ACCY 411 Final Exam

Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?

PCAOB Standards: Yes Generally Accepted Fraud Detection Standards: No

Ascendants

Parents and grandparents of the ceased. Receive remaining assets after surviving spouse and descendants.

Under the traditional doctrine rule, to which of the following parties will a CPA be liable for common law negligence?

Parties in Privity: Yes Foreseen Parties: No

One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed under the Securities Act of 1933 is that the

Plaintiff suffered a loss.

Frank, a certified public accountant, has the right to make the following solicitations of employment involving IRS matters:

Seeking new business from a former client. Communicating with a family member. Targeting mailings.

The Sarbanes-Oxley Act of 2002 (SOX) has strengthened auditor independence by requiring a public company to

Select auditors through audit committees.

Which of the following factors, by itself, requires a corporation to comply with the reporting requirements of the Securities Exchange Act of 1934?

Shares listed on a national securities exchange.

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

The false information is immaterial.

Securities Act of 1933

The first major federal law regulating the securities industry. It requires firms issuing new stock in a public offering to file a registration statement with the SEC.

A tax return preparer must complete the paid preparer's area of the return if

The individual was paid to prepare, assist in preparing, or review the tax return.

In which of the following circumstances would a tax return preparer be prohibited from disclosing a client's tax return information?

The information will be provided to a section 501(c)(3) charity.

Under the Securities Act of 1933, which of the following statements most accurately reflects how securities registration affects an investor?

The investor is provided with information on the principal purposes for which the offering's proceeds will be used.

When a common stock offering requires registration under the Securities Act of 1933,

The issuer would act unlawfully if it were to sell the common stock without providing the investor with a prospectus.

Universal Corp. intends to sell its common stock to the public in an interstate offering that will be registered under the Securities Act of 1933. Under the act,

Universal's filing of a registration statement with the SEC does not automatically result in compliance with the "blue-sky" laws of the states in which the offering will be made.

A preliminary prospectus, permitted under SEC Regulations, is known as the

"Red-herring" prospectus.

Under the Securities Exchange Act of 1934, short-swing profits arise from the sale and purchase (purchase and sale) of the issuer's stock within

180 days.

A corporation files a shelf registration with the SEC. The corporation violates federal securities laws and regulations if it issues covered securities

4 years after the shelf registration without filing a new registration statement.

Regulation A provides an exemption for issuers of securities under the Securities Act of 1933. In reliance on Regulation A, Issuer has offered $45 million of securities for sale during the current calendar year. Which of the following does not violate federal securities laws and regulations?

A nonaccredited investor with annual income of $500,000 purchases $50,000 worth of the offering.

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

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

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

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

Which of the following securities is exempt from registration under the Securities Act of 1933?

A class of stock given in exchange for another class by the issuer to its existing shareholders without the issuer's payment of a commission.

Which of the following statements is true regarding the proxy solicitation requirements of Section 14(a) of the Securities Exchange Act of 1934?

A corporation must file its proxy statements with the SEC if it is a reporting company under the Securities Exchange Act of 1934.

Securities Exchange Act of 1934

A federal law dealing with securities regulation that established the Securities and Exchange Commission to regulate and oversee the securities industry.

Devise

A gift in a will

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

Will

A legally enforceable declaration of how a person wishes his or her property to be distributed after death

Engagement Letter

A letter that formalizes the contract between the auditor and the entity and outlines the responsibilities of both parties.

In which of the following situations may the tax return preparer disclose the tax return information requested without first obtaining the consent of the taxpayer/client?

A partner in a partnership, who was not involved with the return preparation or partnership records, requests a copy of the partnership return, including the Schedule K-1s for all partners. An IRS agent, in his or her official capacity, visits the preparer and requests copies of state and federal income tax returns, related returns, schedules, and records of the taxpayer used in the preparation of the tax returns. The preparer receives a state grand jury subpoena requesting copies of federal and state income tax returns.

Constructive Fraud

A person or entity gained an unfair advantage over another by deceitful or unfair methods

All of the following are tax return preparers except

A person who gives an opinion about theoretical events that have not occurred.

Legatee

A person who receives Personal Property through a will.

Circular 230, Sec. 10.34, discusses standards for advising clients with respect to tax return positions and for preparing or signing returns. Which of the statements below is true?

A practitioner advising a client to take a position on a tax return, or preparing or signing a tax return as a preparer, must inform the client of the penalties reasonably likely to apply to the client with respect to the position advised, prepared, or reported. A practitioner may not sign a tax return as a preparer if the practitioner determines that the tax return contains a frivolous position. A practitioner advising a client to take a position on a tax return, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.

Trust

A relationship where property is held by one party for the benefit of another party

Which of the following statements is true about corporations subject to the reporting requirements of the Securities Exchange Act of 1934?

A report (Form 8-K) must be filed with the SEC after a material important event occurs.

Which of the following most likely is a violation of federal securities law regarding communications before and during registered securities offerings?

A seasoned issuer files hard-copy documents with the SEC that include its registration statement and prospectus.

Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code (IRC) requirement in the prior-year return of a new client. Which of the following actions should Lawson take?

Discuss the requirements of the IRC with the client and recommend that the client amend the return.

Which entity has the authority to prohibit an individual from practicing public accounting?

A state board of accountancy.

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?

A state board of accountancy.

Which of the following persons would be subject to the penalty for improperly negotiating a taxpayer's refund check?

A tax return preparer who operates a check cashing agency that cashes, endorses, or negotiates tax refund checks for returns he prepared.

Which of the following is considered a tax return preparer?

A woman who prepares tax returns in her home during filing season and accepts payment for her services.

All of the following are examples of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service except

Advertising the hourly rates of the CPA.

Frank Maple, CPA, represents his brother Joe Maple and Joe's business partner Bill Smith. Joe Maple and Bill Smith are equal shareholders in the Joe & Bill Corporation. The Internal Revenue Service examined the corporation and determined that one of the shareholders committed fraud, but could not determine which shareholder it was. Frank has made an appointment with the Internal Revenue Service to determine which partner was guilty. Which of the following statements reflects what Frank should do in accordance with Circular 230?

