Becker Professional Review
2K5 Exported Questions
2K5 Exported Questions–Regulation 7
Export Date: 7/11/2005
1
2K5 Exported Questions
Becker Professional Review
Agency
CPA-01299
Type1 M/C
1. CPA-01299 Lw R02 #5
A-D
Corr Ans: C
PM
R 7-01
Page 12
Lee repairs high-speed looms for Sew Corp., a clothing manufacturer. Which of the following
circumstances best indicates that Lee is an employee of Sew and not an independent
contractor?
a.
b.
c.
d.
Lee's work is not supervised by Sew personnel.
Lee's tools are owned by Lee.
Lee is paid weekly by Sew.
Lee's work requires a high degree of technical skill.
CPA-01299
Explanation
Choice "c" is correct. A clear example of an employee is one who works full time for the
employer, uses the employer's tools, is compensated on a time basis, and is subject to
supervision of the employer in the details of the work. A clear example of an independent
contractor is one who has a calling of his own, who uses his own tools, is hired for a particular
job, is paid a given amount for the job, and follows his own discretion. Thus, payment on a
weekly basis is an indication that a person is an employee rather than an independent contractor.
Choice "a" is incorrect. If Lee's work is not supervised by Sew's personnel, per the above, that
would be an indication of independent contractor status.
Choice "b" is incorrect. Per the above, Lee's ownership of his own tools would indicate that he is
an independent contractor.
Choice "d" is incorrect. Work that requires a high degree of skill might be considered a calling or
might be difficult to supervise. In any case, it would be indicative of independent contractor
status.
CPA-01303
Type1 M/C
2. CPA-01303 Lw R02 #6
A-D
Corr Ans: C
PM
R 7-01
Page 4
Blue, a used car dealer, appointed Gage as an agent to sell Blue's cars. Gage was authorized by
Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a sub-agent.
To whom does Vond owe a fiduciary duty?
a.
b.
c.
d.
Gage only.
Blue only.
Both Blue and Gage.
Neither Blue nor Gage.
CPA-01303
Explanation
Choice "c" is correct. A subagent is one who assists the agent in the performance of his or her
duties. When a subagent is appointed by an agent with authority to appoint a subagent, the
subagent owes a duty to both the agent and the principal. Thus, choices "a", "b", and "d" are
incorrect.
CPA-01304
Type1 M/C
3. CPA-01304 Lw R01 #3
A-D
Corr Ans: A
PM
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Page 4
Which of the following is(are) available to a principal when an agent fraudulently breaches a
fiduciary duty?
a.
b.
c.
Termination of the agency
Yes
Yes
No
Constructive trust
Yes
No
Yes
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Becker Professional Review
d.
2K5 Exported Questions
No
No
CPA-01304
Explanation
Choice "a" is correct. If an agent breaches her fiduciary duty, the principal can terminate the
agency and receive the remedy of a constructive trust to ensure that the principal can recover
secret profits obtained by the agent because of the wrongful conduct.
CPA-01307
Type1 M/C
4. CPA-01307 Lw R99 #4
A-D
Corr Ans: C
PM
R 7-01
Page 5
Which of the following statements is(are) correct regarding the relationship between an agent and
a nondisclosed principal?
I.
The principal is required to indemnify the agent for any contract entered into by the agent
within the scope of the agency agreement.
II. The agent has the same actual authority as if the principal had been disclosed.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01307
Explanation
Choice "c" is correct. A principal owes her agent the duty of indemnification, which is a type of
reimbursement for costs and liabilities incurred by the agent as a result of authorized acts on
behalf of the principal.
Actual authority is the authority that the agent reasonably believes she possesses because of the
principal's communications to the agent. The agent has the same actual authority whether the
principal is disclosed or undisclosed.
CPA-01309
Type1 M/C
5. CPA-01309 Lw R96 #3
A-D
Corr Ans: C
PM
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Page 5
Which of the following statements represent(s) a principal's duty to an agent who works on a
commission basis?
I.
II.
a.
b.
c.
d.
The principal is required to maintain pertinent records, account to the agent, and pay the
agent according to the terms of their agreement.
The principal is required to reimburse the agent for all authorized expenses incurred unless
the agreement calls for the agent to pay expenses out of the commission.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01309
Explanation
Choice "c" is correct. A principal is required to pay its commissioned agent as agreed and thus
must maintain sufficient records in order to do so. Therefore, statement I is true. Statement II is
also true. Generally, a principal must indemnify an agent for all expenses the agent reasonably
incurs on the principal's behalf unless the parties have agreed otherwise.
