Frank Maple, CPA, represents his brother Joe Maple and Joe's business partner Bill Smith. Joe Maple and Bill Smith are equal shareholders in the Joe & Bill Corporation. The Internal Revenue Service examined the corporation and determined that one of the s
Advise Joe & Bill that he cannot represent them because there is a conflict of interest.
When an attorney, a CPA, or an enrolled agent knows that a client has backdated a document that the client wants the representative to submit to the IRS, the representative has a duty to do which of the following?
Advise the client promptly of such noncompliance, error, or omission, as well as the consequences under the revenue laws.
Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?
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.
All of the following are examples of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service except
Advertising the hourly rates of the CPA.
A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty a
The tax preparer is responsible for disclosing both penalties to the company.
While reviewing a new client's prior-year tax returns, a CPA became aware that the client did not properly file all required federal income tax returns. Under Treasury Circular 230, what should the CPA do in this situation?
Advise the client of the consequences of the noncompliance.
While preparing a tax return for a new client and reviewing the client's prior-year return, a CPA noticed an error made by the client's former tax preparer. According to Treasury Department Circular 230, which of the following is the CPA specifically requ
Inform the client of the error and advise of the consequences.
Mike is a CPA. Widget, Inc., is an accrual-basis taxpayer. In Year 3, while preparing Widget's Year 2 return, Mike discovered that Widget failed to include income on its Year 1 return that Widget received in Year 2 but that should have been included in in
Advise Widget of the error and the consequences of the error.
According to Circular 230, which of the following statements may not be used when a CPA advertises?
Claims of quality of service that cannot be verified.
The Secretary of the Treasury can censure, suspend, or disbar a practitioner from practice before the Internal Revenue Service for incompetence and/or disreputable conduct. Which one of the following is considered disreputable conduct?
All of the answers are correct.
All of the following are considered examples of disreputable conduct for which a CPA can be disbarred or suspended except
Failure to timely pay personal income taxes.
Ms. Smith hired Tom, a CPA, to prepare her federal income tax return for Year 3. While gathering information to prepare the return, Tom discovered that Ms. Smith failed to file federal income tax returns for the Year 1 and Year 2 tax years. Circular 230 r
Promptly advise Ms. Smith that she did not comply with the Internal Revenue laws by failing to file federal income tax returns for the Year 1 and the Year 2 tax years and of the consequences she may face under the Code and regulations.
Sam is a CPA and a partner in the firm of Taxes-R-Us, LLP. One of Sam's former partners is under investigation by the Office of Professional Responsibility for disreputable conduct. Sam has been asked by the Office of Professional Responsibility to provid
He believes in good faith and on reasonable grounds that the information requested is privileged or that the request is of doubtful legality.
Identify the appropriate action that a practitioner should take when (s)he becomes aware of an error or omission on a client's return.
Promptly advise the client of such noncompliance, error, or omission and the consequences thereof.
Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code (IRC) requirement in the prior-year return of a new client. Which of the following actions should Lawson take?
Discuss the requirements of the IRC with the client and recommend that the client amend the return.
Which of the following is not an example of disreputable conduct for which a CPA may be disbarred or suspended from practice before the Internal Revenue Service?
Soliciting new business in matters relating to the Internal Revenue Service through the publishing of a range of fees for particular services.
A tax return preparer whose client has not complied with the revenue laws of the U.S. is required to
Advise the client of the noncompliance.
Pursuant to Treasury Circular 230, which of the following statements about the return of a client's records is correct?
The practitioner may retain copies of the client's records.
In accordance with Treasury Department Circular 230, a practitioner who has committed a willful violation may be
All of the answers are correct.
A CPA may be disbarred or suspended from IRS practice for which of the following conduct?
All of the answers are correct.
William, a taxpayer, refuses to pay Sara, CPA, for the preparation of his tax return unless Sara changes the return to reduce William's tax liability. The CPA
May withhold the documents she prepared from the client.
Identify the individual below from whom a CPA, in practice before the Internal Revenue Service, may knowingly accept assistance.
An individual who has temporary recognition to practice before the IRS.
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 re
Holding the check for safe keeping and awaiting the client's return.
A tax advisor with what responsibility should take reasonable steps to ensure that the firm's procedures for all members, associates, and employees are consistent with the best practices?
Overseeing either a firm's practice of (1) providing advice concerning federal tax issues or (2) preparing or assisting in the preparation of submissions to the IRS.
Which of the following is not an example of disreputable conduct (as described in Sec. 10.51 of Circular 230) for which a CPA may be suspended or disbarred from practice before the IRS?
Failure to respond to a request by the Director of the Office of Professional Responsibility to provide information.
Which of the following statements is true with respect to a client's request for records of the client that are necessary for the client to comply with his or her federal tax obligations?
The practitioner must, at the request of the client, promptly return the records of the client to the client unless applicable state law provides otherwise.
Which one of the following is considered disreputable conduct under Circular 230?
Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof.
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?
The CPA takes into account the possibility that a tax return will not be audited.
Debbie, CPA, is representing Mary and Matthew, a married couple, before the IRS. Debbie has been the couple's CPA for the past 20 years. If Mary and Matthew have started divorce proceedings, Debbie may continue to represent their conflicting interests bef
Affected parties provide informed, written consent.
The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must
Notify the IRS of the identity of any person who, according to the CPA's belief, could have the records.
Teri is an attorney who is a member in good standing of the bar of the highest court in her state of residence. In her practice before the IRS, Teri
Must file a written declaration for each party represented.
Under Treasury Circular 230, the IRS requires that certain records be returned to a client by the tax practitioner even though no payment for services has been received. Records of the client for this purpose do not include
A schedule prepared by the practitioner that provides mathematical details of a particular amount included in a client's tax return.
Which of the following is least likely to result in a tax practitioner's suspension or disbarment from practice before the IRS?
A CPA refuses to return practitioner-prepared documents upon client request because of a fee dispute.
A CPA received a notice regarding a client from a person claiming to be a field agent with the IRS. The notice demanded all of the client's records in the CPA's possession. If the CPA has a reasonable, good-faith belief that the request is not proper and
Withhold the client's records because the request is not proper and lawful.