Advise Joe & Bill that he cannot represent them because there is a conflict of interest.

Mike is a CPA. Widget, Inc., is an accrual-basis taxpayer. In Year 3, while preparing Widget's Year 2 return, Mike discovered that Widget failed to include income on its Year 1 return that Widget received in Year 2 but that should have been included in income in Year 1 under the accrual method of accounting. What must Mike do?

Advise Widget of the error and the consequences of the error.

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?

Advise the client of the consequences of the noncompliance.

When an attorney, a CPA, or an enrolled agent knows that a client has backdated a document that the client wants the representative to submit to the IRS, the representative has a duty to do which of the following?

Advise the client promptly of such noncompliance, error, or omission, as well as the consequences under the revenue laws.

Personal Property

All property not classified as real property

Identify the individual below from whom a CPA, in practice before the Internal Revenue Service, may knowingly accept assistance.

An individual who has temporary recognition to practice before the IRS.

Legacy

An inheritance; something handed down from an ancestor or from the past

The Securities Act of 1933 broadly classifies the parties involved in the initial offering and sale of securities. The individual or business organization offering a security for sale to the public is

An issuer.

The Jumpstart Our Business Startups (JOBS) Act of 2012 provides an exemption from registration of securities. The related rules issued by the SEC are known as Regulation A. Under these rules, which of the following is not an exempt offering?

An offering of $22 million is made within 12 months, each purchaser receives an offering statement, and sales may be made without approval of the offering statement by the SEC.

Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements?

An owner of 15% of the total face value of the corporation's outstanding debentures.

Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements?

An owner of 5% of the corporation's outstanding debentures or the corporation's general counsel.

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

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

Corporations that are exempt from registration under the Securities Exchange Act of 1934 are subject to the act's

Antifraud provisions.

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

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

Under the Securities Act of 1933, an issuer that makes an initial offering of securities must give a prospectus to each potential investor. Which of the following violates federal securities laws and regulations?

Any issuer may communicate a free-writing prospectus at any time.

Trustee

Any person who holds property, authority, or a position of trust or responsibility for the benefit of another.

Wool, Inc., is a reporting company under the Securities Exchange Act of 1934. The only security it has issued is its voting common stock. Which of the following statements is true?

Any person who owns more than 5% of Wool's common stock must file a report with the SEC.

A penalty may be assessed on any preparer or

Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.

To which of the following parties may a CPA partnership provide working papers related to its tax practice, without being lawfully subpoenaed, without the client's consent, or without taking precautions, such as obtaining a confidentiality agreement, to prevent inappropriate disclosure of client information?

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

A CPA partnership may, without being lawfully subpoenaed or without the client's consent, make working papers related to tax advice provided to international clients available to

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

A penalty may be assessed against an income tax return preparer who takes an unreasonable position that causes an understatement of liability on a return. For purposes of assessing the penalty, "understatement of liability" means

Any understatement of the tax liability or overstatement of the amount to be refunded or credited.

The SEC's antifraud Rule 10b-5 prohibits trading on the basis of inside information of a business corporation's stock by

Anyone who bases his or her trading activities on the inside information.

The reporting requirements of the Securities Exchange Act of 1934 and its rules

Apply to a corporation that registered under the Securities Act of 1933 but that did not register under the Securities Exchange Act of 1934.

Arnie is a Certified Public Accountant who prepares income tax returns for his clients. One of his clients submitted a list of expenses to be claimed on Schedule C of the tax return. Arnie qualifies as a return preparer and, as such, is required to comply with which one of the following conditions?

Appropriate inquiries are required to determine whether the client has substantiation for travel and entertainment expenses.

Mike is a CPA. For the past 5 years, the information that Anne provided Mike to prepare her return included a Schedule K-1 from a partnership showing significant income. However, Mike did not see a Schedule K-1 from the partnership among the information Anne provided to him this year. What does due diligence require Mike to do?

Ask Anne about the fact that she did not provide him with a Schedule K-1.

Which of the following acts, if any, constitute grounds for a tax preparer penalty?

At the taxpayer's suggestion, the tax preparer deducted the expenses of the taxpayer's personal domestic help as a business expense on the taxpayer's individual tax return.

A CPA qualified to practice before the IRS is assisting in the defense of a client in a proceeding in federal court. The plaintiff is the U.S. government. The federal accountant-client privilege

Does not apply if the testimony relates to a private civil matter.

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

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

Holly Corp. engaged Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly was required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover the omission of a fact material to the statements. A purchaser of Holly's securities may recover from Yost under Section 11 of the Securities Act of 1933 only if the purchaser

Brings a civil action within 1 year of the discovery of the omission and within 3 years of the offering date.

Baner, a CPA, is preparing a tax return for Affleck, a new client. During the course of the interview, Baner asks to inspect Affleck's source documents. Affleck responds that the supporting information is not readily available but assures Baner that the summary information is reliable. Which of the following statements best describes how Baner should proceed?

Baner can accept the representations but should make reasonable inquiries to determine if the information appears to be incorrect, incomplete, or inconsistent.

A tax return preparer may disclose or use tax return information without the taxpayer's consent to

Be evaluated by a quality or peer review organization.

Tax preparers who aid and abet federal tax evasion are subject to

Being Prohibited From Acting as Tax Preparers: Yes General Federal Criminal Prosecution: Yes

The Securities Act of 1933 provides an exemption from registration for

Bonds Issued by a Municipality for Governmental Purposes: Yes Securities Issued by a Not-for-Profit Charitable Organization: Yes

A penalty applies to the portion of tax underpayment attributable to I. Negligence of the tax rules or regulations II. A disregard of the tax rules or regulations

Both I and II.

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

Both I and II.

Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to establish the defense of due diligence if I. The auditor performed an additional review of the audited statements to ensure that the statements were accurate as of the effective date of a registration statement. II. The auditor complied with GAAS or other applicable professional standards.

