Certified Public Accountant Regulatory Frameworks & Compliance 4 — Questions and Answers
Question 1: Which element is NOT required for a valid written tax opinion to meet the 'more likely than not' standard under Circular 230?
- Identification of the relevant facts
- Analysis of the applicable law to the facts
- A conclusion that the position is more likely than not correct
- A guarantee that the IRS will not challenge the position (Correct answer)
Correct answer: A guarantee that the IRS will not challenge the position
No tax opinion can guarantee IRS acceptance; the more-likely-than-not standard requires analysis and a conclusion but not certainty of outcome.
Question 2: Under the USA PATRIOT Act, financial institutions are required to implement a Customer Identification Program (CIP). Which information is NOT typically required to be collected for individual customers?
- Name
- Date of birth
- Address
- Credit score (Correct answer)
Correct answer: Credit score
CIP requires name, date of birth, address, and identification number (SSN/TIN) for individuals; credit scores are not a CIP requirement.
Question 3: Under the Securities Exchange Act of 1934, Section 10(b) and Rule 10b-5, insider trading liability requires proof of which element?
- The defendant is a corporate officer or director
- The defendant traded on material, nonpublic information in breach of a duty (Correct answer)
- The defendant made a profit on the transaction
- The defendant received a formal tip from a company insider
Correct answer: The defendant traded on material, nonpublic information in breach of a duty
Section 10(b)/Rule 10b-5 requires proof that the defendant traded on material nonpublic information in breach of a duty of trust or confidence.
Question 4: COSO's Internal Control – Integrated Framework identifies five components of internal control. Which component includes the 'tone at the top' concept?
- Risk Assessment
- Control Activities
- Control Environment (Correct answer)
- Monitoring Activities
Correct answer: Control Environment
The Control Environment component encompasses the organization's ethical values, management philosophy, and organizational structure, including tone at the top.
Question 5: Which IRS penalty applies when a taxpayer substantially understates income tax, defined as an understatement exceeding the greater of 10% of the correct tax or $5,000?
- 20% accuracy-related penalty under IRC Section 6662 (Correct answer)
- 25% failure-to-file penalty under IRC Section 6651
- 75% civil fraud penalty under IRC Section 6663
- 5% delinquency penalty under IRC Section 6656
Correct answer: 20% accuracy-related penalty under IRC Section 6662
The 20% accuracy-related penalty under IRC Section 6662 applies to substantial understatements of income tax meeting the 10%/$5,000 threshold.
Question 6: When a CPA performs a compilation engagement under SSARS, which of the following statements is correct?
- The CPA must verify the accuracy of the financial information provided by management
- The CPA provides no assurance on the financial statements (Correct answer)
- The CPA must assess the risk of material misstatement
- The CPA must issue an opinion on whether the statements conform to GAAP
Correct answer: The CPA provides no assurance on the financial statements
In a compilation, the CPA assists in presenting financial information but provides no assurance that the statements are free from material misstatement.
Question 7: The AICPA's conceptual framework for independence identifies threats that may impair a CPA's independence. Which threat arises when a CPA audits their own firm's work?
- Advocacy threat
- Self-review threat (Correct answer)
- Familiarity threat
- Undue influence threat
Correct answer: Self-review threat
A self-review threat occurs when a CPA is in a position of auditing or reviewing their own previous work or the work of their firm.
Certified Public Accountant Regulatory Frameworks & Compliance 4
Which element is NOT required for a valid written tax opinion to meet the 'more likely than not' standard under Circular 230?