Which of the following individuals qualifies as a practitioner under Circular 230?
All of the answers are correct.
A notice of disbarment or suspension of a certified public accountant from practice before the Internal Revenue Service is issued to which of the following?
All of the answers are correct.
Sam, a CPA, is representing Fred before the Examination Division of the Internal Revenue Service. The Internal Revenue Service is questioning Fred on his Schedule C gross income that is listed on the 2017 tax return. While reviewing the documentation Fred
Sam must advise Fred promptly of the omission and the consequences provided by the Internal Revenue Code and regulations for such omission.
According to the Rules of Conduct before the IRS, a tax practitioner
May charge a contingent fee for an IRS examination of a claim for refund.
In which of the following situations may the tax return preparer disclose the tax return information requested without first obtaining the consent of the taxpayer/client?
All of the answers are 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.
Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, Form 1041, he
Is not considered a tax return preparer.
Which of the following statements is false regarding tax return preparers?
Only a person who signs a return as the preparer may be considered the preparer of the return.
Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty?
Ron died after furnishing tax return information to his tax return preparer. Ron's tax return preparer disclosed the information to Jerry, Ron's nephew, who is not the fiduciary of Ron's estate.
The Internal Revenue Code and the Regulations do not impose penalties on tax return preparers for which of the following?
Failure to notify a taxpayer about an inadvertent error on a tax return filed 10 years ago.
Arnie is a Certified Public Accountant who prepares income tax returns for his clients. One of his clients submitted a list of expenses to be claimed on Schedule C of the tax return. Arnie qualifies as a return preparer and, as such, is required to comply
Appropriate inquiries are required to determine whether the client has substantiation for travel and entertainment expenses.
Jane is a Certified Public Accountant who specializes in preparing federal tax returns. Which of the following returns would not qualify Jane as a tax return preparer?
None of the answers are correct.
Morgan, a sole practitioner CPA, prepares individual and corporate income tax returns. What documentation is Morgan required to retain concerning each return that Morgan has prepared?
Taxpayer's name and identification number or a copy of the tax return.
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
He is not compensated.
Which of the following is considered a tax return preparer?
A woman who prepares tax returns in her home during filing season and accepts payment for her services.
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 organization.
A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate tax return information if the disclosure is made
So that a potential acquirer can analyze the business value.
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?
The CPA may be assessed a tax return preparer penalty.
Which of the following statements is true regarding records required to be maintained by return preparers?
Tax return preparers are required to maintain a complete copy of each return or claim for refund they have filed for 3 years after the return period, or are required to maintain a list of the names, identification numbers, and tax years for whom returns a
Baner, a CPA, is preparing a tax return for Affleck, a new client. During the course of the interview, Baner asks to inspect Affleck's source documents. Affleck responds that the supporting information is not readily available but assures Baner that the s
Baner can accept the representations but should make reasonable inquiries to determine if the information appears to be incorrect, incomplete, or inconsistent.
During a meeting with his client, Susan, John Rawley, CPA, recommended that Susan amend her prior-year tax return. What is the most likely reason for John's advice?
John has discovered an error in Susan's prior-year tax return.
A tax return preparer must complete the paid preparer's area of the return if
The individual was paid to prepare, assist in preparing, or review the tax return.
During an interview conducted by the tax return preparer, the client stated that he had paid $1,500 for deductible travel expenses and $3,000 for charitable contributions. The preparer asked if documentation existed in support of the deductions and was as
The preparer is not subject to a penalty under Sec. 6694 because she is not required to examine or review the client's books and records in order to verify the client's information.
Identify the item below that does not describe information a preparer must maintain about every return prepared.
The date the return or claim for refund was prepared.
Which of the following is not a tax return preparer?
Someone who prepares, as a fiduciary, a return or claim for refund for any person.
Which of the following acts, if any, constitute grounds for a tax preparer penalty?
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 CPA will be liable to a tax client for damages resulting from all of the following actions except
Refusing to sign a client's request for a filing extension.
Starr, CPA, prepared and signed Cox's current-year federal income tax return. Cox informed Starr that Cox had paid doctors' bills of $20,000 although Cox actually had paid only $7,000 in doctors' bills during the year. Based on Cox's representations, Star
Not liable to the IRS for any penalty or interest.
Which, if any, of the following could result in penalties against an income tax return preparer?
Knowing or reckless disclosure or use of tax information obtained in preparing a return
A willful attempt to understate any client's tax liability on a return
Both I and II.
A CPA who prepares clients' federal income tax returns for a fee must
Keep a completed copy of each return for a specified period of time or keep a summarized list of specified return information.
Which of the following situations describes a disclosure of tax return information by a tax return preparer that would subject the preparer to a penalty?
None of the answers are correct.
When preparing a client's Form 1040, U.S. Individual Income Tax Return, a CPA determined that there was documentation supporting only $12,000 of the $20,000 travel expenses claimed by the client. Which of the following courses of action taken by the CPA w
The CPA makes reasonable inquiries to obtain the needed documentation if the information as furnished appears to be incorrect or incomplete.
When must a tax return preparer obtain the consent of the taxpayer to release information?
George is planning to start a business with Ted. George asks to see Ted's tax returns to verify his financial position.
A compensated tax return preparer has prepared a substantial portion of a client's filed tax return. If the preparer has discovered an omission in the return, the preparer must notify the client (taxpayer) and is also required to
Advise the taxpayer of the consequences of the error or omission.
Mike is a CPA. For the past 5 years, the information that Anne provided Mike to prepare her return included a Schedule K-1 from a partnership showing significant income. However, Mike did not see a Schedule K-1 from the partnership among the information A
Ask Anne about the fact that she did not provide him with a Schedule K-1.
A tax preparer filed a return for a taxpayer and used the taxpayer's detailed check register containing both business and personal expenses. If the tax preparer knowingly included personal expenses as deductible business expenses on the taxpayer's busines
Tax preparer will be liable for penalties arising from an understatement due to willful or reckless conduct.
Circular 230, Sec. 10.34, discusses standards for advising clients with respect to tax return positions and for preparing or signing returns. Which of the statements below is true?
All of the answers are correct.