Both I and II.

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

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

Both I and II.

When CPAs fail in their duty to carry out their contracts to prepare tax returns, common law liability to clients may be based on

Breach of Contract: Yes Strict Liability: No

By what date must a tax return preparer furnish a copy of the original return to a taxpayer?

By the date the tax return is presented for the signature of the taxpayer.

The Securities Act of 1933 provides an exemption from registration for offers and sales of securities made only to accredited investors. Federal securities laws and regulations are violated if the exemption is claimed and

The SEC is not informed of exempt sales.

What defense must an accountant establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the act?

Good faith and lack of knowledge of the statement's falsity.

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

Gross negligence.

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

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

Under Regulation D of the Securities Act of 1933, which of the following conditions apply to private placement offerings? The securities

Cannot be the subject of an immediate unregistered reoffering to the public.

Under the Securities and Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the act?

Civil Liability for Monetary Damages: Yes Criminal Liability for a Fine: Yes

According to Circular 230, which of the following statements may not be used when a CPA advertises?

Claims of quality of service that cannot be verified.

Clark, a professional tax return preparer, prepared and signed a client's federal income tax return that resulted in a $600 refund. Which one of the following statements is true 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.

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

Gross negligence.

Compilation

Collection of literary works formed by collecting and assembling preexisting materials or data that are selected, coordinated, or arranged in such a way that the resulting product constitutes an original work of authorship.

The Securities and Exchange Commission requires public companies to disclose all of the following except

Comfort letters for underwriters.

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC's registration requirements?

Companies with assets in excess of $10 million and 500 or more shareholders.

The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant's right to practice before it. What is a basis for suspension?

Conviction of a felony.

The Secretary of the Treasury can censure, suspend, or disbar a practitioner from practice before the Internal Revenue Service for incompetence and/or disreputable conduct. Which one of the following is considered disreputable conduct?

Conviction of any criminal offense under the revenue laws of the United States. Giving false or misleading information or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof. Conviction of any criminal offense involving dishonesty or breach of trust.

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

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

Craven was the CEO of Engines Plus, Inc., a publicly-traded company. Hanson, CPA, was the long-time controller for the company. Engines Plus was about to be sued in a class action suit for defective engines. Only Craven knew about the impending suit. On March 1, Craven told Hanson about the impending suit. On March 2, Craven told Spore, an old friend, about the suit. Spore knew that Craven was the CEO of Engines Plus. On March 3, Craven, Hanson, and Spore all sold the stock they owned in Engines Plus. On March 4, the class action suit was filed and the value of Engines Plus stock plummeted. Under the insider trading provisions of the Securities Exchange Act of 1934, which of the following statements is correct regarding Craven, Hanson, and Spore?

Craven and Hanson would be considered insiders and Spore would be considered a tippee, all with knowledge of material, nonpublic information.

Settlor

Creator of a trust

A CPA may be disbarred or suspended from IRS practice for which of the following conduct?

Criminal conviction of an offense under the Internal Revenue Code. Disbarment or suspension from practice as an attorney, CPA, accountant, or actuary. Misappropriation of funds received from a client for the purpose of tax payments.

Holographic Will

Handwritten will

Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, Form 1041, he

Is not considered a tax return preparer.

At a confidential meeting, a tax 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?

Discuss the entire conversation, including illegal acts.

Burt, CPA, issued an unmodified opinion on the financial statements of Midwest Corp. These financial statements were included in Midwest's annual report, and Form 10-K was filed with the SEC. As a result of Burt's reckless disregard for GAAS, material misstatements in the financial statements were not detected. Subsequently, Davis purchased stock in Midwest in the secondary market without ever seeing Midwest's annual report or Form 10-K. Shortly thereafter, Midwest became insolvent, and the price of the stock declined drastically. Davis sued Burt for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Burt's best defense is that

Davis did not rely on the financial statements or Form 10-K.

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove the

Defendant's Intent to Deceive: No Plaintiff's Reliance on the Registration Statement: No

Under the Private Securities Litigation Reform Act of 1995, Baker, CPA, reported certain noncompliance with laws and regulations to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the noncompliance had a material effect on Supermart's financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to

Deliver a report concerning the noncompliance to the SEC within 1 business day.

Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except

Disclose a conflict of interest.

Which of the following statements about disclosure of confidential client data resulting from a CPA's tax practice is generally true?

Disclosure may be made to any party with the consent of the client.

Pick, CPA, was engaged by Edge Corp. to audit Edge's financial statements. Pick, in performing the audit and rendering an unmodified opinion, intentionally ignored several material omissions in the financial statements. Edge included Pick's auditor's report in its annual filing with the SEC and in its annual stockholders' report. Drane purchased shares of Edge stock based on Drane's review of the past performance of the stock and current-year financial statements. When the omissions in the financial statements became known, the value of Edge stock declined and Drane suffered a loss. Under the provisions of Rule 10b-5 of the Securities Exchange Act of 1934, what will be the result of a suit by Drane against Pick?

Drane will win because Pick acted with intent.

Which of the following circumstances is a defense to an accountant's liability under Section 11 of the Securities Act of 1933 for misstatements and omissions of material facts contained in a registration statement?

Due diligence on the part of the accountant.

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

Engagement letter.

Which of the following individuals qualifies as a practitioner under Circular 230?

Enrolled actuary. Certified public accountant Attorney

Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

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.

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

Failed to exercise due care.

Under state law, one of the elements necessary to hold a CPA liable to a client for preparing a tax return negligently is that the CPA

Failed to exercise due care.

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

Fails to follow professional standards.

The Internal Revenue Code and the Regulations do not impose penalties on tax return preparers for which of the following?

Failure to notify a taxpayer about an inadvertent error on a tax return filed 10 years ago.

Which of the following is not an example of disreputable conduct (as described in Sec. 10.51 of Circular 230) for which a CPA may be suspended or disbarred from practice before the IRS?

Failure to respond to a request by the Director of the Office of Professional Responsibility to provide information.

