7/29/2019 Reg Flash Cards http://slidepdf.com/reader/full/reg-flash-cards 1/33 http://www.flashcardexchange.com/user/tandzfuller9 http://www.flashcardexchange.com/cards/reg-individual-tax-memorize-827364 http://www.flashcardexchange.com/cards/reg-accountants-legal-responsibilities-cpafor-free-829212 1040 Individual Tax 2010 Personal exemption amount: $3,650 2010 Standard deduction: S - $5,700 Single MFJ-$11,400 MFJ & Qualifying Widower H of H - $8,400 Head of HH Addl ded for Elderly & Blind: S - $1400 Single M - $1100 Married (each) Dependent of another Greater of $950 or $300 + earned income, not to exceed regular standard deduction FICA taxable wage limit $106,800 Age 62-64 Social Security limit $14,160 Child tax credit $1,000 Annual Gift Tax Exclusion $13,000 Student Loan Interest Deduction $2,500 IRA Contribution $5,000 Age 50 catch-up $1,000 SIMPLE IRA $11,500
Federal Income Tax: Transactions Relating to Dissolution of Marriage; Deductions
Front Back
Alimony: only category with tax consequences (deductibleby payor; taxable by recipient)
1) In writing pursuant to a written divorce or separation
agreement2) Living together disallowed- can't be same household3) Cease at (or before death) of recipient (continued after =prop settlement)4) Cash: payments must be in cash
All rules apply where spouses separate under writtenseparation agreement w/o getting a final divorce decree
Above the Line Deductions (desirable bc subject to lessrestrictions):Gross income - ATL deductions = adjusted gross income(AGI)
Trade/Business expenses: ordinary and necessary
*Business meals and entertainment may be deductible, if incurred in overall business situation and taxpayer substantiates expenses and business reasons for incurring(only 50% deductible)
Other ATL deductions:
Depreciation expense on property; rental expenses(incurred by owner/landlord); losses from sale/exchang
of property (capital losses); deduction for alimony;moving expenses; contrib to individual retirementaccount
Deductions allowable in lieu of Standard Deduction(below the line or itemized deductions)
* Choose between itemized deductions and standarddeduction, taking whichever's more
Some of more important itemized deductions:- Mortgage interest paid on debt incurred to acquire 1st or 2nd home up to a total indebtedness of $1m
Property taxes and income taxes imposed by state/localgov. are deductible.
In 2004-2005, taxpayer can elect to deduct sales taxes ilieu of deducting state and local income taxes. Neither income taxes, nor employee's share of Social Securitytaxes are deductible.
* Interest expense is deductible based on what the taxpayer does with borrowed proceeds. May be deductible if loanfor business purposes or to purchase investments; homemortgage interest expense; educational expense.
For 2009, taxpayers may deduct up to $2500 as ATLdeduction on student loans incurred to pay the costs of education, with this deduction not allowed if taxpayer h$75k of adjusted gross income for that year. Other typeof personal interest are not deductible.
Education expenses deductible only if they maintain or improve necessary business skills and are not minimumrequirement for a new field or do not qualify taxpayer for a
CREDITS: tax credits (one-for-one reductions of taxesowed) are allowed for education expenses. Hope credit(AOTC) allows a tax credit for up to $1800 a year, but
Exceptions:DEDUCTIONS: Higher education expenses of up to $4k may be deducted ATL. Deduction out if taxpayer's AGI >$65k for a single person ($130k for joint); may not betaken in conjunction with te Hope Credit or LifetimeLearning Credit
only for students who have not completed first 2 yrs ofcollege. Lifetime Learning Credit may be chosen, whic provides a max credit of $2k for 2009, with this creditmay not being limited to first 2 years of college. Lawstudents may take the Lifetime Learning Credit. BothHope and Lifetime are out if taxpayer's AGI > $50k forsingle person ($100k for married)
BarBri Expenses
May not be deducted because it is incurred to help qual
for a new jobCLE Expenses May deduct expenses as business expense
Employee Expenses
"Ugly Clothes Rule"- may only deduct cost of uniform(so no business suits); can't deduct lunch costs,commuting expenses
Deduct cost of interviewing for job only if search is insame field and then only certain expenses (2% floor)
Legal Fees
Legal expenses are deductible only to the extent that theyare properly allocable to taxable. The rest arenondeductible.
Legal expenses deductible only if they are allocable eitto tax advice or to alimony. Rest are nondeductible.
Generally expenses aren't deductible bc personal.
Personal losses
Sale of house/car --> realized loss (personal consumptiso not deductible)
Loss on sale of stock --> capital loss (ductible)
Hobby LossesExpenses may be deducted (up to point of income);additional expenses above the income amount are notdeductible
Standard Deduction (2009)
Married, joint: $11400
Married, separate: $5700Head of household: $8350Single: $5700
Mortgage Transactions
Treat debt as equivalent to cash. When person buys property and borrows to finance purchase, debt amt isincluded in the basis. When person sells property, and buyer assumes debt of seller, it's treated like the buyer paid additional cash.
Like kind exchange
No gain or loss is recognized when property in a trade or business or held for investment (besides stock or securities) is exchanged solely for property of like kind(realty for realty or pesonalty for personalty)
Rationale: taxpayer has continued ownership of same typeof asset
Apt building for grocery store qualifies. Personal residencefor bus office bldg, business truck for investment realestate --> doesn't.
* Generally, the basis of the new property received isequal to the basis of the old property given up.
Same rule for involuntary conversions (i.e., property isdestroyed, stolen or condemned and insurance or anaward is received/reinvested w/in 2 years in property fosimilar or related use)
* If single person has owned and occupied their home for at least 2 out of the last 5 years, they may exclude fromincome up to $250k of gain from the home sale. Age of taxpayer irrelevant for qualifying.
Under rule, if married couple files a return, and they bowould qualify under rule, they may exclude up to $500of gain from being taxed.
Generally, this rule may be used, for both single andmarried persons, once every 2 years.
Capital assets: all assets except-
Inventory; depreciable property; real property used in
business; accounts receivable;copyright/literary/musical/artistic compositions in their creator's hands
Capital gains may be taxed at lower rates.
Long-term capital gain taxed at max rate of 15% asopposed to ordinary income, taxed at max rate of 35%
To qualify for LTCG, must have held capital asset > 12mos. If income low enough that you pay max of 10% oordinary income, then you pay 5% on LTCG.
Short-term capital gain taxed at max of 35% (same asordinary income). STCG recognized when you have heldcapital asset for 12 mos or less.
Special harsh rule for capital gains on collectibles (art,rugs, antiques, metals, gems, stamps, coins). Assets donqualify for LTCG rate of 15% tho held for > 12 mos.Assuming more than 12 mos, they qualify for special raof 28%.
Holding Periods Tack
To qualify for LTCG, seller must have held prop > 12mos.
In case of property acquired by seller as a gift, seller mtack/add on donor's hold period.
* Capital losses are deducted first against capital gains. If they wipe out all capital gains, an additional $3k of capitallosses may be deducted in the current year.
Compare: ordinary losses (inventory property owned issold for a loss): business assets ded. w/o lim
Compare: Personal losses (pers furniture, pers car, homsold for loww)- never deductible
A bad debt can only be deducted to the extent ________
that it was included in income.Bad debt expense is actually the removal of a previousrecognized income that was never received. If Noincome was recognized (cash basis) - no expense can breported.
How much of organizational costs of Corporation can beexpensed in their first year of operations?
Organizational costs of up to $5,000 can be expensedimmediately. Then, the remaining organizationalexpenses are amortized over 180 months.Total = $5000+ amortized costs for the #of months
In computing AMT , a portion of ___________ interestshould be added to taxable income as a component of theadjusted current earnings (ACE) adjustment.
municipal bond
When one party owns over 50 percent of a corporation,they are viewed as related partiesLoses and Gains on sales_____
and losses on sales between them cannot be deducteduntil the property is eventually sold to an outside partyIn contrast, gains continue to be taxable until theownership level hits 80 percent.
Corporations must ____ all short-term and long-termCAPITAL / INVESTMENT gains and losses.
NETAny resulting capital gain is taxed but at the ordinary trate. There is no reduced rate as is applicable for
individual taxpayers. Any net loss is not deductible.Instead, it can be carried back for three years to reduceeliminate net capital gains. In addition, it can then becarried forward for up to five years. When a loss iscarried back and forward in this manner, it is alwayshandled as a short-term capital loss.
Business expenses must be _______________ to bedeductible.
ordinary and necessaryIn addition, the expense must be reasonable in amount
When property is conveyed from a corporation to anowner, whether as a nonliquidating distribution or as aliquidating distribution, it is recorded as ________
if it had been sold for its fair value.
When an owner transfers property to a corporation andwinds up with 80 percent or more of the outstanding stock,the transfer is handling like a partnership rather than acorporation. That is __________
the tax basis is retained by both parties and no incomeeffect results.