Which of the following is a tax return preparer according to the tax return preparer rules?
Mr. A engages a number of persons to prepare tax returns on a commission basis but does not himself prepare returns.
A tax return preparer is not required to
Discuss the tax return with a third party after oral consent by the client-taxpayer.
Which of the following is considered a tax preparer under the tax preparer regulations?
Someone who employs another person to prepare, for compensation, a substantial portion of any return of tax under the income tax provisions of the Code.
Which of the following persons would be subject to the penalty for improperly negotiating a taxpayer's refund check?
A tax return preparer who operates a check cashing agency that cashes, endorses, or negotiates tax refund checks for returns he prepared.
A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must
Promptly advise the client of the error.
Which of the following is not a tax return preparer?
Someone who prepares a return or claim for refund for his or her employer.
Penalties may be imposed on a tax return preparer for an understatement of tax liability because of a position for which there is not a reasonable belief that there is substantial authority that the position will be sustained on its merits. But the penalt
There is reasonable cause and good faith.
A penalty may be assessed against an income tax return preparer who takes an unreasonable position that causes an understatement of liability on a return. For purposes of assessing the penalty, "understatement of liability" means
Any understatement of the tax liability or overstatement of the amount to be refunded or credited.
Which of the following acts by a CPA will not result in a CPA's incurring an IRS penalty?
Understating a client's tax liability as a result of an error in calculation.
With respect to any given tax return, which of the following statements is correct?
More than one person may be deemed to be a preparer of a tax return.
A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her tax return as married filing separately and asked the CPA not to disclose the information to anyone. The CPA was not retained by the husband for any ta
The CPA's attorney, for the evaluation of the negligence claim.
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 true with regard to an Internal Revenue Code penalty Clark may be subject to for e
Clark will be subject to the penalty if Clark endorses and cashes the check.
Jack, a return preparer, did not retain copies of all returns that he prepared but did keep a list that reflected the taxpayer's name, identification number, tax year, and type of return for each of his clients. Which of the following statements best desc
Jack is in compliance with the provisions of the tax code, provided he retains the list for a 3-year period after the close of the return period in which the return was signed.
In which of the following circumstances would a tax return preparer be prohibited from disclosing a client's tax return information?
The information will be provided to a section 501(c)(3) charity.
If a tax return preparer discloses taxpayer information without the taxpayer's consent, the preparer can incur a penalty of
A $250 fine per disclosure up to $10,000 per year
Up to 1 year in prison and up to a $1,000 fine
Up to 3 years in prison and up to
I and II.
You are a CPA retained by the manager of a cooperative retirement village to prepare its tax returns. In performing the work, you discover that there are no invoices to support $25,000 of the manager's claimed disbursements. The manager informs you that a
Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.
A penalty applies to the portion of tax underpayment attributable to
Negligence of the tax rules or regulations
A disregard of the tax rules or regulations
Both I and II.
A CPA must sign the preparer's declaration on a federal income tax return
Only when the CPA prepares a tax return for compensation.
Which of the following statements is correct concerning a penalty for a tax return preparer who understates a taxpayer's liability?
No penalty is imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.
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?
Make reasonable inquiries if the taxpayer's information is incomplete.
Tax preparers who aid and abet federal tax evasion are subject to
Being prohibited from acting as tax preparers - YES
General federal criminal prosecution - YES
All of the following are tax return preparers except
A person who gives an opinion about theoretical events that have not occurred.
A penalty may be assessed on any preparer or
Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim.
Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except
Disclose a conflict of interest.
By what date must a tax return preparer furnish a copy of the original return to a taxpayer?
By the date the tax return is presented for the signature of the taxpayer.
Under its legal authority, the SEC
May prohibit an accounting firm from accepting SEC clients.
Which of the following professional bodies has the authority to revoke a CPA's license to practice public accounting?
State board of accountancy.
Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?
A state board of accountancy.
Which of the following bodies has the authority to suspend or revoke a CPA's license for acts discreditable to the profession?
The state board of accountancy.
The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant's right to practice before it. What is a basis for suspension?
Conviction of a felony.
Which entity has the authority to prohibit an individual from practicing public accounting?
A state board of accountancy.
To whom must a CPA pay license fees in order to maintain a CPA license?
The state board of accountancy of the CPA's state of licensure.
The SEC can suspend or revoke the right of an accountant to sign any document filed by an SEC registrant if the accountant
Lacks integrity - YES
Engages in unethical conduct - YES
Which agency is responsible for determining the continuing professional education requirements for licensed CPAs?
The board of accountancy for the state in which the licensed CPA practices.
If an ethics complaint is filed against a CPA, the matter
May be handled, in most cases, by either the AICPA or a state CPA society.
At a confidential meeting, a tax client informed a CPA about the client's illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to t
Discuss the entire conversation, including illegal acts.
A CPA is permitted to disclose confidential client information without the consent of the client to
Another CPA who has purchased the CPA's tax practice
A successor CPA firm if the information concerns suspected tax return irregularities
A voluntary peer
III only.
Which of the following statements is true regarding a CPA's working papers related to tax practice? The working papers must be
Turned over pursuant to a valid federal court subpoena.
Which of the following statements is correct regarding disclosure of working papers prepared by a CPA related to tax practice?
Working papers may not be transferred to another accountant without the client's permission.
In a jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over working papers without a client's permission?
State CPA society peer review panel.
The CPA firm of Knox & Knox has been subpoenaed to testify and produce its correspondence and working papers in connection with a lawsuit brought by a state taxing authority against a client of the firm. Knox considers the subpoenaed documents to be privi
In the absence of a specific statutory provision, the law does not recognize the existence of privileged communication between a CPA and client.
To which of the following parties may a CPA partnership generally provide its working papers related to its tax practice without either the client's consent or a lawful subpoena?
The IRS - NO
The FASB - NO
A CPA partnership may, without being lawfully subpoenaed or without the client's consent, make working papers related to tax advice provided to international clients available to
Any surviving partner(s) on the death of a partner.
Mell Corp. engaged Davis & Co., CPAs, to prepare its tax returns and provide advice about minimizing taxable income in high-tax states. Mell's management informed Davis it suspected that the taxable income from certain states was materially understated an
Yes, if the working papers are lawfully subpoenaed into court.