CPA-01311
Type1 M/C
A-D
Corr Ans: D
PM
CQ #1
R 7-01
6. CPA-01311 Lw May 95 #6 Page 3
Trent was retained, in writing, to act as Post's agent for the sale of Post's memorabilia collection.
Which of the following statements is correct?
I.
To be an agent, Trent must be at least 21 years of age.
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II. Post would be liable to Trent if the collection was destroyed before Trent found a purchaser.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01311
Explanation
Choice "d" is correct. I is incorrect because while a principal must have capacity, an agent need
not have capacity; a minor may serve as an agent. II is incorrect because destruction of the
subject matter of the agency constitutes a change in circumstances that will terminate the
agency.
CPA-01312
Type1 M/C
A-D
Corr Ans: C
PM
R 7-01
7. CPA-01312 Lw May 95 #7 Page 7
Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to
place purchase orders with Ogden's suppliers. Thorp placed an order with Datz, Inc. on Ogden's
behalf after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of
Ogden's incapacity. Which of the following statements is correct concerning Ogden's liability to
Datz?
a. Ogden will be liable because Datz was not informed of Ogden's incapacity.
b. Ogden will be liable because Thorp acted with express authority.
c. Ogden will not be liable because Thorp's agency ended when Ogden was declared
incompetent.
d. Ogden will not be liable because Ogden was a nondisclosed principal.
CPA-01312
Explanation
Choice "c" is correct. An agency is terminated by operation of law upon the incapacity of the
principal; no notice is needed.
Choice "a" is incorrect. An agency is terminated by operation of law upon the incapacity of the
principal; notice to the third party with whom the agent deals is not necessary.
Choice "b" is incorrect. An agent's authority is terminated by operation of law upon the incapacity
of the principal regardless of whether the authority was express, implied, or apparent.
Choice "d" is incorrect. Ogden will not be liable because of the incapacity; Ogden's status as a
disclosed vs. undisclosed principal is irrelevant.
CPA-01313
Type1 M/C
A-D
Corr Ans: B
PM
CQ #2
R 7-01
8. CPA-01313 Lw May 95 #8 Page 10
When a valid contract is entered into by an agent on the principal's behalf, in a non-disclosed
principal situation, which of the following statements concerning the principal's liability is correct?
a.
b.
c.
d.
The principal may
be held liable
once disclosed
Yes
Yes
No
No
The principal
must ratify
the contract to
be held liable
Yes
No
Yes
No
CPA-01313
Explanation
Choice "b" is correct. Once disclosed, an undisclosed principal can be held liable on a contract
made on the principal's behalf by an agent if the agent had authority. There is no need to ratify;
indeed an undisclosed principal can never ratify because a principal can ratify only when a
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2K5 Exported Questions
person represents that he is an agent acting with authority on the principal's behalf when in fact
the person lacks authority. When a principal is undisclosed, there is no representation of agency
and so a prerequisite for ratification is missing.
CPA-01314
Type1 M/C
A-D
Corr Ans: B
PM
R 7-01
9. CPA-01314 Lw May 95 #9 Page 4
Young Corp. hired Wilson as a sales representative for six months at a salary of $5,000 per
month plus 6% of sales. Which of the following statements is correct?
a. Young does not have the power to dismiss Wilson during the six-month period without cause.
b. Wilson is obligated to act solely in Young's interest in matters concerning Young's business.
c. The agreement between Young and Wilson is not enforceable unless it is in writing and
signed by Wilson.
d. The agreement between Young and Wilson formed an agency coupled with an interest.
CPA-01314
Explanation
Choice "b" is correct. An agent owes the principal a duty of loyalty, which includes the duty to act
solely in the principal's interest in matters relating to the agency.
Choice "a" is incorrect. A principal has the power to terminate an agency relationship at any time,
although the principal might be liable for damages if the termination is in breach of contract.
Choice "c" is incorrect. A contract for services need not be in writing unless it cannot be
performed within one year. The service contract here is for six months.
Choice "d" is incorrect. An agency coupled with an interest arises only when the agent is given
an interest in the subject matter of the agency. A sales commission is not a sufficient interest.
CPA-01315
Type1 M/C
A-D
Corr Ans: B
PM
R 7-01
10. CPA-01315 Lw Nov 94 #16 Page 3
Which of the following actions requires an agent for a corporation to have a written agency
agreement?
a.
b.
c.
d.
