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.