Reg 5 Flashcards
Vee Corp. retained Walter, CPA, to prepare its Year 6 income tax return. During the engagement, Walter discovered that Vee had failed to file its Year 2 income tax return. What is Walter’s professional responsibility regarding Vee’s unfiled Year 2 income tax return?
a.
Advise Vee that the Year 2 income tax return has not been filed and recommend that Vee ignore filing its Year 2 return since the statute of limitations has passed.
b.
Consider withdrawing from preparation of Vee’s Year 6 income tax return until the error is corrected.
c.
Prepare Vee’s Year 2 income tax return and submit it to the IRS.
d.
Advise the IRS that Vee’s Year 2 income tax return has not been filed.
Choice “b” is correct. The CPA should consider withdrawing from the preparation of Vee’s Year 6 income tax return until the error (i.e., the non-filing of the Year 2 tax return) has been corrected.
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.
A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate return information, if the disclosure is made:
a.
Under an administrative order by a state agency that registers tax return preparers.
b.
For peer review.
c.
To enable the tax processor to electronically compute the taxpayer’s liability.
d.
To enable a third party to solicit business from the taxpayer.
Choice “d” is correct. Use of a taxpayer’s return information to assist a third party to solicit business subjects a return preparer to penalty.
A tax return preparer may disclose or use tax return information without the taxpayer’s consent to:
a.
Facilitate a supplier’s or lender’s credit evaluation of the taxpayer.
b.
Be evaluated by a quality or peer review.
c.
Accommodate the request of a financial institution that needs to determine the amount of taxpayer’s debt to it, to be forgiven.
d.
Solicit additional nontax business.
Choice “b” is correct. 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.
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. a. I only. b. Neither I nor II. c. II only. d. Both I and II.
Choice “d” is correct. Both I and II. 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.
A penalty for understated corporate tax liability can be imposed on a tax preparer who fails to: a. Copy all underlying documents. b. Make reasonable inquiries when taxpayer information appears incorrect. c. Examine business operations. d. Audit the corporate records.
Choice “b” is correct. 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.
Choices “d”, “c”, and “a” are incorrect. A tax return preparer is not required to:
Audit the corporate records
Examine the business operations
Copy all underlying documents
In preparing a client’s current-year individual income tax return, a tax practitioner discovers an error in the prior year’s return. Under the rules of practice, the tax practitioner:
a.
Must file an amended return to correct the error.
b.
Is required to notify the IRS of the error.
c.
Is barred from preparing the current year’s return until the prior-year error is rectified.
d.
Must advise the client of the error.
Choice “d” is correct. 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.
Which of the following acts by a CPA will not result in a CPA incurring an IRS penalty?
a.
Failing, without reasonable cause, to provide the client with a copy of an income tax return.
b.
Failing, without reasonable cause, to sign a client’s tax return as preparer.
c.
Negotiating a client’s tax refund check when the CPA prepared the tax return.
d.
Understating a client’s tax liability as a result of an error in calculation.
Choice “d” is correct. The IRS does not impose a penalty on a CPA for making an error in calculating a tax return.
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 correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client’s refund check?
a.
Clark will be subject to the penalty if Clark endorses and cashes the check.
b.
Clark may endorse and cash the check, without penalty, if the amount does not exceed Clark’s fee for preparation of the return.
c.
Clark may endorse and cash the check, without penalty, if Clark is enrolled to practice before the Internal Revenue Service.
d.
Clark may not endorse and cash the check, without penalty, because the check is for more than $500.
Choice “a” is correct. A tax preparer may not endorse and cash a client’s tax refund check.
Which of the following professional bodies has the authority to revoke a CPA's license to practice public accounting? a. State board of accountancy. b. Professional Ethics Division of AICPA. c. National Association of State Boards of Accountancy. d. State CPA Society Ethics Committee.
Choice “a” is correct. 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.
Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? a. A state board of accountancy. b. A state CPA society. c. The SEC. d. The AICPA.
Choice “a” is correct. Only a state board of accountancy has the authority to suspend or revoke a CPA’S license to practice public accounting.