Purchasing office supplies for the principal's business.
Purchasing an interest in undeveloped land for the principal.
Hiring an independent general contractor to renovate the principal's office building.
Retaining an attorney to collect a business debt owed the principal.
CPA-01315
Explanation
Choice "b" is correct. Generally, agency power may be granted orally, even if the agent enters
into contracts that must be in writing to be enforceable. However, most states require an agency
agreement to be in writing if the agent is to purchase or convey interests in land.
Choice "a" is incorrect. Generally, agency power may be granted orally. The power to buy office
supplies need not be granted in writing.
Choice "c" is incorrect. Generally, agency power may be granted orally. The power to hire
persons to perform services need not be granted in writing. (Note that repairing a building
involves a service and not an interest in land.)
Choice "d" is incorrect. Generally, agency power may be granted orally, even if the agent is to
enter into contracts that must be in writing to be enforceable. The power to hire persons to
perform services need not be granted in writing.
CPA-01316
Type1 M/C
A-D
Corr Ans: C
11. CPA-01316 Lw Nov 94 #17 Page 8
5
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Bolt Corp. dismissed Ace as its general sales agent and notified all of Ace's known customers by
letter. Young Corp., a retail outlet located outside of Ace's previously assigned sales territory,
had never dealt with Ace. Young knew of Ace as a result of various business contacts. After his
dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash
deposit for 20% of the purchase price. It was not unusual for an agent in Ace's previous position
to receive cash deposits. In an action by Young against Bolt on the sales contract, Young will:
a.
b.
c.
d.
Lose, because Ace lacked any implied authority to make the contract.
Lose, because Ace lacked any express authority to make the contract.
Win, because Bolt's notice was inadequate to terminate Ace's apparent authority.
Win, because a principal is an insurer of an agent's acts.
CPA-01316
Explanation
Choice "c" is correct. Although Bolt gave known customer's notice of Ace's dismissal, some
courts might also require a notice placed in a newspaper to terminate Ace's apparent authority as
to people, like Young, who had heard of Ace.
Choice "a" is incorrect. Although Ace lacked implied authority, a court might find that he had
apparent authority since Bolt had held Ace out as its agent previously.
Choice "b" is incorrect. Although Ace lacked express authority, a court might find that he had
apparent authority since Bolt had held Ace out as its agent previously.
Choice "d" is incorrect. A principal is not an insurer of an agent's acts. A principal is liable only
when the agent acts with authority.
CPA-01317
Type1 M/C
A-D
Corr Ans: A
PM
R 7-01
12. CPA-01317 Lw Nov 94 #18 Page 11
Easy Corp. is a real estate developer and regularly engages real estate brokers to act on its
behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but
are instructed to do so in their own names without disclosing Easy's identity or relationship to the
transaction. If a broker enters into a contract with a seller on Easy's behalf:
a. The broker will have the same actual authority as if Easy's identity had been disclosed.
b. Easy will be bound by the contract because of the broker's apparent authority.
c. Easy will not be liable for any negligent acts committed by the broker while acting on Easy's
behalf.
d. The broker will not be personally bound by the contract because the broker has express
authority to act.
CPA-01317
Explanation
Choice "a" is correct. Actual authority arises from the communications between the principal and
the agent. Whether the agent discloses the principal to the third party with whom the agent
contracts has no effect on the communications between the principal and the agent.
Choice "b" is incorrect. Apparent authority arises from the communications between the principal
and the third party with whom the agent deals. If the principal is undisclosed, as under the facts
here, the third party has no idea that there is a principal, and so there are no communications
between the third party and the principal from which apparent authority can arise.
Choice "c" is incorrect. A principal generally is not liable for an agent's torts, but can be liable
when the torts are authorized. The fact that the principal is undisclosed has no effect on this rule.
Choice "d" is incorrect. When a principal is undisclosed, the third party with whom the agent
deals may hold either the agent or the principal liable on contracts that the agent enters into on
the principal's behalf.
CPA-01318
Type1 M/C
A-D
Corr Ans: C
13. CPA-01318 Lw Nov 94 #19 Page 10
6
PM
CQ #3
R 7-01
Becker Professional Review
2K5 Exported Questions
An agent will usually be liable under a contract made with a third party when the agent is acting
on behalf of a(an):
a.
b.
c.
d.