All of the following are considered examples of disreputable conduct for which a CPA can be disbarred or suspended except

Failure to timely pay personal income taxes.

An offering made under the provisions of Regulation A Tier 1 requires that the issuer

File an offering statement with the SEC.

Integral Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. For its current fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed officers of the corporation. Integral did not notify the SEC of shareholder "short-swing" profits, report that a competitor made a tender offer to Integral's shareholders, and report changes in the price of its stock as sold on the New York Stock Exchange. Under the SEC reporting requirements, which of the following was Integral required to do?

File the periodic report listing newly appointed officers.

For what minimum period should working papers related to tax practice be retained by the independent CPA?

For the statutory period within which legal action may be brought against the independent CPA.

Corcoran, Inc.'s common stock trades on the New York Stock Exchange. The past year was disappointing for Corcoran. Cash flow, operating income, and net income were all significantly lower than in previous years. While discussing the financial results, Barbara Freeburg, an outside member of the board of directors, learned that Corcoran's management recorded large, one-time expenses in the last quarter of the year that related to warranty, bad-debt, environmental, and other liabilities. Management provided adequate support for the large increase in the liabilities, but Freeburg, believing liabilities were materially overstated, disagreed and resigned from the board. The large expenses recorded by Corcoran in the last quarter will most likely be reported on

Form 10-K.

What form must be filed with the Securities and Exchange Commission (SEC) by nonreporting and unseasoned issuers?

Form S-1.

Which of the following is least likely to be considered a security under the Securities Act of 1933?

General partnership interests.

Which one of the following is considered disreputable conduct under Circular 230?

Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof.

Under the Securities Exchange Act of 1934, a corporation whose common stock is listed on a national stock exchange

Is subject to having the registration of its securities suspended or revoked.

The traditional nonstatutory rules regarding accountant's liability to third parties for negligence

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

Testate

Having made and left a valid will.

Sam is a CPA and a partner in the firm of Taxes-R-Us, LLP. One of Sam's former partners is under investigation by the Office of Professional Responsibility for disreputable conduct. Sam has been asked by the Office of Professional Responsibility to provide information regarding his former partner. Sam must provide all the information requested unless

He believes in good faith and on reasonable grounds that the information requested is privileged or that the request is of doubtful legality.

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 not compensated.

Hugh Gibson is suing Simpson & Sloan, CPAs, to recover losses incurred in connection with Gibson's transactions in Zebra Corporation securities. Zebra's annual Form 10-K report contained material false and misleading statements in the financial statements audited by Simpson & Sloan. To recover under the Securities Exchange Act of 1934, Gibson must, among other things, establish that

He relied upon the financial statements in his decision to purchase or sell Zebra securities.

A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client's home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except

Holding the check for safe keeping and awaiting the client's return.

The Private Securities Litigation Reform Act of 1995 provided a safe harbor from liability in connection with releases of information by the corporation through reports, speeches, public announcements, or press releases. Which of the following is (are) protected by this safe harbor? I. Statements that are immaterial II. Statements made without actual knowledge that they are false or misleading III. Statements accompanied by cautionary remarks, even if they are not specific

I and II.

Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following must a plaintiff prove to hold a CPA liable? I. The misstatements contained in the financial statements certified by the CPA were material. II. The plaintiff relied on the CPA's unmodified opinion.

I only.

Under the provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which of the following activities must be proven by a stock purchaser in a suit against a CPA? I. Intentional conduct by the CPA designed to deceive investors II. Negligence by the CPA

I only.

In which of the following situations is an accountant considered to have aided and abetted violations of the Securities Exchange Act of 1934? I. The accountant is generally aware of his or her participation in an improper activity or knowingly aids the activity. II. The accountant is generally aware of his or her participation in an improper activity and knowingly aids the activity. III. The accountant observes the activity and remains silent. This may constitute abetting.

II only.

Under the Securities Act of 1933, which of the following statements, if any, are correct regarding the purpose of registration? I. The purpose of registration is to allow for the detection of management fraud and prevent a public offering of securities when management fraud is suspected. II. The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.

II only.

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

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

A CPA is permitted to disclose confidential client information without the consent of the client to I. Another CPA who has purchased the CPA's tax practice II. A successor CPA firm if the information concerns suspected tax return irregularities III. A voluntary peer review board

III only.

James Fisk recently acquired Valiant Corporation by purchasing all of its outstanding stock pursuant to a tender offer. Fisk demanded and obtained the resignation of the existing board of directors and replaced it with his own slate of nominees. Under these circumstances,

If Valiant is listed on a national stock exchange, Fisk must file his tender offer with the SEC.

Zack Limited Partnership intends to sell $6 million of its limited partnership interests. Zack conducts all of its business activities in the state in which it was organized. Zack intends to use the offering proceeds to acquire municipal bonds. Which of the following statements is true concerning the offering and the registration exemptions that might be available to Zack under the Securities Act of 1933?

If Zack complies with the requirements of Regulation D, Zack may make an unlimited number of offers to sell the limited partnership interests.

According to the Securities Act of 1933, which of the following statements is correct regarding an issuer of securities?

If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid.

Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under Section 11, a CPA usually will not be liable to the purchaser

If the CPA can prove due diligence.

Regulation D of the Securities Act of 1933 provides a private placement exemption from registration of a securities offering. Federal securities laws and regulations are violated if the securities are sold

In an immediate unregistered reoffering to the public.

The CPA firm of Knox & Knox has been subpoenaed to testify and produce its correspondence and working papers in connection with a lawsuit brought by a state taxing authority against a client of the firm. Knox considers the subpoenaed documents to be privileged communication and therefore seeks to avoid admission of such evidence in the lawsuit. Which of the following is correct?

In the absence of a specific statutory provision, the law does not recognize the existence of privileged communication between a CPA and client.

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?

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

What is the standard that must be established to prove a violation of the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?

Intentional misconduct.

Actual Fraud

Intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage.

