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CPA - REG > REG - Ethics > Flashcards

REG - Ethics Flashcards

1
Q

What is the body that issues permits to practice?

A

State boards of accountancy (or similar authorities)

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2
Q

What are requirements of the UAA?

A
  • UAA contains requirements for the issuance of CPA certificates
  • UAA contains a substantial equivalency provision to allow for movement between states
  • UAA contains provisions for continuing education
  • UAA does NOT require all accountants to be licensed, only those that perform attest services or compilations of FS
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3
Q

What are the possible results of an AICPA ethics investigation?

A
  • No violation/dismissal
  • Admonishment (warning) (publication is mandatory)
  • Corrective action required (additional education)
  • Suspension up to 2 years
  • Expulsion
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4
Q

What are the items that may results in automatic expulsion or suspension from the CPA?

A
  • Revocation of CPA certificate by an authorized body/state
  • Filing a fraudulent tax return for client or self
  • Failure to file his/her required tax return
  • Conviction of a crime punishable by imprisonment for more than 1 year
  • NOTE - conviction for a felony or misdemeanor does NOT result in auto expulsion
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5
Q

What is the likely result of a member of the AICPA being convicted of filing a fraudulent tax return?

A

Can be suspended or expelled without a hearing

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6
Q

What is a good defense against negligence for a CPA?

A

Performing an audit in accordance with GAAS does not guarantee there is no negligence, but it is normally a good defense.
Bad defenses include privity of contract (incl oral agreement), oral contract still enforceable without signed engagement letter, and CPA does not have to perform audit recklessly or with intent to deceive to be liable for negligence.

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7
Q

What is negligence for a CPA?

A

Means that a CPA failed to exercise due care owed of the average reasonable accountant in performing an audit.

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8
Q

How does a CPA meet the standard of due care in conducting an audit of a client’s FS

A

A CPA has the duty to perform with the same degree of skill and judgment expected of an ordinarily prudent CPA under the circumstances. The standard of due care is guided by state and federal statute, court decisions, contract with client, GAAS and GAAP, customs of profession.

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9
Q

When is a CPA liable for failure to detect fraud or irregularities

A
  • a normal audit would have detected it
  • the accountant by agreement has undertaken greater responsibility
  • the wording of the audit report indicated greater responsibility
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10
Q

What are the elements needed to establish fraud against an accountant?

A
  • misrepresentation of the accountant’s expert opinion
  • scienter shown by either the accountant’s knowledge of falsity or reckless disregard of the truth aka GROSS negligence
  • reasonable reliance by injured party
  • actual damages
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11
Q

What must the auditor do if they become aware of weaknesses in the design or operation of the internal control structure?

A

The weaknesses/reportable conditions must be communicated to the audit committee of the client.

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12
Q

Which source of law would be used for the different types of parties?

A

Lawsuits by clients for negligence - common law
Suits by investors in securities issued by a public company would be filed under Securities Act of 1933
Suits by individuals who purchase or sell securities of a public company - Securities Exchange Act of 1934
Suits by individuals who purchase or sell securities regulated by a state - State securities law

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13
Q

What type of negligence should be proved on the part of the CPA if there is privity of contract?

A

Client only needs to prove ordinary negligence, not gross.

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14
Q

What must a third party prove against the accountant to be awarded damages?

A
  • losses/damages
  • negligence (ordinary or gross depending on the type of party) by the CPA
  • proximate cause (reliance on the work of CPA caused losses)
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15
Q

What is the difference between joint, several, and joint and several liability?

A

Joint - both accountant and mgmt are liable up to the full amount of obligation
Several/proportionate - party is only liable for respective share of damages - liability standard in UAA
Joint and several - party is responsible for full amount but may seek reimbursement from other parties - applied by most state courts

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16
Q

How are CPAs liable to foreseeable parties?

A

Liable for gross negligence or fraud such as knowingly issuing an unqualified opinion on materially misstated FS

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17
Q

What is the Ultramares rule and where does liability go to?

A

Under Ultramares, the accountant is held liable only to parties whose primary benefit the FS are intended. Thus, only those in privity of contract, NOT to foreseen parties.

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18
Q

What is needed to establish common law liability against an accountant based upon negligence?

A

Must be proven:
1- accountant had duty to exercise due care
2 - accountant breached duty of due care
Evidence of due care/diligence includes following GAAS OR GAAP
3 - damages or loss resulted
4 - causal relationship exists between the fault of accountant and resulting damages

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19
Q

What is needed to establish common law liability against an accountant based upon fraud?

A

To prove common law fraud, following must be present:
1 - misrepresentation of a material fact or the accountant’s expert opinion
2 - scienter, shown by either an intent to mislead or reckless disregard for the truth.
3- reasonable or justifiable reliance by injured party
4 - actual damages resulted
Contributory negligence or lack of privity are NOT defenses in cases of fraud. Under fraud, accountant is generally liable to all parties defrauded.

