REG 5
The civil penalty for aiding and abetting an understatement of tax liability on a tax return is
$1,000 for all taxpayers except corporations and $10,000 for corporations
The SEC can impose fines of up to
$100,000, not $1,000,000, for an individual (and $500,000 for a firm). There is no "repeat offender" or "serial offender" provision.
A CPA's duty of due care to a client most likely will be breached when a CPA:
Fails to follow generally accepted auditing standards. Negligence is the failure to exercise due care, and GAAS represents the industry's opinion of what is required for due care. Thus, failure to follow GAAS will likely breach the standard of due care owed to a client.
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on:
Gross negligence. Reckless departure from standards of due care constitutes gross negligence, which is also called constructive fraud. A CPA who commits constructive fraud is liable to all plaintiffs, not just those with whom the CPA dealt or of whom the CPA knew.
If there was a reasonable basis for a disclosed tax position on the tax return, and John acted in good faith, the penalty for understatement of tax would not apply if John actually did understate his tax.
He would still be liable for the unpaid tax, and any interest, but he would not be liable for the penalty.
Some tax legislation originates in the Senate as riders to other non-tax proposals.
However, most tax legislation originates in the House of Representatives.
Circular 230 addresses the practice before the IRS of "practitioners."
However, practitioners do not include just Attorneys, Certified Public Accountants, and Enrolled Agents. Practitioners can also be Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers.
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. Accuracy-related penalties apply to the portion of tax underpayments attributable to negligence or disregard of tax rules and regulations as well as to any substantial understatement of income tax.
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
Is the client's creditor who sues the accountant for negligence. A creditor of a client generally cannot sue the client's accountant for negligence unless the accountant had reason to know that the creditor would be relying on the accountant's work.
The U.S. Tax Court is a specialized trial court, not an appellate court.
It hears only Federal tax cases, not Federal tax and other Federal cases.
Rescission is the cancellation of a contract
It is available after a breach, but usually the nonbreaching party will choose to recover its money damages instead of canceling.
Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer:
It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail.
Circular 230 does not prohibit referral or compensation agreements.
It merely requires that any compensation agreement or referral agreement between the practitioner and a promoter be disclosed.
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. The CPA must retain a completed copy of each return for three years after the close of the return period (IRC Section 6107).
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements?
Lack of scienter. A suit for common law fraud may succeed only if the accountant acted with scienter (knew that the statement was wrong or recklessly disregarded the truth).
Under Rule 504:
No "specific" disclosure (financial information) is required for any investor. General solicitation generally is prohibited; and Registration under the 1934 Act is not required under Rule 504.
The registration statement is divided into two parts
Part I is the prospectus; Part II contains other information about the securities being issued.
Regulation D of the Securities Act of 1933:
Permits an exempt offering to be sold to both accredited and unaccredited investors. Under Regulation D's rules 504, 505, and 506, sales may be made to both accredited and unaccredited investors, although under rules 505 and 506 the unaccredited investors may not number more than 35, and under rule 506 the unaccredited investors must also be sophisticated investors.
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. To participate in the preparation of audit reports for a company registered with the SEC, a CPA firm must first register with the Public Company Accounting Oversight Board.
Under Section 11 of the 1933 Act, the plaintiff need not prove the following:
Reliance (there is a rebuttable presumption of reliance). Negligence (or any other level of fault). Privity of contract (the duty is imposed by statute).
The SEC is responsible for the following
Requiring disclosure of facts concerning offerings of securities listed on national stock exchanges. Regulating the activities of securities brokers. Investigating securities fraud.
Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct?
Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act. A transaction exemption applies only to the particular transaction. Subsequent sales must qualify for their own exemption, or they must be registered.
Securities exempt
Securities Act 3(a)(4) exempts securities of not-for-profit organizations. Securities Act 3(a)(2) exempts securities guaranteed by domestic governmental organizations. Securities Act 3(a)(5) exempts securities issued by a savings and loan association.
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. A preparer is not required to obtain supporting documentation, unless the preparer has reason to suspect the accuracy of the information provided. However, the preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.
Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?
The CPA probably is liable to any person who suffered a loss as a result of the fraud.
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 IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
Qualification as a financial expert is a judgmental issue is typically made by the Board of Directors.
The Sarbanes-Oxley Act is silent as to what group has the authority to designate an individual a financial expert but in practice, the board most often makes that decision. The Act provides some guidance but does not prescribe specific qualifications.
Judges for the U.S. Tax Court hear cases at various locations in the country, but the justices for the U.S. Supreme Court do not.
