Professional and Legal Responsibilities

Question 1

Law that has historically been established by judicial precedents–the source of libability to clients and third parties (not covered by securities laws)

Answer 1

Common law

Question 2

Failure to use even slight care–often referred to as gross negligence

Answer 2

Constructive fraud

Question 3

Negligence on the part of the plaintiff that contributed to that party’s losses–typically mitigates some or all of the defendant’s damages

Answer 3

Contributory negligence

Question 4

The standard of care required under filings under the SEcurties Act of 1933

Answer 4

Due diligence

Question 5

A misrepresentation intended ot mislead another party or a reprsentation made witha reckless disregard for its truth

Answer 5

Fraud

Question 6

A concept of liability similar to joint liability except that if all of the judgment is recovered from one defendant, that party may attempt to collect from other defendats their proportionate shares of the judgment

Answer 6

Joint and several liability

Question 7

A joint program of the AICPA and state CPA societies to jointly investigate ethics violations

Answer 7

Joint Ethics Enforcement Program (JEEP)

Question 8

A liablity concept in which any joint defendant may be forced to pay the entire amount of a judgment

Answer 8

Joint liability

Question 9

Failure ot perform with the level of skill and judgment possessed by a typical professional

Answer 9

Negligence/ ordinary negligence

Question 10

A party other than the client who primarily benefits from the contracted services provided by the CPA –has the same rights as a client under common law

Answer 10

Primary beneficiary (ex. a bank who requests an audit of a client company)

Question 11

Communication that is not subject to disclosure in court or administrative proceedings–must be established by law, and generally the communicaiton between an accountant and a client is not privileged

Answer 11

Privileged communication

Question 12

A mutual relationship esbalished between parties typically established by a contract

Answer 12

Privity

–the client and third party benefiiciares are in privity with the CPA in a contract to provide services

Question 13

A nonprofit organization created by SOX to oversee the audits of public companies

Answer 13

PCAOB–Public Company Accounting Oversight Board

Question 14

an act that seta new set of enhanced standards for public company boards, management, and public accounting firms–established the PCAOB

Answer 14

Public Company Accounting Reform and Investor Protection Act (SARBANES OXLEY)

Question 15

An act deisgned to allow prosecution of organized criminals–can result in recovery of treble damanges–ussed to pursue CPA firms who engage in multiple instances of wrongfu acts

Answer 15

Racketeer Influenced and Corrupt Organization (RICO) Act

Question 16

A federal securities act that covers the initial registration of securities

Answer 16

Securities Act of 1933

Question 17

A federal securities act that covers the secondary purchase and sale of securities

Answer 17

Securties Exchange Act of 1934

Question 18

A concept of liability in which joint defendants are responsible for only thier proportionate share of the judgment

Answer 18

Several Liability–the liability standard included in the UAA

Question 19

State boards that regulate hte practice of public accountancy in a state or jurisdiction

Answer 19

State Boards of Accountancy

Question 20

AICPA standards for CPAs that perform tax services for clients

Answer 20

Statements on Standards for Tax Services

Question 21

REgulatory requirements regarding the authority to practice before the Internal REvenue Service

Answer 21

Treasury Department Circular 230

Question 22

A federal agency wiht primary responsibility for enforcing hte federal securities laws and regulatin the securities industry

Answer 22

US Securities Exchange Commission (SEC)

Question 23

A code of ethics applicable to all AICPA members, not just those in public practice–provides minium levels of acceptable conduct relating to all services performed by CPAs, unless wording of a standard specifically excludes some members

Answer 23

AICPA Code of Professional Conduct

Question 24

An act developed by the AICPA to provide state jurisdictions a model act to regulate CPAs

Answer 24

Uniform Accountancy Act (UAA)

Question 25

A senior technical committee of the AICPA that interprets and enforces the AICPA Code of Professional Conduct

Answer 25

Professional Ethics Executive Committee (PEEC)

Question 26

Duties under a contract in which the accountant owes the duty to perform in a nonnegligent manner

Answer 26

Implied Duty under contract

Question 27

A duty of the accountnat to perform under terms of the contract

Answer 27

Express duty under contract

Question 28

Where all terms of a contract between a CPA and client should be explicitly recorded IN WRITING

Answer 28

Enagment letter

Question 29

Monetary compensation awarded to an injured party that goes beyond that which is necessary to compensate the individual for losses and that is intended to punish the wrongdoer.—generally not awarded for breach of contract

Answer 29

Punitive damanges

Question 30

damages recovered in payment for actual injury or economic loss, which does not include punitive damages (as added damages due to malicious or grossly negligent action).