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20
Q

What does the plaintiff need to prove under the Securities act of 1933?

A

Only that damages were incurred AND that there was a material misstatement or omission. The burden of proof is then shifted to the CPA to prove due diligence.
Do not need to prove scienter or negligence or even that there was reliance on the FS, or intent to deceive

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21
Q

What is the amount of liability for the CPA under the Securities Act of 1933?

A

The plaintiff can recover damages equal to the difference between the amount paid and the market value of the stock at the time of the suit.

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22
Q

What must be established under the Securities Exchange Act of 1934 Section 10b, Rule 10b-5?

A

Following elements must be proven:
- damages resulted to plaintiff in connection with the purchase or sale of security in interstate commerce
- material misstatement or omission existed in info released by firm
- plaintiff justifiably relied on FS
- existence of scienter - prove lack of good faith
It is less likely to prove this than 1933 Act.

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23
Q

Who can the CPA share the working papers with and under what conditions?

A

CPA cannot share to third parties without clients consent or if required by valid subpoena. No exceptions to IRS or FASB, or purchaser of CPA practice, or another CPA.
Any of the partners of the CPA partnership can have access to the partnerships’ working papers.
It is allowed for use in a quality review under AICPA authorization or to be given to the state CPA society quality control panel (in jurisdiction having accountant client privilege)

24
Q

Explain privileged communication between accountant and client.

A

Only recognized in a few states, the client can prevent the accountant from testifying. Only exists at state stature not common law. In these few states, it can be claimed in both civil and criminal suits.

25
Q

What happens if the previous year fees are not paid yet?

A

It would be a violation of the profession’s ethical standards as independence is impaired when current year report is issued but previous year fees are unpaid.

26
Q

What are examples of criminal violations - perjury and tax evasion?

A

perjury - willfully preparing false returns

tax evasion - willfully assisting others to evade taxes

27
Q

What are the sources of law that can result in criminal liability?

A 
Securities act of 1933
Securities exchange act of 1934
RICO
Federal tax law
NOT common law as this can only result in civil liability
28
Q

What is the RICO and what is liability under it?

A

The Racketeer Influenced and Corrupt Organizations Act provides for potential treble damages. Also allows civil suits by private parties.

29
Q

Under the Private securities litigation reform act, who must the auditor inform if material error found?

A

The auditor must inform first the audit committee or board of directors. If no remedial action is taken, auditor must inform SEC.

30
Q

What does the private securities litigation reform act require?

A

Auditor is required to establish procedures to:

  • detect illegal acts
  • identify material related party transactions
  • evaluate the ability of the firm to continue as a going concern
31
Q

What is the private securities litigation reform act and what does it apply to?

A

It amends the 1933 and 1934 acts which apply to stocks sold on a stock exchange. Applies to CS and PS of publicly held corporations.

32
Q

What is the liability under the private securities litigation reform act - knowingly vs unknowingly?

A

The reform act changes the joint and several liability for unknowing conduct and substitutes proportionate liability. Knowingly - joint and several
If defendant is insolvent, accountant can be liable for an additional 50%.

33
Q

What are the nonattest services that may not be performed by an auditor for a public company?

A

Includes bookkeeping services, appraisal services, and internal audit services
Tax services may be performed but must be approved by the company’s audit committee.

34
Q

Which board has the responsibility to regulate CPA firms that audit public companies?

A

Public Company Accounting Oversight Board (PCAOB)

35
Q

What are the provisions of Sox?

A

Provisions for penalties for failure to retain audit workpapers, requirement for registration of CPA firms to audit public companies, and requirement for inspection of public company audits.

36
Q

Who must personally certify accuracy of FS filed with SEC under Sox?

A

CEO and CFO

37
Q

When must a form 8-k be filed with the SEC

A

Within 4 days of the occurrence of a triggering event

38
Q

The Sox of 2002 requires rotation of the audit partner on a public company audit at least every…

A

5 years

39
Q

When is a tax return preparer subject to penalty?

A

If the preparer knowingly or recklessly discloses info furnished in connection with the preparation of a tax return, unless such info is furnished for quality or peer review, under an administrative order by a regulatory agency, or pursuant to an order of a court.
Additionally, if any part of an understatement of liability with respect to a return or refund claims is due to the preparer’s willful attempt to understate tax liability, or to any reckless or intentional disregard of rules and regulations.

40
Q

What happens if there is a old income tax return that has never been filed? What is the statute of limitations?

A

If the return for the old year is not submitted, the CPA should not submit the current year. CPA may need to consider withdrawing unless the old year is filed.
The normal statute of limitations for the assessment of a tax deficiency is 3 years after the due date of the return or 3 years after the return is filed, whichever is later. Since the old year was never filed, there is no time limit for the assessment of tax.

