1. Which of the following acts by a CPA will not result in a CPA's incurring an IRS penalty? 
A. Understating a client's tax liability as a result of an error in calculation. 
B. Failing, without reasonable cause, to provide the client with a copy of an income tax return. 
C. Failing, without reasonable cause, to sign a client's tax return as preparer. 
D. Negotiating a client's tax refund check when the CPA prepared the tax return.

2. Burt, CPA, issued an unqualified opinion on the financial statements of Midwest Corp. These financial statements were included in Midwest's annual report, and Form 10-K was filed with the SEC. As a result of Burt's reckless disregard for GAAS, material misstatements in the financial statements were not detected. Subsequently, Davis purchased stock in Midwest in the secondary market without ever seeing Midwest's annual report or Form 10-K. Shortly thereafter, Midwest became insolvent, and the price of the stock declined drastically. Davis sued Burt for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Burt's best defense is that 
A. Davis did not purchase the stock as part of an initial offering. 
B. There has been no subsequent sale for which a loss can be computed. 
C. Davis was not in privity with Burt. 
D. Davis did not rely on the financial statements or Form 10-K

3. Krim, president and CEO of United Co., engaged Smith, CPA, to audit United's financial statements so that United could secure a loan from First Bank. Smith issued an unqualified opinion on May 20, but the loan was delayed. On August 5, on inquiry to Smith by First Bank, Smith, relying on Krim's representation, made assurances that there was no material change in United's financial status. Krim's representation was untrue because of a material change after May 20. First relied on Smith's assurances of no change. Shortly afterward, United became insolvent. If First sues Smith for negligent misrepresentation, Smith will be found 
A. Liable, because Smith should have contacted the chief financial officer rather than the chief executive officer. 
B. Not liable, because Smith's opinion only covers the period up to May 20. 
C. Not liable, because Krim misled Smith, and a CPA is not responsible for a client's untrue representations. 
D. Liable, because Smith should have undertaken sufficient auditing procedures to verify the status of United.

4. Which of the following acts constitute(s) grounds for a tax preparer penalty? 
I. Without the taxpayer's consent, the tax preparer disclosed taxpayer income tax return information under an order from a state court. 
II. At the taxpayer's suggestion, the tax preparer deducted the expenses of the taxpayer's personal domestic help as a business expense on the taxpayer's individual tax return. 

A. Neither I nor II. 
B. Both I and II. 
C. II only. 
D. I only

5. Holly Corp. engaged Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly was required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover the omission of a fact material to the statements. A purchaser of Holly's securities may recover from Yost under Section 11 of the Securities Act of 1933 only if the purchaser 
A. Proves that the registration statement was relied on to make the purchase. 
B. Brings a civil action within 1 year of the discovery of the omission and within 3 years of the offering date. 
C. Establishes privity of contract with Yost. 
D. Proves that Yost was negligent

6. While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose.
• In a suit by a purchaser against Larson for common-law fraud, Larson's best defense is that 

A. Larson did not have actual or constructive knowledge of the misstatements. 
B. Larson was not in privity of contract with its client. 
C. Larson's client knew or should have known of the misstatements. 
D. Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit

7. Accounting Firm is among several defendants found liable in a private civil action brought by an individual plaintiff under the Securities Exchange Act of 1934. Plaintiff, who has a net worth of $500,000, received a judgment for damages of $1 million. The jury determined that Accounting Firm did not commit a knowing violation of the securities laws but that it was responsible for 10% of the total damages. If Accounting Firm is the only defendant from which plaintiff can recover, it will be liable for 
A. $1,000,000 
B. $150,000 
C. $100,000 
D. $50,000

8. When CPAs fail in their duty to carry out their contracts for services, liability to clients may be based on Breach of Contract Strict Liability 
A. Yes No 
B. No Yes 
C. Yes Yes 
D. No No

9. If a CPA is engaged by an attorney to assist in the defense of a criminal tax fraud case involving the attorney's client, information obtained by the CPA from the client after being engaged 
A. Is not privileged in jurisdictions that do not recognize an accountant-client privilege. 
B. Will be deemed privileged communications under certain circumstances. 
C. Is not privileged because the matter involves a federal issue. 
D. Will be deemed privileged communications provided that the CPA prepared the client's tax return