Under the liability provisions of Sec. 18 of the Securities Exchange Act of 1934, for which of the following actions would an accountant generally be liable?

Intentionally preparing and filing with the SEC a reporting corporation's incorrect quarterly report.

A notice of disbarment or suspension of a certified public accountant from practice before the Internal Revenue Service is issued to which of the following?

Interested departments and agencies of the federal government. State authorities. IRS employees.

Spendthrift Trust

Is a trust that protects the settler's assets from being spent recklessly by the beneficiary and the beneficiaries' creditors.

Regulation A provides an exemption for issuers of securities under the Securities Act of 1933. In reliance on Regulation A, Issuer has offered $18 million of securities for sale during the current calendar year. Which of the following violates federal securities laws and regulations?

Issuer does not register under state blue-sky laws.

Integral Corp., with assets in excess of $4 million, has issued common and preferred stock and has 350 shareholders. Its stock is sold on the New York Stock Exchange. Under the Securities Exchange Act of 1934, Integral must be registered with the SEC because

Its shares are listed on a national stock exchange.

Thorp, CPA, was engaged to prepare tax returns and provide other tax services to Ivor Co. During the engagement, Thorp discovered that Ivor was selling worthless mortgages to investors. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial. Ivor claimed accountant-client privilege to prevent Thorp from testifying. Which of the following statements is true regarding Ivor's claim?

Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege.

Jack, a return preparer, did not retain copies of all returns that he prepared but did keep a list that reflected the taxpayer's name, identification number, tax year, and type of return for each of his clients. Which of the following statements best describes this situation?

Jack is in compliance with the provisions of the tax code, provided he retains the list for a 3-year period after the close of the return period in which the return was signed.

Jay Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally expressed an unmodified opinion on the financial statements even though material misstatements were discovered. The financial statements and Jay's unmodified opinion were included in a registration statement and prospectus for an original public offering of Maco stock. Which of the following statements is true regarding Jay's liability to a purchaser of the offering under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934?

Jay will be liable if the purchaser relied on Jay's unmodified opinion on the financial statements.

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

Justifiably relied on the financial statements.

Ford & Co., CPAs, prepared Owens Corp.'s tax returns. Relying on these tax returns, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the tax returns or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common law fraud action against Ford, Century must prove, in addition to other elements, that Century was

Justified in relying on the tax returns.

A CPA who prepares clients' federal income tax returns for a fee must

Keep a completed copy of each return for a specified period of time or keep a summarized list of specified return information.

LPCO intends to sell securities. It is organized in the state where it carries on all of its business activities. If LPCO offers the securities in reliance on Rule 147, which of the following is a violation of federal securities laws and regulations?

LPCO makes unlimited offers to nonresidents.

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

Lack of scienter.

The SEC can suspend or revoke the right of an accountant to sign any document filed by an SEC registrant if the accountant

Lacks Integrity: Yes Engages in Unethical Conduct: Yes

Real Property

Land and everything permanently attached to it

Fact Pattern: Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. In a suit against Jay under the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Larson must prove all of the following except

Larson was an intended user of the false registration statement.

Fact Pattern: While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unmodified 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. Which of the following statements is true with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933?

Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate.

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

Liable for losses attributable to her negligence.

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

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

To avoid tax return preparer penalties for a return's understated tax liability due to an intentional disregard of the regulations, which of the following actions must a tax preparer take?

Make reasonable inquiries if the taxpayer's information is incomplete.

A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to

Make reasonable inquiries when taxpayer information appears incorrect.

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

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

A tax advisor with what responsibility should take reasonable steps to ensure that the firm's procedures for all members, associates, and employees are consistent with the best practices?

Overseeing either a firm's practice of (1) providing advice concerning federal tax issues or (2) preparing or assisting in the preparation of submissions to the IRS.

If an ethics complaint is filed against a CPA, the matter

May be handled, in most cases, by either the AICPA or a state CPA society.

Under its legal authority, the SEC

May prohibit an accounting firm from accepting SEC clients.

Noncupative Will

Oral will

Fact Pattern: Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Larson succeeds in the Section 11 suit against Dart, Larson would be entitled to

Monetary damages only.

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

Money damages.

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.

Which of the following is a tax return preparer according to the tax return preparer rules?

Mr. A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.

Which of the following securities is exempt from registration under the Securities Act of 1933?

Municipal bonds.

Spiffy Manufacturing plans to offer a new issue of voting stock to the investing public. Assuming that it properly uses an exemption from registration under the Securities Act of 1933, Spiffy

Must adhere to both federal antifraud rules and state law.

Dee is the owner of 12% of the shares of common stock of D&M Corporation that she acquired in Year 1. She is the treasurer and a director of D&M. The corporation registered its securities in Year 2 and made a public offering pursuant to the Securities Act of 1933. If Dee decides to sell part of her holdings in Year 9, the shares

Must be registered if Dee sells 50% of her shares through her broker to the public.

On May 1, Apel purchased 7% of Stork Corp.'s preferred stock traded on a national securities exchange. After the purchase, Apel owned 9% of the outstanding preferred stock. Stork is registered under the Securities Exchange Act of 1934. With respect to the purchase, Apel

Must file with the SEC, the issuer, and the national securities exchange information concerning the purpose of the acquisition.

The registration provisions of the Securities Exchange Act of 1934 require disclosure of all of the following information except the

Names of owners of at least 5% of any class of nonexempt equity security.

Which of the following requirements must be met by an issuer of securities who wants to make an offering by using shelf registration?

Original Registration Statement Must be Kept Updated: Yes The Offeror Must Be a First-Time Issuer of Securities: No

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

Negligence and breach of contract.

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

Negligently performs a professional service.

A main provision of the Securities Act of 1933, as amended in 1934, is the requirement that

New securities offered for sale in interstate commerce be registered with the SEC.

Jane is a Certified Public Accountant who specializes in preparing federal tax returns. Which of the following returns would not qualify Jane as a tax return preparer?

None of the answers are correct.