Schedule M-1 is a schedule found on the corporate incometax return (form 1120) in which the tax return preparer isrequired to reconcile financial statement income (referredto as "book income") to the taxable income reported to thegovernment. _______________ are all reported for taxpurposes
state and municipal bond interest,and penalties and fines
The payment of a foreign income tax is one of the fewitems in federal income tax rules that an item can be used ateither of two places.
Normally, the benefit is larger if a credit is taken but thtaxpayer is also allowed the option of using the amounas an itemized deduction.
Moving expenses that relate to employment are deductiblein arriving at
adjusted gross income if the taxpayer is forced to movat least fifty miles.Casualty losses and gambling losses are both includedwith itemized deductions. The cost of child care is a tacredit that reduces the amount of income taxes rather than adjusted gross income.
Educators in all of the grades from kindergarten throughthe twelfth grade are allowed to deduct their out-of-pocketcosts up to a maximum amount $___________
($250 in recent years).Qualified expenses include ordinary and necessaryexpenses paid in connection with books, supplied,equipment, software, and the like.However, expenses for home schooling are not includeas allowable costs for this deduction.
What is true with respect to GAIN/LOSS on capital assetsfor individual taxpayers?
The taxpayer must report gains and losses on investme property, but only reports gains on personal property.
Because of the potential for abuse that would be availableon transactions between related parties, GAIN/LOSSare_______
gains are taxed but losses are not deductible.
A loan to a relative which has not been repaid is
categorized as Non-business bad debt and is _________
written-off in the year the loan is deemed worthless anis categorized as short-term irrespective of the time period involved. The foregone interest is notdeductible.Non-business bad debts are deductible as
short term capital losses on Schedule D of the form 10in the year the debt becomes worthless. Such losses artreated as short-term capitales loss no matter how longthe debt was outstanding.
The value of assets received through inheritance is notreportable on an income tax return as income for the simplereason that inheriting assets is
not earning income.The property will have a tax basis equal to the fair valuof the assets on the date of death. However, the executof the estate may choose an alternate valuation datewhich is 6 months from the date of death (or the date oconveyance, if earlier).
The short-term capital loss and the long-term capital gainmust be netted. Individual taxpayer can deduct capitallosses but only up to $_______
$3,000 per year.Any remaining loss can be carried over indefinitely.
Qualified dividends are those dividends collected from aUS domestic corporation or a qualified foreign corporation.To encourage investments in these companies, thedividends are taxed at _______
the same reduced rate that applies to long-term capitalgains.
In the like-kind exchange of property and no boot (cash)was received, __________
no taxable gain or loss is recognized.Because no gain or loss is recognized, the taxpayer retains the tax basis given up.
Because the trade was not of like-kind property, the basis removed and the asset received is recorded at its fair
of the property given up is value. The difference in the new tax basis and the tax basis given up+cash paid is recorded as a gain on theexchange.
Like-kind exchanges are normally tax-free. However, if thetaxpayer receives boot (usually cash to even up theexchange), a gain is recognized that is _____
the lower of the boot or the gain on the exchange. Thegain is determined by taking the tax basis surrenderedand comparing it to the fair value received
When property that has been received as a gift is soldabove the previous owner’s tax basis, the difference is
_________ the gain on the sale.
When property that has been received as a gift is soldbelow the previous owner’s tax basis,________
a loss must be computed by comparing the amountreceived with the lower of the previous owner’s basis o
the fair value at the date of gift.
Basis of gifted stock and gain or loss on resale
General rule: FMV>Donor's Basis -> use DONOR'SBASIS
FMV < Donor's Basis ->1) sell higher --> use Donor's Basis to calc. gain2) sell between --> NO G/L3) Sell lower --> use LOWER FMV on the day of gift
The net short-term capital gain is taxed at ________rate. ordinary income rate
What is the tax basis of a new property in a like kindexchange when FMV of a new item is < than FMV of oldand boot is received?
In a like-kind exchange, the taxable gain is the lower othe gain on the trade or the cash (boot) received. If thegain is actually a loss -- no gain is recognized.The items received must have a tax basis of the old iteless boot received.
Hobby loss rules apply to individuals, S corporations,partnerships, estates, and trusts that are attributable to anactivity not engaged in for profit. Taxpayers are presumedto be engaged in a hobby if
the operation fails to earn a profit in any three of themost recent five years including the tax year in questioLosses from a business can be used to reduce other income but expenses related to a hobby are deductibleonly to the extent of revenues earned.
Benefits received under a cafeteria plan (child carereimbursements, group-term life insurance premiums,Employer-provided health insurance) are not taxable unless_________
received in cash.
The items INCLUDED in income are :Other items that would be EXCLUDED from income are:
1)breach of contract damages, compensation for servic jury duty fees and unemployment compensation, debtforgiven2)Employer-provided health insurance, group-term lifeinsurance premiums (up to $50,00), gifts and inheritanand workers’ compensation.
Stock dividends are not taxable as long as the new sharesare the same type as the previous shares. Stock dividendsare taxable if 1 and 2
1)the taxpayer has the right to choose cash instead of tstock.2)Preferred stock dividends issued on common stock ataxable because the stocks are different. The taxableamount is the fair market value per share times thenumber of shares issued.
Normally, employees who have the option of receivingbenefits or cash are deemed to have “constructive receipt”of the money and must include the amount of cash or benefit no matter which option is chosen. An exception tothis rule is provided under the rules for ________
cafeteria plans. Employees are only required to includethe cash received in lieu of benefits that are offered unthese plans.
Winnings from gambling activities are reported__________ Losses are shown as________
1)within the income of the taxpayer.2) miscellaneous itemized deductions.However, the losses deducted cannot exceed the amouof gambling winnings being reported.
passive losses on rental activities are _______
deductible up to $25,000 as long as the owner is anactive participant in the management. The deductibilityof this $25,000 is lost gradually if the taxpayer's incomis especially high.
Under normal situations, in non cash transaction, revenue
reported for tax purposes is equal to ______ of the itemsactually received.
the value
All ordinary and necessary expenses to maintain and rentthese houses can be taken as a deductible expense. Thisincludes costs such as ______
depreciation, interest, insurance, repair, and maintenanCharitable contributions are not necessary for theoperation of rental homes.
For tax purposes, when work is done and an asset isreceived as payment other than cash, the assumption is thatthe ________ has been earned.
fair value of this asset
The benefit received rule requires that when a taxpayer makes a contribution to a qualified charity, the deductible
charitable contribution is reduced by the value of whatever is received by the taxpayer. An exception to this ruleapplies to contributions made to a college or university woreceives the right to purchase tickets to an athletic event.%?
Eighty percent of the payment is treated as a charitablecontribution regardless of whether the tickets would ha been otherwise available. The value of donated serviceor foregone income are not tax deductible butunreimbursed expenses related to these activities may deductible.
The cost of surgery that is purely cosmetic is ______
not deductible, but the cost of reconstructive surgery ifnecessitated by illness, accident, or the like. Theinstallation of a swimming pool is not deductible eventhought the exercise benefits the taxpayer. Burialexpenses do not qualify as medical deductions and arenot deductible for income tax purposes.
Joannie McKenzie is a single taxpayer. She incurs thefollowing medical expenses for the current year: Medicalinsurance premiums: $2,000, Doctors' appointments: $800,Eyeglasses: $900, Handicapped ramp installation whichdoes not increase the value of her home: $2,810, Homehealth nurse: $16,000, Dentist: $580, Nonprescriptionmedicine for heartburn and migraines: $120, Liposuction:$21,000, Cost of mileage for medical appointments: $54.Which items are ND in calculation of Med. deduction?
Surgery that is only cosmetic in nature (liposuction) annonprescription medicine (such as for heartburn andmigraines) are not deductible for income tax purposes.
The cost of a business suit is _______ if it is required tocomply with a dress code
not deductibleeven if it is required to comply with a dress code because such clothing can be worn outside theworkplace.
To be deductible, points must be paid to secure a homeequity or home acquisition loan . If the points are on theoriginal mortgage or the purpose of the loan is to makeimprovements to the property, the points can be deducted________ Otherwise, the points must________
in the year paid. be amortized and deducted over the life of the loan.Thus, points paid simply to refinance an existingmortgage must be amortized over the life of the loan.Points paid on a home equity loan used to improve the property (such as by adding a swimming pool) aredeductible when paid. Points paid on home equity loanwhere the proceeds are not used for home improvemen
must be amortized over the life of the loan. Prepaymenof mortgage interest are required to be matched with thtax years to which the interest applies.
Only three types of interest can be taken as an itemizeddeduction by an individual taxpayer:
interest on a home acquisition loan (to buy, construct, improve home) of up to $1 million of debt, interest on home equity loan (the house is used as security but themoney is not used to buy, construct, or improve home)up to $100,000 of debt, and interest expense to buyinvestments (but only the interest up to the amount of n
investment income can be deducted).If a short-term capital asset is donated to a qualifiedcharity, the itemized deduction is ____
the lesser of the cost or fair value of the gift.
