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A CPA is liable to his client for:
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Under Contract law, a CPA is liable for:
- Contract breaches
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Under Tort Law, a CPA is liable for:
- - Negligence
- - Fraud (actual and constructive)
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Ordinary Negligence requires four elements:
- - Duty of care
- - Breach of duty of care
- - Damages
- - Causality
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Actual fraud (MSRID) requires the following elements:
- - Material misrepresentation of facts
- - Scienter (deceit)
- - Reasonable reliance
- - Intent to rely
- - Damages
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Constructive fraud, AKA Gross Negligence, requires the following elements (MRRID):
- - Material misrepresentation of facts
- - Reckless disregard for the truth (making a statement without knowing the veracity of it)
- - Reasonable reliance
- - Intent to rely
- - Damages
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The best defense available for the CPA when sued for ordinary negligence is:
- The CPA conformed to Generally Accepted Auditing Standards (GAAS)
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The relationship between the accountant and the client is:
- Confidential
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If subpoenaed in a court case, does the CPA need to divulge client's info?
- If the state recognizes a confidential relationship, YES. If state recognizes a privileged relationship, NO.
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A peer review or quality control panel is:
- A review of one's firm by another CPA firm.
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Working papers belong to…
- The accountant, who may not reveal them to third parties. Confidentiality rules apply.
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Are Accountants liable to third parties for ordinary negligence?
- No, as there is no privity (third parties are not a party to the contract) unless the CPA knew who the 3rd party was and expected for them to rely on the information (particular user or intended group of users mentioned in engagement letter).
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Are Accountants liable to third parties for fraud?
- Yes. CPA is reliable for actual/constructive fraud to ANY third party.
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Security Act of 1933 deals with:
- - Public offering of securities from one state to another.
- - Audited financial statements
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According to the Section 11 Anti Fraud provisions of the Security Act of 1933, a CPA may be sued for
- - Civil liabilities, only involving monetary damages (third parties)
- - Criminal liability, when SEC recommends to the DOJ
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If sued under Security Act of 1933 for civil liabilities, the plaintiff must meet the following requirements:
- - Prove they actually bought the securities
- - Prove they suffered a loss
- - Prove there was a material misrepresentation of facts in the financial statements
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Under SEC Act of 1933, the Plaintiff does not have to prove the following items when suing for Actual or Constructive fraud:
- - Scienter or Reckless disregard for the truth
- - Reliance on the information provided
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Under the 1933 act, the burden of proof lays on
- The CPA, who must show due diligence was done
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The statute on limitations for lawsuits under Security Act of 1933 is:
- - 3 years from date of registration filing to the date of the discovery of the misrepresentation
- - 1 year from the moment the client finds out about the misrepresentation
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Security Act of 1934 sets standards for
- Annual, quarterly, and periodic reporting of financials
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Under the Security Act of 1934, a CPA may be liable for:
- Civil liabilities (third parties)
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If sued under Security Act of 1934 for civil liabilities, the plaintiff must meet the following requirements:
- - Prove they actually bought the securities
- - Prove they suffered a loss
- - Prove there was a material misrepresentation of facts in the financial statements
- - Prove there was scienter or reckless disregard for the truth (actual or constructive fraud)
- - Prove reliance on the information
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Under the Security Act of 1934, the burden of proof lays on:
- The plaintiff, who must prove fraud.
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Best defense against Act of Fraud:
- Lack of Scienter
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Best defense against Constructive Fraud:
- Lack of Reckless disregard for the truth
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Under the Private Securities Litigation Reform Act, auditors who audit financial statements under SEC Act of 1943 are required to establish procedures to:
- - Deter material illegal acts
- - Identify material related-party transactions
- - Evaluate ability of firm to continue as going concern
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If the auditor detects possible illegal activity, the auditor must report the information to
- - The audit committee or
- - The board of directors
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If the audit committee does not act on a report of illegal activity, the BOD must:
- Notify the SEC within 1 business day
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If the BOD does not communicate illegal activity to the SEC after one day, the auditor should
- Furnish audit report to the SEC and/or resign from audit
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If the auditor does not inform the SEC of the BOD's failure to notify illegal activity, the auditor may be subject to:
- Civil liability
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If auditors do not catch fraud in financial statements, they can be liable for:
- - If unknowingly, percentage of total loss attributed to them Up to $300K
- - If knowingly, liable for the full amount
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The name of the SOX act is
- Public Company Accounting Reform and Investor Protection Act
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SOX requires businesses to retain audit and review workpapers for:
- Five years, some cases seven
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The PCAOB (Public Company Accounting Oversight Board) Board's main functions are to:
- - Register and conduct inspections of public accounting firms
- - Set standards on auditing, quality control, independence, or preparation of audit reports.
- - Regulate the nature and extent of non-audit services that CPA firms may perform for audit clients.
- - Enforce compliance with professional standards and laws
- - Perform investigations and disciplinary proceedings
- - Perform other duties to promote high professional standards
- - Provide material services
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A CPA firm doing attest work for a client may not perform the following services for the client:
- - Bookkeeping
- - Financial information system design
- - Appraisal services
- - Internal audit
- - Management functions
- - Actuarial services
- - Investment services
- - Certain tax services
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The SOX act states that an audit partner cannot do attest services for a client for more than x years:
- Five
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When preparing tax returns for a client, a CPA should/should not audit financial data
- Should not, but should make sure the information is not clearly incorrect and make reasonable inquiries.
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Circular 230 states that an RTRP may only represent a taxpayer before the IRS only if:
- The RTRP signed the tax return or claim for refund
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If the CPA makes a willful attempt to understate tax liability or intentionally disregards rules and regulations, the prepares is subject to:
- A penalty of the greater of $5,000 or 50% of the income derived from the return or refund claim.
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A tax prepared must keep a return and all backup data for a period of:
- Three years
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