A newly acquired$$ client, who carries on a business as a sole$$ proprietor, brings a list of business expenses to his accountant. The client also provides the accountant with a dollar amount of the total revenue. He instructs his accountant to prepare an income statement and income tax return based on this information. The accountant has a quick look at the expenses. The expenses seem to be consistent with the type of business of the client and nothing stands out as unreasonable. After the$$ client's income statement is$$ prepared, it reflects $ $80,000$ of revenue and $ $55,000$ of$$ expenses, and the income tax return is filed on that basis.

Upon$$ audit, the CRA finds a large proportion of the expenses claimed cannot be substantiated by adequate documentation and may not have been incurred.$$ Furthermore, the reported revenue is only half of the actual revenue.

A$.$

The auditor should not have dug any deeper than the accountant did. Having done$$ this, the auditor could be subject to reprimands and penalties.

B$.$

In light of the$$ taxpayer's business, there was nothing in the income statement that would have made the accountant question the validity of the information provided.$$ Therefore, the accountant could rely on the good faith reliance exception and would not be subject to the preparer penalty.

C$.$

The accountant should have made up a reason to question the validity of the information provided.$$ Therefore, the accountant cannot rely on the good faith reliance exception and could be subject to the preparer penalty.

D$.$

The accountant has a responsibility to look deeper into the expenses to determine whether there were irregularities. Since the accountant did not perform due$$ diligence, the accountant is subject to the preparer penalty.