Calculate casualty loss
The loss isthe LOWER of the tax basis of the property OR the drop in value.That amount is then reduced by any insurance paymento arrive at the actual loss incurredEach casualty loss must then be reduced by $100and all of the casualty losses combined must be furtherreduced by 10 percent of adjusted gross income.
For individual income tax purposes, filing status isdetermined by examining the taxpayer's marital status as of December 31 of the tax year. Taxpayers who are married asof the end of the year and do not have a separate maintenceagreement must file
either a joint return or each must file as married but filseparately. Anna may not file head of household, eventhough she maintains a home for dependent children, because she is not legally separated.
FILING status rules
Taxpayers who meet the requirements for qualifyingwidow(er) may not file as head of household. Head of household is taxed at lower tax rate than single filers bat a higher rate than joint filers. Head of household alsgets a higher standard deduction than single filers but
lower than joint filers. Single taxpayers pay the highestax rate of the three and have the lowest standarddeduction. Filing status is determined as of December of the tax year. Head of household is for single filers wmaintain a home for an unmarried child or dependentrelative.
What filing status should a taxpayer use in the year of death and subsequent years in which the unmarriedchildren continue to live with her/him?
He/she should file married filing jointly in the year of death, then qualifying widow with dependent child fortwo years, and then head of household for all subsequeyears,as long as she does not remarry and either anunmarried child or dependent relative lives with her.
The statute of limitations is the time available to correcterrors on a return by both the taxpayer and government.
The statute is normally the due date for the return. If thtaxpayer files before the due date, the statute still startrun on the due date for the return.If the taxpayer files one or more extensions and files threturn after the due date, the statute of limitation beginon the filing date.However, if there is fraud involved, there is no statute limitations. If the taxpayer omits more than 25 percentthe income to be reported, the statute of limitations isextended to six years.If no extension and filed after due date - the statute of
If the couple takes itemiezed deductions each year rather than the standard deduction, they must include
any state income tax refunds as revenue and payment o balances due on the state return in the year paid.
Blood relatives include
parent, grandparents, siblings, children, grandchild,aunts. uncles, nephews, and nieces.→ Do not have to live with taxpayer to be QualifyingrelativeCousins are not considered to be blood relatives nor arin-laws.→
have to live for the Whole year with taxpayer
The tax laws provide a few tax benefits for the elderly. Oneof those is an
increased level for the standard deduction. If 65 y.o.Hitchcock does not itemize his deductions, he will takthe standard deduction and he will be somewhat highe because of his age.
If a couple has divorced or received a legal separation bythe end of the tax year,
they cannot file as married.
the taxpayer can have the head of household status whenan unmarried child lives with the taxpayer,without the child having to be a dependent.
When doing a tax return for a client, the CPA is not
required to do any investigation and can rely on theinformation provided unless it appears to be incomplete,inconsistent, or inaccurate. If a question arises, the CPAcan complete the return and take any position as long as ithas a realistic possibility of being sustained. That has beendefined as _____
a 1/3 likelihood of success.
The CPA has been hired to complete the Year Two taxreturn. The Year One tax return is the property of theclient. The problem with Year One T/R may well have
been an innocent mistake. CPA should advise the client
that the amended return needs to be filed as quickly as possible.If the client does not file the amended return to correctthe problem, CPA should consider resigning from theYear Two engagement. The CPA should not be
associated with a party who files erroneous tax returnsand refuses to correct them.
Under normal circumstances, income tax credits arenonrefundable. The taxpayer can use them to reduceincome taxes to zero but cannot use them to create credits.One major exception to that rule does exist:
the earned income credit. This credit is designed to provide benefit to low-income workers who have wagor salaries (and, in most cases, a qualifying child).Because the purpose is to benefit workers with lowincome, the earned income credit was designed to berefundable; the benefit is available regardless of theamount of income tax that is owed.
the Hope Scholarship credit is only available for the
of 1933 damages are calculated as and their value on the date suit was filed.
A registration statement is used in connection with theissuance of securities. Misstatements contained in aregistration are governed by
the provisions of the 1933 Securities Act.
Under the provisions of Section 10(b) of the SecuritiesExchange Act of 1934, an accountant may be held liable for
actions which are tantamount to common law fraud, a slightly lesser standard, gross negligence whichamounts to reckless disregard for the truth. There mu be evidence of a material misstatement or omissionknowingly (or recklessly) made, which the injured party relied upon to his or her detriment. The reliancan element which must be proven.The U. S. Supreme Court, in Central Bank of DenverFirst Interstate Bank of Denver (1994), ruled thatentities may not be held liable under the provisions othe Securities Exchange Act of 1934 for merely “aid
and abetting.” (assisting).
Under the provisions of Section 10(b) of the SecuritiesExchange Act of 1934, a CPA may be held liable for actionswhich are tantamount (equivalent ) to common law fraud, or a slightly lesser standard, gross negligence which amounts toreckless disregard for the truth. That the misstatement (or omission) was
material is one of the elements which must be provenThere must be evidence of a material misstatement oomission knowingly (or recklessly) made, which theinjured party relied upon to his or her detriment.
To recover in an action for common law fraud, one mustprove five elements:
a misstatement or omission of a material fact;knowingly made with an intent to deceive (scienter);relied upon by the complaining party; which results idamages.Privity of contract may exist, but is not a necessaryelement. And, proof of mere negligence is notsufficient to establish scienter.
An accountant must possess the skills that
an ordinarily prudent accountant would have, and
exercise the degree of care that an ordinarily prudentaccountant would exercise. This standard of care,however, is dependent on the particular circumstanceexisting at the time the work is performed. Anaccountant is expected to exercise ordinary care anddiligence, measured by the particular circumstances.
Constructive fraud by a CPA means that the CPA wasmore than merely negligent, but did not act with malof with a specific intent to deceive, but was reckless grossly negligent.
A CPA’s failure to carry out the duty expressed in the
engagement will result in
liability for breach of contract regardless of negligen(A CPA’s failure to carry out the duty expressed in th
engagement may or may not have been a product of negligence.)
CPAs are liable to third parties whenthey are aware that their work will be relied upon, suas for an extension of credit.
Orth, a CPA, conducted an audit of Palladium Resources,Inc., and rendered an opinion as to the company’s financial
condition. In a suit by Palladium Resources, Inc., againstOrth for breach of contract and negligence, which of thefollowing would be an INCORRECT statement as to thestandard of care required of Orth?
The correct answer was C.
An accountant will be liable for breach of contract if negligent in performing the contracted work. It is nonecessary for a client to prove gross negligence or fraud. All of the other statements are generally correc
A A violation of GAAP or GAAS will be evidence of theaccountant’s negligence unless the accountant qualifies
his/her opinion.B An accountant must exercise the skills that an ordinarilyprudent accountant would have exercised under the particular circumstances of the audit engagement.C Orth will only be liable for breach of contract if he was
grossly negligent.D Orth is NOT required to detect all fraudulent schemes inexistence at Palladium Resources, Inc.
with regard to an accountant’s liability to a client andthe standard of acre generally imposed by commonlaw.
With respect to negligence, an accountant is liable to
his client and in most jurisdictions, to the intendedusers of his work product where the users are membeof a limited class, such as the case here (“several
investment bankers who were considering purchasingcontrolling interest in Tracy Corporation”). In additioif Javier’s wrongdoing was fraudulent or involved
gross negligence (constructive fraud) his liabilitywould extend to any third party injured thereby.
For a third party to recover against a CPA, the third partymust prove
fraud or gross negligence on the part of the CPA, or,if the CPA is merely negligent,the third party may recover if it can be shown that thCPA knew the third party would be relying on theCPA's work product, andactually did rely.
A limited number of states have enacted laws grantingvarying degrees of
accountant-client privilege, but the privilege is not as broad as the attorney-client privilege. Where such a privilege exists, only the client can wave the privileg
The Internal Revenue Service Restructuring and Reform Act
of 1998 gives taxpayers a privilege regarding written or verbal tax advice from a CPA. Which statement wouldrepresent an INCORRECT interpretation of theRestructuring and Reform Act of 1998?
A The creation of the new privilege was not intended tomodify, but rather to extend the attorney-client common lawconfidentiality privilege to other practitioners, such as CPAs.B Information disclosed to a CPA for the purpose of preparing a return is privileged under the Reform Act.C The preparation of tax accrual work papers is notconsidered tax advice when developed to evaluate a client’s
contingent tax liabilities in connection with financialcondition disclosures.D The privilege does not extend to written tax advice tocorporate clients concerning their corporations’ involvement
in tax shelters.
The correct answer was B.