The Supreme Court hears cases in Washington, DC with all nine justices present. The Supreme Court does not conduct jury trials.
A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate return information, if the disclosure is made:
To enable a third party to solicit business from the taxpayer. Use of a taxpayer's return information to assist a third party to solicit business subjects a return preparer to penalty.
Under Regulation D of the Securities Act of 1933,
Tork may only resell if the resale transaction continues to fall under the registration exemptions found in Section 3 of the 1933 Act.
An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer:
Under Regulation A, an offering circular must be filed with the SEC.
Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an exempt offering may be made?
Under Rule 504 the issuance of securities may not exceed $1 million dollars in a 12-month period. Under Rule 505 the issuance of securities may not exceed $5 million dollars in a 12-month period. Rule 506 permits an unlimited amount of stock to be issued. 506 is often referred to as a private placement because that rule exempts transactions not involved in a public offering.
When performing an audit, a CPA will most likely be considered negligent when the CPA fails to
Warn a client of known internal control weaknesses.
A collateral trust certificate is a bond secured by collateral and deposited with a trustee. Like other bonds, it is considered a security. Under the securities laws, "investment contracts" are specifically deemed to be securities.
While not defined in the securities laws, an investment contract generally is defined as any financial contract, investment, or scheme in which the investor expects to make a profit solely through the management by others.
Under Rule 505
a balance sheet is required if there are unaccredited investors, but a prospectus is not required.
Generally, specific performance (an order to perform as agreed) is available only in
a contract for the sale of rare or unique property. Specific performance is not available to enforce a personal services contract, for such an order would constitute an order for involuntary servitude.
With regards to a tax shelter,
a penalty for understatement of taxpayer liability could apply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld on its merits. This is more stringent than a reasonable basis for the position, a reasonable possibility of success for the position, and substantial authority for the position.
Registered public accounting firms are required to maintain audit work papers and supporting documentation for
a period of seven years
Circular 230 does prohibit
a practitioner from endorsing or negotiating refund checks which the IRS has issued to the practitioner's client
Resales must qualify for their own exemption. The fact that the securities were purchased pursuant to a Regulation D offering does not mean that
a resale would necessarily be exempt from the registration requirements.
A presidential veto (other than a pocket veto) can be overridden by
a vote of two-thirds of both the House and the Senate.
Section 10(b) and Rule 10b-5 apply to
all sales of securities involving interstate commerce, not just those registered.
A tax preparer is not required to retain workpapers used in preparing a tax return
although doing so is often a sound business practice. Among other reasons, the workpapers could be beneficial in the event of an audit, or in the preparation of the following year's tax return for the client.
The negligence penalty with respect to understatement of tax is
an accuracy-based penalty for negligence or for disregard of tax rules and regulations.
Rule 505 offerings can be sold to
an unlimited number of accredited investors, but there can be no more than 35 unaccredited investors.
A CPA who fraudulently performs an audit will be liable to
any person who is harmed as a result of the fraud.
Characteristic of a best practice in rendering tax advice is
establishing in a tax memorandum relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts.
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.
A CPA does not guarantee
everything to be accurate, only that the work was performed in a competent and professional manner.
The CPA generally cannot give out a client's confidential information to anyone without the client's consent. However
exceptions are generally made for court subpoenas and state CPA society quality control panels.
Under the Securities Act of 1933, an exemption exists for securities
exchanged by the issuer exclusively with its existing shareholders so long as no commission is paid and both sets of securities are issued by the same person.
The Securities Act of 1933 provides an exception in the case of intrastate issues. Rule 147 provides that
for 9 months after the last sale by the issuer, resales can only be made to residents of the state.
The state board of accountancy can conduct a
formal hearing for possible disciplinary action.
Shelf registrations are permitted when the issuer, for example, a well-known seasoned issuer (WKSI), is
frequently issuing securities on a national exchange. The original registration statement must be kept current in order to provide accurate information to investors, and the SEC will not allow an issuer to use shelf registrations unless the issuer has a history of issuing securities. SA Rule 415.
The Discriminant Inventory Function System DIF selects for audit returns of
generally selects for audit returns of individuals with gross incomes greater than $100,000 self-employed individuals with substantial business income and deductions. cash businesses (because cash income is easier to conceal). individuals whose itemized deductions are in excess of norms established for income levels are often selected for audit.
The taxpayer can generally avoid penalties if
he/she acted in good faith, if there was a reasonable basis to support the tax return position, and if the taxpayer did not have willful neglect.