Which of the following situations describes a disclosure of tax return information by a tax return preparer that would subject the preparer to a penalty?

None of the answers are correct.

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

Not be liable because Safe was not a foreseen user.

Starr, CPA, prepared and signed Cox's current-year federal income tax return. Cox informed Starr that Cox had paid doctors' bills of $20,000 although Cox actually had paid only $7,000 in doctors' bills during the year. Based on Cox's representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox's figures and did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox's tax return, Starr is

Not liable to the IRS for any penalty or interest.

Pate Corp. is offering $3 million of its securities solely to accredited investors pursuant to Regulation D of the Securities Act of 1933. Under Regulation D, Pate is

Not required to provide any specified information to the accredited investors.

The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must

Notify the IRS of the identity of any person who, according to the CPA's belief, could have the records.

You are a CPA retained by the manager of a cooperative retirement village to prepare its tax returns. In performing the work, you discover that there are no invoices to support $25,000 of the manager's claimed disbursements. The manager informs you that all the disbursements are proper. What should you do?

Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.

Beneficiary

One who benefits from something; a person who is left money or other property in a will or the like

Apogee Co. has filed with the SEC for many years, and its market capitalization is $10 billion. Perigee Co. has filed continuously with the SEC for 3 years, and its market capitalization is $75 million. Which of the following is most likely a true statement about communications prior to and during a registered offering of securities?

Only Apogee may make oral communications at any time if certain conditions are met.

Which of the following statements is false regarding tax return preparers?

Only a person who signs a return as the preparer may be considered the preparer of the return.

An accountant engaged in tax practice before the IRS has a confidentiality privilege regarding communications with a client. This privilege applies

Only to advice on legal issues.

A CPA must sign the preparer's declaration on a federal income tax return

Only when the CPA prepares a tax return for compensation.

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

Prevail based on the contract.

How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law?

Privity with purchasers is not a necessary element of proof.

A CPA who fraudulently performs a professional service will

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

Ms. Smith hired Tom, a CPA, to prepare her federal income tax return for Year 3. While gathering information to prepare the return, Tom discovered that Ms. Smith failed to file federal income tax returns for the Year 1 and Year 2 tax years. Circular 230 requires that Tom do the following:

Promptly advise Ms. Smith that she did not comply with the Internal Revenue laws by failing to file federal income tax returns for the Year 1 and the Year 2 tax years and of the consequences she may face under the Code and regulations.

Identify the appropriate action that a practitioner should take when (s)he becomes aware of an error or omission on a client's return.

Promptly advise the client of such noncompliance, error, or omission and the consequences thereof.

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must

Promptly advise the client of the error.

Collaterals

Property, including accounts, contract rights, and chattel paper, that is subjected to a security interest in exchange for credit or as security for a debt.

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

Punitive damages.

A CPA firm's working papers related to its tax practice are least likely to be protected from disclosure

Pursuant to a state court subpoena.

Link Corporation is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following documents must Link file with the SEC?

Quarterly Reports (Form 10-Q): Yes Proxy Statements: Yes

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

Reckless disregard.

A CPA will be liable to a tax client for damages resulting from all of the following actions except

Refusing to sign a client's request for a filing extension.

A CPA firm must do which of the following before it can participate in the preparation of an audit report of a company registered with the Securities and Exchange Commission (SEC)?

Register with the Public Company Accounting Oversight Board.

Pix Corp. is making a $60 million stock offering. Pix wants the offering exempt from registration under the Securities Act of 1933. Which of the following provisions of the act would Pix have to comply with for the offering to be exempt?

Regulation D, Rule 506.

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

Reliance on the Financial Statements: No Fraud by the CPA: No

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

Reliance.

The antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934

Require that the wrongful act be accomplished through the mail, any other use of interstate commerce, or through a national securities exchange.

The provisions of the Securities Exchange Act of 1934 include all of the following except the

Requirement that firms offering securities for public sale to file a registration statement and provide a prospectus to potential investors.

Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty?

Ron died after furnishing tax return information to his tax return preparer. Ron's tax return preparer disclosed the information to Jerry, Ron's nephew, who is not the fiduciary of Ron's estate.

If securities are exempt from the registration provisions of the Securities Act of 1933, any fraud committed in the course of selling such securities can be challenged by the

SEC: Yes Person Defrauded: Yes

The Securities Act of 1933 applies to the

Sale of new securities.

Regulation A provides an exemption for issuers of securities under the Securities Act of 1933. In reliance on Regulation A, Issuer has offered $18 million of securities for sale during the current calendar year. Which of the following violates federal securities laws and regulations?

Sales are made before the offering statement is approved by the SEC.

Sam, a CPA, is representing Fred before the Examination Division of the Internal Revenue Service. The Internal Revenue Service is questioning Fred on his Schedule C gross income that is listed on the 2017 tax return. While reviewing the documentation Fred provided, Sam discovers income that was omitted from the tax return. What is the appropriate action for Sam to take?

Sam must advise Fred promptly of the omission and the consequences provided by the Internal Revenue Code and regulations for such omission.

Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, the financial statements included material misstatements. Ocean was unaware of this fact. The financial statements and Ocean's unmodified opinion were included in a registration statement and prospectus for an original public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following acts is Sharp most likely to prevail in a lawsuit against Ocean?

Securities Exchange Act of 1934, Section 10(b), Rule 10b-5: No Securities Act of 1933, Section 11: Yes

The partnership of Rodgers & Higgs, CPAs, performed audits of Alt Corp., a publicly-traded company, for the past several years. After issuing the current year's audit report, the CFO of Alt confessed to having committed fraud against Alt. Under which of the following statutes would the investors most likely bring suit against Rodgers & Higgs?

Securities Exchange Act of 1934, if they can prove scienter.

Dean, Inc., a publicly traded corporation, paid a $10,000 bribe to a local zoning official. The bribe was recorded in Dean's financial statements as a consulting fee. Dean's unaudited financial statements were submitted to the SEC as part of a quarterly filing on Form 10-Q. Which of the following federal statutes did Dean violate?

