Case Studies & Practical Application Flashcards
7 cards from real Certified Public Accountant practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Case Studies & Practical Application flashcards as text
A CPA discovers during a tax engagement that a client has been skimming cash receipts for three years. The client confesses privately and refuses to correct the returns or notify the IRS. What should the CPA do?
Answer: Withdraw from the engagement and, depending on jurisdiction, consider notifying appropriate authorities
The CPA should withdraw when the client refuses to correct known fraud; AICPA rules prohibit continued association, and state law may require reporting.
A retail client uses a perpetual inventory system. The physical count at year-end shows inventory 8% lower than the book balance. What is the most likely audit risk the CPA should investigate?
Answer: Theft, recording errors, or unrecorded write-downs causing inventory overstatement
A book-to-physical shortage suggests inventory is overstated, which could result from theft, spoilage not written off, or fictitious purchase entries.
A partner in a general partnership has an outside basis of $0 and receives a $50,000 cash distribution from the partnership. The partnership has no liabilities. What is the tax consequence to the partner?
Answer: $50,000 recognized as capital gain to the extent the distribution exceeds outside basis
Under IRC §731, cash distributions exceeding a partner's outside basis are taxable as capital gain in the year of distribution.
A company acquires 100% of a subsidiary for $10 million. The fair value of net identifiable assets is $7.5 million. What amount is recorded as goodwill, and under what circumstances would it later be impaired?
Answer: $2.5 million goodwill; impaired if book value of reporting unit exceeds its fair value
Goodwill equals the acquisition price minus the fair value of net identifiable assets ($10M − $7.5M = $2.5M); under ASC 350, impairment occurs when a reporting unit's carrying value exceeds its fair value.
A CPA's client receives an IRS notice proposing a $40,000 adjustment due to a disallowed deduction. The CPA believes the position is defensible but was not disclosed on the return. What standard governs whether the original position was appropriate?
Answer: The position must meet the substantial authority standard (approximately 40% or greater likelihood of prevailing)
For non-disclosed positions, IRC §6694 and AICPA standards require substantial authority (roughly a 40% or greater chance of being sustained) to avoid preparer penalties.
A CPA is performing a financial statement audit and identifies a material weakness in internal controls over financial reporting. What is required in the audit report for a nonpublic company?
Answer: The CPA must communicate the material weakness in writing to management and those charged with governance
AU-C 265 requires auditors to communicate material weaknesses in writing to management and those charged with governance; a separate ICFR opinion is required only for public companies.
A calendar-year S corporation has a built-in gain of $600,000 on appreciated assets held when it converted from C corporation status five years ago. The corporation sells those assets this year. What is the tax treatment?
Answer: The gain is subject to the built-in gains tax at the highest corporate rate (21%) at the entity level
Under IRC §1374, built-in gains recognized within the 5-year recognition period are subject to the corporate tax rate (21%) at the S corporation level, in addition to shareholder-level tax on the pass-through.