Under rule 506 of Regulation D
if only accredited investors invest, no prospectus need be given.
Regulation D prohibits
immediate reoffering to the public regardless of whether the reoffering is an interstate transaction or not.
Under SEC reporting requirements, a public company (Integral) is required to report
in form 8-K newly appointed officers as part of the "material events" that occurred in that month.
Section 10(b) of the 1934 Act, and Rule 10b-5 promulgated thereunder, only applies if the wrongful act occurred through
interstate commerce (for example, use of the U.S. Postal Service mail or via a state-to-state long distance telephone call) or via a national securities exchange.
The state board of accountancy
is the only body listed that can grant a CPA license and the only body that may revoke such a license.
Section 10(b) of the 1934 Act primarily governs post-issuance transactions;
issuance of securities generally is governed by the 1933 Act. Although Section 10(b) and Rule 10b-5 could be applied to the issuance of securities, this section and the rule do not require that the securities involved be part of an original issuance.
When the U.S. Supreme Court denies a writ of certiorari
it does not confirm the lower court's decision.
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.
The IRS does not impose a penalty on a CPA for
making an error in calculating a tax return.
Financial statement disclosures include
management's assumption of responsibility for internal control, management's assessment of internal control effectiveness and a statement that the auditor has reported on management's evaluation. Management does not describe disagreements, if any, between management and the auditor.
The U.S. Court of Federal Claims has jurisdiction over
most claims for money damages against the United States, one type of which is tax refunds.
Under Rule 10b-5, a purchaser must prove scienter (either an intent to deceive or gross negligence, which is the reckless disregard for the truth);
negligence is insufficient to establish scienter.
Rule: A compensated preparer is liable for a penalty if his understatement of taxpayer liability on a return or claim for refund is due to
negligent or intentional disregard of rules and regulations. A preparer is not required to obtain supporting documentation unless he has reason to suspect the accuracy of the taxpayer's figures; however, the preparer must make reasonable inquiries if the taxpayer's information appears incorrect or incomplete.
IRS publications are
not considered a primary authoritative source when one is conducting tax research
The person making the tender offer is required to notify the SEC
not the corporation receiving it.
Under sections 6 and 7 of the 1933 Act, a registration statement must include
specific financial information such as a balance sheet and a profit and loss statement, and "other material facts." One such material fact is the principal purpose(s) for which the proceeds of the issuance will be used.
A CPA can be compelled to disclose confidential client information if he or she is
subpoenaed and if the information is relevant to the court case. The CPA's information regarding illegal insider trading would be relevant in a criminal case
Reports issued by the U.S. Congress, IRS regulations, rules, and releases, and U.S. court case decisions, but not foreign court case decisions, constitute
substantial authority for the substantial authority standard.
The SEC can
suspend or permanently revoke an accountant's right to practice before the SEC.
The 1934 Act (section 13) requires persons making a
tender offer to shareholders of a registered corporation to file a report with the SEC, and the 1934 Act (section 14) prohibits anyone from soliciting proxies in a registered company without filing a report with the SEC.
When a CPA is aware of an error made on a tax return
the CPA must inform the client of the error and advise the client of the consequences of the error.
A CPA should not give written federal tax advice if
the CPA takes into account the possibility that a tax return will not be audited.
The state board of accountancy must find, by the preponderance of the evidence, not by proof beyond a reasonable doubt, that
the CPA's actions constituted professional misconduct.
Circular 230 prohibits a practitioner from charging an "unconscionable" fee but does allow contingent fees in the following situations:
(1) an IRS examination or audit, (2) a claim solely for a refund of interest and/or penalties, or (3) a judicial proceeding arising under the Internal Revenue Code. An IRS examination or audit is in connection with the IRS's examination of, or challenge to, an original tax return or an amended return or claim for refund (with certain additional conditions, of course).
With respect to a tax return preparer's failure to disclose a conflict of interest
the Internal Revenue Code does not set forth any penalty.
The issues surrounding risk and growth are significant to investors and generally addressed by enterprise risk management concepts; however,
the Sarbanes-Oxley Act focuses less on strategic operations and more on the financial reporting issues impacted by the audit committee's competence, the ethical behavior of senior officers and the adequacy of internal controls.
The courts of original jurisdiction for tax cases, i.e., the courts in which a taxpayer would first bring a lawsuit against the IRS, are
the Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.
When a CPA breaches a contract for professional services
the client and any third party beneficiary of the contract are entitled to compensatory money damages.
