## Question 1 A mid-sized firm specialising in family law has recently undergone a digital transformation, opting to transition from paper-based to entirely digital client files. This change includes the conversion of historical accounting records to a digital format. The partners want to ensure this digital transition complies with the SRA Accounts Rules 2019, particularly concerning the retention period of these digital accounting records. For how many years must the firm retain its digital accounting records to remain compliant with the SRA Accounts Rules 2019? - A. Two years. - B. Three years. - C. Five years. - D. Six years. - E. Eight years.

Click to reveal answer

The correct answer is D. In alignment with the SRA Accounts Rules 2019, the firm must maintain its digital accounting records for a minimum duration of six years. This retention period ensures the firm can address any financial audits or queries, upholding principles of financial transparency and accountability. Option A is incorrect because two years is significantly less than the mandated retention period, failing to meet the rule's requirements. Option B is incorrect as three years falls short of the six-year minimum retention duration mandated by the SRA Accounts Rules. Option C is incorrect because five years, while closer to the requirement, still does not fulfill the six-year retention period specified by the rules. Option E is incorrect because retaining records for eight years surpasses the minimum requirement. Though this would exceed the SRA’s stipulations, the rules specify a six-year retention period, making this answer incorrect.

## Question 2 Following the successful resolution of a personal injury claim, a solicitor is in the process of distributing the settlement award to the client. The total settlement awarded is £25,000. The solicitor's firm has deducted legal fees of £3,000 plus VAT at 20%, which amounts to £600, thus totaling £3,600 for legal fees and VAT. Additionally, the client had previously paid £200 towards a medical report, which the firm agreed to reimburse from the settlement. The solicitor's firm holds £1,500 of the client's money in their client account, which was an advance payment towards the legal fees. How much should the client receive from the settlement after all deductions, including the reimbursement and the funds already held on account? - A. £23,100. - B. £22,700. - C. £21,600. - D. £20,900. - E. £23,300.

Click to reveal answer

The correct answer is A. The calculation is: settlement of £25,000 less legal fees and VAT of £3,600 gives £21,400; adding the £200 reimbursement for the medical report paid by the client gives £21,600; adding the £1,500 already held on account (returned because the settlement now covers the fees) gives a final amount payable to the client of £23,100. Option B is incorrect because it omits the £200 reimbursement and the £1,500 held on account from the calculation. Option C is incorrect because it reflects the sum after fees and VAT plus the reimbursement but overlooks the £1,500 held on account that must be returned. Option D is incorrect because it significantly underestimates the total amount due to the client after accounting for legal fees, VAT, the reimbursement, and the balance held on account. Option E is incorrect because it overstates the amount payable, reflecting an error in applying the VAT or reimbursement figures.

## Question 3 During a compliance review in preparation for an upcoming SRA inspection, the finance director of the firm discovers an inconsistency in the firm's financial records relating to client account transactions over the past year. The director is aware of the importance of adhering to the SRA Accounts Rules for maintaining the firm's operational integrity and its reputation. In order to rectify the discovered inconsistency and ensure compliance with the SRA Accounts Rules ahead of the inspection, which of the following actions should the finance director prioritize? - A. Inform the SRA of the inconsistency immediately and await further instructions. - B. Conduct an internal audit of all client transactions to identify and rectify any discrepancies. - C. Prepare a detailed report of the inconsistency for review during the SRA inspection. - D. Consult with an external accountant to independently verify the firm's client account records. - E. Brief the firm's partners and suggest ignoring the inconsistency to avoid potential penalties.

Click to reveal answer

The correct answer is B. Conducting an internal audit of all client transactions to identify and rectify any discrepancies is crucial for ensuring compliance with the SRA Accounts Rules, and it directly addresses the issue by seeking to correct the inconsistency within the firm's financial records. Option A is incorrect because while reporting to the SRA is advisable in certain situations, immediate priority should be given to identifying and rectifying the discrepancies internally to comply with the Accounts Rules. Option C is incorrect because merely preparing a report of the inconsistency does not actively address or rectify the underlying issue. Option D is incorrect because, although consulting with an external accountant can be beneficial, the priority should be on conducting an internal review and rectification process as a first step toward compliance. Option E is incorrect because ignoring the inconsistency and potentially misleading the SRA or the firm’s partners is unethical and contrary to the SRA Standards and Regulations, specifically compromising the integrity principle.