Which of the following statements concerning an accountant’s disclosure of confidential client data is generally correct?
a.
Disclosure may be made to any party on consent of the client.
b.
Disclosure may be made to comply with Generally Accepted Accounting Principles.
c.
Disclosure may be made to any state agency without subpoena.
d.
Disclosure may be made to comply with an SEC audit request.
Choice “a” is correct. An accountant may disclose confidential client information to any party if the client specifically consents to the release of information.
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.
Another CPA firm if the information concerns suspected tax return irregularities.
III.
A state CPA society voluntary quality control review board.
a.
I and III only.
b.
II and III only.
c.
II only.
d.
III only.
Choice “d” is correct. 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.
A CPA who prepares clients’ federal income tax returns for a fee must:
a.
Indicate the CPA’s federal identification number on a tax return only if the return reflects tax due from the taxpayer.
b.
Keep a completed copy of each return for a specified period of time.
c.
File certain required notices and powers of attorney with the IRS before preparing any returns.
d.
Receive client documentation supporting all travel and entertainment expenses deducted on the return
Choice “b” is correct. 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 acts constitute(s) grounds for a tax preparer penalty? I. Without the taxpayer's consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court. II. 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. Neither I nor II. b. I only. c. Both I and II. d. II only.
Choice “d” is correct. 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)
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.
Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return prepared?
a.
A power of attorney.
b.
Workpapers associated with the preparation of each tax return.
c.
An unrelated party compliance statement.
d.
Taxpayer’s name and identification number or a copy of the tax return.
Choice “d” is correct. For each tax return prepared, a tax preparer must retain either the taxpayer’s name and identification number, or a copy of the return.
Which of the following statements is correct for penalties and fines with respect to exercising due diligence for the earned income credit?
a.
The penalty for each failure to be diligent in determining a client’s eligibility for the earned income credit is a minimum of 2 years imprisonment in a designated Federal Correctional Institution.
b.
The due diligence requirements address eligibility checklists, computation worksheets, and record retention.
c.
The penalty for each failure to be diligent in determining the amount of the earned income credit is $1,000 for each such failure.
d.
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.
Choice “b” is correct. The due diligence requirements for the earned income credit address eligibility checklists, computation worksheets, record retention, and also reasonable inquiries to the taxpayer.
With respect to the penalty for aiding and abetting understatements of tax liability on a tax return:
a.
Applies only when the understatement is with the knowledge and consent of the persons authorized or required to file the return.
b.
The burden of proof shifts to the IRS from the taxpayer.
c.
The civil penalty is $10,000 for all taxpayers except corporations and $100,000 for corporations.
d.
The penalty applies to tax return preparers only.
Choice “b” is correct. 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).
Circular 230:
a.
Addresses the practice before the IRS of “practitioners”, which includes only Attorneys, Certified Public Accountants, and Enrolled Agents.
b.
Prohibits referral or compensation agreements.
c.
Prohibits a practitioner from charging a contingent fee.
d.
Prohibits a practitioner from endorsing or negotiating refund checks issued to the client.
Choice “d” is correct. Circular 230 does prohibit a practitioner from endorsing or negotiating refund checks which the IRS has issued to the practitioner’s client.
Choice “a” is incorrect. 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.
Under Circular 230, for tax returns:
a.
A practitioner must exercise due diligence in preparing tax returns and other documents, unless such due diligence is waived in writing by the client.
b.
A practitioner may rely on client-furnished information under any circumstances. The client is always right.
c.
A practitioner must return all client records at the request of the client.
d.
A practitioner can advise a client to take a tax return position that is frivolous only if the taxpayer is a member of an officially recognized tax protest organization.
Choice “c” is correct. A practitioner must return all client records at the request of the client.
For an opinion to be a covered opinion:
a.
The opinion’s evaluation of significant tax issues cannot take into account the possibility that (1) a tax return will not be audited, (2) an issue will not be raised on audit, or (3) an issue, if raised, will be resolved through settlement.
b.
The opinion can be based on reasonable or unreasonable factual assumptions, depending on the circumstances.
c.
The opinion must reach an overall conclusion as to the likelihood of the tax treatment for each significant federal tax issue and provide the reasons for this conclusion.
d.