Disclosed
principal
Yes
Yes
No
No
Undisclosed
principal
Yes
No
Yes
No
CPA-01318
Explanation
Choice "c" is correct. An agent generally is not liable on contracts that the agent enters into on
the principal's behalf if the principal is disclosed, but the agent is personally liable on contracts
entered into for the principal when the principal is undisclosed.
CPA-01319
Type1 M/C
A-D
Corr Ans: D
PM
R 7-01
14. CPA-01319 Lw Nov 93 #11 Page 3
Noll gives Carr a written power of attorney. Which of the following statements is correct regarding
this power of attorney?
a.
b.
c.
d.
It must be signed by both Noll and Carr.
It must be for a definite period of time.
It may continue in existence after Noll's death.
It may limit Carr's authority to specific transactions.
CPA-01319
Explanation
Choice "d" is correct. A power of attorney is a form of agency, and like all agencies it may be
limited in scope of authority.
Choice "a" is incorrect. As a general rule, no writing is required to form an agency relationship,
and even where a writing is required, it need only be signed by the principal (the one sought to be
bound).
Choice "b" is incorrect. A power of attorney, like other agencies, need not explicitly state a
duration.
Choice "c" is incorrect. A power of attorney, like all agencies, is terminated by the death of either
the principal or the agent.
CPA-01331
Type1 M/C
A-D
Corr Ans: B
PM
R 7-01
15. CPA-01331 Lw Nov 93 #13 Page 12
Generally, a disclosed principal will be liable to third parties for its agent's unauthorized
misrepresentations if the agent is an:
a.
b.
c.
d.
Employee
Yes
Yes
No
No
Independent Contractor
Yes
No
Yes
No
CPA-01331
Explanation
Choice "b" is correct. As a general rule, a principal is not liable for torts committed by its agents,
and this rule generally holds true for torts committed by independent contractors. Under the
doctrine of respondeat superior, an employer can be liable for torts committed by its employees,
but generally has no liability for an employee's intentional torts. Misrepresentation can be
construed to not be an intentional tort and this we believe the examiners are intending here.
Thus, generally a principal is not liable for either an employee's or an independent contractor's
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unauthorized misrepresentation. (A principal can be liable for misrepresentations that were
authorized by actual or apparent authority or by ratification.)
CPA-01333
Type1 M/C
A-D
Corr Ans: C
PM
R 7-01
16. CPA-01333 Lw Nov 93 #14 Page 11
Which of the following rights will a third party be entitled to after validly contracting with an agent
representing an undisclosed principal?
a.
b.
c.
d.
Disclosure of the principal by the agent.
Ratification of the contract by the principal.
Performance of the contract by the agent.
Election to void the contract after disclosure of the principal.
CPA-01333
Explanation
Choice "c" is correct. If the principal is undisclosed, the third party with whom the agent dealt can
hold the agent liable on the contract.
Choice "a" is incorrect. A third party has no general right to discover the identity of an
undisclosed principal.
Choice "b" is incorrect. A third party never has the right to force a principal to ratify a contract;
only a principal has a right to choose to ratify an unauthorized contract. However, an undisclosed
principal never has the right to ratify because ratification is available only if the agent entered into
the contract purportedly on behalf of the principal, and if the principal is not disclosed, this cannot
occur.
Choice "d" is incorrect. As a general rule a third party who has contracted with an agent for an
undisclosed principal has no right to rescind the contract on discovering the principal. Such a
right exists only if the nondisclosure was fraudulent.
CPA-01335
Type1 M/C
A-D
Corr Ans: C
PM
CQ #4
R 7-01
17. CPA-01335 Lw Nov 93 #15 Page 8
North Inc., hired Sutter as a purchasing agent. North gave Sutter written authorization to
purchase, without limit, electronic appliances. Later, Sutter was told not to purchase more than
300 of each appliance. Sutter contracted with Orr Corp. to purchase 500 tape recorders. Orr had
been shown Sutter's written authorization. Which of the following statements is correct?
a.
b.
c.
d.
Sutter will be liable to Orr because Sutter's actual authority was exceeded.
Sutter will not be liable to reimburse North if North is liable to Orr.
North will be liable to Orr because of Sutter's apparent authority.
North will not be liable to Orr because Sutter's actual authority was exceeded.