Section 7525 provides: “With respect to tax advice, t
same common law protections of confidentiality whiapply to a communication between a taxpayer and anattorney shall also apply to a communication betweetaxpayer and any federally authorized tax practitioneto the extent the communication would be considered privileged communication if it were between a taxpaand an attorney” but only with respect to “non crimin
tax matter before the Internal Revenue Service and n
criminal tax proceedings in Federal court brought byagainst the United States.” In addition, the privilegedoes not extend to written tax advice to corporateclients concerning their corporations’ involvement in
tax shelters.
A legal action may be successfully maintained against anaccountant by a person not in privity of contract with theaccountant only under certain circumstances.
If the legal action is based upon fraud, or on grossnegligence which amounts to a reckless disregard forthe truth, lack of privity is no defense. Mere negligen by an accountant is actionable by an entity not in
privity with the accountant only if the accounting wowas intended for the plaintiff (or for a group whichincluded the plaintiff).
The Sarbanes-Oxley Act requires that
financial reports reflect all material correctingadjustments;that off – balance sheet transactions be disclosed;and, that companies disclose to the public on a rapidand current basis additional information concerningmaterial changes in financial condition or operations
plain English.The Act further requires that each annual report inclua discussion stating management’s responsibility for establishing effective internal controls and procedurefor financial reporting, and provide an assessment ofthe effectiveness of such controls and procedures.
Pursuant to the 1933 Securities Act, a CPA will be liable for misstatements or omissions in financial statements which arepart of a registration statement if the misinformation ismaterial and results in damages. A purchaser need not prove
fraud, negligence or reliance in order to prevail.
Under Section 11 of the Securities Act of 1933, a CPA maybe liable, in connection with his work product, to purchasersof securities if the work product contains materialmisstatements or omissions, and damages were suffered.Plaintiffs need 1)_____on the part of the CPA, but a CPAcan avoid liability by 2)_____
1)not prove negligence2)proving the exercise of due diligence.
The Securities Act of 1933 requires that, in a public offeringexceeding $5,000,000 either
a registration statement must be filed or resale of the securities within two years is restricted.
Rule 505 of regulation D permits a company to sell up to $5million in securities over a 12 month period but
prohibits______
general advertising, limits a sales to not more than 35nonaccredited investors and restricts resale for twoyears.
SO share certificates must be marked with a legendindicating that resale is restricted.
The Securities Act of 1933 imposes on companies who seek to raise capital in the marketplace a requirement that theyfirst file a registration statement by which prospectiveinvestors are provided information about the companynecessary ______
to make an informed investment decision - generallyassuring
Violations of the Section 17(a) of the Securities Act of 1933,and Sections 10(b) and 13(b)(5) of the Securities ExchangeAct of 1934 can result in ___
civil penalties,forfeiture of profits, including prejudgment interest, as well asa permanent injunction prohibiting future violations.
Rule 506 of regulation D permits a company to sell anunlimited amount of securities to accredited purchasers butlimits immediate resale by imposing
a two year waiting period and if a registration statemis first put into effect.
For a purchaser of original issue securities to hold liableexperts who participated in the preparation of the registrationstatement, the purchaser must prove the existence of a _____ and _______
material misstatement (or omission) in the financialstatements, anddamages.These are the only elements of 1933 Act fraud, unlikcommon law fraud which requires, in addition, scien(intent to deceive) and reliance.
Material misstatements or omissions in connection with asale of securities is___
a violation of the anti fraud provisions of the 1933Securities Act.
Proof reliance or intent are not necessary.There is a critical distinction between disclosing therisk a future event might occur and disclosing actualknowledge the event will occur. Phish's cautionarylanguage only disclosed a risk that the Motor VehicleDepartment might leave Marx Place, not his knowledthat it actually planned to do so in the near future.
Restricted securities are securities acquired in unregistered,private sales from the issuer or from an affiliate of the issuer.
Investors typically receive restricted securities throughprivate placement offerings, Regulation D offerings andemployee stock benefit plans. Sale of restricted securities canbe made by complying with the mandates of Rule 144. Ingeneral, this means
holding the stock for two year before selling, or,holding the stock for one year, then selling in small
brokered transactions. If the securities are not held fotwo years, there must be adequate current informatioavailable about the issuer. This generally means theissuer has complied with the periodic reportingrequirements of the Securities Exchange Act of 1934
Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibitsfraud related to securities trading, including
trading on inside information. Mal traded on insider information and as a result is subject to both criminaand civil penalties. The Insider Trading Sanctions Acof 1984 and the Insider Trading and Securities FraudEnforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the
profit gained or the loss avoided from the illegaltrading. Mal was not in violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibitshort-swing profits (from any purchases and saleswithin any six month period) made by corporatedirectors, officers, or stockholders owning more than10% of a firm's shares.
The 1934 Act regulates proxy solicitation, which isinformation that must be given to a corporation'sshareholders prior to soliciting votes. Prior to everyshareholder meeting, a registered company must provideeach shareholder with a proxy statement containing certainmaterial, along with a proxy
form on which the shareholder may vote on each proposal to be presented at the meeting. For securitieregistered in the names of brokers, a company mustattempt to determine the beneficial ownership of thesecurities and furnish sufficient copies of the proxystatement for distribution to all beneficial owners.Copies of the proxy statement and proxy form must bfiled with the SEC when first mailed to shareholdersUnder certain circumstances preliminary copies mus be filed ten days before mailing. Although a proxystatement does not become "effective" in the same was a statement registered under the 1933 Act, the SECmay comment on and require changes in the proxystatement before mailing. Proxies for an annualmeeting calling for election of directors must include
report containing financial statements covering the previous two fiscal years. Special rules apply when acontest for election or removal of directors isscheduled.
SLUSA provides for preclusion of certain securities classactions brought under state law: No covered class actionbased upon the statutory or common law of any State may bemaintained in any State or Federal court by any private partyalleging (A) and (B)
(A) a misrepresentation or omission of a material facin connection with the purchase or sale of a coveredsecurity; or (B) that the defendant used or employed anymanipulative or deceptive device or contrivance inconnection with the purchase or sale of a coveredsecurity. SLUSA does not itself displace state law wi
federal law but makes some state-law claimsnonactionable through the class action device in fedeas well as state court.
The Williams Act of 1968 amended many sections of the1934 Securities Exchange Act to address problems with
tender offers. Pursuant to the Williams Act, persons makinga tender offer that would result in ownership of more than 5percent of a class of registered securities must
first file with the SEC and furnish to each offeree astatement that includes the background of the persongroup; the source of funds used and the purpose of thacquisition; the number of shares owned; and anyrelevant contracts, arrangements, or understandings. addition, the offer must be made to all holders of the
class of securities sought, and a uniform price must b paid to all tendering shareholders. A shareholder maywithdraw tendered shares at any time while the tendeoffer remains open. If the person making the offer seeks fewer than all outstanding shares and theresponse is oversubscribed, shares will be taken up o pro rata basis.
Companies whose securities are traded on a nationalsecurities exchange or whose assets are in excess of $10,000,000 and which have equity securities held by morethan 500 persons must ___________
register under the Securities Exchange Act of 1934 acomply with its provisions.
The Securities Exchange Act of 1934 prohibits actual fraudin connection with the sale of securities in interstatecommerce, as well as fraudulent schemes involving the saleof securities and market manipulation.No actual fraud is present because the statements by ChuteEnterprises' president would not be considered factual sincestatements regarding FUTURE events are not typicallyexpected to induce_______________ .
reasonable reliance
The 1934 Act requires that issuers regularly file materialinformation with the SEC ____
(the annual 10-K filing and the quarterly 10-Q filing)The filed reports are available to the public through
EDGAR. In the event of a material event, the compamust timely issue an 8-K filing that reflects thesechanged conditions. Tender offers for 5% or more ofregistered company must be reported.
To establish a claim for damages under Section 10(b) andRule 10b-5 of Securities Exchange Act of 1934 one mustprove
a misstatement or omission of a material fact,knowingly made (or made with reckless disregard fothe truth), relied upon by the injured party, anddamages. The plaintiff can be the buyer or seller of securities.
Section 301 of the Sarbanes-Oxley Act provides: Eachmember of the audit committee shall be
a member of the board of directors of the issuer, andshall otherwise be independent;
the audit committee of an issuer shall be directlyresponsible for the appointment, compensation, andoversight of the work of any registered publicaccounting firm employed by that issuer;the audit committee shall establish procedures for the"receipt, retention, and treatment of complaints"received by the issuer regarding accounting, internalcontrols, and auditing;and, each audit committee shall have the authority toengage independent counsel or other advisors, as itdetermines necessary to carry out its duties.
Workpapers belong to the accountant that prepares them, notthe client. The acct-t is prohibited from showing theworkpapers to anyone without the client's permission Except
1. w/papers are subpoenaed and relevant to a court ca2. w/papers must be given to a surviving member of acct-ts firm3. a state CPA society review4. to defend a lawsuit brought by client5 official investigation of the AICPA6. GAAP/GAAS requires disclosure
NOTE - a person to whom a CPA sells his or her
practice is NOT on the listA minority of states follow the ULTRAMARES decision,which limits CPA liability to _________ and _________
person in privily if contract with the CPA and intendthird party beneficiaries.