The opinion must set forth the likelihood that the taxpayer will prevail on the merits for each significant federal tax issue. If the likelihood for each issue cannot be determined, no opinion can be issued.
Choice “a” is correct. For an opinion to be a covered opinion, the opinion’s evaluation of significant federal tax issues cannot take into account the possibility that (1) a tax return will not be audited, (2) an issue will not be raised on audit, or (3) an issue, if raised, will be resolved through settlement. The evaluation must be based on the chances of success on the merits, not on these other factors.
For an opinion to be a covered opinion:
a.
If the opinion is a limited opinion, the opinion must be limited to only one of the significant federal tax issues so that the significant tax issue may be sufficiently and clearly covered.
b.
The opinion can be limited to just some of the significant federal tax issues if the practitioner and the taxpayer agree that the opinion will be limited and that the taxpayer’s reliance on the opinion for the purpose of avoiding penalties will be similarly limited.
c.
The opinion can be limited to just some of the significant federal tax issues if the significant federal tax issues that the opinion does consider are at least 50% of all of the significant federal tax issues.
d.
The opinion must consider all significant federal tax issues.
Choice “b” is correct. For an opinion to be a covered opinion, the opinion can be limited to just some of the significant federal tax issues if the practitioner and the taxpayer agree that the opinion will be limited and that the taxpayer’s reliance on the opinion for the purpose of avoiding penalties will be similarly limited.
For an opinion to be a covered opinion:
a.
The practitioner issuing the covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered and may reasonably rely on the opinion of other practitioners for part(s) of the opinion. No identification should be made of the other practitioner or the other practitioner’s opinion since the original practitioner is responsible for the entire opinion.
b.
The practitioner issuing the covered opinion must be knowledgeable in all aspects of federal tax law and may not rely on the opinion of any other practitioner for parts of the opinion.
c.
A written advice subject to contractual protection is one where the practitioner has a written contract to issue the written advice.
d.
The practitioner issuing the covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered and may rely on the opinion of other practitioners for part(s) of the opinion, with identification of the other practitioner’s opinion and conclusion.
Choice “d” is correct. The practitioner issuing a covered opinion must be knowledgeable in all aspects of federal tax law relevant to the opinion being rendered and may rely on the opinion of other practitioners for part(s) of the opinion, with identification of the other practitioner’s opinion and conclusion.
Green & Ishade, CPAs are issuing a marketed opinion for a particular investment plan. Which of the following statements is correct for this opinion or other types of covered opinions?
a.
A listed transaction is a tax avoidance transaction.
b.
A marketed opinion is advice that will be used to promote, market, or sell an investment plan in a corporate form.
c.
A marketed opinion does not include advice which is about any arrangement the principal purpose of which is federal tax avoidance or evasion.
d.
A reportable transaction is a transaction which must be included on a separate line of a federal tax return.
Choice “a” is correct. A listed transaction is a tax avoidance transaction. It is a reportable transaction (a transaction that is required to be reported on a return or statement attached to that return which is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the Treasury as a tax avoidance transaction). Listed transactions include sale-in/lease-out transactions, certain offsetting currency transactions solely used for losses but not gains, and loss transactions resulting in a taxpayer claiming a tax loss exceeding certain specified amounts.
A civil fraud penalty can be imposed on a corporation that underpays tax by:
a.
Failing to report income it erroneously considered not to be part of corporate profits.
b.
Maintaining false records and reporting fictitious transactions to minimize corporate tax liability.
c.
Omitting income as a result of inadequate recordkeeping.
d.
Filing an incomplete return with an appended statement, making clear that the return is incomplete.
Choice “b” is correct. Imposition of the civil fraud penalty requires conduct that transcends negligence or stupidity. Maintaining false records and reporting fictitious transactions is adequate to demonstrate civil fraud, a willful and deliberate attempt to evade taxes.
Which of the following statements is correct for the disciplinary power of the state boards of accountancy?
a.
The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.
b.
Negligence, fraud, and dishonesty are types of misconduct outside the scope of performing accounting services.
c.