A CPA firm's working papers related to its tax practice are least likely to be protected from disclosure
Pursuant to a state court subpoena.
With respect to privileged communications of accountants, which of the following is true?
The privilege will be lost if the party asserting the privilege voluntarily submits part of the privileged communications into evidence.
If a CPA is engaged by an attorney to assist in the defense of a criminal tax fraud case involving the attorney's client, information obtained by the CPA from the client after being engaged
Will be deemed privileged communications under certain circumstances.
A CPA qualified to practice before the IRS is assisting in the defense of a client in a proceeding in federal court. The plaintiff is the U.S. government. The federal accountant-client privilege
Does not apply if the testimony relates to a private civil matter.
Which of the following statements is true with respect to ownership, possession, or access to a CPA firm's working papers related to its tax practice?
Working papers are not transferable to a purchaser of a CPA practice unless the client consents.
Which of the following statements about disclosure of confidential client data resulting from a CPA's tax practice is generally true?
Disclosure may be made to any party with the consent of the client.
Thorp, CPA, was engaged to prepare tax returns and provide other tax services to Ivor Co. During the engagement, Thorp discovered that Ivor was selling worthless mortgages to investors. Ivor was indicted and Thorp was subpoenaed to testify at the criminal
Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege.
An accountant engaged in tax practice before the IRS has a confidentiality privilege regarding communications with a client. This privilege applies
Only to advice on legal issues.
To which of the following parties may a CPA partnership provide working papers related to its tax practice, without being lawfully subpoenaed, without the client's consent, or without taking precautions, such as obtaining a confidentiality agreement, to p
Any surviving CPA partner(s) on the death of a partner.
For what minimum period should working papers related to tax practice be retained by the independent CPA?
For the statutory period within which legal action may be brought against the independent CPA.
Craven was the CEO of Engines Plus, Inc., a publicly-traded company. Hanson, CPA, was the long-time controller for the company. Engines Plus was about to be sued in a class action suit for defective engines. Only Craven knew about the impending suit. On M
Craven and Hanson would be considered insiders and Spore would be considered a tippee, all with knowledge of material, nonpublic information.
Which of the following events must be reported to the SEC under the reporting provisions of the 1934 act?
Tender offers - YES
Insider trading - YES
Solicitation proxies - YES
Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC's registration requirements?
Companies with assets in excess of $10 million and 500 or more nonaccredited shareholders.
Which of the following statements is true about corporations subject to the reporting requirements of the Securities Exchange Act of 1934?
A report (Form 8-K) must be filed with the SEC after a material important event occurs.
Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements?
An owner of 15% of the total face value of the corporation's outstanding debentures.
The reporting requirements of the Securities Exchange Act of 1934 and its rules
Apply to a corporation that registered under the Securities Act of 1933 but that did not register under the Securities Exchange Act of 1934.
Integral Corp., with assets in excess of $4 million, has issued common and preferred stock and has 350 shareholders. Its stock is sold on the New York Stock Exchange. Under the Securities Exchange Act of 1934, Integral must be registered with the SEC beca
Its shares are listed on a national stock exchange.
Which of the following factors, by itself, requires a corporation to comply with the reporting requirements of the Securities Exchange Act of 1934?
Shares listed on a national securities exchange.
James Fisk recently acquired Valiant Corporation by purchasing all of its outstanding stock pursuant to a tender offer. Fisk demanded and obtained the resignation of the existing board of directors and replaced it with his own slate of nominees. Under the
If Valiant is listed on a national stock exchange, Fisk must file his tender offer with the SEC.
The registration provisions of the Securities Exchange Act of 1934 require disclosure of all of the following information except the
Names of owners of at least 5% of any class of nonexempt equity security.
Wool, Inc., is a reporting company under the Securities Exchange Act of 1934. The only security it has issued is its voting common stock. Which of the following statements is true?
Any person who owns more than 5% of Wool's common stock must file a report with the SEC.
Under the Securities Exchange Act of 1934, a corporation whose common stock is listed on a national stock exchange
Is subject to having the registration of its securities suspended or revoked.
The provisions of the Securities Exchange Act of 1934 include all of the following except the
Requirement that firms offering securities for public sale to file a registration statement and provide a prospectus to potential investors.
Integral Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. For its current fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed office
File the periodic report listing newly appointed officers.
Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements?
An owner of 5% of the corporation's outstanding debentures or the corporation's general counsel.
Link Corporation is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following documents must Link file with the SEC?
Quarterly reports (Form 10-Q) - YES
Proxy Statements - YES
Which one of the following laws addresses the issue of insider trading?
Securities Exchange Act.
On May 1, Apel purchased 7% of Stork Corp.'s preferred stock traded on a national securities exchange. After the purchase, Apel owned 9% of the outstanding preferred stock. Stork is registered under the Securities Exchange Act of 1934. With respect to the
Must file with the SEC, the issuer, and the national securities exchange information concerning the purpose of the acquisition.
Which of the following statements is true regarding the proxy solicitation requirements of Section 14(a) of the Securities Exchange Act of 1934?
A corporation must file its proxy statements with the SEC if it is a reporting company under the Securities Exchange Act of 1934.
The SEC's antifraud Rule 10b-5 prohibits trading on the basis of inside information of a business corporation's stock by
Anyone who bases his or her trading activities on the inside information.
Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodic reports?
The corporation has fewer than 500 shareholders - YES
The securities are listed on a national exchange - NO
A main provision of the Securities Act of 1933, as amended in 1934, is the requirement that
New securities offered for sale in interstate commerce be registered with the SEC.
Apogee Co. has filed with the SEC for many years, and its market capitalization is $10 billion. Perigee Co. has filed continuously with the SEC for 3 years, and its market capitalization is $75 million. Which of the following is most likely a true stateme
Only Apogee may make oral communications at any time if certain conditions are met.
Pix Corp. is making a $6 million private placement stock offering. It is subject to Rule 506 under Regulation D of the Securities Act of 1933. The securities must be sold
To no more than 35 purchasers who are not accredited investors.
