1. If an equity shareholder sued a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, if present, which of the following would be the CPA’s best defense?
a. The shareholder lacks privity to sue
b. The false statements were immaterial
c. The CPA did not financially benefit from the alleged fraud
d. The contributory negligence of the client
2. With respect to privileged communications of accountants, which of the following is correct?
a. A state statutory privilege will be recognized in case being tried in a federal question.
b. Most courts recognize a common-law privilege between an accountant and the client.
c. As a result of legislative enactment and court adoption, the client-accountant privilege is recognized in the majority of jurisdictions.
d. The privilege will be lost if the party asserting the privilege involuntarily submits part of the privileged communications to evidence.
3. Bob’s accounting firm was hired by Tom’s Tacos, Inc., his best friend’s company to perform an audit in order to obtain a loan from Local Bank and Trust. The bank extended a $350,000 loan to Tom’s Tacos based on the auditor’s report prepared by Bob. During the following year, Tom’s Tacos sought bankruptcy protection and could not repay the loan. During the bankruptcy proceeding, Local Bank and Trust realized Bob’s firm failed to discover a material overstatement of Tom’s Tacos assets. Of the following statements, which one is correct regarding a potential lawsuit by Local Bank and Trust against Bob’s accounting firm? Local Bank and Trust:
a. Cannot sue Bob’s accounting firm because of the statute of limitations
b. Can sue Bob’s accounting firm for the loss of the loan because of negligence
c. Cannot sue Bob’s accounting firm because there was no privity of contract
d. Can sue Bob’s accounting firm for the loss of the loan because of the rule of privilege
4. Substantial authority to avoid preparer penalties can include which of the following:
a. Memorandum Opinion from the Tax Court
b. article from the Wall Street Journal
c. comments made by an IRS auditer at a cocktail party
d. opinion from the Michigan Supreme Court
5. Circular 230 is:
a. a guideline practitioners must follow in order to become a CPA
b. a Treasury Regulation that governs practice before the I.R.S.
c. a Revenue Procedure that governs practice before the I.R.S.
d. a rule published in the Internal Revenue Bulletin
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