CPA Regulation Reg Quiz: Ethical And Professional Responsibilities

What this quiz covers

This quiz focuses on Ethical And Professional Responsibilities, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Regulation Reg.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. The position must have at least a 50% probability of being sustained (more likely than not standard).
2. The position must have a realistic possibility of being sustained on the merits (generally interpreted as at least one-in-three or greater chance), or the position must be disclosed on the return if it meets only the not-frivolous standard. (correct answer)
3. Any position may be taken as long as the taxpayer is willing to pay any resulting tax and penalties.
4. The CPA must obtain written authorization from the IRS before taking any uncertain position.

Explanation: Under AICPA SSTS No. 1 and Circular 230, a practitioner may recommend a return position if the position has a 'realistic possibility of being sustained on its merits' (generally interpreted as approximately a one-in-three or greater chance of success). If the position does not meet this standard but is not frivolous, it may be taken if adequately disclosed on the return. A 20% probability may not meet the realistic possibility standard, requiring disclosure. Answer A (50% or more likely than not) is a higher standard used for opinions, not the minimum for return positions. Answer C has no support in professional standards. Answer D is incorrect because IRS pre-approval is not required.

Question 2

1. Representing a client in a tax matter where the practitioner disagrees with the client's position.
2. Charging a fee that the client considers too high.
3. Willfully failing to file a required tax return for a client, providing false information to the IRS, or soliciting employment through in-person visits to prospective clients who have not sought the practitioner's advice. (correct answer)
4. Taking a legitimate tax position that is ultimately rejected by the IRS.

Explanation: Circular 230 Section 10.51 lists disreputable conduct that can result in censure, suspension, or disbarment. Examples include: willfully failing to file required tax returns, providing false or misleading information to the IRS, willfully evading tax, charging unconscionable fees, and improper solicitation such as in-person uninvited contact with potential clients. Answer A is incorrect because disagreeing with a client's position is not disreputable - the practitioner should advise the client of their views. Answer B is incorrect because charging a fee a client considers high (without it being unconscionable) is not specifically prohibited. Answer D is incorrect because taking a legitimate position that is later rejected is not disreputable.

Question 3

1. When a third party asks the CPA for the information.
2. When the CPA believes disclosure would benefit the client.
3. When requested to do so by another CPA firm conducting a peer review.
4. When required by a valid court order, subpoena, or applicable law. (correct answer)

Explanation: Under the AICPA Code of Professional Conduct Rule 301, a CPA may not disclose confidential client information without the consent of the client, except in certain circumstances including: compliance with a validly issued and enforceable subpoena or summons, ethical requirements such as responding to a state CPA licensing board, complying with applicable laws, and cooperating with authorized quality or peer review programs. Answer A is incorrect because a third-party request alone does not override confidentiality. Answer B is incorrect because the CPA's belief about client benefit is not sufficient. Answer C describes a peer review exception that may apply under specific programs but is not the primary mandatory disclosure scenario.

Question 4

1. The practitioner must reasonably believe they can provide competent and diligent representation to each affected client, and each client must give written informed consent after full disclosure of the conflict. (correct answer)
2. The practitioner must withdraw from representing one client immediately.
3. The practitioner may continue representing both clients without disclosure as long as the representation is competent.
4. The practitioner must refer the matter to a colleague and cease representation of both clients.

Explanation: Under Circular 230 Section 10.29, a practitioner may represent a client when a conflict of interest exists if: (1) the practitioner reasonably believes they can provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; and (3) each affected client gives informed written consent. Without these conditions, the practitioner must decline or withdraw from the representation. Answer B is too absolute; the conflict does not automatically require withdrawal if consent is obtained. Answer C is incorrect because disclosure and consent are required. Answer D is too extreme; withdrawal of both is not automatically required.

Question 5

1. The CPA must promptly inform the client of the error, advise the client of the relevant corrective steps (such as filing an amended return), and may not file a corrected return or contact the IRS on the client's behalf without the client's consent. (correct answer)
2. The CPA must immediately file an amended return on the client's behalf.
3. The CPA must report the error directly to the IRS without first consulting the client.
4. The CPA has no obligation to inform the client of errors discovered on prior returns.

Explanation: Under AICPA SSTS No. 6 (Knowledge of Error: Return Preparation and Administrative Proceedings), when a CPA discovers an error in a client's previously filed return, the CPA has an obligation to: (1) promptly notify the client, (2) recommend corrective measures (such as filing an amended return), and (3) advise the client of the potential consequences of not correcting the error. However, the CPA may not unilaterally file an amended return or contact the IRS without the client's authorization. If the client refuses to correct the error, the CPA should consider whether to continue the representation. Answer B is incorrect because the CPA cannot act without client consent. Answer C is incorrect because there is no general duty to report to the IRS without client consent. Answer D is incorrect because notification to the client is required.