The majority rule, a CPA's duty to care runs toany person or Limited foreseeable class of personswhom the CPA knows will rely on the CPA's work.
Section 11 of the 1933 ActPlaintiff need not to prove_________
Intentnegligence privityor reliance
According to ULTRAMARES, the third party that proves
_________ will be successful in reaching the CPA withoutregard to privity;CPA will NOT be liable to third parties for ___________
1 Gross negligence2 Simple negligence
Under the provisions of Section 10(b) of the SecuritiesExchange Act of 1934, an accountant may be held liable if the CPA acted
Without GOOD FAITHmere negligence is not enough
Securities Exchange Act of 1934 provides for liability in thecase of _______ in connection with the purchase or sale of any security.
an INTENTIONAL misrepresentation or omission omaterial fact
A CPA will be liable to a Tax client for damages from (3)
failing to timely file a client's TR failing to advise a client of certain tax deductions
neglecting to evaluate the option of preparing Joint oSeparate returns
if a CPA hasn't file a TR for 3 years , he has committed_______
an act discreditable to the profession
A CPA may be held liable to Any party who suffered a lossas a result of ___________
FRAUD or GROSS NEGLIGENCE
The essential element of 'common law fraud' is an_________
intent to defraud (SCIENTER) or deceive.A good defense would be proof that there was a lack'scienter'
Which of the following bodies promulgates standard of
audits of federal financial assistance recipientsGovernment Accountability Office
CPAs are required to maintain ___________ even if they arenot in public practice.
Integrity and Objectivity
____________ is the committee designated by the AICPA topromulgate standards in connection with unaudited financialstatements of nonpublic entities that are NOT req. to file F/S
Accounting and Review Services Committee
Which events may justify a departure from a Statement of Financial Accounting Standards
New legislationEvolution of a new form of business transacrion
REG Accountants' legal responsibilities CPAfor free If Pierce successfully sues Grant, Grant & Wall, CPAs,for damages under Section 11 of the Securities Act of 1933, what will be the measure of Pierce’s damages?
A The difference between the price paid for thesecurities and their value on the date suit was filed.B The difference between the price paid for thesecurities and their value on the date of trial.C Two times the difference between the price paid for the securities and their value on the date suit was filed.D Two times the difference between the price paid for the securities and their value on the date of trial.
The correct answer was A.
In a suit for damages under Section 11 of the Securities Aof 1933 damages are calculated as the difference betweenthe price paid for the securities and their value on the datsuit was filed.
A CPA may be liable to a purchaser of securities for certifying financial statements which are included as partof a registration statement and which contain materiallyfalse information. Such a purchaser is most likely torecover damages under the provisions of
A The Sarbanes-Oxley Act.B The Securities Exchange Act of 1934.C The Securities Act of 1933.D Regulation FD (Full Disclosure).
The correct answer was C.
A registration statement is used in connection with theissuance of securities. Misstatements contained in aregistration are governed by the provisions of the 1933Securities Act.
Harvest Services Corporation engaged Willet & Fund,CPAs, to conduct an audit of Harvest. Wren, president
and CFO of Harvest, knowingly misled Willet & Fund,CPAs, in the course of their audit resulting in materialmisstatements of to company’s profitability. Young, who
purchased Harvest common stock in reliance upon thefinancial statements, has filed suit against Willet &Fund, CPAs, under the anti-fraud provisions of theSecurities Exchange Act of 1934 for losses sustained dueto the errors contained in the audited financialstatements. Which is correct?
A Willet & Fund, CPAs, may be held liable as “aidersand abettors” even if they acted in good faith.B Young must prove reliance in order to recover.C Mere negligence on the part of Willet & Fund, CPAs,in being misled by Wren will result in liability.D Young may recover upon proof that Willet & Fund,CPAs, did not act with due diligence.
The correct answer was B.
Under the provisions of Section 10(b) of the SecuritiesExchange Act of 1934, an accountant may be held liable actions which are tantamount to common law fraud, or aslightly lesser standard, gross negligence which amountsreckless disregard for the truth. There must be evidence omaterial misstatement or omission knowingly (or recklessly) made, which the injured party relied upon to hor her detriment. Thus, answer B is correct since reliancean element which must be proven. With regard to answer
A, the U. S. Supreme Court, in Central Bank of Denver vFirst Interstate Bank of Denver (1994), ruled that entitiesmay not be held liable under the provisions of the SecuritExchange Act of 1934 for merely “aiding and abetting.”
HHG Enterprises engaged Barrington & Associates,CPAs, to prepare financial statements. In reliance uponthese financial statements, Folkes purchased 10,000shares of HHG Enterprises common stock. Folkes later
The correct answer was D.
Under the provisions of Section 10(b) of the SecuritiesExchange Act of 1934, a CPA may be held liable for
filed suit against Barrington & Associates, CPAs, under the provisions of Section 10(b) of the SecuritiesExchange Act of 1934 claiming that the financialstatements prepared and certified by Barringtoncontained a misstatement as to certain contingentliabilities. For Folkes to succeed in his suit he mustprove that
A Barrington & Associates, CPAs, failed to followGAAP.B Barrington & Associates, CPAs, acted negligently.C The financial statements were contained in aregistration statement.D The misstatement regarding contingent liabilities wasmaterial.
actions which are tantamount to common law fraud, or aslightly lesser standard, gross negligence which amountsreckless disregard for the truth. That the misstatement (oromission) was material is one of the elements which mus be proven. There must be evidence of a materialmisstatement or omission knowingly (or recklessly) madwhich the injured party relied upon to his or her detrimen
Which of the following would constitute a valid defenseby a CPA in an action for fraud where the plaintiff wasNOT in privity of contract with the CPA?
A The engagement was ambiguous as to the CPA’s
responsibilities.B The CPA does not carry malpractice insurance whichcovers losses due to fraud.C The CPA followed the instructions of his client.D The plaintiff’s reliance was not reasonable.
The correct answer was D.
To recover in an action for common law fraud, one must prove five elements: a misstatement or omission; of amaterial fact; knowingly made with an intent to deceive(scienter); relied upon by the complaining party; whichresults in damages. D is the best answer since proof or reliance is a necessary element to proving fraud, and proothat the reliance was not reasonable may defeat the plaintiff’s claim.
In a suit by Clem against Price, CPA, for common lawfraud, Price will prevail even if
A Clem can only prove negligence on the part of Price.B Clem was NOT in privity of contract with Price.C Clem did not actually rely on the work productgenerated by Price.D Price’s error, though intentional, was minor in nature.
The correct answer was B.
To recover in an action for common law fraud, one must prove five elements: a misstatement or omission; of a
material fact; knowingly made with an intent to deceive(scienter); relied upon by the complaining party; whichresults in damages. Privity of contract may exist, but is na necessary element. And, proof of mere negligence is nosufficient to establish scienter.
One has fulfilled the general standard of care expected of an accountant if
A the accountant has faithfully follow the standardsimposed by GAAP.
B the accountant has acted in good faith.C the services provided by the accountant were providedwith the level of skill ordinarily exercised under thecircumstances.D the accountant has exercised his best efforts inconnection with the services provided.
The correct answer was C.
An accountant must possess the skills that an ordinarily prudent accountant would have, and exercise the degree ocare that an ordinarily prudent accountant would exercise
This standard of care, however, is dependent on the particular circumstances existing at the time the work is performed. An accountant is expected to exercise ordinarcare and diligence, measured by the particular circumstances.
With regard to the liability of a CPA in conducting anaudit, which of the following statements isINCORRECT?
The correct answer was D.
Constructive fraud by a CPA means that the CPA was mothan merely negligent, but did not act with malice of withspecific intent to deceive, but was reckless or grossly
A A CPA who recklessly departs from the ordinarystandard of care would be liable to third parties.B A CPA’s failure to carry out the duties expressed in
the engagement will result in liability only if the CPAwas negligent or grossly negligent.C In an action against the CPA based on constructivefraud, it must be proven that the CPA acted in a grosslynegligent manner.D A CPA only has liability to the client.
negligent. A CPA’s failure to carry out the duty expressein the engagement will result in liability for breach of contract regardless of negligence. (A CPA’s failure to ca
out the duty expressed in the engagement may or may nohave been a product of negligence.) And, CPAs are liablethird parties when they are aware that their work will berelied upon, such as for an extension of credit.
Orth, a CPA, conducted an audit of PalladiumResources, Inc., and rendered an opinion as to thecompany’s financial condition. In a suit by PalladiumResources, Inc., against Orth for breach of contract andnegligence, which of the following would be anINCORRECT statement as to the standard of carerequired of Orth?