## Question 4 During a compliance review, a newly qualified solicitor at a high street firm is evaluating transactions to ensure they align with the SRA Accounts Rules, especially concerning the classification and handling of various payments. The firm has recently handled a diverse range of client transactions, some of which have led to questions regarding the proper categorization of funds. Which one of the following instances should be classified as office money under the SRA Accounts Rules? - A. A £25,000 retainer received from a client for a probate case where work has not yet started. - B. A £2,000 cheque from a client to cover registration fees for a future property transaction. - C. A refund of £500 from the court for fees the firm overpaid from its office account. - D. A £15,000 advance from a client for conveyancing fees and anticipated disbursements. - E. A £4,500 payment from a client to settle a vendor's invoice for document review services.

Click to reveal answer

The correct answer is C. A refund of £500 received from the court, where the firm had overpaid fees from the office account for a client's litigation case, is classified as office money because it represents a reimbursement for monies already expended by the firm from its own funds. This money does not belong to the client but is a recoupment of costs borne by the firm, and therefore, should be credited back to the office account. Option A is incorrect because the £25,000 payment is client money, as it is paid in advance for legal services yet to be rendered, and must be held in the client account until earned. Option B is incorrect because the £2,000, intended to cover registration fees for a property transaction, is client money designated for specific disbursements on behalf of the client and thus should be held in the client account. Option D is incorrect as the £15,000 constitutes client money since it is an advance payment covering legal fees and anticipated disbursements for conveyancing work yet to be provided. Option E is incorrect because the £4,500, earmarked for settling a third-party invoice for services in a client matter, is client money intended for disbursements, and must be handled through the client account.

## Question 5 A law firm registered for VAT has decided to offer a discount on its services to a long-standing client as a goodwill gesture. The discount was agreed after the services were provided but before the invoice was issued. The original fee was £12,000 plus VAT. As a member of the finance team at the firm, you are adjusting the invoice according to VAT accounting rules. How should the discount be treated for VAT purposes when preparing the invoice? - A. Reduce the invoice total by the discount, then calculate VAT on the new, lower amount. - B. Issue an invoice for the full fee, then process a separate refund for the discount plus VAT. - C. Calculate VAT on the full fee, then list the discount on the invoice as a non-VAT item. - D. Charge VAT on the full fee and inform the client that the discount does not reduce the VAT. - E. Invoice the full fee without the discount, then adjust the firm's VAT records later on.

Click to reveal answer

The correct answer is A. The correct method for applying the discount for VAT purposes is to reduce the invoice by the discount amount first and then calculate the VAT on the net, reduced amount. This ensures that VAT is charged accurately based on the actual payment received for the services, reflecting the discount given to the client. Option B is incorrect because issuing the invoice for the full amount and then refunding the discount plus VAT back to the client complicates the transaction unnecessarily and does not provide an accurate reflection of the price agreed upon for the services. Option C is incorrect as it suggests calculating VAT on the original amount without considering the discount. The discount must adjust the taxable amount before VAT calculation to reflect the real transaction value. Option D is incorrect because charging VAT on the original fee without adjusting for the discount does not comply with VAT accounting principles, which require the taxable amount to reflect the actual price paid after discounts. Option E is incorrect as it proposes issuing the invoice without discounts and adjusting VAT records at the end of the financial year, which does not accurately record the transaction at the time of supply and could lead to inaccuracies in VAT accounting.