Question 6

1. A practitioner must provide all client records to the IRS immediately upon any written request.
2. A practitioner must return all documents and records that belong to the client within a reasonable time after the engagement is completed or terminated, even if fees are owed, with limited exceptions. (correct answer)
3. A practitioner may withhold all client records as leverage until outstanding fees are paid.
4. A practitioner has no obligation to return client records after the engagement ends.

Explanation: Under Circular 230 Section 10.28, a practitioner must promptly return all records of the client that are necessary for the client to comply with their tax obligations upon the client's request, even if the practitioner is owed fees and even if there is a dispute. The practitioner may retain copies but must return the originals. Some states allow a retaining lien on certain work product, but Circular 230 requires the return of records needed for the client's tax compliance. Answer A incorrectly overrides privilege rights. Answer C is incorrect because withholding necessary client records is prohibited. Answer D is incorrect because the obligation to return records exists.

Question 7

1. The position must be 100% correct.
2. The position must have more than a 50% chance of being sustained.
3. The position must be disclosed on the return regardless of its probability of success.
4. The position must meet the 'substantial authority' standard (greater than roughly 40% chance of success), or if disclosed on the return, must have a reasonable basis (greater than roughly 20% chance of success). (correct answer)

Explanation: Under Section 6694(a), a tax return preparer is subject to a penalty if the position does not meet the 'substantial authority' standard. If the position is disclosed on Schedule UTP or otherwise, the lesser 'reasonable basis' standard applies. Substantial authority is generally interpreted as a roughly 40% or greater chance of success; reasonable basis is approximately 20% or greater. The more-likely-than-not (over 50%) standard applies to tax shelters and reportable transactions. Answer A is incorrect; certainty is not required. Answer B (50%) is the more-likely-than-not standard for tax shelters. Answer C alone (disclosure) is not sufficient if the position lacks reasonable basis.

Question 8

1. Written advice must be based on reasonable factual and legal assumptions, must identify and consider all relevant facts, must not be based on unreasonable factual or legal assumptions, and must not rely on representations of the taxpayer unless the practitioner reasonably believes them. (correct answer)
2. Written advice on a federal tax matter must be signed by a partner of the firm.
3. Written advice on a federal tax matter requires IRS pre-clearance before being issued.
4. The written advice standards under Section 10.37 apply only to transactions involving amounts over $1 million.

Explanation: Under Circular 230 Section 10.37, the written advice standard requires that a practitioner: (1) base written advice on reasonable factual and legal assumptions; (2) use reasonable efforts to identify and ascertain relevant facts; (3) not rely on representations of the taxpayer or others that the practitioner knows or should know are incorrect, unreasonable, or incomplete; (4) consider all relevant facts and applicable law; and (5) not give greater weight to the possibility that the position will not be examined than to the technical merits of the position. Answer A is correct. Answer B is incorrect because no specific signatory requirement (such as a partner signature) is mandated by Circular 230. Answer C is incorrect because IRS pre-clearance is not required for written advice. Answer D is incorrect because the Section 10.37 standards apply to written advice regardless of the transaction amount.

Question 9

1. Always recommend the most aggressive tax position to maximize the client's benefit.
2. Refuse to advise the client until the law is clarified by the courts or IRS.
3. Advise the client of the relevant uncertainty, the potential consequences of taking various positions, and the applicable standards for tax return positions, allowing the client to make an informed decision. (correct answer)
4. Recommend a conservative position only to minimize risk of IRS audit.

Explanation: AICPA SSTS No. 3 (Certain Procedural Aspects of Preparing Returns) and SSTS No. 1 address advising on uncertain positions. When the law is unclear, the CPA should identify the uncertainty, explain the potential consequences of different positions, advise the client of the standards that must be met for a position to be recommended, and let the client make an informed decision. The CPA's role is to advise, not to unilaterally choose between aggressive and conservative positions. Answer A ignores the client's risk tolerance and professional standards. Answer B is impractical and not required. Answer D reflects only the preparer's risk preferences, not the client's situation.

Question 10

1. Practitioners may not advertise their tax services in any media.
2. Practitioners may advertise in all media but must charge the same fee to all clients.
3. Practitioners may not use testimonials or endorsements in advertising.
4. Practitioners may not use false, fraudulent, misleading, deceptive, or unfair statements in advertising or solicitation; solicitation - including in-person solicitation - is prohibited when it is false, misleading, coercive, or otherwise violates applicable law or professional rules, but is not categorically banned. (correct answer)

Explanation: Circular 230 Section 10.30 prohibits practitioners from using advertising or solicitation that contains false, fraudulent, misleading, deceptive, or unfair statements. Solicitation - including in-person solicitation - is not categorically banned; rather, it is prohibited when it is false, misleading, coercive, or otherwise violates applicable law or professional rules. Practitioners may truthfully advertise their services and may respond to inquiries from prospective clients. Answer D is correct. Answer A is incorrect because advertising is permitted when truthful and not misleading. Answer B is incorrect because there is no uniform fee requirement under Circular 230. Answer C is incorrect because testimonials and endorsements are not categorically banned; they must simply not be false or misleading.

