Acct. Ethics-4a
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.
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.
Which Senate committee considers new tax legislation? Budget. Finance. Appropriations. Rules and Administration.
Finance.
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.
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.
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.
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
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 Tribble owes 5% of $60,000 ($3,000) times 4 (the number of months late), which multiplies out to $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 $100,000 × .25% = $25,000
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 0.5% × 4 × $20,000 = $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
When an ethics complaint carrying national implications arises, which entity typically handles it? SEC. PCAOB. State CPA society. AICPA.
AICPA.
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
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
All of the following are administrative sources of the tax law except: Private letter rulings. Technical advice memoranda. Revenue rulings. Committee reports.
Committee reports.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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 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.
Three.
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.
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
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.
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.
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.
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.
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.
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
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. The penalty is 20% of the underpayment of $100,000, or $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. 20% × $200,000 = $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.