An accountant may disclose confidential client information to any party if
the client specifically consents to the release of information.
A Notice of Proposed Rulemaking is a public notice issued when
the federal government wishes to add, remove, or change a rule or regulation. It simply provides notice of the proposed change in an attempt to invite public comment; it does not discuss the intent of Congress in proposing the change.
Under Rule 505 of Regulation D
the issuer must make reasonable effort to ensure that the purchasers are purchasing for their own account and not for resale.
The SEC can suspend or permanently revoke a CPA's right to practice before the SEC for a host of reasons, not only if the accountant has willfully violated the federal securities laws or regulations. Other reasons include
(1) the accountant lacks the qualifications to represent others, (2) the accountant lacks character or integrity, (3) the accountant acted unethically or unprofessionally, and (4) the accountant was convicted of a felony or a misdemeanor involving moral turpitude, or (5) the accountant's license to practice public accountancy was suspended or revoked.
A CPA may reveal confidential information without the client's consent in a number of situations
(e.g., when subpoenaed, when requested by a CPA society voluntary quality control review board). However, there is no exception to the duty of confidentiality merely because tax irregularities are suspected.
Stockbroker transactions are exempt only if the transaction
(i) is on a customer's order, (ii) is through an exchange or over-the-counter market, and (iii) constitutes a usual brokerage function.
Ultramares limits the accountant's liability for negligence to
(i) parties in privity and (ii) intended third party beneficiaries; parties who are merely "foreseen" cannot recover.
Under Section 11, a plaintiff need only prove that:
(i) the plaintiff acquired (not necessarily bought) the security, (ii) there was a material misstatement in the financial statements included in the registration statement that was signed by the defendant, and (iii) the plaintiff suffered a loss. The plaintiff need not prove reliance or fraud.
Securities of regulated common carriers are within a securities exemption
(on the rationale that the regulating government agency will oversee the securities issuance).
Place the following events in the legislative process for a specific tax law in the proper logical order:
-Tax legislation is originated in the House Ways and Means Committee -It is then voted on and approved by the full House -and goes to the Senate and the Senate Finance Committee (the Senate Finance Committee is not included in the events to be sequenced). Upon approval by the Senate Finance Committee, it is voted on and approved by the full Senate -It is then considered by a Joint Conference Committee -Finally, the legislation is vetoed by the President -and the veto is overridden by two-thirds votes of the House and the Senate
Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client's financial report be liable?
Any foreseen or known third party who relied on the report. Under the majority position an accountant is liable for negligence only to third parties whom the accountant knows or should foresee will be relying on the accountant's work.
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 correct?
Any person who owns more than 5% of Wool's common stock must file a report with the SEC.
A preliminary prospectus, permitted under SEC Regulations, is known as the:
"Red-herring" prospectus. The regulations allow the use of a "red herring" prospectus in certain circumstances. A "red herring" prospectus may be missing certain information that is not yet available.
The penalty for failure to comply with the IRS' "due diligence" requirements with respect to determining a client's eligibility for the earned income credit is a penalty of
$500 for each such failure, not a minimum of 2 years imprisonment in a designated Federal Correctional Institution.
An owner of 5% of a corporation's voting stock is not subject to the insider reporting provisions
(although there are reporting requirements for acquiring 5% or more of a registered equity). Only if the stockholder owns more than 10% of the stock is the stockholder an insider.
An accountant is prohibited from showing the workpapers to anyone without the client's permission, except:
1. Lawful subpoena. 2. Surviving member of the firm. 3. Quality control panel. 4. AICPA/State Trial Board. 5. Court proceedings.
The elements of constructive fraud:
1. Misrepresentation of a material fact. 2. Defendant acts with gross negligence or recklessly. 3. Intent to induce plaintiff's reliance. 4. Actual and justifiable reliance by plaintiff. 5. Damages. Actual fraud requires intent to deceive.
Under Rule 506 of Regulation D, any type of security, including debentures, of an unlimited amount, may be sold without registration so long as:
1. There is no general solicitation; The buyer's right to resell is restricted for two years; 2. Non-accredited investors are: Limited in number to 35 investors, 3. Sophisticated, and Provided with an audited balance sheet and other financial statements.
The reporting requirements of the 1934 Act apply to any company:
1. Whose shares are traded on a national exchange, or 2. Which has at least 500 shareholders in any one class who are not accredited and more than $10 million in assets.
A reporting company under the Securities Exchange Act of 1934 must file its proxy statements with the SEC at least
10 days before sending the proxy statements to the shareholders irrespective of the number of stock classes outstanding.