Question 11

1. Maintain independence in all professional relationships, regardless of the type of service.
2. Report all financial irregularities discovered during an engagement.
3. Be impartial, intellectually honest, and free from conflicts of interest; not subordinating professional judgment to the interests of the client, employer, or third parties. (correct answer)
4. Accept only engagements for which the CPA has extensive prior experience.

Explanation: The objectivity principle requires CPAs to be impartial and intellectually honest, free from conflicts of interest that could bias their professional judgment, and not to allow bias, conflict of interest, or undue influence of others to override their professional judgment. Objectivity applies to all CPAs in all engagements, not just attest services. Answer A describes independence, which is a specific and more formal requirement primarily for attest services. Answer B describes a reporting obligation that exists in some contexts but is not the objectivity principle. Answer D describes an aspect of competence.

Question 12

1. The CPA must independently verify all information provided by the client through third-party sources.
2. The CPA must refuse to prepare the return until the client provides documented proof of all items.
3. The CPA may generally rely on information provided by the client without audit-type verification, but must make reasonable inquiries when the information appears incorrect, inconsistent, or incomplete.
4. The CPA must independently verify all items that exceed $10,000. (correct answer)

Explanation: Under AICPA SSTS No. 3, a CPA preparing a tax return may generally rely on information provided by the client without independently verifying it. The CPA is not required to conduct an audit-like verification of all items. However, the CPA must make reasonable inquiries when client-provided information appears incorrect, inconsistent, or incomplete, and should not knowingly use incorrect information. Answer A is incorrect because independent verification of all information is not required. Answer B is incorrect because documented proof for all items is not required. Answer D is incorrect because no specific dollar threshold triggers an independent verification requirement.

Question 13

1. The practitioner may be censured (public reprimand), suspended from practice before the IRS for a period, or disbarred (permanently prohibited) from practice before the IRS. (correct answer)
2. The practitioner receives only a private warning for the first offense.
3. The practitioner is subject to a mandatory $5,000 fine.
4. The practitioner's PTIN is automatically revoked without a hearing.

Explanation: Under Circular 230, the Office of Professional Responsibility (OPR) may impose the following sanctions on practitioners who engage in disreputable conduct: (1) censure - a public reprimand; (2) suspension - a temporary prohibition from practicing before the IRS; or (3) disbarment - a permanent prohibition. Practitioners are entitled to due process, including notice and a hearing before an administrative law judge. Answer B is incorrect because censure, not a private warning, is the lightest formal sanction, and repeat offenses may result in suspension or disbarment. Answer C is incorrect because there is no mandatory $5,000 fine under Circular 230 (though monetary penalties exist under Section 6694). Answer D is incorrect because PTIN revocation requires due process.

Question 14

1. A CPA must maintain independence in both fact and appearance in all professional engagements.
2. A CPA must observe professional and technical standards, continually improve competence, and discharge professional responsibilities with diligence and thoroughness. (correct answer)
3. A CPA must act in a manner consistent with the public interest and not place client interests above all others.
4. A CPA must maintain confidentiality of all client information in perpetuity.

Explanation: The due care principle in the AICPA Code requires members to observe applicable technical and ethical standards, to continuously develop their competence and knowledge, and to discharge all professional responsibilities with thoroughness and diligence. Due care encompasses both technical competence and the diligence with which work is performed. Answer A describes the independence principle. Answer C describes the responsibilities principle and public interest. Answer D describes an aspect of the confidentiality principle.

Question 15

1. The arrangement is permitted because the former IRS agent is no longer a government employee.
2. The arrangement is permitted as long as the referring fee is disclosed to clients.
3. The arrangement is permitted only if the former agent is also licensed as a practitioner.
4. The practitioner must be cautious: Circular 230 restricts fee-splitting arrangements, and former IRS employees are subject to post-employment restrictions that may prohibit them from receiving referral fees related to IRS matters they were involved with during their government service. (correct answer)

Explanation: Circular 230 Section 10.27 restricts fee splitting and referral fee arrangements in certain contexts. Additionally, former government employees are subject to Section 10.25, which imposes post-employment restrictions: a former government employee may not represent a client in a matter in which they personally and substantially participated as a government employee, and broader restrictions apply to matters within the official's responsibility during their last year of service. Receiving a referral fee from matters they were personally involved with could violate these restrictions. Answer A oversimplifies by ignoring post-employment restrictions. Answer B is incorrect because disclosure alone may not cure the restriction. Answer C is incorrect because licensure does not eliminate post-employment ethics restrictions.

