[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for REG.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

[Reg_Slayer]

SE EARNINGS = .9235 OF SE INCOME !!! ?

SE TAX = 15.3%

and the adjustment is only half of what we paid.

[jpowell31]

my internet at work or the Ninja server is just taking AGES now. ughhhhhhhhhh why?? time to rewrite some notes and hopefully still manage to hit my MCQ goal today.

[jonm857]

Summary of “Levels of Fault”

I. “Reasonable Care” (“due care”) is taken = No Negligence = Not liable
a. GAAP and GAAS are guidelines as to what constitutes “reasonable care”.

II. Lack of Reasonable Care = Ordinary Negligence
a. The CPA is liable to anyone he knows or reasonable should expect will rely on his/her work.

III. Lack of Even Slight Care = Gross Negligence or Constructive Fraud
a. The CPA is liable to all people who rely on the F/S, even if he/she does not know or reasonably should not expect such people to rely on the F/S.

IV. Actual Fraud = Actual Intent to Deceive
a. The CPA is liable to all people who rely on the F/S, even if he/she does not know or reasonably should not expect such people to rely on the F/S.

V. Criminal Fraud = Actual Intent to Deceive
a. Levels 1 through 4 are civil in nature. Only level 5 is criminal.

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

This question pisses me off. When you know that a creditor is relying on the f/s, he can sue you for negligence. Here, Beckler did know Mac would be relying on the f/s. So my instinct is that the answer is I only, but that's wrong. It's wrong because Mac can also recover based on gross negligence. But out of the 5 elements of gross negligence, there are only 3 here in the problem:

1) actual and justifiable reliance
2) misrepresentation of a material fact
3) damages

The other 2 elements are missing. There's no reckless action on the part of the CPA and there's intent to induce the reliance, so how the hell can Mac recover based on gross negligence?? All 5 have to be present, right?

———–

Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover?

I. Beckler was negligent in conducting the audit.
II. Mac relied on the financial statements.

a. Both I and II.
b. I only.
c. Neither I nor II.
d. II only.

Explanation
Choice “a” is correct. Although a CPA generally is liable to third parties only for fraud or constructive fraud (gross negligence), where the CPA knows that the third party will be relying on the audit, the CPA can be liable to the third party for mere negligence (the CPA owes the third party a duty of care since the third party is an intended beneficiary of the engagement). An action for gross negligence requires both reliance on a misstatement and negligence.

B - 81
A - 87
R - 73
F - July 5th

[jpowell31]

I think the problem with this question is that both I and II are needed but that doesn't mean more isn't needed….that was a few double negatives…why would you think that only I was right, when your list includes justifiable reliance (which is II)?

[jonm857]

Because there was nothing in the problem that showed Beckler's intent to induce the reliance, and there was no evidence he acted recklessly (the 5th element of gross negligence). I don't understand how many elements a plaintiff has to prove to recover.

Further, the answer says a plaintiff need only prove reliance and negligence in order to recover under “gross negligence”. That doesn't even make sense with the text's definition of gross negligence. The text says gross negligence (aka Constructive Fraud) is:

Misrepresentation of material fact
Actual and justifiable reliance
Intent to induce reliance
Damages
Defendant acted recklessly

B - 81
A - 87
R - 73
F - July 5th

[jpowell31]

yeah I'm not sure about “intent” to induce reliance, but my guess is that because he knew it would be used for a loan, he should assume that the figures were being relied upon. most questions would just state the justifiably relied on piece but I haven't actually seen an example where intent to induce reliance was used. I think that's implied when the CPA knows his stuff will be used to obtain something. it's also assumed he acted recklessly if it resulted in a material misstatement. these are assumptions I make anyway when reading these silly questions.

[jonm857]

I haven't seen one either with “intent to induce”, but what you're saying makes sense. I'll roll with it.

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

And now we are on to securities regulation…..

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

I'm typing this from memory as practice before I start:

section 11 of 1933 act elements:
1) plaintiff acquired the stock
2) suffered a loss
3) there was a material misrepresentation or material ommission

rule 10b-5 of the 1934 act elements:
1) plaintiff acquired the stock
2) suffered a loss
3) there was a material misrepresentation or material ommission
4) scienter
5) justifiable reliance on the misrepresentation
6) use of interstate commerce

B - 81
A - 87
R - 73
F - July 5th

[Reg_Slayer]

The first $50,000 of group term life insurance is NOT TAXABLE !!!

[jonm857]

I'm thinking about changing up my strategy. I may go after business law really hard for the next 5 days, and then switching to tax and go after that for about a week straight. I'll leave the last two days to do progress tests and review notes.

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

This question is real slippery. I think what it boils down to is “what is the best answer”, because under Rule 506 general solicitations are sometimes allowed. I don't think there is enough info in the question to make that conclusion though. Any thoughts?

– – – – –

Kamp is offering $10 million of its securities. Under Rule 506 of Regulation D of the Securities Act of 1933:

a. There must be more than 35 purchasers.
b. Kamp may make a general solicitation in connection with the offering.
c. The securities may be debentures.
d. Kamp must be a corporation.

Explanation

Choice “c” is correct. Under Rule 506 of Regulation D, any type of security, including debentures, of an unlimited amount, may be sold without registration so long as:
There is no general solicitation;
The buyer's right to resell is restricted for two years;
Non-accredited investors are:
Limited in number to 35 investors,
Sophisticated, and
Provided with an audited balance sheet and other financial statements.

Choice “d” is incorrect. Rule 506 is not limited to securities of a corporation.
Choice “a” is a distractor. The “35” limitation is on the number of unaccredited investors.
Choice “b” is incorrect because general solicitation is prohibited under Rule 506.

B - 81
A - 87
R - 73
F - July 5th

[Madam Secretary]

can I take piano lesson and swimming lesson as tuition/education deductible expense?

[jonm857]

@Warrior

My first impression is “no” because these don't look like qualified higher education expenses.

B - 81
A - 87
R - 73
F - July 5th

[Author]

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