Flashcards in Professional Responsibilities Deck (30):
What is the purpose of a Consulting Engagement?
This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.
What is required by the Statements on Standards for Consulting Services (SSCS)?
Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity
NOT REQUIRED: Independence
What is the difference between Express versus Implied duties of an accountant under contract?
Express: Contract specifies what accountant will do
Implied: Accountant performs without negligence
Accountant's liability for negligence - What are the requirements?
DUTY - DAMAGES - RESULT
Duty - Accountant must have had duty to perform with due care exercised by an average accountant.
Damages - The client experienced actual damages.
Result/Causation - The damages were as a result of the negligence.
What is an Accountant's Liability for Detecting Fraud
(Under Normal Circumstances)?
It is not the accountant’s job to find fraud and they are not normally liable for not detecting it
When can a client be sued for failing to detect fraud?
When a normal audit following GAAS would have detected the fraud.
When an accountant agrees to take on more responsibility than what is required under a normal audit.
When accountant words the audit report to indicate this greater responsibility.
When has an accountant committed fraud?
Misrepresentation - Accountant misrepresents MATERIAL fact(s)
Scienter - Accountant commits scienter
Damages - Client has actual damages.
Reasonable Reliance - Client reasonably relied on the misinformation.
What is Scienter?
To report something knowing it is false.
Characterized by reckless disregard for truth
Intentionally conceal facts
What is the Accountant's Liability to Third Parties - Privity Defense?
Lack of privity defends against contract breach and negligence.
NOT a defense against fraud.
The definition of Ultramares Decision:
Accountants are not liable to third parties unless the third party was an
intended beneficiary of the engagement AND the accountant knew they
would be relying on the financial statements.
What is Common Law Fraud?
Misrepresentation of Material Fact
What is Constructive Fraud?
Gross Negligence - reckless disregard for truth
CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.
What are the required actions with Discovery of Illegal Activity?
Accountant must report discovered illegal activity to Audit Committee or Board of Directors
If material in public company; BOD has *1 DAY* to notify SEC.
What is the Accountant-Client Privilege?
NO Federal Accountant-Client privilege for non-disclosure of private
conversations to a court unless a particular state recognizes such a privilege.
If your client tells you “Yeah; I cheated on my taxes;” a court could force an accountant to testify about that conversation.
Accountant's Workpapers - Confidentiality Requirements
1. Can be subpoenaed
2. Can be looked at by another CPA doing peer review
3. Property of the accountant who created them
Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.
True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.
Accountants have no way of auditing individual's personal finances and are not required to do so when preparing a return
When a past error is found in a client's tax return; what should an accountant do?
If a past error is found; accountant should inform client of this error.
Contacting the IRS is NOT required.
If client won't fix it; then the accountant should reconsider whether they want to do business with the client
Name the key responsibilities of an accountant when preparing a tax return.
Accountant must prepare the return in good faith and ask for more information if something is missing
When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court
What does "more likely than not" mean?
More than 50% chance that the court will uphold decision
What does "reasonable basis" mean?
Greater than 20% chance that tax position will be upheld
What does "substantial authority" mean?
Greater than 33% but less than 50% chance that tax position will be upheld
Tax preparer vs. practictioner
Preparer - compensation
Practictioner - enrolled to practice before IRS
What is a covered opinion?
Written or electronic advice by a practitioner concerning federal tax issue related to:
1. Tax avoidance (listed transaction)
2. Tax avoidance or evasion (tax shelter)
3. Reliance or marketed opinion
(4. Confidential or contractual)
What is a reliance opinion?
Type of covered opinion
More likely than not (> 50%) to be in taxpayers favor
What is a marketed opinion?
A type of covered opinion
Used to promote, market, or sell an arrangement
What power does the State Board have?
- licensing CPAs
- monetary fine
What power does the AICPA have?
(Without hearing for proof of conviction)
What power does the IRS have?
Criminal & civil penalties
What power does the SEC have?
- Revoke right to practice before SEC
- civil penalties (limited)