Question 1. You have decided to prepare tax returns for individuals and businesses. Discussing your decision with a friend, who is also a tax preparer, she asks if you have prepared an engagement letter to be distributed to your clients.
Perform an Internet search on "tax preparer engagement letters" or "engagement letters" (then focus on those for tax preparers).
What protections do these engagement letters offer tax preparers and/or their clients? How would you, the tax preparer, be impacted if your client informs you that they had $4,800 of deductible contributions but could not produce supporting documentation and then they are audited by the IRS and told that the $2,300 has been disallowed?
Will you use an engagement letter when preparing tax returns for a fee? Why or why not?
Question 2. You are the head accountant at Wazzu Company. One of your main duties is verifying the existence of the fixed asset accounts. There has been increased employee turnover in several departments which are the custodians of these fixed assets. Due to this, you are especially concerned about the acquisitions and dispositions of all fixed asset transactions.
Based on these factors, how would you go about ensuring the existence of all fixed assets, and that they are accounted for properly on the books of the company? Explain your reasoning using at least one example.
Question 3. Why does lowering a company's cost of capital increase overall firm value? If a company is financed with all equity, how might substituting some debt for equity impact the cost of capital?