The state boards of accountancy have no disciplinary power other than the power to reprimand licensees and refer the situation to the state’s Attorney General for civil prosecution.
d.
The failure to file a tax return is an example of misconduct outside the scope of performing accounting services.
Choice “a” is correct. The three broad categories of misconduct are misconduct while performing accounting services, misconduct outside the scope of performing accounting services, and a criminal conviction.
Which of the following statements is correct for penalties that can be imposed by the SEC?
a.
The SEC can suspend or permanently revoke a CPA’s right to practice before the SEC only if the accountant has willfully violated the federal securities laws or regulations.
b.
The SEC can suspend or permanently revoke an accountant’s right to practice before the SEC.
c.
The SEC can impose fines of up to $1,000,000 for an individual and $2,000,000 if the accountant is a repeat, or serial, offender.
d.
The SEC can suspend or permanently revoke an accountant’s license to practice public accounting.
Choice “b” is correct. The SEC can suspend or permanently revoke an accountant’s right to practice before the SEC.
Which of the following statements is correct for the disciplinary power of the state boards of accountancy?
a.
The state board of accountancy must find, by proof beyond a reasonable doubt, that the CPA’s actions constituted professional misconduct.
b.
Adverse state board decisions cannot be reviewed by the courts. The state board’s decision is final.
c.
The state board of accountancy can conduct a formal hearing for possible disciplinary action.
d.
The state board of accountancy does not have to provide due process of law.
Choice “c” is correct. The state board of accountancy can conduct a formal hearing for possible disciplinary action.
Which of the following statements is correct for disciplinary action by the AICPA and state CPA societies?
a.
Membership in the AICPA can be suspended or terminated without a hearing.
b.
The Joint Trial Board of the AICPA can expel a member by majority vote.
c.
The AICPA cannot suspend or terminate membership for failure to pay dues but can suspend or terminate membership for failure to meet CPE requirements.
d.
The AICPA and state CPA societies can sanction their members and, in addition, can suspend or permanently revoke a CPA’s license.
Choice “a” is correct. 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.
Leslie Ponzi has just received written tax advice from her attorney, Dewey H. Cheatem. Cheatem has described this document as a “covered opinion.” Ponzi is not exactly sure what the covered opinion covers and what its tax significance is. She has asked for your advice. Which of the following statements is correct?
a.
Circular 230 addresses only covered opinions and does not address any other issues.
b.
A covered opinion is addressed by Circular 229, not Circular 230. Circular 230 addresses only tax shelter opinions.
c.
The covered opinion can be invariably relied on by Ponzi to avoid penalties with respect to the significant federal tax issue(s) addressed in the covered opinion.
d.
If the covered opinion is a reliance opinion, it can generally be relied on by Ponzi to avoid penalties.
Choice “d” is correct. If the covered opinion is a reliance opinion, it can generally be relied on by Ponzi to avoid penalties, so long as the reliance opinion does not contain additional advice which is not related to the listed transactions or to the partnership, plan, or other arrangement.
Pursuant to Treasury Circular 230, which of the following statements about the return of a client’s records is correct?
a.
The practitioner does not need to return any client records that are necessary for the client to comply with the client’s federal tax obligations.
b.
The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client’s records.
c.
The client’s records are to be destroyed upon submission of a tax return.
d.
The practitioner may retain copies of the client’s records.
Choice “d” is correct. A tax preparer should retain client records for three years.
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:
a.
He is a member of the board of directors.
b.
Returns for nonprofit organizations are exempt from the preparer rules.
c.
The return does not contain a claim for a tax refund.
d.
He is not compensated.
Choice “d” is correct. 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.
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?
a.
Audit the taxpayer’s corresponding business operations.
b.
Examine the taxpayer’s supporting documents.
c.
Review the accuracy of the taxpayer’s books and records.
d.
Make reasonable inquiries if the taxpayer’s information is incomplete.
Choice “d” is correct. A tax preparer must make reasonable inquiries if the taxpayer’s information is incomplete.
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.
Which of the following is not considered a primary authoritative source when conducting tax research? a. Internal Revenue Code. b. Treasury regulations. c. IRS publications. d. Tax Court cases.