Regulation A provides an exemption for issuers of securities under the Securities Act of 1933. In reliance on Regulation A, Issuer has offered $18 million of securities for sale during the current calendar year. Which of the following violates federal sec
Issuer does not register under state blue-sky laws.
Which of the following securities are regulated by the provisions of the Securities Act of 1933?
Securities issued by insurance companies.
A corporation files a shelf registration with the SEC. The corporation violates federal securities laws and regulations if it issues covered securities
4 years after the shelf registration without filing a new registration statement.
For an offering to be exempt under Regulation D of the Securities Act of 1933, Rule 506 requires that
The offering be made without general advertising if any sales are made to purchasers who are not accredited investors.
The Securities Act of 1933 applies to the
Sale of new securities.
Maco Limited Partnership intends to sell $6 million of its limited partnership interests. The state in which Maco was organized is also the state in which it carries on all of its business activities. If Maco intends to offer the limited partnership inter
Under Rule 147, certain restrictions apply to resales of the limited partnership interests by purchasers.
Regulation D of the Securities Act of 1933 provides a private placement exemption from registration of a securities offering. Federal securities laws and regulations are violated if the securities are sold
In an immediate unregistered reoffering to the public.
Which of the following is least likely to be considered a security under the Securities Act of 1933?
General partnership interests.
Under the Securities Act of 1933, an issuer that makes an initial offering of securities must give a prospectus to each potential investor. Which of the following violates federal securities laws and regulations?
Any issuer may communicate a free-writing prospectus at any time.
When a common stock offering requires registration under the Securities Act of 1933,
The issuer would act unlawfully if it were to sell the common stock without providing the investor with a prospectus.
The Securities Act of 1933 provides an exemption from registration for offers and sales of securities made only to accredited investors. Federal securities laws and regulations are violated if the exemption is claimed and
The SEC is not informed of exempt sales.
Which of the following disclosures must be contained in a securities registration statement filed under the Securities Act of 1933?
The principal purposes for which the offering proceeds will be used.
Under Regulation D of the Securities Act of 1933, which of the following conditions apply to private placement offerings? The securities
Cannot be the subject of an immediate unregistered reoffering to the public.
Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?
The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.
Lux Limited Partnership offered $300,000 of its limited partnership interests under Rule 504 of Regulation D of the Securities Act of 1933. The securities were registered and disclosure was made under state law. Which of the following statements is true?
The resale of the limited partnership interests by a purchaser will not be restricted.
Which of the following are exempt from the registration requirements of the Securities Act of 1933?
Stock of a corporation offered and sold only to residents of the state in which the issuer was incorporated and doing all of its business.
Which of the following securities is exempt from registration under the Securities Act of 1933?
A class of stock given in exchange for another class by the issuer to its existing shareholders without the issuer's payment of a commission.
Regulation A provides an exemption for issuers of securities under the Securities Act of 1933. In reliance on Regulation A, Issuer has offered $18 million of securities for sale during the current calendar year. Which of the following violates federal sec
Sales are made before the offering statement is approved by the SEC.
Under the Securities Act of 1933, an initial offering of securities must be registered with the SEC unless
The type of security or the offering involved is exempt from registration.
Spiffy Manufacturing plans to offer a new issue of voting stock to the investing public. Assuming that it properly uses an exemption from registration under the Securities Act of 1933, Spiffy
Must adhere to both federal antifraud rules and state law.
The Securities Act of 1933 broadly classifies the parties involved in the initial offering and sale of securities. The individual or business organization offering a security for sale to the public is
An issuer.
The Securities Act of 1933 provides an exemption from registration for
Bonds issued by a municipality for governmental purposes - YES
Securities issued by a not-for-profit charitable organization - YES
Pix Corp. is making a $60 million stock offering. Pix wants the offering exempt from registration under the Securities Act of 1933. Which of the following provisions of the act would Pix have to comply with for the offering to be exempt?
Regulation D, Rule 506.
An offering made under the provisions of Regulation A Tier 1 requires that the issuer
File an offering statement with the SEC.
Which of the following transactions is subject to registration requirements of the Securities Act of 1933?
The public sale by a corporation of its negotiable 10-year notes.
The Jumpstart Our Business Startups (JOBS) Act of 2012 provides an exemption from registration of securities. The related rules issued by the SEC are known as Regulation A. Under these rules, which of the following is not an exempt offering?
An offering of $22 million is made within 12 months, each purchaser receives an offering statement, and sales may be made without approval of the offering statement by the SEC.
A preliminary prospectus, permitted under SEC Regulations, is known as the
Red-herring" prospectus.
Which of the following securities is exempt from registration under the Securities Act of 1933?
Municipal bonds.
Corcoran, Inc.'s common stock trades on the New York Stock Exchange. The past year was disappointing for Corcoran. Cash flow, operating income, and net income were all significantly lower than in previous years. While discussing the financial results, Bar
Form 10-K.
Under the Securities Act of 1933, Wallace, a private, nonreporting issuer, is required to
Prepare and publicly file a detailed initial registration statement.
Zack Limited Partnership intends to sell $6 million of its limited partnership interests. Zack conducts all of its business activities in the state in which it was organized. Zack intends to use the offering proceeds to acquire municipal bonds. Which of t
If Zack complies with the requirements of Regulation D, Zack may make an unlimited number of offers to sell the limited partnership interests.
Which of the following statements about the prospectus required by the Securities Act of 1933 is true?
The prospectus is a part of the registration statement.
Under the Securities Act of 1933, which of the following statements, if any, are correct regarding the purpose of registration?
The purpose of registration is to allow for the detection of management fraud and prevent a public offering of securities when
II only.
Under the Securities Act of 1933, which of the following statements most accurately reflects how securities registration affects an investor?
The investor is provided with information on the principal purposes for which the offering's proceeds will be used.
Universal Corp. intends to sell its common stock to the public in an interstate offering that will be registered under the Securities Act of 1933. Under the act,
Universal's filing of a registration statement with the SEC does not automatically result in compliance with the "blue-sky" laws of the states in which the offering will be made.
Which of the following most likely is a violation of federal securities law regarding communications before and during registered securities offerings?
A seasoned issuer files hard-copy documents with the SEC that include its registration statement and prospectus.