A A violation of GAAP or GAAS will be evidence of the accountant’s negligence unless the accountant
qualifies his/her opinion.B An accountant must exercise the skills that anordinarily prudent accountant would have exercisedunder the particular circumstances of the auditengagement.C Orth will only be liable for breach of contract if hewas grossly negligent.D Orth is NOT required to detect all fraudulent schemesin existence at Palladium Resources, Inc.
The correct answer was C.
An accountant will be liable for breach of contract if negligent in performing the contracted work. It is notnecessary for a client to prove gross negligence or fraud.
All of the other statements are generally correct with regto an accountant’s liability to a client and the standard of
acre generally imposed by common law.
Javier, CPA, was engaged by Madison to prepare auditedfinancial statements for Tracy Corporation. Javier was
made aware at the time of the engagement that TracyCorporation intended to submit the financial statementsto several investment bankers who were consideringpurchasing a controlling interest in Tracy Corporation.Prime Reserve Fund ultimately purchased a controllinginterest in Tracy Corporation based in part on the auditedfinancial statements produced by Javier. Which of thefollowing statements is correct?
A Javier, CPA, has no duty to any entity other than
Tracy Corporation.B In a majority of jurisdictions, Javier, CPA, would beliable for negligence to any foreseeable users of theaudited financial statements.C Javier, CPA, would be liable, in most jurisdictions, toPrime Reserve Fund for negligence committed inconnection with the audits.D Since Javier, CPA, is not in privity of contract withPrime Reserve Fund, Javier would have no liability toPrime for any wrongdoing.
The correct answer was C.
With respect to negligence, an accountant is liable to hisclient and in most jurisdictions, to the intended users of hwork product where the users are members of a limitedclass, such as the case here (“several investment bankerswho were considering purchasing a controlling interest in
Tracy Corporation”). In addition, if Javier’s wrongdoingwas fraudulent or involved gross negligence (constructivfraud) his liability would extend to any third party injuredthereby.
Lipton Enterprises, considering a buyout of Moss & Co., The correct answer was C.
demanded it be provided audited financial statements of the company. Lipton was presented with certifiedfinancial statements prepared by Drake & Drake, CPAs.The liabilities of Moss & Co. were grossly understated inthe financial statements certified by the Drake firm.Lipton Enterprises suffered serious losses as a result of the merger which related the understatement of Moss &Co.’s liabilities. To recover against Drake & Drake,
CPAs, Lipton Enterprises must prove: I. Drake & Drake
CPAs was aware that a third party, such as LitponEnterprises, would be relying on the financialstatements; II. Lipton Enterprises actually relied on thefinancial statements; III. Drake & Drake, CPAs wasnegligent.
A I onlyB I and II onlyC I, II and IIID I and III only
For a third party to recover against a CPA, the third partymust prove fraud or gross negligence on the part of theCPA, or, if the CPA is merely negligent, the third partymay recover if it can be shown that the CPA knew the th party would be relying on the CPAS work product, andactually did rely.
BrainTree Investments engaged PPL Associates, CPAs,to audit BrainTree’s financial statements. In the course
of the audit, PPL Associates discovered anembezzlement scheme involving two of BrainTree’s top
officers. With regard to a claim of accountant-clientprivilege,
A the accountant-client privilege is virtually identical tothe attorney-client privilege.B BrainTree Investments may waive the accountant-
client privilege.C no states have yet enacted an accountant-clientprivilege.D an accountant-client privilege is only available infederal court.
The correct answer was B.
A limited number of states have enacted laws grantingvarying degrees of accountant-client privilege, but the privilege is not as broad as the attorney-client privilege.Where such a privilege exists, only the client can wave th privilege.
The Internal Revenue Service Restructuring and ReformAct of 1998 gives taxpayers a privilege regarding writtenor verbal tax advice from a CPA. Which statementwould represent an INCORRECT interpretation of theRestructuring and Reform Act of 1998?
A The creation of the new privilege was not intended tomodify, but rather to extend the attorney-client commonlaw confidentiality privilege to other practitioners, suchas CPAs.B Information disclosed to a CPA for the purpose of preparing a return is privileged under the Reform Act.C The preparation of tax accrual work papers is notconsidered tax advice when developed to evaluate aclient’s contingent tax liabilities in connection with
financial condition disclosures.
The correct answer was B.
Section 7525 provides: “With respect to tax advice, the
same common law protections of confidentiality whichapply to a communication between a taxpayer and an
attorney shall also apply to a communication between ataxpayer and any federally authorized tax practitioner to extent the communication would be considered a privilegcommunication if it were between a taxpayer and anattorney” but only with respect to “non criminal tax matt
before the Internal Revenue Service and non criminal tax proceedings in Federal court brought by or against theUnited States.” In addition, the privilege does not extendwritten tax advice to corporate clients concerning their corporations’ involvement in tax shelters.
D The privilege does not extend to written tax advice tocorporate clients concerning their corporations’involvement in tax shelters.
On February 1, Halsey commenced an action againstPound & Associates, CPAs for damages in connectionwith certified financial statements prepared by Pound &Associates. Pound & Associates has alleged lack of privity as a defense. Pound & Associates will prevailbased on this defense if
A Halsey is the client of Pound & Associates.B Halsey’s suit is based on common law fraud. C the evidence presented at trial is of reckless disregardfor the truth on the part of Pound & Associates, CPAs.D Halsey, based on the financial statements, extendedcredit to Forte Corp. for whom Pound & Associates,CPAs, prepared and certified the financial statements.
The correct answer was D.
A legal action may be successfully maintained against anaccountant by a person not in privity of contract with theaccountant only under certain circumstances. If the legal
action is based upon fraud, or on gross negligence whichamounts to a reckless disregard for the truth, lack of privis no defense. Mere negligence by an accountant isactionable by an entity not in privity with the accountantonly if the accounting work was intended for the plaintiff(or for a group which included the plaintiff). Of course, iHalsey is Pound & Associates’ client (answer A) they are
privity of contract with one another and alleging lack of privity would be contrary to the facts.
To comply with the provisions of the Sarbanes-OxleyAct, members of an audit committee must ensure which
of the following: I. Financial reports reflect all materialcorrecting adjustments; II. Off – balance sheettransactions be disclosed; III. Companies disclose to thepublic on a rapid and current basis informationconcerning material changes in its financial condition.
A I onlyB II and II onlyC I, II and IIID II and III only
The correct answer was C.
The Sarbanes-Oxley Act requires that financial reportsreflect all material correcting adjustments; that off – balansheet transactions be disclosed; and, that companiesdisclose to the public on a rapid and current basis additioinformation concerning material changes in financialcondition or operations, in plain English. The Act furtherrequires that each annual report include a discussion statimanagement’s responsibility for establishing effective
internal controls and procedures for financial reporting, a provide an assessment of the effectiveness of such controand procedures.
Davidson & Co., CPAs failed to include certain chargesagainst income in the financial statements which itprepared for its client, Bayliss Bros., Inc. Davidson &Co.’s unqualified opinion accompanied the financial
statements as a part of a registration statement whichwas filed in connection with a public offering of nonvoting common stock by Bayliss Bros., Inc. In a suitby Lake, a purchaser of a significant portion of the initialpublic offering, against Davidson & Co., CPAs, for losses incurred when the shares dropped in value, LakeCANNOT prevail unless he can prove that
A the omission was material.B he reviewed the financial statements.C the omission was negligent.D Davidson & Co., CPAs, acted with reckless disregardfor the accuracy of the financial statements.
The correct answer was A.
Pursuant to the 1933 Securities Act, a CPA will be liablefor misstatements or omissions in financial statementswhich are part of a registration statement if themisinformation is material and results in damages. A
purchaser (Lake) need not prove fraud, negligence or reliance in order to prevail.
Brent, a CPA, was a lead accountant in the preparationof various financial information which was included inFausst & Co.'s registration statement filed in connectionwith an initial public offering by Fausst. Under Section
The correct answer was A.
Under Section 11 of the Securities Act of 1933, a CPA m be liable, in connection with his work product, to
11 of the Securities Act of 1933, Brent may be liable topurchasers of Fausst & Co. securities even though
A the purchaser cannot prove negligence by Brent.B Brent is able to prove that he exercised due diligence.C the misstatements alleged by the purchasers were notmaterial.D the value of the stock on the date suit is filed is greater
than the price paid by the purchasers.
purchasers of securities if the work product containsmaterial misstatements or omissions, and damages weresuffered. Plaintiffs need not prove negligence on the partthe CPA, but a CPA can avoid liability by proving theexercise of due diligence. The necessary element of materiality is absent in answer C and damages are absentanswer D.
In an initial public offering by McKenny-RiceManagement Group, LLC, Rice, a founding member andprincipal, was granted options to purchase 5% of theshares being offered to the public. Six months later, Riceexercised part of his options, purchasing a 1% stake inthe company. McKenny-Rice Management Group, LLC,raised $12,000,000 in connection with the stock offering.Rice
A is in violation of SEC regulation 144.B may resell the shares without restriction if aregistration statement was in effect.C holds restricted securities regardless of registration.D holds shares which are exempt from any restrictionssince he is not a controlling person.
