his property to his wife Gertie. Gertie immediately consulted tax accountant Mac, telling him: "I am terminally ill. What can I do to leave as much money to our child Billy as possible?" Under state law, the obvious thing to do was for Gertie to disclaim the inheritance, which would have meant that Lee's property would have transferred directly to Billy. Mac didn't think of this, however, meaning that Gertie had to pay estate tax on Lee's inheritance and shortly thereafter Billy had to pay a second round of estate tax when Gertie left everything to him. Billy sued Mac for breaching his contract with Gertie. Mac moved to dismiss the lawsuit on grounds that Billy was not a party to the contract and therefore could not sue for its breach. Which of the following is true? The motion to dismiss will be granted because Billy is a mere incidental beneficiary. The motion to dismiss will be denied, because Billy is an intended creditor beneficiary. The motion to dismiss will be denied, because Billy is an intended donee beneficiary. None of the above.

The motion to dismiss will be denied, because Billy is an intended donee beneficiary.

According to Treasury Department Circular 230, a tax practitioner must promptly submit records or information in any matter before the IRS unless: The practitioner believes in good faith and on reasonable grounds that the records or information are privileged. The practitioner believes that the records or information would be incriminating to the client. The practitioner believes the client would not want the records or information provided. The practitioner believes the records and information may not be relevant

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

Pursuant to Treasury Circular 230, which of the following statements about the return of a client's records is correct? The client's records are to be destroyed upon the submission of a tax return. The practitioner may retain copies of the client's records. The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client's records. The practitioner does not need to return any client records that are necessary for the client to comply with the client's federal tax returns.

The practitioner may retain copies of the client's records.

To whom must a CPA pay license fees in order to maintain a CPA license? The Public Company Accounting Oversight Board The American Institute of Certified Public Accountants The state board of accountancy of the CPA's state of licensure The state society of certified public accountants of the CPA's state of licensure

The state board of accountancy of the CPA's state of licensure

No penalty will be imposed on a corporation for underpayment of estimated tax for a particular year if The tax for that year is less than $500. Estimated tax payments for the year equal at least 93% of the tax shown on the return for that year. The corporation is a personal holding company. The alternative minimum tax is at least $1,000.

The tax for that year is less than $500.

What is the purpose of a 90-day letter?

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

In general, which of the following statements is correct with respect to ownership, possession, or access to workpapers prepared by a CPA firm in connection with an audit? The workpapers may be obtained by third parties where they appear to be relevant to issues raised in litigation. The workpapers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the workpapers. The workpapers are the property of the client after the client pays the fee. The workpapers must be retained by the CPA firm for a period of 10 years.

The workpapers may be obtained by third parties where they appear to be relevant to issues raised in litigation.

What does the Bank Secrecy Act require of taxpayers?

This act requires taxpayers to report foreign bank accounts

For regulations regarding practice as an accountant before the Internal Revenue Service, a CPA should look to AICPA Code of Professional Conduct. AICPA Statements of Responsibilities in Tax Practice. Treasury Department Circular 230. The Internal Revenue Code.

Treasury Department Circular 230.

A CPA who commits fraud is liable to all plaintiffs whom the CPA could reasonably foresee would be injured by the fraud. True False

True

A disclosed position will not be punished if it has a reasonable basis (≥20% chance of being sustained if challenged). True False

True

A penalty cannot be imposed for claiming an improper deduction if the taxpayer has a reasonable basis that the deduction is not frivolous and discloses this position on the tax return. True False

True

A penalty for failing to file a tax return runs concurrently with the penalty imposed for failing to pay the tax due on the return, meaning that the total for these two penalties will never exceed 5% per month. True False

True

A person who intentionally refuses to file an income tax return where one is required under the law might well end up being indicted for tax evasion. True False

True

A plaintiff seeking to sue a CPA for fraud must prove that he or she justifiably relied upon the CPA's false representations. True False

True

What court of original jurisdiction does not require prepayment of the disputed tax?

U.S. Tax Court

Which of the following courts is not a court of original jurisdiction? United States Tax Court. United States District Court. United States Court of Appeals. United States Court of Federal Claims

United States Court of Appeals.

Under which of the following scenarios will Jenny be in trouble under Section 6713's confidentiality provisions? When she sells a celebrity client's confidential tax information to a tabloid newspaper. When she discloses a rich client's confidential tax information pursuant to court order. When she shows several of her clients' tax returns to another accountant performing a peer review of Jenny's firm. All of the above.

When she sells a celebrity client's confidential tax information to a tabloid newspaper.

Which of the following statements best describes whether a CPA has met the required standard of care in conducting an audit of a client's financial statements? The client's expectations with regard to the accuracy of audited financial statements. The accuracy of the financial statements and whether the statements conform to generally accepted accounting principles. Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances. Whether the audit was conducted to investigate and discover all acts of fraud.

Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances.

Hark CPA, failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will Win because there was no privity of contract between Hark and Third. Lose because Hark knew that banks would be relying on the financial statements. Win because Third was contributorily negligent in granting the loan. Lose because Hark was negligent in performing the audit.

Win because there was no privity of contract between Hark and Third.

Edge Corp., a calendar year C corporation, had a net operating loss and zero tax liability for its 2016 tax year. To avoid the penalty for underpayment of estimated taxes, Edge could compute its first quarter 2017 estimated income tax payment using the Annualized income method Preceding-year method Yes Yes Yes No No Yes No No

Yes No

When CPAs fail in their duty to carry out their contracts for services, liability to clients may be based on Breach of contract Strict liability Yes Yes Yes No No Yes No No

Yes No

Tax preparers who aid and abet federal tax evasion are subject to Injunction to be prohibited from acting as tax preparers General federal criminal prosecution No No Yes No No Yes Yes Yes

Yes Yes

When computing a corporation's federal income tax for estimated income tax purposes, which of the following should be taken into account? Corporate tax credits Alternative minimum tax No No No Yes Yes No Yes Yes

Yes Yes

Omar's correct tax amount is $500,000, but he filed a form reporting that it was only $400,000. There is no claim of fraud. Is this a "substantial understatement" that will subject him to the 20% understatement penalty? Yes, and his penalty will be $100,000. Yes, and his penalty will be $20,000. Yes, and his penalty will be $5,000. No.

Yes, and his penalty will be $20,000

ABC Corporation, a Chapter C corporation, had a correct tax amount of $1,000,000 but reported only $800,000. There is no claim of fraud. Is this a "substantial understatement" that will subject ABC to the 20% understatement penalty? Yes, and its penalty will be $40,000. Yes, and its penalty will be $20,000. Yes, and its penalty will be $10,000. No.

Yes, and its penalty will be $40,000.

Under Circular 230, it is proper to delay as long as possible in fulfilling an IRS request for records or information if: You have investigated and believe in good faith that the information is privileged. It would benefit your client strategically in his tax dispute with the IRS. A and B None of the above.

You have investigated and believe in good faith that the information is privileged.

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. ≥ 10% chance of being sustained ≥ 20% chance of being sustained ≥ 40% chance of being sustained >50% chance of being sustained

≥ 20% chance of being sustained