Question 16

1. The CPA prepares the financial statements for a non-attest client.
2. The CPA has a direct financial interest in the attest client, such as owning shares of the client's stock. (correct answer)
3. The CPA receives fees from an attest client that represent more than 10% of the CPA firm's total revenues.
4. The CPA has a social relationship with an officer of the attest client.

Explanation: Under the AICPA Code of Professional Conduct (ET Section 1.240), a CPA's independence is impaired when they have a direct financial interest in an attest client, such as owning the client's stock. This is because the CPA has a financial stake in the client's reported results, which could compromise their objectivity. Answer A is incorrect because preparing financial statements for a non-attest client does not impair independence (though it may raise independence questions for attest clients). Answer C is incorrect because fee dependency may raise independence concerns but is not a per se impairment under the rules (the 15% or more threshold under SEC rules is more relevant for public companies). Answer D is incorrect because a social relationship alone does not automatically impair independence.

Question 17

1. Contingent fees are permitted for all tax services without restriction.
2. Contingent fees are prohibited for all accounting and tax services.
3. Contingent fees are permitted for all services except audits.
4. Contingent fees are generally prohibited for preparing original tax returns or amended returns, but are permitted for tax matters that are subject to the IRS examination or appeals process where the outcome is uncertain. (correct answer)

Explanation: Under AICPA Ethics Rule 1.510.001, a CPA in public practice shall not perform for a contingent fee any professional services for a client for whom the CPA also performs attest services. Additionally, contingent fee arrangements for preparation of an original return or an amended return when the original return was not filed are prohibited. However, contingent fees are permissible for representing clients in IRS examinations, appeals, and proceedings where the fee is contingent on the outcome. Answer A is incorrect because significant restrictions apply. Answer B is too broad; contingent fees are permitted in some contexts. Answer C is not the correct statement of the rule.

Question 18

1. A CPA must not allow pressures from an employer, client, or third party to cause the CPA to subordinate their professional judgment to others or to sign off on work that does not meet professional standards. (correct answer)
2. A CPA must always follow the instructions of the client or employer, even if it conflicts with professional standards.
3. A CPA may subordinate their judgment to a partner or supervisor in the firm.
4. Subordination of judgment is permitted if the CPA is compensated adequately for taking on the risk.

Explanation: The integrity and objectivity principles in the AICPA Code require that CPAs not subordinate their professional judgment to the preferences of employers, clients, or other interested parties. A CPA who is pressured to sign off on incorrect information, approve misleading financial statements, or take positions that violate professional standards must refuse to do so, even at the risk of losing the client or job. Answer B is incorrect because professional standards override client or employer preferences in cases of conflict. Answer C is incorrect because even partners and supervisors cannot require a CPA to violate professional standards. Answer D is incorrect because compensation does not justify subordination of judgment.

Question 19

1. A practitioner must have the legal, technical, and ethical competence necessary to provide the services undertaken, including keeping current with changes in tax law, and may not act incompetently or negligently in representing clients. (correct answer)
2. A practitioner must pass a competency examination each year to maintain their license.
3. A practitioner must be competent only in federal income tax matters and may be ignorant of other tax laws.
4. Competence is satisfied as long as the practitioner has practiced for at least five years.

Explanation: Circular 230 Section 10.35 (and competence-related provisions) requires that practitioners only provide competent representation, which means having the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the representation. This includes keeping reasonably current with relevant legal developments. Answer B is incorrect because no annual competency exam is required (though CPE is required for many practitioners). Answer C is incorrect because competence encompasses all relevant areas of tax law applicable to the client's situation. Answer D is incorrect because years of practice alone do not establish competence for all matters.

Question 20

1. A CPA must be technically proficient in all areas of practice.
2. A CPA must maintain objectivity and independence in all engagements.
3. A CPA must be honest and candid in all professional and business relationships, avoiding subordination of professional judgment and not knowingly misrepresenting facts or subordinating one's judgment to others. (correct answer)
4. A CPA must serve the public interest above the interest of their employer.

Explanation: The integrity principle in the AICPA Code requires members to be honest and candid within the constraints of client confidentiality. It requires avoiding subordinating professional judgment, not knowingly making misrepresentations of fact or opinion, and maintaining honesty in all professional relationships. Answer A describes competence. Answer B describes the objectivity and independence principles. Answer D is closer to the public interest principle but does not specifically describe integrity.