Which of the following transactions is subject to registration requirements of the Securities Act of 1933?
The public sale by a corporation of its negotiable 10-year notes.
The objectives of the Securities Act of 1933 include all of the following except
To authorize the Board of Governors of the Federal Reserve System to control the use of margins in securities trading.
The Securities and Exchange Commission requires public companies to disclose all of the following except
Comfort letters for underwriters.
LPCO intends to sell securities. It is organized in the state where it carries on all of its business activities. If LPCO offers the securities in reliance on Rule 147, which of the following is a violation of federal securities laws and regulations?
LPCO makes unlimited offers to nonresidents.
Dee is the owner of 12% of the shares of common stock of D&M Corporation that she acquired in Year 1. She is the treasurer and a director of D&M. The corporation registered its securities in Year 2 and made a public offering pursuant to the Securities Act
Must be registered if Dee sells 50% of her shares through her broker to the public.
Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is true?
The offering would be exempt from the registration requirements of the Securities Act of 1933.
Pate Corp. is offering $3 million of its securities solely to accredited investors pursuant to Regulation D of the Securities Act of 1933. Under Regulation D, Pate is
Not required to provide any specified information to the accredited investors.
Regulation A provides an exemption for issuers of securities under the Securities Act of 1933. In reliance on Regulation A, Issuer has offered $45 million of securities for sale during the current calendar year. Which of the following does not violate fed
A nonaccredited investor with annual income of $500,000 purchases $50,000 worth of the offering.
Which of the following requirements must be met by an issuer of securities who wants to make an offering by using shelf registration?
Original registration statement must be kept updated - YES
The offeror must be a first-time issuer of securities - NO
Pax Co. is making a $7 million stock offering and wants the issue to be exempt from registration under the Securities Act of 1933. Regulation D provides that Pax can offer
$7 million of securities to an unlimited number of accredited investors and up to 35 nonaccredited investors under Rule 506.
Under the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted
Without good faith.
Burt, CPA, issued an unmodified opinion on the financial statements of Midwest Corp. These financial statements were included in Midwest's annual report, and Form 10-K was filed with the SEC. As a result of Burt's reckless disregard for GAAS, material mis
Davis did not rely on the financial statements or Form 10-K.
For a CPA to be liable for damages under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove all of the following except that
The CPA violated generally accepted auditing standards.
Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under Secti
Reliance on the financial statements - NO
Fraud by the CPA - NO
Fact Pattern: Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was i
Monetary damages only.
Under the Securities Exchange Act of 1934, short-swing profits arise from the sale and purchase (purchase and sale) of the issuer's stock within
180 days.
Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?
PCAOB Standards - YES
Generally accepted fraud detection standards - NO
The partnership of Rodgers & Higgs, CPAs, performed audits of Alt Corp., a publicly-traded company, for the past several years. After issuing the current year's audit report, the CFO of Alt confessed to having committed fraud against Alt. Under which of t
Securities Exchange Act of 1934, if they can prove scienter.
Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under Secti
If the CPA can prove due diligence.
The antifraud provision of the Securities Exchange Act of 1934 is Section 10(b). The SEC's Rule 10b-5 issued under the antifraud provision most often is applied to
Insider trading.
The Public Company Accounting Oversight Board (PCAOB) was established to
Regulate, inspect, and investigate public accounting firms.
A CPA's defenses to liability under Section 11 of the Securities Act of 1933 do not include which of the following?
The plaintiff was unaware of the misstatement or omission in a registration statement.
Under the provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which of the following activities must be proven by a stock purchaser in a suit against a CPA?
Intentional conduct by the CPA designed to deceive investors
Neglig
I only.
Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, the financial statements included material misstatements. Ocean was unaware of this fact. The financial statement
Securities exchange act of 1934, section 10(b), rule 10b-5 - NO
Securities act of 1933, section 11 - YES
Violations of the PCAOB's rules also are violations of the
Securities Exchange Act of 1934.
Pick, CPA, was engaged by Edge Corp. to audit Edge's financial statements. Pick, in performing the audit and rendering an unmodified opinion, intentionally ignored several material omissions in the financial statements. Edge included Pick's auditor's repo
Drane will win because Pick acted with intent.
Dean, Inc., a publicly traded corporation, paid a $10,000 bribe to a local zoning official. The bribe was recorded in Dean's financial statements as a consulting fee. Dean's unaudited financial statements were submitted to the SEC as part of a quarterly f
Securities Exchange Act of 1934.
Hugh Gibson is suing Simpson & Sloan, CPAs, to recover losses incurred in connection with Gibson's transactions in Zebra Corporation securities. Zebra's annual Form 10-K report contained material false and misleading statements in the financial statements
He relied upon the financial statements in his decision to purchase or sell Zebra securities.
Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to establish the defense of due diligence if
The auditor performed an additional review of the audited statements to ensure that the statements were accurate a
Both I and II.
Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following must a plaintiff prove to hold a CPA liable?
The misstatements contained in the financial statements certified by the CPA were material.
The plaintiff relie
I only.
Plaintiff acquired a security issued under a registration statement that contained a material misstatement of facts. In a suit by Plaintiff under Section 11 of the Securities Act of 1933 against the issuer's auditor,
Plaintiff need not prove intent or causation by the defendant.
West & Co., CPAs, expressed an unmodified opinion on the financial statements of Pride Corp. These were included in Pride's registration statement filed with the SEC. Subsequently, Hex purchased 500 shares of Pride's preferred stock, which were acquired a
The misstatements were material.
What is the standard that must be established to prove a violation of the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?
Intentional misconduct.
A requirement of a private action to recover damages for violation of the registration requirements of the Securities Act of 1933 is that
The plaintiff acquired the securities in question.
Holly Corp. engaged Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly was required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover th
Brings a civil action within 1 year of the discovery of the omission and within 3 years of the offering date.
Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, expressed an unmodified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy
There was a material misstatement in the financial statements.
An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that
There was a material omission or misstatement.
Under the liability provisions of Sec. 18 of the Securities Exchange Act of 1934, for which of the following actions would an accountant generally be liable?
Intentionally preparing and filing with the SEC a reporting corporation's incorrect quarterly report.