Securities Exchange Act of 1934.

Which one of the following laws addresses the issue of insider trading?

Securities Exchange Act.

Which of the following securities are regulated by the provisions of the Securities Act of 1933?

Securities issued by insurance companies.

A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate tax return information if the disclosure is made

So that a potential acquirer can analyze the business value.

Which of the following is not an example of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service?

Soliciting new business in matters relating to the Internal Revenue Service through the publishing of a range of fees for particular services.

Which of the following is considered a tax preparer under the tax preparer regulations?

Someone who employs another person to prepare, for compensation, a substantial portion of any return of tax under the income tax provisions of the Code.

Which of the following is not a tax return preparer?

Someone who prepares a return or claim for refund for his or her employer.

Which of the following is not a tax return preparer?

Someone who prepares, as a fiduciary, a return or claim for refund for any person.

In a jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over working papers without a client's permission?

State CPA society peer review panel.

Which of the following professional bodies has the authority to revoke a CPA's license to practice public accounting?

State board of accountancy.

Which of the following are exempt from the registration requirements of the Securities Act of 1933?

Stock of a corporation offered and sold only to residents of the state in which the issuer was incorporated and doing all of its business.

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

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

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

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

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 for penalties arising from an understatement due to willful or reckless conduct.

Which of the following statements is true regarding records required to be maintained by return preparers?

Tax return preparers are required to maintain a complete copy of each return or claim for refund they have filed for 3 years after the return period, or are required to maintain a list of the names, identification numbers, and tax years for whom returns are prepared and to keep this list for 3 years after the return period.

Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return that Morgan has prepared?

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

Which of the following events must be reported to the SEC under the reporting provisions of the 1934 act?

Tending Offers: Yes Insider Trading: Yes Solicitation Proxies: Yes

When preparing a client's Form 1040, U.S. Individual Income Tax Return, a CPA determined that there was documentation supporting only $12,000 of the $20,000 travel expenses claimed by the client. Which of the following courses of action taken by the CPA would be in compliance with Treasury Circular 230?

The CPA makes reasonable inquiries to obtain the needed documentation if the information as furnished appears to be incorrect or incomplete.

A CPA prepares a client's tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA's lack of inquiry?

The CPA may be assessed a tax return preparer penalty.

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

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

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?

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

For a CPA to be liable for damages under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove all of the following except that

The CPA violated generally accepted auditing standards.

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

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

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

Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodic reports?

The Corporation has Fewer than 500 shareholders: Yes The Securities are Listed on a National Securities Exchange: No

To which of the following parties may a CPA partnership generally provide its working papers related to its tax practice without either the client's consent or a lawful subpoena?

The IRS: No The FASB: No

Attestation

The act of witnessing a person's signing of an instrument by a notary public.

Fact Pattern: Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Larson succeeds in the Section 10(b) and Rule 10b-5 suit, Larson would be entitled to

The amount of any loss caused by the fraud.

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

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

Identify the item below that does not describe information a preparer must maintain about every return prepared.

The date the return or claim for refund was prepared.

Under the Securities Exchange Act of 1934, a person is liable for making a false or misleading statement (or omission) of a material fact in an SEC filing (Section 18). Moreover, defrauding anyone in the purchase or sale of any security is illegal (Section 10). Under these provisions, a plaintiff must bring a suit within

The earlier of 2 years after discovery of the facts on which the suit is based or 5 years after the cause of action arose.

Which of the following is incorrect regarding an engagement letter?

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

Fact Pattern: Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Larson must prove that

The misstatements contained in Dart's financial statements were material.

Fact Pattern: West & Co., CPAs, expressed an unmodified opinion on the financial statements of Pride Corp. These were included in Pride's registration statement filed with the SEC. Subsequently, Hex purchased 500 shares of Pride's preferred stock, which were acquired as part of a public offering subject to the Securities Act of 1933. Hex has commenced an action against West based on the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Which of the following elements must Hex prove to hold West liable?

The misstatements were material.

For an offering to be exempt under Regulation D of the Securities Act of 1933, Rule 506 requires that

The offering be made without general advertising if any sales are made to purchasers who are not accredited investors.

Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is true?

The offering would be exempt from the registration requirements of the Securities Act of 1933.

A requirement of a private action to recover damages for violation of the registration requirements of the Securities Act of 1933 is that

The plaintiff acquired the securities in question.

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

The plaintiff justifiably relied on the misrepresentations.

Under the Section 10(b) Rule 10b-5 antifraud provisions of the Securities Exchange Act of 1934, which of the following conditions must a plaintiff prove to recover damages from an accountant?

The plaintiff relied on the accountant's intentional misstatement of material facts.

A CPA's defenses to liability under Section 11 of the Securities Act of 1933 do not include which of the following?

The plaintiff was unaware of the misstatement or omission in a registration statement.

Pursuant to Treasury Circular 230, which of the following statements about the return of a client's records is correct?

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

Which of the following statements is true with respect to a client's request for records of the client that are necessary for the client to comply with his or her federal tax obligations?

The practitioner must, at the request of the client, promptly return the records of the client to the client unless applicable state law provides otherwise.

During an interview conducted by the tax return preparer, the client stated that he had paid $1,500 for deductible travel expenses and $3,000 for charitable contributions. The preparer asked if documentation existed in support of the deductions and was assured by the client that adequate documentation did exist. When the client's return was later examined by the IRS, a tax deficiency resulted due to the client's lack of supporting documentation for the travel expenses. Which of the following statements best describes this situation?

The preparer is not subject to a penalty under Sec. 6694 because she is not required to examine or review the client's books and records in order to verify the client's information.

Which of the following disclosures must be contained in a securities registration statement filed under the Securities Act of 1933?

The principal purposes for which the offering proceeds will be used.

With respect to privileged communications of accountants, which of the following is true?

The privilege will be lost if the party asserting the privilege voluntarily submits part of the privileged communications into evidence.

