Wsu Msa Comprehensive - Regulation

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Code of professional conduct: Termination of an engagement prior to completion

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required to return clients records

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Code of professional conduct: Contingent fees for tax engagements

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allowable when representing a client in an examination by a revenue agent of the client's federal or state income tax return.

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Code of professional conduct: Working papers and confidential client information

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CPA owns the working papers but information in the CPA's working papers is confidential and may not be disclosed without client's consent or by court order; work-papers may be reviewed during a quality review of a professional practice by a team from the state CPA society, AICPA. Reviewing CPA is also bound by confidentiality requirements

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Code of professional conduct: Independence

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a CPA must be independent, in both fact and appearance, of an attest client; an audit cannot be performed if a client has not paid the auditor for more than one year's services; relationships not impeding independence could include those in the normal course of business such as membership at a client's country club or maintaining a bank account with a client bank when the account is fully insured or those in which the auditor has an immaterial indirect financial interest in the client

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Common law liability to clients: Failure to discover a material misstatement

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Can be liable fi the failure to discover was due to the CPA's own negligence; a good defense against negligence is performing an audit in accordance with generally accepted auditing standards

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Code of professional conduct: Liability for negligence / standard of due care

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CPA can be liable if they failed to exercise the same skill and due care expected of an ordinarily prudent CPA under the circumstances; client does not necessarily have to prove CPA's performance was reckless or CPA had an intent to deceive

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Code of professional conduct: Enforceability of contract with client

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An oral contract is still enforceable even if there is no signed engagement letter

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Code of professional conduct: Responsibility for financial statements

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Lies with client's management to prepare financial statements in accordance with GAAP

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Code of professional conduct: Liability for fraud

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CPA is not normally liable for failure to detect fraud or irregularities unless:
(1) a "normal" audit would have detected it
(2) the accountant by agreement has undertaken greater responsibility
(3) the wording of the audit report indicates greater responsibility

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Code of professional conduct: Liability for constructive fraud

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established by:
(1) misrepresentation of a material fact
(2) reckless disregard for the truth
(3) reasonable reliance by the injured party
(4) actual damages

Gross negligence in applying GAAS constitutes a reckless disregard for the truth and can be found to be constructive fraud
Ordinary negligence is not sufficient to support a finding of constructive fraud

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Common law liability to third parties (non-clients)

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Defenses - lack of privity can be a viable defense against third parties in a common law case of negligence or breach of contract
a client's creditor is not in privity of contract with the CPA
Plaintiffs need not show privity of contract if suing for fraud, constructive fraud, or GROSS negligence

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Responsibilities of Auditors under Private Securities Litigation Reform Act, SOX, SEC Acts: Detection of probable criminal activity

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auditor should FIRST inform the audit committee or board of directors of the client entity; if no remedial action is then taken, then auditor must inform SEC

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Responsibilities of Auditors under Private Securities Litigation Reform Act, SOX, SEC Acts: Permitted services for attest clients

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A number of non-attest services MAY NOT be performed by the auditor for a public company
Tax services MAY BE performed but must be approved by the client company's audit committee

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Taxation of Partnerships: Contribution of money or property to a partnership in exchange for a partnership interest

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Generally no gain or loss is recognized (non-recognition rule applies even if value of the partnership capital interest received exceeds the fair market value of property contributed)

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Taxation of Partnerships: Applicable limitations in determining a partner's deduction for that partner's share of partnership losses

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Three different loss limitations apply in determining deductibility of a partner's share of partnership losses;
Only lose losses that make it through all three limitations at the partner level are deductible by a partner; limitations are:
(1) basis in partnership interest
(2) at-risk limitation
(3) passive loss limitation

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Taxation of Partnerships: Guaranteed payments

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made by a partnership to partners for services rendered
an ordinary deduction in computing a partnership's ordinary income or loss from trade or business activities on pate 1 of form 1065
Partnership must also report guaranteed payments on Schedule K and the receiving partner's Schedule K-1
Partners must report the receipt of guaranteed payments as ordinary income (self-employment income)

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Taxation of Partnerships: Calculation of partner's basis in partnership

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Increased or decreased by partner's distributive share of all partnership items
Increased by partner's distributive share of all income items (including tax-exempt income)
Decreased by all loss and deduction items (including non-deductible items)
Decreased by distributions received from the partnership

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Taxation of Partnerships: Amount realized form sale of a partnership interest

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Total amount realized consists of the amount of cash received plus the buyer's assumption of the selling partner's share of partnership liabilities

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Taxation of Partnerships: Treatment / Type of income from sale of a partnership interest

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Sale of a partnership interest generally results in CAPITAL GAIN OR LOSS, however, ORDINARY INCOME, must be, RECOGNIZED TO THE EXTENT, of the selling partner's SHARE OF UNREALIZED RECEIVABLES (and appreciated inventory)

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Taxation of Corporations: Organization of a corporation