The correct answer was B.
The Securities Act of 1933 requires that, in a publicoffering exceeding $5,000,000 either a registrationstatement must be filed or resale of the securities within
two years is restricted.
Bastille Iron Works, Inc., wishes to make an offering of securities which will comply with the rules for exemption under Rule 505 of Regulation D of theSecurities Act of 1933. To meet these requirements
A all purchasers must be accredited investors.B a registration statement must be filed with the SEC,but need not be approved.C share certificates must be marked with a legendindicating that resale is restricted.D Bastille Iron Works, Inc., may advertise to the generalpublic the availability of its securities, but may notadvertise on the internet.
The correct answer was C.
Rule 505 of regulation D permits a company to sell up tomillion in securities over a 12 month period but prohibitsgeneral advertising, limits a sales to not more than 35nonaccredited investors and restricts resale for two years
In general, the provisions of the Securities Act of 1933accomplish the goal of stability in the marketplace for
securities by
A generally assuring that prospective investors areprovided information about an issuer of securitiesnecessary to make an informed investment decision.B providing a government guaranty as to the soundnessof securities issued by private companies.C establishing the Securities Assurance Fund to whichinvestors may apply for full or partial reimbursement for losses sustained due to fraudulent securities schemes.
The correct answer was A.
The Securities Act of 1933 imposes on companies whoseek to raise capital in the marketplace a requirement thathey first file a registration statement by which prospectivinvestors are provided information about the companynecessary to make an informed investment decision.
D guarantying the accuracy of information containedwithin any registration statement which has beenapproved by the SEC.
Watson along with four other executives of PittWay,Inc., engaged over many years in a fraudulent scheme togrant undisclosed "in-the-money" options to themselvesand to others by backdating stock options to coincidewith historically low closing prices of PittWay commonstock. Among other things, Watson created company
records that falsely indicated that PittWay'scompensation committee had approved a grant of stock options on a date when, in reality, no such corporateaction took place. Pittway, Inc., is a publicly tradedcompany. Watson's actions could result in
A a court order permanently enjoining Watson him fromviolating the antifraud and securities ownership-reporting provisions of the federal securities laws.B civil monetary penalties.
C disgorgement of profits.D all of the above.
The correct answer was D.
Violations of the Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the SecuritiesExchange Act of 1934 can result in civil penalties,forfeituof profits, including prejudgment interest, as well as a permanent injunction prohibiting future violations.
Countdown Corporation issued $15,000,000 of newsecurities to finance expansion in overseas markets. Theentire block of securities was sold to Magna Insuranceand Pension Group without the filing of a registrationstatement. Resale of the securities by Magna to thegeneral public
A is unrestricted.
B would be unlawful because the original sale to Magnawas in violation of the Securities Act of 1933.C may be made if a registration statement is first put intoeffect.D can be made without restriction after one year fromthe original sale to Magna.
The correct answer was C.
Rule 506 of regulation D permits a company to sell anunlimited amount of securities to accredited purchasers b
limits immediate resale by imposing a two year waiting period.
Krauss & Co., CPAs, certified the financial statements of Boardwalk Corporation. The financial statements of Boardwalk, which were included in company'sregistration statement, contained material misstatements.Under Section 11 of the Securities Act of 1933, Krauss
& Co., CPAs, will NOT be liable to a purchaser of thesecurities
A who suffered no damages.B if the purchaser exercised due diligence.C unless the purchaser can prove intent or recklessdisregard for the truth on the part of Krauss & Co.,CPAs.D unless there is privity between the purchaser andKrauss & Co., CPAs.
The correct answer was A.
For a purchaser of original issue securities to hold liableexperts who participated in the preparation of theregistration statement, the purchaser must prove theexistence of a material misstatement (or omission) in thefinancial statements, and damages. These are the onlyelements of 1933 Act fraud, unlike common law fraudwhich requires, in addition, scienter (intent to deceive) anreliance.
Peter Phish is CEO and 50% owner of Phish & Assoc., aregistered broker dealer. Phish served as underwriter for municipal bonds to finance the purchase of Marx Place,an office building. The bonds had a maturity of fiveyears and were sold to buyers in several states. At thetime the bonds were offered for sale, the state Motor Vehicle Department (MVD) occupied 70% of MarxPlace. At the time he promoted the sale of the bonds,Phish knew that the MVD intended to move to a new
location within 18 months. Occupancy of Marx Place bya state agency was critical to the tax exempt status of thebonds. Cautionary statements in the offering documentswarned, in boldface capital letters: "Certain leases arescheduled to expire prior to the maturity of the bonds;there is no guarantee that the Motor Vehicle Departmentwill renew its lease." Subsequent to the bond sale, theDepartment of Motor Vehicles vacated Marx Place andthe bonds lost their tax exempt status. An action bypurchasers of the bonds against Phish & Assoc. under the anti-fraud provisions of the 1933 Securities Act will
A NOT succeed because the cautionary statementsnegated any possible false representation by Phishrelating to the MVD lease.B NOT succeed because there is no evidence of amisstatement in the offering documents.C succeed unless Phish & Assoc. can prove that thepurchasers of the bonds did not rely on the offeringdocuments.D succeed because the cautionary statement was
insufficient to negate the material omission by Phish thathe actually knew that the MVD was vacating before thebond maturity date.
The correct answer was D.
Material misstatements or omissions in connection with asale of securities is a violation of the anti fraud provisionof the 1933 Securities Act. Proof reliance or intent are nonecessary. Phish's omissions regarding MVD's knownintention to vacate would have been of importance toinvestors. Phish's cautionary statements were so deficienthe must have known investors would be misled by theoffering documents. There is a critical distinction betweedisclosing the risk a future event might occur and
disclosing actual knowledge the event will occur. Phish'scautionary language only disclosed a risk that the Motor Vehicle Department might leave Marx Place, not hisknowledge that it actually planned to do so in the near future.
Carter owns restricted securities which she receivedthrough a Regulation D offering. To sell these securities,Carter may comply with the safe harbor provisions of Rule 144. In general, Carter would be in compliancewith Rule 144 if she: I. holds the stock for two year before selling. II. holds the stock for one year, then sellsin small brokered transactions after confirming that thecompany has complied with the periodic reportingrequirements of the Securities Exchange Act of 1934.
A I only is correct.B II only is correct.C I and II are both correct.D Neither I nor II is correct.
The correct answer was C.
Restricted securities are securities acquired in unregistere private sales from the issuer or from an affiliate of theissuer. Investors typically receive restricted securitiesthrough private placement offerings, Regulation Dofferings and employee stock benefit plans. Sale of restricted securities can be made by complying with the
mandates of Rule 144. In general, this means holding thestock for two year before selling, or, holding the stock foone year, then selling in small brokered transactions. If thsecurities are not held for two years, there must be adequcurrent information available about the issuer. Thisgenerally means the issuer has complied with the periodireporting requirements of the Securities Exchange Act of1934.
On April 9 Mal received a telephone call from Glotz, anemployee of Charter Bank with whom Mal hadpreviously worked at Charter. Glotz's department
The correct answer was B.
Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibit
performed due diligence on banks which Charter soughtto acquire. The day before Glotz called Mal, her supervisor had informed her that she would beconducting due diligence at an acquisition target. Whileshe deliberately was not provided the target's identity,she learned through her own investigations that the duediligence was to take place in Lottsburg and that threebanks were based there: Trust Bank, County Branch andA&B Bank. During the next 24 hours Mal purchased of
stocks and options in the three banks. It was later disclosed that Charter Bank intended to acquire A&BBank. Within a week, A&B Bank's stock increased invalue significantly allowing Mal to sell his stock andoptions at a gain of $225,000. With regard to SECsanctions for violation of insider trading rules
A Mal is not in violation of insider trading rules becausehe was not told the specific identity of Charter'sacquisition target, and, in fact, could have lost money in
the acquisitions.B The SEC may seek to impose civil penalties againstMal of up to $675,000.C Glotz's activities were in violation of the short swingprofit rules of Section 16(b) of the Securities ExchangeAct of 1934.D Although Glotz is subject to civil penalties, includingdisgorgement of all profits, there are no criminalpenalties since his gains were less than $250,000.
fraud related to securities trading, including trading oninside information. Mal traded on insider information andas a result is subject to both criminal and civil penalties.The Insider Trading Sanctions Act of 1984 and the InsideTrading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as hias three times the profit gained or the loss avoided from tillegal trading. Mal was not in violation of Section 16(b) the Securities Exchange Act of 1934, which prohibits sho
swing profits (from any purchases and sales within any smonth period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares.
Which if the following is correct regarding the 1934Securities Exchange Act's regulation of proxysolicitations?