The Sarbanes-Oxley Act of 2002 (SOX) has strengthened auditor independence by requiring a public company to
Select auditors through audit committees.
The external auditor must report ramifications of the use of alternative disclosures and treatments to
The audit committee.
While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unmodified opinion was included with the financial statements in a registration statement and prospectus fo
Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate.
If securities are exempt from the registration provisions of the Securities Act of 1933, any fraud committed in the course of selling such securities can be challenged by the
SEC - YES
Person defrauded -YES
Jay Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally expressed an unmodified opinion on the financial statements even though material misstatements were discovered. The financial statements and Jay's unmodified opinion were incl
Jay will be liable if the purchaser relied on Jay's unmodified opinion on the financial statements.
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)?
Register with the Public Company Accounting Oversight Board.
Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dar
The amount of any loss caused by the fraud.
A CPA firm must register with the Public Company Accounting Oversight Board (PCAOB) to
Prepare an audit report for an SEC registrant.
Under the Section 10(b) Rule 10b-5 antifraud provisions of the Securities Exchange Act of 1934, which of the following conditions must a plaintiff prove to recover damages from an accountant?
The plaintiff relied on the accountant's intentional misstatement of material facts.
The Public Company Accounting Oversight Board (PCAOB) was established by the
Sarbanes-Oxley Act of 2002 (SOX).
Under the Securities Exchange Act of 1934, a person is liable for making a false or misleading statement (or omission) of a material fact in an SEC filing (Section 18). Moreover, defrauding anyone in the purchase or sale of any security is illegal (Sectio
The earlier of 2 years after discovery of the facts on which the suit is based or 5 years after the cause of action arose.
Corporations that are exempt from registration under the Securities Exchange Act of 1934 are subject to the act's
Antifraud provisions.
Alfalfa Corporation, a publicly traded company, is in the business of manufacturing and selling farm equipment. Members of the board of directors for Alfalfa Corporation include the following:
Tim, CEO of Alfalfa Corporation
Melinda, CFO of Alfalfa Corpor
Peter.
The antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934
Require that the wrongful act be accomplished through the mail, any other use of interstate commerce, or through a national securities exchange.
Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dar
The misstatements contained in Dart's financial statements were material.
One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed under the Securities Act of 1933 is that the
Plaintiff suffered a loss.
In which of the following situations is an accountant considered to have aided and abetted violations of the Securities Exchange Act of 1934?The accountant is generally aware of his or her participation in an improper activity or knowingly aids the activi
II only.
Under the Securities and Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the act?
Civil liability for monetary damages - YES
Criminal liability for a fine - YES
According to the Securities Act of 1933, which of the following statements is correct regarding an issuer of securities?
If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid.
Under the Securities Act of 1933, which of the following acts by an accountant may subject the accountant to criminal penalties?
Willfully including materially misstated financial statements in a registration statement.
To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove the
Defendant's intent to deceive - NO
Plaintiff's reliance on the registration statement - NO
Petty Corp. made a public offering subject to the Securities Act of 1933. In connection with the offering, Ward & Co., CPAs, rendered an unmodified opinion on Petty's financial statements included in the SEC registration statement. Huff purchased 500 of t
Ward was not in privity of contract with Huff.
Under the Securities Exchange Act of 1934, willfully making a materially false or misleading statement or omission in any SEC filing results in all of the following except
Liability for negligence.
The similarities and differences between Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 include the following:
1933 act - Section 11
1934 act - Section 10(b)
1
Plaintiff does not need to prove scienter, r
Line 3.
Fact Pattern: West & Co., CPAs, expressed an unmodified opinion on the financial statements of Pride Corp. These were included in Pride's registration statement filed with the SEC. Subsequently, Hex purchased 500 shares of Pride's preferred stock, which w
West was not in privity of contract with Hex.
Fact Pattern: Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unmodified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was i
Larson was an intended user of the false registration statement.
How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law?
Privity with purchasers is not a necessary element of proof.
What defense must an accountant establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the act?
Good faith and lack of knowledge of the statement's falsity.
Which of the following circumstances is a defense to an accountant's liability under Section 11 of the Securities Act of 1933 for misstatements and omissions of material facts contained in a registration statement?
Due diligence on the part of the accountant.
Which of the following facts must be proven for a lender to prevail in a state-law negligent misrepresentation action against a CPA who prepared a borrower's tax return that was disclosed to the lender?
The plaintiff justifiably relied on the misrepresentations.
Under the position taken by a majority of state courts, to which third parties will a CPA who negligently prepares a client's tax return be liable?
Any foreseen or known third party who relied on the tax return.
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?
Lack of scienter.
Mary Martinson is a CPA. One of her clients is suing her for common law negligence, alleging that she failed to follow federal tax law when preparing the current year's tax return. Which of the following statements is true?
Martinson's failure to follow federal law results in tort liability.
Under the traditional doctrine rule, to which of the following parties will a CPA be liable for common law negligence?
Parties in privity - YES
Foreseen parties - NO
Under state law, which of the following statements most accurately reflects the liability of a CPA who fraudulently prepares a client's tax return?
The CPA probably is liable to any person who suffered a loss as a result of the fraud.
A CPA's common law duty of due care when preparing a tax return for a client most likely will be breached when the CPA
Fails to follow professional standards.
Brown & Co., CPAs, prepared tax returns for its client, King Corp. Based on the strength of King's tax returns, Safe Bank lent King $500,000. Brown was unaware that Safe would receive a copy of the tax returns or that they would be used in obtaining a loa
Justifiably relied on the financial statements.
The traditional nonstatutory rules regarding accountant's liability to third parties for negligence
Have been substantially changed at both the federal and state levels.
If a CPA recklessly departs from the standards of due care when preparing a tax return, the CPA will be liable to third parties who are unknown to the CPA based on common law
Gross negligence.
A CPA firm was hired by a company to prepare tax returns it needed to obtain a loan from a bank. The bank lent $500,000 to the company based on the CPA's work. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The ban
Can sue the CPA firm for the loss of the loan because of negligence.