Choice “c” is correct. IRS publications are not considered a primary authoritative source when one is conducting tax research
Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?
a.
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.
b.
Requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum.
c.
Requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors.
d.
Recommending to the client that the advisor’s tax advice be made orally instead of in a written memorandum.
Choice “a” is correct. 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 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:
a.
Endorsing the check and depositing it into the client’s bank account.
b.
Holding the check for safe keeping and awaiting the client’s return.
c.
Holding the check until the client is billed, then endorsing and depositing the check into the CPA’s account as payment for the bill.
d.
Endorsing the check and depositing it into an escrow account for the client’s benefit.
Choice “b” is correct. Circular 230 does not prohibit a practitioner’s holding the check for safe keeping and awaiting the client’s return.
Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except: a. Disclose a conflict of interest. b. Keep a record of returns prepared. c. Provide a client with a copy of the tax return. d. Sign a tax return as a preparer.
Choice “a” is correct. 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.
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?
a.
The client will not owe an understatement penalty if the return is audited and the expenses disallowed.
b.
The CPA may be charged with preparing a fraudulent return.
c.
The CPA may be assessed a tax return preparer penalty.
d.
The client will not be subject to a fraud penalty.
Choice “c” is correct. 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 Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?
a.
The CPA takes into consideration assumptions about future events related to the relevant facts.
b.
The CPA takes into account the possibility that a tax return will not be audited.
c.
The CPA reasonably relies upon representations of the client.
d.
The CPA considers all relevant facts that are known.
Choice “b” is correct. 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.
A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable?
a.
There was a reasonable basis for the position.
b.
There was a reasonable possibility of success for the position.
c.
It is reasonable to believe that the position would more likely than not be upheld.
d.
There was substantial authority for the position.
Choice “c” is correct. 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
Which of the following bodies has the authority to suspend or revoke a CPA’s license for acts discreditable to the profession?
a.
The Public Company Accountancy Oversight Board.
b.
The state society of certified public accountants.
c.
The state board of accountancy.
d.
The American Institute of Certified Public Accountants.
Choice “c” is correct. A suspension or revocation of a CPA’s license may only be imposed by a state board of accountancy.
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? President's Salary Board Member's Salary a. Yes Yes b. No No c. No Yes d. Yes No
Choice “d” is correct. 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.
Under the Sarbanes-Oxley Act of 2002, which of the following statements is correct regarding an issuer’s audit committee financial expert?
a.
The audit committee financial expert must be the issuer’s audit committee chairperson to enhance internal control.
b.
If an issuer does not have an audit committee financial expert, the issuer must disclose the reason why the role is not filled.
c.
The issuer’s current outside CPA firm’s audit partner must be the audit committee financial expert.
d.
The issuer must fill the role with an individual who has experience in the issuer’s industry.
Choice “b” is correct. 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.
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: a. Internal auditor. b. Annual audit for all issuers. c. Independent Board of Directors. d. Audit committee.
Choice “d” is correct. 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.
The Sarbanes-Oxley Act of 2002 requires that the officers of a corporation be held accountable to a code of ethics. According to the Act, codifications of ethical standards should include provisions for all of the following, except:
a.
Compliance with laws, rules, and regulations.
b.
Honest and ethical conduct.
c.
Prompt internal reporting of code provisions and accountability for adherence to the code.
d.
Full, fair, accurate, and timely disclosure in periodic financial statements.
Choice “c” is correct. Although the SEC proposed standards for codes of ethics to include both internal reporting of code provisions and accountability for adherence to the code, the Sarbanes-Oxley Act itself does not have this requirement.
The Sarbanes-Oxley Act of 2002 requires that the management report on internal control include all of the following, except:
a.
A statement that there are no disagreements between management and the auditor as to the effectiveness of internal controls.
b.
A statement of management’s responsibilities for establishing and maintaining adequate internal controls.
c.
A statement that the auditor has attested and reported on management’s evaluation of internal controls.
d.
A conclusion about the effectiveness of the company’s internal controls.
Choice “a” is correct. 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.