A A registered company must provide each stockholder with a proxy statement containing certain material, alongwith a form of proxy on which the shareholder may voteon each proposal to be presented at a shareholder meeting.B Copies of the proxy statement and proxy form must befiled with the SEC when they are first mailed to securityholders.C The SEC may comment on but may not requirechanges in a proxy statement before mailing.D Proxies relating to an annual meeting calling for election of directors must include a report containingfinancial statements covering the previous two fiscalyears.
The correct answer was D.
The 1934 Act regulates proxy solicitation, which isinformation that must be given to a corporation'sshareholders prior to soliciting votes. Prior to everyshareholder meeting, a registered company must provideeach shareholder with a proxy statement containing certamaterial, along with a proxy form on which the shareholdmay vote on each proposal to be presented at the meetingFor securities registered in the names of brokers, acompany must attempt to determine the beneficialownership of the securities and furnish sufficient copies othe proxy statement for distribution to all beneficial owne
Copies of the proxy statement and proxy form must be filwith the SEC when first mailed to shareholders. Under certain circumstances preliminary copies must be filed tedays before mailing. Although a proxy statement does no become "effective" in the same way as a statementregistered under the 1933 Act, the SEC may comment onand require changes in the proxy statement before mailinProxies for an annual meeting calling for election of directors must include a report containing financialstatements covering the previous two fiscal years. Speciarules apply when a contest for election or removal of
My-Gen is a defunct corporation whose stock waspreviously listed on the NASDAQ exchange. ExchangeServices, a national securities broker, loaned Cargill, themajority owner of My-Gen, $10,000,000 secured byCargill's shares in My-Gen which represented over 25%of My-Gen's outstanding shares. Shortly thereafter,Exchange Services called the Cargill loan, then sold allthe My-Gen stock which it held as collateral. The stock's
price plunged during this time. A class action suit wasthereafter filed against Exchange Services in the statecourt of Redacre alleging civil conspiracy, violation of Redacre's securities laws, and tortious manipulation of markets. If Exchange Services seeks dismissal of theclass action claim under Securities Litigation UniformStandards Act (SLUSA) of 1998 it will
A prevail, but only if the class action was based onsecurities fraud.
B lose because SLUSA does not apply to state courtclass action suits.C prevail since the suit is, in essence, a claim of marketmanipulation.D lose since the suit did not specifically allege violationsot the Federal Securities laws.
The correct answer was C.
SLUSA provides for preclusion of certain securities class
actions brought under state law: No covered class action based upon the statutory or common law of any State ma be maintained in any State or Federal court by any privat party alleging-(A) a misrepresentation or omission of amaterial fact in connection with the purchase or sale of acovered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of acovered security. SLUSA does not itself displace state lawwith federal law but makes some state-law claimsnonactionable through the class action device in federal a
well as state court.
Trells has decided to make an offer to purchase thecommon stock of Tarrington, Inc., a company whoseshares are listed on the New York Stock Exchange.Tarrington currently trades at $15.50 per share and Trells
intends to offer $18.00 per share. If after the acquisitionTrells would own 5% or more of Tarrington, Inc., theSecurities Exchange Act of 1934 requires all of thefollowing EXCEPT
A Trells must file a report with the SEC which includesthe source of her funds.B Trells must file a report with the SEC which includesthe purpose of the purchase.C If more shares are tendered than Trells is willing to
purchase, Trells must withdraw her offer.D Trells must notify Tarrington, Inc., of her intention.
The correct answer was C.
The Williams Act of 1968 amended many sections of the1934 Securities Exchange Act to address problems withtender offers. Pursuant to the Williams Act, persons mak
a tender offer that would result in ownership of more than percent of a class of registered securities must first file wthe SEC and furnish to each offeree a statement thatincludes the background of the person or group; the sourof funds used and the purpose of the acquisition; thenumber of shares owned; and any relevant contracts,arrangements, or understandings. In addition, the offer m be made to all holders of the class of securities sought, ana uniform price must be paid to all tendering shareholderA shareholder may withdraw tendered shares at any timewhile the tender offer remains open. If the person making
the offer seeks fewer than all outstanding shares and theresponse is oversubscribed, shares will be taken up on a prata basis.
Rienzi, Act II, LLC, a domestic U.S. company, promotesopera performances throughout the world. Which of thefollowing would make Rienzi, Act II, LLC, subject tothe reporting requirements of the Securities ExchangeAct of 1934?
A Rienzi, Act II, LLC, with assets of less than
The correct answer was A.
Companies whose securities are traded on a nationalsecurities exchange or whose assets are in excess of $10,000,000 and which have equity securities held by mothan 500 persons must register under the SecuritiesExchange Act of 1934 and comply with its provisions.
$1,000,000, is listed on one of the national exchanges.B Rienzi, Act II, LLC, has issued both common andpreferred stock.C Rienzi, Act II, LLC, has gross income in excess of $2,000,000 annually.D There are between 350 and 400 shareholders of Rienzi, Act II, LLC.
Rake, Comptroller of Gauge Corporation, backdatedseveral million dollars' worth of employee stock option
grants at Gauge so that they appeared to have beenissued when Gauge's stock price was at a periodic lowpoint. Rake has earned over $300,000 in profits throughthis scheme. Which of the following is NOT true withrespect to Rake's activities?
A Rake is subject to monetary fines.B Gauge Corporation can be sentenced to more than oneyear in prison.C Rake's actions constituted a violation of the 1934
Securities Act.D Rake would be liable for securities violations even if he had not profited from the options backdating scheme.
The correct answer was B.
Although Rake, the individual who carried out thefraudulent scheme would be subject to criminal sanctionsincluding prison, a corporation cannot be imprisoned.
On May 1, Sterling purchased 4,000 shares of ChuteEnterprises, Inc., for $5,600,000 on one of the nationalstock exchanges. The shares plunged in value within twomonths due to a downturn in the economy. Sterling soldthe shares on the open market for $4,400,000. Sterlingbrought an action for her losses alleging fraud under theSecurities Exchange Act of 1934 based in part on her assertion that she was misled by assertions by Chute's
president that Chute Enterprises, Inc., "was recession-proof" and "anticipates continued profits regardlesswhether there is a downturn in the economy." Sterling'saction will
A likely fail since she will be unable to prove reliance onthe president's statements.B likely fail since the president's statements were notmaterial.C likely fail because the president's statements were not
factual.D likely succeed, but her action must be based upon theprice of the securities as of the date suit is filed.
The correct answer was C.
The Securities Exchange Act of 1934 prohibits actual frain connection with the sale of securities in interstatecommerce, as well as fraudulent schemes involving the sof securities and market manipulation. No actual fraud is present here for a variety of reason, but primarily becausthe statements by Chute Enterprises' president would notconsidered factual since statements regarding future evenare not typically expected to induce reasonable reliance.
Puritan Cleaning Products, Inc., is subject to thereporting requirements of the Securities Act of 1934. Asa result:
A Puritan Cleaning Products, Inc., is exempt from theregistration requirements of the 1933 Securities Act.B must file quarterly financial reports with the SEC.
The correct answer was B.
The 1934 Act requires that issuers regularly file materialinformation with the SEC (the annual 10-K filing and thequarterly 10-Q filing). The filed reports are available to t public through EDGAR. In the event of a material event,the company must timely issue an 8-K filing that reflectsthese changed conditions. Tender offers for 5% or more o
C is excused from the requirement of filing proxystatements.D must file a report of a tender offer, but only if the offer is for 10% or more of the company.
a registered company must be reported.
The provisions of Section 10(b) and Rule 10b-5 of Securities Exchange Act of 1934 require that certainmatters must be proven to hold a CPA or other expertliable. Which of the following does NOT have to beproven to prevail in an action under the 1934 Act?
A Scienter B MaterialityC DamagesD Plaintiff was the buyer of the securities
The correct answer was D.
To establish a claim for damages under Section 10(b) and
Rule 10b-5 one must prove a misstatement or omission omaterial fact, knowingly made (or made with recklessdisregard for the truth), relied upon by the injured party,and damages. The plaintiff can be the buyer or seller of securities.
Section 301 of the Sarbanes-Oxley Act sets forthguidelines for the establishment of public company auditcommittees. Which of the following provisions is/arecontained in Section 301: I. No member of the audit
committee shall be a member of the board of directors of the subject company. II. Each audit committee shall havethe authority to engage independent counsel or other advisors as necessary to carry out its duties.
A I only is correct.B II only is correct.C Neither I nor II is correct.D Both I and II are correct.
The correct answer was B.
Section 301 of the Sarbanes-Oxley Act provides: Eachmember of the audit committee shall be a member of the board of directors of the issuer, and shall otherwise be
independent; the audit committee of an issuer shall bedirectly responsible for the appointment, compensation, aoversight of the work of any registered public accountingfirm employed by that issuer; the audit committee shallestablish procedures for the "receipt, retention, andtreatment of complaints" received by the issuer regardingaccounting, internal controls, and auditing; and, each audcommittee shall have the authority to engage independencounsel or other advisors, as it determines necessary tocarry out its duties.
