1. Question

Access the authoritative literature of the PCAOB Auditing and Interim Standards to address the issue presented in Case 2: Scope Limitations.

Case 2--Scope limitations: In Tom Holstrums audit of the Lander Company, Tom seeks to obtain an attorney representation letter regarding any, undisclosed potential corporate liabilities. John Engle, the Lander Company General Council responded to this letter by citing American Bar Association (ABA) language that emphasizes attorney-client privilege regarding such unasserted claims. E.g., the letter uses such phrases as it would be inappropriate for this firm to respond to such general inquiries and we can not comment upon the adequacy of the companys listing, if any, of unasserted possible claims or assessments. Do such responses constitute limitations in the scope of the audit?

Case 2 Solution:

Problem Identification: Do attorneys citing ABA language about the adequacy or inadequacy of client legal representations impairs the scope of the CPAs audit services?

Keywords: Legal liability, unasserted claims; attorney representation letter.

Conclusion: Use the appropriate AU Section to provide your conclusion for Case 2: Scope limitations

1. Question

The information contained on the IRS site is very interesting and useful. Not only it is a great tool for tax professionals, but it also provides great information for the individual taxpayer that is brave enough to prepare their own returns.

Lets use the IRS's Tax Professionals website to locate Tax Codes, Regulations and Official Guidance. You will have to research the Code using the Internal Revenue Code website to (a) Discuss the Law of When Gross Income is Accrued, (b) Apply the Tax Law of When Gross Income is Accrued and (c) Write a Tax Memo for Case Study: When Gross Income is Accrued.

CASE 2. When Gross Income is Accrued (Basic)

Taxpayer is a securities firm which uses the accrual method of accounting. Taxpayer executes stock trades and performs settlement functions. Settlement functions include recording the sale and confirming it with the customer. Trades made on December 28, 20X5, until the end of the month are not settled until January of 20X6. Taxpayer made $1,000,000 of net commissions from these trades in late December. Since the security is not credited to the customers account until settlement date, taxpayer wants to declare the income on the settlement dates in 20X6. Taxpayer does not receive the money until January 20X6. Advise the taxpayer.

ISSUE: Whether an accrual basis securities firm has gross income under sec. 451(a) on the trading date or the next year on the settlement date when all the work is performed, payment is due, and money received?

CONCLUSION: The trading date is the date for $1,000,000 of gross income from the net commissions on the securities because?

Discussion of the Law: Discuss Gross income under section 61(a)(1), Section 451(a). and Reg. 1.451-1(a).

APPLICATION OF THE LAW: Discuss whether the taxpayers gross income of $1,000,0000 should be included in taxable year 20X5 . As in Charles Schwab Corp v. Commissioner, 107 TC 282 (1996), taxpayers settlement functions were conditions subsequent, so that the settlement date is irrelevant to the determination of gross income.