Trust Res

The property of which the trust consists

Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, expressed an unmodified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 act that deal with omission of facts required to be in the registration statement. Quincy must prove that

There was a material misstatement in the financial statements.

Which of the following statements about the prospectus required by the Securities Act of 1933 is true?

The prospectus is a part of the registration statement.

Which of the following transactions is subject to registration requirements of the Securities Act of 1933?

The public sale by a corporation of its negotiable 10-year notes.

Devisee

The recipient of a gift of real property by will.

Working Papers

The records kept by an independent auditor regarding the procedures followed, tests performed, information obtained, and conclusions reached in an audit.

Lux Limited Partnership offered $300,000 of its limited partnership interests under Rule 504 of Regulation D of the Securities Act of 1933. The securities were registered and disclosure was made under state law. Which of the following statements is true?

The resale of the limited partnership interests by a purchaser will not be restricted.

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?

The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.

To whom must a CPA pay license fees in order to maintain a CPA license?

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

Which of the following bodies has the authority to suspend or revoke a CPA's license for acts discreditable to the profession?

The state board of accountancy.

Trust Corpus

The sum of money or property that is set aside to produce income for a named beneficiary

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to the company?

The tax preparer is responsible for disclosing both penalties to the company.

Under the Securities Act of 1933, an initial offering of securities must be registered with the SEC unless

The type of security or the offering involved is exempt from registration.

Penalties may be imposed on a tax return preparer for an understatement of tax liability because of a position for which there is not a reasonable belief that there is substantial authority that the position will be sustained on its merits. But the penalties may be excused if

There is reasonable cause and good faith.

An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that

There was a material omission or misstatement.

The objectives of the Securities Act of 1933 include all of the following except

To authorize the Board of Governors of the Federal Reserve System to control the use of margins in securities trading.

Pix Corp. is making a $6 million private placement stock offering. It is subject to Rule 506 under Regulation D of the Securities Act of 1933. The securities must be sold

To no more than 35 purchasers who are not accredited investors.

Which of the following statements is true regarding a CPA's working papers related to tax practice? The working papers must be

Turned over pursuant to a valid federal court subpoena.

Maco Limited Partnership intends to sell $6 million of its limited partnership interests. The state in which Maco was organized is also the state in which it carries on all of its business activities. If Maco intends to offer the limited partnership interests in reliance on Rule 147, the intrastate registration exception under the Securities Act of 1933, which one of the following statements is true?

Under Rule 147, certain restrictions apply to resales of the limited partnership interests by purchasers.

Which of the following acts by a CPA will not result in a CPA's incurring an IRS penalty?

Understating a client's tax liability as a result of an error in calculation.

Petty Corp. made a public offering subject to the Securities Act of 1933. In connection with the offering, Ward & Co., CPAs, rendered an unmodified opinion on Petty's financial statements included in the SEC registration statement. Huff purchased 500 of the offered shares. Huff has brought an action against Ward under Section 11 of the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Ward's weakest defense is that

Ward was not in privity of contract with Huff.

Fact Pattern: West & Co., CPAs, expressed an unmodified opinion on the financial statements of Pride Corp. These were included in Pride's registration statement filed with the SEC. Subsequently, Hex purchased 500 shares of Pride's preferred stock, which were acquired as part of a public offering subject to the Securities Act of 1933. Hex has commenced an action against West based on the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Which of the following defenses is least helpful to West in avoiding liability to Hex?

West was not in privity of contract with Hex.

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

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

If a CPA is engaged by an attorney to assist in the defense of a criminal tax fraud case involving the attorney's client, information obtained by the CPA from the client after being engaged

Will be deemed privileged communications under certain circumstances.

Under the Securities Act of 1933, which of the following acts by an accountant may subject the accountant to criminal penalties?

Willfully including materially misstated financial statements in a registration statement.

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

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

Under the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted

Without good faith.

Which of the following statements is true with respect to ownership, possession, or access to a CPA firm's working papers related to its tax practice?

Working papers are not transferable to a purchaser of a CPA practice unless the client consents.

Which of the following statements is correct regarding disclosure of working papers prepared by a CPA related to tax practice?

Working papers may not be transferred to another accountant without the client's permission.

Mell Corp. engaged Davis & Co., CPAs, to prepare its tax returns and provide advice about minimizing taxable income in high-tax states. Mell's management informed Davis it suspected that the taxable income from certain states was materially understated and financial statement net income was materially overstated. Nonetheless, Davis expressed an unmodified opinion on the statements and did not amend the tax returns. Mell relied on the documents to obtain a loan from National Bank to expand its operations. National relied on the documents in making the loan to Mell. As a result, Mell has defaulted on the loan and has incurred a substantial loss. If National sues Davis for fraud, must Davis furnish National with the audit working papers?

Yes, if the working papers are lawfully subpoenaed into court.

Residuary

the person entitled to the remainder of an estate

Administrator

a person appointed by the court to handle the estate of someone who died without a will

Review

a scholarly journal focusing on legal issues

Fraud

an intentional misrepresentation of material existing fact

Negligence

carelessness

Descendants

children, grandchildren, and continuing generations

Abatement

decrease, reduction

Intestate

dying without a will

Per Stirpes

each branch of the family is to receive an equal share of an estate.

Scienter

guilty knowledge

Privileged Communication

information held confidential within a protected relationship

Private Securities Litigation Reform Act of 1995

intended to rein in excessive levels of private securities litigation

Ademption

is the act of revoking a gift mentioned in a will by destruction, or selling or giving away the gift before death.

Probate

is the process of proving a will is valid and thereafter administering the estate of a dead person according to the terms of the will.

Per Capita

per person

Executor

person designated to execute the terms of a will

Descent and Distribution

refers to the body of law (statutory and case law) that determines who is entitled to the property from the estate under the rules of inheritance.

Independence

self-reliance and freedom from outside control

Bequest

something left to someone in a will

Probate Estate

the property of a decedent that is subject to administration by the executor or administrator of an estate

Audit

to check the accuracy of financial accounts and records