ABC Construction Company enters into a personal service contract to hire Brown, CPAs, to perform services as an independent contractor. Brown's status as an independent contractor is inconsistent with
Outsourcing tax return preparation services to Green, CPAs, a well-respected local firm. Brown did not consult ABC about this decision.
The firm Meek & Co., CPAs, was engaged by Reed, the president of Sulk Corp, to prepare its federal and state tax returns by March 15, Year 2, for the fiscal year ended December 31, Year 1. Meek's engagement and its fee of $20,000 were approved by Sulk's b
Prevail based on the contract.
Walters & Whitlow, CPAs, failed to discover a fraudulent scheme used by Davis Corporation's head cashier to embezzle corporate funds during the past 5 years. Walters & Whitlow would have discovered the embezzlements promptly if they had not been negligent
Punitive damages.
Under the common law, which of the following statements is generally true regarding the liability of a CPA who negligently prepares a client's tax return?
The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
Ford & Co., CPAs, prepared Owens Corp.'s tax returns. Relying on these tax returns, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the tax returns or that Owens would use them to obtain a loan. Owens defaulted on t
Justified in relying on the tax returns.
Which of the following elements, if present, would support a finding of common law constructive fraud on the part of a CPA who prepared a tax return?
Gross negligence.
Under state law, one of the elements necessary to hold a CPA liable to a client for preparing a tax return negligently is that the CPA
Failed to exercise due care.
Beckler & Associates, CPAs, audits the financial statements and prepares the tax returns of Queen Co. The financial statements contained material misstatements, but an unmodified opinion was expressed. Furthermore, the CPA preparer made no inquiries about
Both I and II.
The scope and nature of a CPA's contractual obligation to prepare tax returns for a client that is not publicly traded ordinarily is set forth in the
Engagement letter.
Brown & Co., CPAs, prepared tax returns for its client, King Corp. Based on the strength of King's tax returns, Safe Bank lent King $500,000. Brown was unaware that Safe would receive a copy of the tax returns or that they would be used in obtaining a loa
Not be liable because Safe was not a foreseen user.
A CPA who fraudulently performs a professional service will
Probably be liable to any person who suffered a loss as a result of the fraud.
Sun Corp. approved a merger plan with Cord Corp. Factors in approving the merger were the tax returns of Cord prepared by Frank & Co., CPAs. Sun had required Cord to disclose its tax returns and audited financial statements as a condition of the merger. F
Failed to exercise due care.
Which of the following is most likely to be effective as a defense in a breach of contract suit brought by a client against a CPA?
Suspension or termination of performance justified because of the client's breach.
Which of the following is incorrect regarding an engagement letter?
The engagement letter need not include specific descriptions of services to be performed.
If a shareholder sues a CPA in state court for nonstatutory fraud based on false information contained in a tax return prepared by the CPA, which of the following, if present, would be the CPA's best defense?
The false information is immaterial.
In a nonstatutory action against a CPA, lack of privity is a viable defense if the plaintiff
Is the client's creditor who sues the CPA for negligence.
One traditional test of whether a third party can recover from an accountant for negligence is the primary benefit test. Which of the following has standing under the primary benefit test?
A bank that is considering a loan to the accountant's client and is waiting for the tax returns on which to base its decision.
Hark, CPA, failed to follow generally accepted auditing standards in auditing the financial statements of Long Corp., a nonpublic company. Hark also took several tax return positions that were not likely to be sustained on the merits because they were not
Win because Hark and Third were not in privity of contract.
Which of the following statements is correct regarding the liability of a CPA for services performed?
A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner.
When CPAs fail in their duty to carry out their contracts to prepare tax returns, common law liability to clients may be based on
Breach of contract - YES
Strict liability - NO
Ritz Corp. wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale and to prepare its state and federal income tax returns. Based on these documents, Ritz acq
Negligence and breach of contract.
To which of the following parties will a CPA be liable if the CPA fraudulently issues an unqualified opinion on a corporation's materially misstated financial statements?
Corporate shareholders - YES
Corporate bondholders - YES
A CPA most likely will be negligent when the CPA fails to
Correct errors discovered in tax returns previously prepared for the client.
Which one of the following, if present, would support a finding of constructive common law fraud on the part of a CPA?
Reckless disregard.
Magnus Enterprises engaged a CPA firm to prepare its annual federal income tax return. Which of the following is a true statement with respect to the CPA firm's liability to Magnus for common law negligence?
The CPA firm must not only exercise reasonable care in what it does but also must possess at least that degree of accounting knowledge and skill expected of a CPA.
Which of the following penalties is usually imposed against an accountant who, in the course of preparing a tax return, breaches common law contract duties owed to a client?
Money damages.
A CPA firm acts with scienter in all the following circumstances except when the firm
Negligently performs a professional service.
Under the common law, which of the following defenses, if used by a CPA, would best avoid liability in an action for negligence brought by a client?
The CPA's negligence was not the proximate cause of the client's losses.
A client suing a CPA for negligent preparation of a tax return in a state court must prove each of the following factors except
Reliance.
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA under the law of
Gross negligence.
Phillip, CPA, was engaged by Veda, Inc., to audit Veda's financial statements. Phillip was told that the financial statements and the audit report were to be shown to Ryan, a potential investor. As a result of the audit, Phillip issued an audit report con
No, because Phillip exercised reasonable care in performing the audit.
The best defense a CPA can assert in a suit brought against the CPA for common law fraud based on the CPA's unqualified opinion on materially false financial statements is
Lack of scienter.
Which of the following pairs of elements must a client prove to hold a CPA liable for common law negligence?
Breach of the accountant's duty of care and loss.
One of a CPA's major concerns regarding contractual questions resulting from the preparation of a client's tax returns is
Whether the parties involved have a clear understanding of the procedures and services to be performed.
Harriet Harrison, CPA, failed to adhere to standards applicable to tax return preparers when preparing the returns of Lamp Corp. As a result, a material fraud by the company's CFO was not detected. Based on nonstatutory law, to what extent is Harrison lia
Liable for losses attributable to her negligence.
Which of the following statements, if any, are true regarding the state law elements that must be proven to support a finding of constructive fraud against a CPA in the preparation of a tax return?
The plaintiff has justifiably relied on the CPA's misrepr
Both I and II.