Certified Public Accountant Case Studies & Practical Application 5

Question 1

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?

Accepted Answer

Withdraw from the engagement and, depending on jurisdiction, consider notifying appropriate authorities

Answer

The CPA should withdraw when the client refuses to correct known fraud; AICPA rules prohibit continued association, and state law may require reporting.

Question 2

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?

Accepted Answer

Theft, recording errors, or unrecorded write-downs causing inventory overstatement

Answer

A book-to-physical shortage suggests inventory is overstated, which could result from theft, spoilage not written off, or fictitious purchase entries.

Question 3

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?

Accepted Answer

$50,000 recognized as capital gain to the extent the distribution exceeds outside basis

Answer

Under IRC §731, cash distributions exceeding a partner's outside basis are taxable as capital gain in the year of distribution.

Question 4

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?

Accepted Answer

$2.5 million goodwill; impaired if book value of reporting unit exceeds its fair value

Answer

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.

Question 5

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?

Accepted Answer

The position must meet the substantial authority standard (approximately 40% or greater likelihood of prevailing)

Answer

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.

Certified Public Accountant Practice Test

Certified Public Accountant Practice Test

Certified Public Accountant Case Studies & Practical Application 5