41
Q

What action should a tax return preparer take to avoid penalties for a return’s understated tax liability due to a taxpayer’s intentional disregard of regulations?

A

A return preparer may in good faith rely without verification upon info furnished by the client or third parties, and is not required to audit, examine, or review records in order to independently verify the taxpayer’s info.
The preparer should not ignore the implications of info furnished and should make reasonable inquiries if the info appears incorrect, incomplete or inconsistent.

42
Q

Can a CPA rely on info given by the client or third parties?

A

A CPA may in good faith rely upon info furnished by the client or third parties in preparing a tax return.

43
Q

When is a tax return preparer subject to penalties and when not?

A

Subject to penalty for knowingly or recklessly disclosing corporate tax return info, if the disclosure is made to enable a third party to solicit business from the taxpayer.
No penalty when disclosure is made to enable the tax processor to electronically compute the taxpayer’s liability, for purposes of the tax return preparer’s peer review, or if the disclosure is made under an admin order by a state agency that registers tax return preparers.

44
Q

What is the penalty amount against a tax return preparer?

A

Penalty up to $1000 for preparer that knowingly or recklessly discloses or uses any tax return info other than to prepare return.
Additionally, the greater of 5k or 50% of the income to be derived by the return preparer from the return or refund claim - for preparer who willfully attempts to understate any client’s tax liability on a return or claim for refund.

45
Q

What is the penalty for endorsing and cashing the client’s refund check?

A

The preparer endorsing or negotiating any check which is issued to a taxpayer has to pay a penalty of $500

46
Q

What must a CPA who prepares a federal income tax return for a fee do?

A

Required to keep a completed copy of the return for a min of 3 years. CPA federal id number is required on any federal income tax return prepared for a fee, even if tax due or not.

47
Q

What does a CPA owe a duty to inform the client of

A

Any errors in a previously filed tax return so that client can file an amended tax return.

48
Q

What happens if the taxpayer wishes to dispute the assessment and the IRS issues a 30 day letter?

A

The tax payer has 30 days to request a conference with an appeals officer or file a written protest letter OR may elect to do nothing in the 30 day period and await a 90 day letter. The taxpayer would then have 90 days to file a petition with the tax court.
The taxpayer could also pay the taxes and file a claim for refund. If claim disallowed, the taxpayer could then commence an action in federal district court.

49
Q

When is a CPA liable to a tax client for damages

A

1 - failure to file a clients return on a timely basis
2 - gross negligence or fraud conduct resulting in client losses
3 - erroneous advice or failure to advise client of certain tax elections
4 - wrongful disclosure or use of confidential info
CPA is not liable if they do not sign a clients request for filing extension.

50
Q

What are the IRS penalties to a tax preparer

  • that fails to furnish a copy of the return to taxpayer
  • fail to sign a return (without reasonable cause)
  • endorse or negotiate a clients tax refund checks
A

50$
50$
500$
No penalty for understating clients tax liability due to an error in calculation.

51
Q

Before signing a clients tax return, what should the preparer consider?

A

1 - info actually known to the CPA from the tax return of another client
2 - info provided by the client that appears to be correct based on the clients returns from prior years

52
Q

Under Circular 230, who can practice and what can they charge?

A

Practicioners include CPAs, attorneys, enrolled agents, enrolled actuaries, retirement plan agents, and registered tax return preparers.
They can charge a contingent fee for representing a client in connection with a judicial proceeding.

53
Q

When can a practicioner sign a tax return according to Circular 230?
What is the %?

A

They cannot sign a tax return/claim if they know or should know reasonably that the position lacks a reasonable basis, is an unreasonable position, or is a willful attempt by the practicioner to understate tax liability.
The reasonable basis standard is at least 20% probability of being sustained.
The others 50% (more likely than not) 40% substantial, and 33% realistic possibility are higher standards.

54
Q

What are each for? common law/ 1933 act/ 1934 act/ RICO

A

Common law - applies to client suits and third party suits for nonissuer/nonpublic companies
1933 - initial pubic offerings of stock by issuer companies
1934 - applies to further issuances of stock after the initial
RICO - requires plaintiff to prove a pattern of improper activity

55
Q

Who should the CPA speak with if he finds a material noncompliance in prior year return of new client?

A

Discuss with client and recommend amendment of return.

Cannot contact IRS or prior CPA as this violates client confidentiality.

56
Q

If both the CPA auditor and company are liable 40/60% split, who pays and how much?

A

State with joint only, or joint and several liability - CPA may be required to pay full amount.
Several only - pay only their portion of liability. CPA would not pay the full amount and try to recover from company.

57
Q

Difference between compilation and audit?

A

Compilation is not an audit, and thus cannot have a statement that the FS were fairly stated.
Audit - the CPA is responsible for the FS and can find misstatements.

CPA - REG (15 decks)

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