## Question 6 A newly qualified solicitor in a busy law firm is tasked with managing the accounts of a high-profile construction project that the firm is advising on. During the review, the solicitor notices that an overpayment has been made by the client for services not yet rendered, resulting in excess funds within the firm's business account. According to the Solicitors Regulation Authority (SRA) Accounts Rules, what is the most appropriate action for the solicitor to take? - A. Hold the excess funds in the firm's business account until they have been earned. - B. Move the excess funds to a high-interest savings account to await allocation. - C. Immediately refund the full amount of the overpayment directly to the client. - D. Promptly transfer the excess funds into the firm's designated client account. - E. Apply the excess funds as a credit against the client's future legal invoices.

Click to reveal answer

The correct answer is D. According to the SRA Accounts Rules, the solicitor should transfer the overpayment into the client account as soon as possible to ensure that client money is kept separate from office money and is protected. Option A is incorrect because holding client money in the business account, even temporarily, risks breaching the accounts rules by failing to keep client and office money separate. Option B is incorrect because investing client money into any account other than the client account, especially for the purpose of generating interest for the firm, is against the principles of handling client funds as laid out by the SRA. Option C is incorrect because although refunding the client could be seen as a solution, it may not be the most efficient or preferred method compared to transferring to the client account, where the funds can be more accurately managed against future invoices. Option E is incorrect because using the overpayment to offset future invoices without first placing it into the client account contravenes the SRA’s requirement to keep client funds separate and safeguarded.

## Question 7 During a routine audit at a law firm, a scenario emerged involving the firm's recent interaction with a corporate client concerning a significant property transaction. The client deposited £5,000 into the firm's client account as an advance for various legal fees and disbursements associated with the property deal. Following this, the firm paid £800 (excluding VAT) for a detailed land survey required by the transaction directly from the client account. Considering the VAT rate is 20%, how should the firm record this transaction in its accounts to comply with standard accounting practices for solicitors? - A. Credit the office account and debit the client account. - B. Credit the VAT account and debit the office account. - C. Credit the client account and debit the disbursement account. - D. Credit the disbursement account and debit the client account. - E. Credit the VAT account and debit the disbursement account.

Click to reveal answer

The correct answer is D. When paying a disbursement of £800 (exclusive of VAT) on behalf of a client from the client account, the transaction should be recorded by crediting (decreasing) the client account to reflect the use of client funds and debiting (increasing) the disbursement account to indicate the expense incurred on behalf of the client. The addition of VAT is managed through separate accounting entries concerning VAT obligations. Option A is incorrect because this situation requires managing client funds for a disbursement, not transferring funds between the office and client accounts. Option B is incorrect because the immediate transaction involves paying a disbursement on behalf of the client, not allocating VAT between accounts, which is handled separately. Option C is incorrect because crediting the client account implies adding funds, which contradicts the action of paying out for a disbursement. Option E is incorrect as it relates to managing VAT transactions, which is a separate step not directly linked with the payment of the disbursement from the client account.

## Question 8 A law firm is holding a considerable sum on behalf of a client for a property transaction. The client's money has been deposited into a client account that accrues interest. The firm has noticed that the interest rates have risen since the initial deposit. Following the SRA Accounts Rules, how should the firm proceed with the accrued interest to ensure compliance? - A. Keep all accrued interest, as any amount earned on the client account belongs to the firm. - B. Inform the client about the accrued interest and await their specific instructions for it. - C. Calculate and pay the accrued interest to the client after deducting a firm handling fee. - D. Calculate interest for the client using the original deposit rate to avoid complexity. - E. Calculate and pay the client a fair sum of interest that reflects current market rates.

Click to reveal answer

The correct answer is E. According to the SRA Accounts Rules, firms must ensure that money held on behalf of clients is treated fairly in terms of interest. When interest rates rise, solicitors should ensure that the interest credited to the client accurately reflects these changes, aligning with market rates and without deductions for firm fees. Option A is incorrect because the interest earned on client money does not automatically belong to the firm; it must be handled in a way that is fair to the client, reflecting the interest that the money would have earned had it been held in an account beneficial to the client. Option B is incorrect as while communicating with clients is important, the SRA Rules stipulate that clients should be paid a fair sum of interest without needing to ask for instructions on every occasion that rates change. Option C is incorrect because the SRA Accounts Rules require that a fair sum of interest is paid to the client without deductions for handling fees by the firm. Option D is incorrect because maintaining the initial interest rate when the market rates have increased does not reflect the fairness principle outlined in the SRA Accounts Rules.