Under Regulation D, the SEC must be notified within
15 days after the first sale of the offering.
A tax preparer penalty may be assessed for fraud and accuracy related acts.
Intentional disregard of the regulations would be deducting of personal help as a business expense.
There is absolutely no requirement that tax legislation be enacted in exactly the same form in both the House and the Senate.
A conference committee is most often required to reconcile the differences between the two bills.
Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following documents must Link file with the SEC?
A corporation registered under the 1934 Act must file quarterly reports (Form 10-Q) and proxy solicitations by management.
The reasonable basis standard involves a position that is arguable but fairly unlikely to prevail in court.
A numerical statement of this standard has at least a 20% chance of succeeding.
Under the Securities Exchange Act of 1934, a corporation with common stock listed on a national stock exchange:
Is subject to having the registration of its securities suspended or revoked.
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?
A plaintiff must show four elements to make a case for negligence against a CPA. The plaintiff must show the defendant owed a duty of care to the plaintiff, the defendant breached that duty by failing to act with due care, the breach caused the plaintiff's injury, and damages. A defense that the negligence was not the proximate cause of plaintiff's losses would be a valid defense, as the third element would not exist.
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 unqualified 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?
A plaintiff under Rule 10b-5 must prove reliance on a misstatement and that the defendant acted with scienter (intent to deceive or reckless disregard for truth). Here, neither element can be proved because Sharp did not read the offering statement (and so could not have relied on it) and because Ocean did not act with scienter (the CPA did not know of the error; rather, the CPA made the error negligently). An action under Section 11 will be successful because the plaintiff need only show that the plaintiff acquired the stock, that there was a misstatement in the registration statement, and that the plaintiff suffered damages. Because Ocean acted negligently, it cannot prove the defense of due diligence.
Under Circular 230, for tax returns:
A practitioner must return all client records at the request of the client.
Constructive fraud does not require intent. Constructive fraud only requires reckless disregard for truth or falsity.
Actual fraud, on the other hand, requires intent in making a material misstatement, upon which the plaintiff justifiably relies (and that the plaintiff suffers damages). We did not have such intent here. Thus, Darleen can be liable only for constructive fraud.
Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933?
All offerings made under Regulation A. Regulation A provides an exception from the full registration requirements. It provides a more simplified form of registration.
Information contained in client files ("workpapers") are the property of the CPA firm.
Although the accounting firm owns the workpapers, the firm and its employees are generally prohibited from showing the workpapers to anyone without the client's permission. Furthermore, an employee of a CPA firm may not take information contained in client files when leaving the firm. Workpapers produced by the firm for, or on behalf of a client, may not be copied and removed by an employee for personal use.
A CPA will be liable in negligence if he or she fails to exercise the care and prudence that an ordinary CPA would exercise in performing an audit.
An ordinary CPA would normally adhere to GAAS. Thus, proof of adherence to GAAS may prevent liability.
Office audits are not normally performed at the national office of the IRS in Washington, DC.
They are normally performed at local IRS offices.
The Sarbanes-Oxley Act of 2002 requires that the members of the audit committee of a public company be independent. Receipt of which of the following would destroy independence within the meaning of the law?
Audit committee members must be members of the public company's board of directors and may receive compensation for their service on the board. However, they cannot accept compensation from the public company or be affiliated with it in any other way. Thus, an audit committee member may receive compensation for serving as a director, but not for being the company's president. Receipt of a president's salary would destroy independence.
The Sarbanes-Oxley Act of 2002 was enacted in response to corporate scandals that largely centered on the quality of corporate financial disclosure and highlighted the inadequate oversight of management, auditors and the the Board of Directors of publicly held companies. The Sarbanes-Oxley Act addresses the problems related to inadequate board oversight by requiring public companies to have an:
Audit committee. Public companies are required to establish an audit committee comprised of board members who are otherwise independent of the company. The audit committee is directly responsible for the appointment, compensation, and oversight of the work of the public accounting firm employed by that public company.
A tax return preparer is not required to:
Audit the corporate records Examine the business operations Copy all underlying documents
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 preparer is allowed to accept a taxpayer's representations as a preparer is not required to obtain supporting documentation unless the preparer has reason to suspect the accuracy of the information provided by the taxpayer. However, a preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.
Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover? I. Beckler was negligent in conducting the audit. II. Mac relied on the financial statements.