Conflict of interest provisions of the Sarbanes-Oxley Act of 2002 generally prohibit the directors or executive officers of public companies from:
a.
Receiving a personal loan from the issuer not in the ordinary course of business.
b.
Owning more than 10% of common stock.
c.
Receiving perquisite compensation.
d.
Owning more than 10% of any form of equity.
Choice “a” is correct. Issuers are generally prohibited from making personal loans to directors or executive officers under the Sarbanes-Oxley Act of 2002. Exceptions exist for loans made in the ordinary course of business.
The Sarbanes-Oxley Act of 2002 requires that one or more members of the audit committee be a financial expert and that the financial reports disclose:
a.
The existence of financial expert(s) on the audit committee or the reasons why the audit committee does not have a financial expert.
b.
The name of the Board member(s) serving as financial expert(s).
c.
Confirmation of the audit opinion by the financial expert.
d.
Certification of independence of the financial expert.
Choice “a” is correct. In the financial reports, the issuer must disclose the existence of financial expert(s) on the committee or the reasons why the committee does not have a financial expert.
The primary benefit of having a financial expert on a company’s audit committee is:
a.
The financial expert certifies compliance with SEC requirements and thereby reduces audit fees.
b.
The financial expert checks the auditor’s work and verifies the appropriateness of the audit opinion.
c.
The expert designation conveys a higher level of due diligence on the expert and shields audit committee members and the corporation from most liabilities.
d.
The enhanced level of financial sophistication of the financial expert can serve as a resource for the audit committee.
Choice “d” is correct. The benefits of a financial expert on the audit committee relate to the expertise that the board can bring to its oversight function.
Arnold Astor, CPA, is a local tax practitioner who has been asked to sit on the Board of BigLarge Corporation, a multinational issuer. Astor has never had any involvement either as an employee or as an auditor with publicly traded companies but does teach an accounting principles class at the community college. Under the provisions of the Sarbanes-Oxley Act of 2002:
a.
Astor must petition the SEC for a waiver of prior experience requirements to be considered a financial expert.
b.
The Board of Directors would likely evaluate Astor’s qualifications to serve on the audit committee and be designated as a financial expert based on mix of knowledge and experience.
c.
Astor qualifies as a financial expert based on achievement of a CPA certificate.
d.
The audit committee would immediately certify Astor’s qualifications as a financial expert based on his CPA license and academic experience with GAAP and experience with internal control.
Choice “b” is correct. 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.
The Sarbanes-Oxley Act of 2002 seeks to improve investor confidence by providing greater transparency for all of the following issues, except:
a.
Means and methods for balancing risk and growth.
b.
Compliance of senior officers with a code of ethics.
c.
Adequacy of internal controls.
d.
Competency of audit committees.
Choice “a” is correct. 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.
How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform in order to to be subject to mandatory annual inspection by the PCAOB? a. More than 10 audits. b. More than 100 audits. c. One audit. d. More than 50 audits.
Choice “b” is correct. The Sarbanes-Oxley Act requires the PCAOB to perform an annual inspection of each registered public accounting firm that regularly provides audit reports for more than 100 issuers.
Under the provisions of the Sarbanes-Oxley Act of 2002, registered public accounting firms are required to prepare and maintain audit work papers and other information related to any audit report for a period of: a. Seven years. b. Five years. c. Three years. d. One year.
Choice “a” is correct. Registered public accounting firms are required to maintain audit work papers and supporting documentation for a period of seven years. Thus, choices “d”, “c”, and “b” are incorrect.
The Sarbanes-Oxley Act of 2002 prohibits a registered public accounting firm from providing any non-audit service to an issuer contemporaneously with the audit, except:
a.
Appraisal or valuation services, fairness opinions, or contribution-in-kind reports.
b.
Bookkeeping or other services related to the accounting records or financial statements of the audit client.
c.
Financial information systems design and implementation.
d.
Tax services pre-approved by the audit committee.
Choice “d” is correct. Most services that audit firms previously provided to publicly traded clients have been prohibited by the Sarbanes-Oxley Act of 2002, except for approved tax services.
