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Flashcards in R5-pt4 Deck (27)
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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?

- Accountant must have had DUTY to perform with due care exercised by an average accountant.

- BREACHED that duty

- Breach CAUSED plaintiff injury

- 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 CPA 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: CPA misrepresents MATERIAL fact(s)

- Scienter: CPA 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:

- CPA are not liable to third parties unless the third party was an intended beneficiary of the engagement


- the CPA knew they would be relying on the financial statements.


What is Common Law Fraud?

Regular fraud

Misrepresentation of Material Fact



Reasonable Reliance


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 DirectorsIf 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.



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.


What are 2 Negligence acts?

- Failure to warn client of known internal control weakness

- Failure to properly supervise/review


Who is the Duty owed under a Majority Rule?

- Limited foreseeable class of persons whom the CPA knows will be relying on the CPA's work

-Ex. Investors, Lenders


Who is the Duty owed under a Minority Rule?

- Follows the Ultramares decision

- limits CPA Liability in Privity

- Intended for 3rd Party Beneficiaries


Actual Fraud has what 5 Elements?

- Misrepresentation of Material Facts

- Intent to deceive

- Actual & Justifiable reliance by plaintiff on misrepresentation

- Intent to Induce plaintiff's reliance

- Damages "Maids"


What kind of Negligence is Constructive Fraud?

- Gross Negligence


When a CPA signs off on F/S & can be held Liable when the Plaintiff: Section 11 of 1933 Act:

- Acquires the stock

- Suffered a Loss

- F/S contained Misrepresentation


Each Audit required pursuant to the 1934 Act must include:

- Designed to Detect Illegal Acts

- Designed to Identify Related Party Transactions

- Evaluate whether there is substantial doubt about the ability of the issuer to Con't As A Going Concern


If the CPA detects information of illegal Acts, the CPA must?

- Inform the Audit Committee

- If Audit Committee takes no action, report directly to Board of Directors


Who does the Board of Directors report information of illegal acts to?

- To SEC within 1 day

- If the CPA doesn't receive a copy of notice, then CPA sends SEC with a copy of the report within one day

- CPA may Resign


When can a CPA be allowed to disclose workpapers without the clients consent?

- Subpoenaed

- Prospective purchaser: not confidential info.

- CPA society voluntary quality control review

- Defense in a lawsuit

- Official Investigation by AICPA/state trail board

- GAAP/GAAS req. disclosure



Under which Act does the Plaintiff NOT have to prove Reliance?

- Section 11 of the 1933 Act