Both Although a CPA generally is liable to third parties only for fraud or constructive fraud (gross negligence), where the CPA knows that the third party will be relying on the audit, the CPA can be liable to the third party for mere negligence (the CPA owes the third party a duty of care since the third party is an intended beneficiary of the engagement). An action for gross negligence requires both reliance on a misstatement and negligence.
Under the Securities Exchange Act of 1934, which of the following types of instruments is excluded from the definition of "securities?"
Certificates of deposit issued by a bank are not deemed to be securities. A certificate of deposit is an instrument issued by a bank noting a deposit of funds and containing a promise to repay them at a later date.
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 continuous disclosure system?
Companies with assets in excess of $10 million and 500 or more shareholders. Under Section 12, a company must register (is subject to continuous disclosure requirements) if it is listed on a national securities exchange or if it has at least 500 shareholders in any outstanding class and has more than $10 million in assets.
The Sarbanes-Oxley Act of 2002 seeks to improve investor confidence by providing greater transparency for all of the following issues
Competency of audit committees. Compliance of senior officers with a code of ethics. Adequacy of internal controls.
Tax preparer penalties may be assessed for improper use or disclosure of information. Acceptable circumstances for disclosure include:
Computer processing Peer review Administrative order (court order)
The Securities Act of 1933 provides an exemption for the following:
Corporate reorganizations (stock dividends, stock dividends, etc.) with existing owners as long as no commission is paid, Municipal bonds issued for government purposes, Securities of the following: Banks, Carriers, S & L associations, and Farm co-ops Commercial paper due within 9 months, Insurance and conventional annuity contracts, Intrastate issues (as long as: (i) the issuer does at least 80% of its business in that state and (ii) for nine months purchasers cannot re-sell to nonresidents of that state), Charitable organizations, Securities issued under Ch. 11 of the Bankruptcy Code, Securities issued by a church plan or similar entity that is not an investment company, Casual sales (the seller is not an issuer, underwriter, or dealer), and Reg. A's partial exemption and Reg. D's exemptions under rule 504, 505, or 506.
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 Rule 506 an offering can be made of any amount of securities without registering the offering if it is made to any number of accredited investors and no more than 35 unaccredited investors who are sophisticated in investing.
If only accredited investors purchase the securities, the issuer is not required to make any disclosures, but if any unaccredited investors purchase any of the securities, all investors must receive at least an annual report containing audited financial statements.
The Securities Act of 1933 requires registration of issuances of securities unless an exemption applies.
Long-term notes (with maturity dates beyond nine months) are considered securities, and there is no exemption for 10-year notes of corporations. Thus, the sale must be registered.
World Corp. wanted to make a public offering of its common stock. On May 10, World prepared and filed a registration statement with the SEC. On May 20, World placed a "tombstone ad" announcing that it was making a public offering. On May 25, World issued a preliminary prospectus and the registration statement became effective on May 30. On what date may World first make oral offers to sell the shares assuming it is not a well known seasoned issuer?
May 10, immediately after filing the registration statement, it is lawful to make oral offers to sell shares.
World Corp. wanted to make a public offering of its common stock. On May 10, World prepared and filed a registration statement with the SEC. On May 20, World placed a "tombstone ad" announcing that it was making a public offering. On May 25, World issued a preliminary prospectus, and the registration statement became effective on May 30. On what date may World first sell the shares assuming it is not a well known seasoned issuer?
May 30. It is unlawful to "sell" the shares until the "effective date."
Membership in the AICPA can be suspended or terminated without a hearing.
Membership in the AICPA can be suspended or terminated without a hearing for certain offenses. These offenses include but are not limited to (1) proof of conviction of a crime punishable by imprisonment for more than one year, (2) proof of conviction for willful failure to file any income tax return, (3) proof of conviction for filing a false or fraudulent income tax return or aiding in the preparation of a false or fraudulent income tax return of a client.
Municipal bonds.
Municipal bonds are securities issued by the government and are generally exempt from registration.
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.
An issuer making an offering under the provisions of Regulation A of the Securities Act of 1933 must file a (an):
Offering statement. Regulation A is a short form registration that only requires an offering statement (which consists of a "notification" and an "offering circular").
Under the Securities Act of 1933, which of the following statements most accurately reflects how securities registration affects an investor?
One piece of information required in a registration statement is a statement of how the funds received will be used.
The corporation is not required to report stockholder's short swing profits to the SEC
Only insiders are subject to SEC insider (short swing or long swing) reporting provisions, and the insiders must update the SEC monthly about their holdings).
Not all intrastate offerings are exempt from registration.
Only intrastate offerings made by issuer's doing 80% or more of their business in that state are exempt from registration.
Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was 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:
Only monetary damages are available under Section 11 of the 1933 Act.
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. Which of the following federal statutes did Dean violate?
Securities Exchange Act of 1934. Publicly traded corporations must register with the SEC and make certain periodic reports under the 1934 Act. These reports include business reports (10K, 10Q & 8K), insider trading tender offers & proxy solicitations. The unaudited financials, which are part of the company's 10Q filing, fraudulently described the bribe.
Which of the following securities would be regulated by the provisions of the Securities Act of 1933?
Securities issued by insurance companies There is an exemption for insurance policies [Securities Act 3(a)(8)], but other securities issued by insurance companies must generally be registered.
Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?
Taxpayer's name and identification number or a copy of the tax return.
Under the 1934 Act -- TIP
Tender offers, insider trading, and proxy solicitations all must be reported under the 1934 Act.
The 1933 Act generally requires issuances of securities to be registered unless a securities or transaction exemption applies
The 1933 Act includes a securities exemption for bonds issued by a municipality for governmental purposes and for securities issued by a not-for-profit charitable organization (and for certain other securities, too).
Upon submission, all returns are checked for mathematical accuracy and to ensure that required items such as Social Security numbers and signatures are not missing.
This check is made regardless of whether or not the return indicates a refund.
With respect to the penalty for aiding and abetting understatements of tax liability on a tax return:
The burden of proof shifts to the IRS from the taxpayer. With respect to the penalty for aiding and abetting an understatement of tax liability on a tax return, the burden of proof shifts to the IRS from the taxpayer. Unless the law expressly states otherwise, the taxpayer has the burden of proof to establish by the preponderance of the evidence that the law and the evidence do not support the position of the IRS. With respect to any criminal action, the government has the burden of proof to establish by evidence beyond a reasonable doubt that the taxpayer is guilty of the charges. Note that these burdens of proof are different; criminal (beyond a reasonable doubt) is considerably higher than civil (preponderance of the evidence).
The primary benefit of having a financial expert on a company's audit committee is:
The enhanced level of financial sophistication of the financial expert can serve as a resource for the audit committee. The benefits of a financial expert on the audit committee relate to the expertise that the board can bring to its oversight function.
Sarbanes-Oxley requires that an issuer's audit committee have at least one financial expert, or disclose why that role is not filled.
The financial expert must have an understanding of GAAP and financial statements, be able to assess the application of accounting principles, have comparable experience applying accounting principles to entities that present a similar level of complexity of the issuer, and understand both internal controls and audit committee functions.
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. It is unlawful to sell a registered security without delivering a prospectus to the investor.
Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is correct?
The offering would be exempt from the registration requirements of the Securities Act of 1933. Intrastate securities offerings are exempt from the registration requirements of the Securities Act of 1933.
A tax preparer may not
endorse and cash a client's tax refund check.
The penalty for failure to file a tax return by the due date is 5% per month or fraction of month (up to a maximum of 25%) on the amount of tax shown as due on the return.
The penalty for failure to pay by the due date (1/2% per month) is also based on the amount due on the return.
Each one of these statements is a requirement for written advice under Circular 230.
The practitioner must base written advice on reasonable factual and legal assumptions, including assumptions as to future events The practitioner may not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited. The practitioner must not rely on representations, statements, findings, or agreements of the taxpayer if reliance on them would be unreasonable.
Under the Securities Act of 1933, which of the following statements is(are) correct regarding the purpose of registration?
The principal purpose of the Securities Act of 1933 is to provide investors with sufficient information to make an informed investment decision. The act accomplishes this goal by requiring registration of new issues of securities. Thus, II is a correct statement. The SEC does not guarantee the accuracy of this information, evaluate the offering's financial merits or give assurances against loss. Thus, I is an incorrect statement.
Which of the following statements is correct for the disciplinary power of the state boards of accountancy?
The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.
Generally, there is no federal accountant-client privilege.
There is a limited federal privilege for noncriminal tax proceedings other than tax shelter matters, but here the engagement was for audit services, and the proceeding is a criminal proceeding.
The term "tax return preparer" means any person who prepares for compensation, or who employs one or more persons to prepare for compensation,
any tax return required under the IRC or any claim for refund of tax imposed by the IRC.
The majority rule (the law followed in the majority of the states) is that accountants are liable to
anyone in a class (such as potential lenders or investors) of third parties whom the CPA knows will rely on the opinion of the financial statements.