## Question 9 During a regular audit of the law firm's finances, a senior legal accountant discovers a £5,000 transaction that was mistakenly recorded as office money, when in fact it was a client deposit for a property transaction. The accountant understands the critical nature of adhering to the SRA Accounts Rules concerning the handling of client money. What is the most appropriate course of action for the accountant to correct the error and ensure compliance with the SRA Accounts Rules? - A. Record a debit entry for the amount in the office account column of the office ledger. - B. Transfer the funds to the client account and record a credit entry in the client ledger. - C. Make no change to the entry but note the error in the firm's reconciliation report. - D. Make a debit entry for the amount in the client account column of the office ledger. - E. Withdraw the funds as cash and deposit them into the client account without a record.

Click to reveal answer

The correct answer is B. The accountant should transfer the £5,000 to the Client Account and make a corresponding credit entry in the Client Account column of the Client Ledger. This ensures that the client funds are correctly positioned within the Client Account, and the records accurately reflect the transaction in compliance with the SRA Accounts Rules, which stipulate clear and accurate accounting of client money separately from office funds. Option A is incorrect because simply making a debit in the Office Account does not address the misplacement of client funds nor does it ensure their correct categorisation and separation according to the SRA Accounts Rules. Option C is incorrect because leaving the entry as is and merely noting the mistake does not rectify the breach of SRA Accounts Rules regarding the segregation and correct recording of client money. Option D is incorrect because making a debit entry in the Client Account column of the Office Ledger does not correct the initial misclassification of the funds; it exacerbates the issue by further misrecording the transaction. Option E is incorrect because physically handling the misallocated funds in such a manner bypasses the formal accounting processes and does not provide an auditable trail for the transaction, thereby failing to meet SRA Accounts Rules on transparency and accuracy in handling client money.

## Question 10 A solicitor has recently received a sum of £2,500 from a client. This sum includes £1,500 for disbursements that the solicitor will pay on behalf of the client related to event licensing and a £1,000 advance on legal fees for contract negotiations with vendors. According to the SRA's guidelines on the handling of funds, how should the solicitor record this transaction in the firm's accounts? - A. Record the £2,500 as a single, undifferentiated entry in the client ledger until the work has been completed. - B. Record £1,500 as business money for upcoming disbursements and £1,000 as office money for the advance on fees. - C. Record £1,500 as client money for disbursements and £1,000 as business money representing advance fees. - D. Allocate £1,500 as office money immediately to cover anticipated disbursements and £1,000 as client money. - E. Record £1,500 and £1,000 as client money since neither disbursements nor fees have yet been incurred or earned.

Click to reveal answer

The correct answer is E. The £1,500 designated for disbursements must be treated as client money because these are costs that have not yet been incurred on behalf of the client. Similarly, the £1,000 advance on legal fees must also be classified as client money until the services are rendered and billed, following the Solicitors Regulation Authority's regulations concerning the separation and handling of client and business funds. Option A is incorrect because it fails to differentiate between the nature of the different sums within the total amount, which is critical for proper compliance with SRA standards. Option B is incorrect because it misclassifies the £1,000 advance on fees as office money when it has not yet been earned and therefore should remain as client money. Option C is incorrect because it classifies the advance on fees as business money, which conflicts with the principle that client money should be used for client-specific expenses or kept secure until fees are earned. Option D is incorrect as it improperly allocates anticipated disbursements as office money instantly, which breaches the protocol of keeping client money separate until actual disbursements are incurred.

SQE1 FLK2 Solicitors Accounts Sample Questions July 2024