Under the provisions of the Sarbanes-Oxley Act of 2002, the lead audit or coordinating partner and the reviewing partner must rotate off the audit: a. Every seven years. b. Each year. c. Every three years. d. Every five years.
Choice “d” is correct. The lead audit or coordinating partner and the reviewing partner must rotate off the audit every five years. Thus, choices “b”, “c”, and “a” are incorrect.
Rules issued under the Sarbanes-Oxley Act of 2002 prohibit a registered accounting firm from performing an audit at a public company if any person serving as the public company's chief executive, chief financial or chief accounting officer, or controller or chief accounting officer worked for the registered accounting firm within the preceding: a. Within two years of the current audit. b. Within three years of the current audit. c. Within five years of the current audit. d. Within one year before the current audit.
Choice “d” is correct. To avoid conflicts of interest, a registered company public accounting firm cannot perform an audit for a public company if one of the indicated officers of the company worked at the auditing firm within a year before the audit.
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)?
a.
Register with the SEC pursuant to the Securities Exchange Act of 1934.
b.
Register with the Financial Accounting Standards Board (FASB).
c.
Join the SEC Practice Section of the AICPA.
d.
Register with the Public Company Accounting Oversight Board.
Choice “d” is correct. 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.
A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be computed? a. $45,000 b. $50,000 c. $5,000 d. $0
Choice “c” is correct. 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.
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. a. Neither I nor II. b. Both I and II. c. II only. d. I only.
Choice “b” is correct. 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.
John S. Loppe has not been particularly careful in preparing his income tax returns and, as a result, has substantially understated his tax. The negligence penalty with respect to understatement of tax might thus be applicable to him. The negligence penalty with respect to understatement of tax:
a.
Is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.
b.
Is imposed in conjunction with the penalty for substantial underpayment of tax and the penalty for a substantial valuation misstatement.
c.
Is computed as 25% of the understatement of tax.
d.
Defines “disregard” as any careless, reckless, or unintentional disregard of tax rules and regulations.
Choice “a” is correct. The negligence penalty with respect to understatement of tax is an accuracy-based penalty for negligence or for disregard of tax rules and regulations.
Chatham Corporation is a defendant in a lawsuit by the IRS. Which of the following statements is correct with respect to the various defenses that might be available to Chatham to avoid or reduce civil and criminal penalties that might otherwise be imposed on it?
a.
The substantial authority standard involves a position that has a less than 50% chance but more than a one-in-four chance of succeeding.
b.
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 10% chance of succeeding.
c.
The more-likely-than-not standard involves a position that has a more than 50% chance of succeeding.
d.
Reports issued by the U.S. Congress, IRS regulations, rules, and releases, and U.S. and foreign court case decisions constitute substantial authority for the substantial authority standard.
Choice “c” is correct. The more-likely-than-not standard involves a position that has a more than 50% chance of succeeding.
John R. Fudge is an individual taxpayer in Cut and Shoot, Texas. He has been accused of understating the tax on one of his returns and is concerned about the possibility of imprisonment if he is convicted. The understatement has nothing to do with a tax shelter. Which of the following statements is correct for his situation?
a.
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.
b.
If John took a reasonable position on his tax return, he is subject to the penalty for understatement of tax but not to the penalty for substantial understatement of tax.
c.
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 still apply if John actually did understate his tax.
d.
If John’s understatement of tax is a substantial understatement, the penalty is double what it would have been for a simple understatement.
Choice “a” is correct. 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.
Dewey Cheatam, Esq. is a leading candidate for the next open seat on the U.S. Supreme Court. He recently addressed the graduating class at The University of Texas Law School on the subject of the judicial process for tax issues. Which of the following statements in his address was correct?
a.
U.S. District Court cases are heard before one judge, not a panel of judges.
b.
When the U.S. Supreme Court denies a writ of certiorari, it confirms the lower court’s decision.
c.
Judges for the U.S. Tax Court hear cases at various locations in the country as do justices for the U.S. Supreme Court.
d.
The U.S. Court of Federal Claims follows the decisions of the Federal Court of Appeals and the geographical Courts of Appeals
Choice “a” is correct. U.S. District Court cases are heard before one judge, not a panel of judges.