A transaction exemption applies when a corporation issues stock to its own shareholders and no commission is paid
as in the case of a stock split.
The registration statement, including the prospectus, must be filed
before any offer to sell may be made.
Unlike normal non-tax cases, the taxpayer most often bears the
burden of proof in civil tax cases. In certain tax cases, the burden of proof shifts to the IRS, but this shift has nothing to do with which party can afford expensive lawyers.
The substantial authority standard involves a position that has a more than one-in-three chance
but a less than 50% chance of succeeding.
The U.S. Court of Federal Claims follows the decisions of the Federal Court of Appeals
but not the geographical Courts of Appeals
The 1933 Act generally is concerned with sales
by issuers, underwriters, or dealers. Sales by other persons are exempt.
A tombstone advertisement:
can be placed before a registration statement is effective. Only certain information, such as the nature of the security, the price, and the availability of a prospectus, may be included in the ad.
Violation of Rule 10b-5 of the Securities Exchange Act of 1934 can result in
civil damages, an SEC injunctive action and or criminal fines and penalties.
If John relied on the opinion of a reputable accountant or attorney who prepared his return and furnished all relevant information, in general, he would have a reasonable basis for the tax return position and
could avoid the penalties for understatement of tax.
The state board of accountancy does have to provide
due process of law. Adverse state board decisions can be reviewed by the courts. The state board's decision is not final.
Negligence has 4 elements
duty of care, breach (which is lack of due care), causality and injury.
The due diligence requirements for the earned income credit address
eligibility checklists, computation worksheets, record retention, and also reasonable inquiries to the taxpayer.
Rule: Upon discovery of an error in a previously filed return or the client's failure to file a required return, the CPA should promptly notify the client (either orally or in writing)
of the error, noncompliance, or omission and advise the client of the appropriate measures to be taken (e.g., advise the client to file the tax return). If the client does not rectify the error, the CPA should consider withdrawing from the engagement.
U.S. District Court cases are heard before
one judge, not a panel of judges.
The statute of limitations for Section 11 of the Securities Act of 1933 is
one year after the discovery of the untrue statement or omission and within three years of the offering date.
The accountant-client privilege can be claimed
only in those states that recognize the privilege.
Knowing or reckless disclosure or use of tax information obtained in preparing a return and a willful attempt to understate any client's tax liability on a return or claim for refund could both result in
penalties against an income tax return preparer.
The Internal Revenue Code, tax court cases, and Treasury regulations, respectively, are considered
primary authoritative sources when one is conducting tax research; hence they are incorrect choices (the question asks which item is not considered a primary authoritative source).
Upon discovery of an error in a previously-filed return or the client's failure to file a required return, the tax practitioner should
promptly notify the client (either orally or in writing) of the error, noncompliance, or omission and advise the client of the appropriate measures to be taken (e.g., advise the client to file the tax return). If the client does not rectify the error, the tax practitioner should consider withdrawing from the engagement.
The Supreme Court seldom hears tax cases,
regardless of the importance of the tax issues to the economic health of the nation. That means that the Courts of Appeals often have the last word on tax issues.
The anti-fraud provisions of the 1933 Act are not limited to
registered securities. An action can be brought under Sections 12 or 17 by either a private citizen or the SEC.
The Appeals Division, but not a revenue agent, can
settle an unresolved tax issue based on the probability of winning the case in court.
While a CPA owns his or her workpapers,
the ownership rights are very limited. Generally, a CPA may not reveal client workpapers to third parties without the client's consent.
To recover damages for violation of Rule 10b-5, a plaintiff must prove all of the following:
the plaintiff bought or sold the securities, the plaintiff suffered a loss, there was a material misrepresentation or material omission of fact, scienter (intent to deceive or reckless disregard for the truth), the plaintiff relied on the misrepresentation, and interstate commerce was involved.
The penalty for failure to be diligent will not apply if
the tax return preparer can demonstrate that the preparer's normal office procedures were reasonably designed and routinely followed to ensure due diligence compliance and the failure to meet the due diligence requirements was isolated and inadvertent. Both aspects are necessary.
Following an audit, if agreement is reached with the taxpayer,
the taxpayer signs Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax).
The Joint Trial Board of the AICPA can expel a member by a
two-thirds vote
The penalty for aiding and abetting an understatement of tax liability on a tax return applies whether or not the
understatement is with the knowledge or consent of the person authorized or required to file the return.
While the securities of a not-for-profit corporation are indeed exempt from registration
where a prospectus is issued and contains material misrepresentations, liability can be imposed under the 1933 Act.