Answer 30

Compensatory damanges

Question 31

A phrase in a contract that means that performance by one party at or within the period specified in the contract is necessary to enable that party to require performance by the other party–if contracted party does not perform obligation in time period under this clause, not entitled to compensation

Answer 31

Time is of the essence

Question 32

An act from which an injury results as a natural, direct, uninterrupted consequence and without which the injury would not have occurred.–would not have happend “but for” the acts of the defendent

Answer 32

Proximate cause

Question 33

reckless disregard for the truth/ intent to mislead

Answer 33

scienter

Question 34

A third party who the accountant knew would rely on finanical statements or a member of a limited class that the accountant knew would rely on financial statements for a specified transaction

Answer 34

Foreseen party—a bank is a forseen party if the CPA firm knew that the audit was to secure a loan with some bank

Question 35

Rule that says that accountants are liable to forseen third parties for ordinary negligence–accountant liable for fraud, constructive fraud, or gross negligence

Answer 35

Majority rule

Question 36

Any party that an accountant could reasonable forsee would receive finanical statemnts and use them–accountnats not liable to these parties for negligence

Answer 36

Forseeable parties–majority rule

Question 37

Under this doctrine, an accountant is liable only for negligence to third parties who are in privity of contract –minority rule

Answer 37

Ultramares doctrine

Question 38

A review of financial statements subsequent to the balance sheet date

Answer 38

S-1 Review–can still be liable under the Securites Exchange Act of 1933

Question 39

Rule making it unlawful to employ any device, scheme or artifice to defraud (2) make untrue statement of material fact or omit material fact (3) engage in act, practice, or course of business to commit fraud or deceit in connection with purchase or sale of security

Answer 39

Section 10b-5 of Securities Exchange Act of 1934

Question 40

Rule making it unlawful to make false or misleading statements with respect o a material statemnt unless done in “good faith”

Answer 40

Section 18 of Securities Exchange Act of 1934

Question 41

Evidence, notes, computations, etc. that the accountant accumulates when doing pofessional work for a client-owned by the accountant unless there is agreement to the contrary

Answer 41

Working papers

Question 42

The Financial Privacy Rule requires financial institutions to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice must explain the information collected about the consumer, where that information is shared, how that information is used, and how that information is protected.

Answer 42

Gramm-Leach Bliley (financial Moderniation) Act of 1999

Question 43

Under this act, plaintiffs need more proof of fraud before they can initiate a suit. This makes it very difficult to file a frivolous suit, but it also makes it much harder to file legitimate ones, as plaintiffs are forced to present evidence of fraud before any pretrial discovery has taken place–designed to make it harder to file frivolous law suits against accountants–amends the Federal Securities Act of 1933 and the Federal Securities Exchange Act of 1934

Answer 43

Private Securities Litigation Reform Act (PSLRA)

Question 44

Other name for Sarbanes-Oxley

Answer 44

Public Company Accounting Reform and Investor Protection Act

Question 45

The act that established the PCAOB

Answer 45

Sarbanes-Oxley

Question 46

A nonprofit corporation, consisting of 5 members (2 CPAs, 3 not) that regulate firms that audit SEC registrants (public companies)

Answer 46

Public Company Accounting Oversight Board (PCAOB)

Question 47

This must be filed with the SEC within 4 days of the occurrence of a triggering event

Answer 47

Form 8-K

Question 48

An individual who prepares for compensation, or who employs one or more persons to prepare for compensation, any federal tax return, or a substnatial portion thereof, including income, employment, excise, exempt organization, gift, and estate tax returns

Answer 48

Preparer

Question 49

Standard of success that a CPA can use to make decisiosn in preparing a tax return to requires one-third likelihood of success

Answer 49

Realistic Possibility of success standard

Question 50

A success standard that a CPA may use in making decisions in preparing tax returns that requires more than 50% probability of success

Answer 50

More Likely Than Not Standard

Question 51

written advice, including electronic communications (i.e., e-mail, faxes), on a federal tax issue arising from an arrangement in which the principal purpose of thetransaction is tax avoidance, or a significant purpose

Answer 51

Circular 230 covered opinion

Question 52

Written advice that advises a taxpayer that he has a 50 percent chance of favorably resolving tax issues.

Answer 52

Circular 230 reliance opinion

Question 53

A document established by the US Treasury department that prohibts written advice that advises tax avoidance or a reliance opinion

Answer 53

Circular 230

Question 54

A position in which there is at least a 20% probability of being sustained on its merits

Answer 54

REasonable basis position

Question 55

Applies if there was a material misstatement due to a tax preparer relying in good faith on he advice of an adisory preparer who the return preparer had reason to believe was competent to render such advise

Answer 55

REasonable cause and good faith exception—IRS reviews the facts and circumstances in these cases ato determine whether this exception applies