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Generally no gain or loss is recognized for stock, if immediately after the transfer, the transferors of property are in control of the corporation; control is defined as 80% of the combined voting power of stock entitled to vote, and at least 80% of each class of non-voting stock;
If no gain or loss is recognized upon organization, then the shreholder's basis in the stock received is CASH CONTRIBUTED PLUS the ADJUSTED BASIS of other property transferred

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Taxation of Corporations: Deductible organizational expenditures

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Include fees for accounting and legal services incident to incorporation, expenses of organizational meetings and of temporary directors meetings, fees paid to the state of incorporation; EXCLUDES costs incurred in issuing and selling stock and securities (professional fees to issue stock, printing costs, underwriter commissions)

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Calculation of income tax before credits given certain information and partial rate table

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*dividends received deduction of 70% for dividends received from a 15%-owned taxable domestic corporation
*be able to use a tax rate table

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Taxation of Corporations: Charitable contributions deduction

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LIMITED TO 10% of a corporation's taxable income COMPUTED BEFORE the charitable contribution and dividends receivable deduction

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Taxation of Estates, Gifts, and Trusts: Annual exclusion for gifts:

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The first $13,000 (2010 amount) of gifts made to any person during any calendar year is excluded in determining the total amount of gifts for the year.

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Taxation of Estates, Gifts, and Trusts: Gift-splitting

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Spouses may elect to "split" gifts; allows one spouse to give $26,000 (2010 amount) to each donee during a year, even if the assets were only owned by one spouse; allows gift to be treated as bing made 1/2 by each spouse eliminating any transfer tax on the gift to the extent the gift does not exceed $26,000 (2010 amount); amount of gift(s) exceeding $26,000 (2010 amount) in total is(are) a taxable gift(s)

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Taxation of Estates, Gifts, and Trusts: Unified transfer tax rate schedule

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Applies on a CUMULATIVE BASIS to both life and death transfers; during a person's lifetime, a tax is first computed on cumulative lifetime taxable gifts, made in prior years in order to tax the current year's gifts at applicable marginal rates; AT DEATH, a unified transfer tax is COMPUTED ON TOTAL LIFE AND DEATH TRANSFERS, then is reduced by the tax already paid on post-1976 gifts, the unified transfer tax credit, foreign death taxes, and prior transfer taxes

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Taxation of Estates, Gifts, and Trusts: Marital deduction

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Marital deduction - an unlimited marital deduction is allowed for gift tax purposes for gifts to a donee, who, AT THE TIME OF THE GIFT, is the donor's spouse; gifts given in the year of marriage should be tracked to taxability under gift tax rules can be determined; any gifts prior to marriage are taxable but the annual exclusion ($13,000 for 2010) applies

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Taxation of Estates, Gifts, and Trusts: Alternate valuation date for federal estate tax purposes

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Under certain conditions an executor can elect to VALUE ASSETS on the alternative valuation date which is six months after the decedent's date of death or date of deposition of the asset, whichever occurs earlier; election of alternat valuation dte can only be made if its use DECREASES BOTH the value of the gross estate AND the estate tax liability; irrevocable election; applies only to the valuation of the assets in an estate, not the liabilities

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Taxation of Estates, Gifts, and Trusts: Taxability of income earned by a trust

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If grantor of trust retains substantial control (the power to revoke both the income interest and remainder interest at any time) over the trust, then the trust income will be TAXED TO THE GRANTOR of the trust and not to the trust or its beneficiaries

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Taxation of Individuals: location for Miscellaneous revenue items

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1040 Line 21 Other income
added to ordinary income

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Taxation of Individuals: location for medical expenditures

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Schedule A Line 1 Medical and dental expenses
Deductible to the extent that they exceed 7.5% of AGI

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Taxation of Individuals: Interest income

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Schedule B part I
1040 Line 8a Taxable interest
Added to ordinary income

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Taxation of Individuals: Potentially deductible items for a self-employed person including any applicable limitations for meals and entertainment expenses

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Schedule C Part II,
Meals and entertainment are limited to 50%
subtracted from gross business income

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Taxation of Individuals: Alimony received / paid

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Received: 1040 Line 11 Alimony Received
Paid: 1040 Line 31 Alimony Paid
Added (or subtracted) to/from ordinary income

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Taxation of Individuals: Personal casualty losses

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Schedule A Line 20 Casualty or theft loss(es)
carry over to 1040 line 40

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Taxation of Individuals: Nondeductible expenses

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Generally an item is not deductible if any resulting income would not be taxable
(interest expense on loans used to acquire securities that generate tax-exempt investment income, life insurance premiums)

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Taxation of Individuals: Difference between cash and accrual basis

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Income is only included when cash is received and expenses deductible when cash is paid for cash basis taxpayers
Accrual basis taxpayers include income when earned and expenses when incurred, subject to certain exceptions (exam will NOT address those exceptions)