CPA-01335
Explanation
Choice "c" is correct. Although Sutter had apparent authority by virtue of the written statement of
authority, he had no actual authority because actual authority is that authority which the agent
reasonably believes he has, and here North told Sutter that he no longer had authority to make
unlimited purchases. There is no requirement that actual authority granted in writing be
rescinded in writing. North is liable to purchase from Orr for 300 appliances because of actual
authority and for 200 appliances because of apparent authority.
Choice "a" is incorrect. An agent impliedly warrants to third parties with whom he deals that he
has the authority that he purports to have. If this warranty is breached, he is liable to the principal
for any damages that are caused.
Choice "b" is incorrect. An agent who exceeds his actual authority is liable to his principal for any
damages caused by the excess. There is no requirement that actual authority granted in writing
be rescinded in writing; the oral limitation on actual authority was valid between North and Sutter.
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Choice "d" is incorrect. Although Sutter exceeded his actual authority, North will be liable
because of Sutter's apparent authority. Apparent authority arises from a third party's reasonable
beliefs of authority based on the principal's holding the agent out. Where the principal has given
the agent written authority, the agent has apparent authority consistent with the written authority,
even after actual authority is terminated, until the written authority is retrieved.
CPA-01337
Type1 M/C
A-D
Corr Ans: B
PM
R 7-01
18. CPA-01337 Lw May 89 #12 Page 12
Neal, an employee of Jordan, was delivering merchandise to a customer. On the way, Neal's
negligence caused a traffic accident that resulted in damages to a third party's automobile. Who
is liable to the third party?
a.
b.
c.
d.
Neal
No
Yes
Yes
No
Jordan
No
Yes
No
Yes
CPA-01337
Explanation
Choice "b" is correct. A tortfeasor is liable for the damages caused by his negligence. Thus,
Neal is liable. Additionally, if the tortfeasor is an employee operating within the scope of his
employment, his employer also is liable under the doctrine of repondeat superior. Thus, since
Neal was Jordan's employee and was delivering Jordan's merchandise at the time of the
accident, Jordan is also liable for the accident.
CPA-01339
Type1 M/C
A-D
Corr Ans: D
PM
R 7-01
19. CPA-01339 Lw May 87 #4 Page 9
A general agent's apparent authority to bind her principal to contracts with third parties will cease
without notice to those third parties when the:
a.
b.
c.
d.
Agent has fulfilled the purpose for which the agency relationship was created.
Time set forth in the agreement creating the agency relationship has expired.
Principal and agent have mutually agreed to end their relationship.
Principal has received a discharge in bankruptcy under the liquidation provisions of the
Bankruptcy Code.
CPA-01339
Explanation
Choice "d" is correct. Generally, a general agent's apparent authority does not cease unless and
until notice is given. However, if the principal has received a discharge in bankruptcy, notice is
not required to terminate the agent's apparent authority.
Choice "a" is incorrect. Apparent authority is based on the reasonable beliefs of the third party
with whom the agent deals. Since third parties have no way of knowing whether an agency
purpose has been fulfilled, notice is required to terminate agency power after fulfillment of the
purpose.
Choice "b" is incorrect. Apparent authority is based on the reasonable beliefs of the third party
with whom the agent deals. Since third parties have no way of knowing how long an agency is to
last, notice is required to terminate agency power after the period of the agency has elapsed.
Choice "c" is incorrect. Apparent authority is based on the reasonable beliefs of the third party
with whom the agent deals. Since third parties have no way of knowing whether the principal and
agent have terminated their relationship, notice is required to terminate agency power after the
principal and agent agree to terminate the relationship.
CPA-01341
Type1 M/C
A-D
Corr Ans: D
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20. CPA-01341 Lw May 87 #6 Page 9
Starr is an agent of a disclosed principal, Maple. On May 1, Starr entered into an agreement with
King Corp. on behalf of Maple that exceeded Starr's authority as Maple's agent. On May 5, King
learned of Starr's lack of authority and immediately notified Maple and Starr that it was
withdrawing from the May 1 agreement. On May 7, Maple ratified the May 1 agreement in its
entirety. If King refuses to honor the agreement and Maple brings an action for breach of
contract, Maple will:
a.
b.
c.
d.
Prevail since the agreement of May 1 was ratified in its entirety.
Prevail since Maple's capacity as a principal was known to Starr.
Lose since the May 1 agreement is void due to Starr's lack of authority.
Lose since King notified Starr and Maple of its withdrawal prior to Maple's ratification.
CPA-01341
Explanation
Choice "d" is correct. A third party may withdraw from a transaction or agreement entered into
with an agent who exceeded his or her authority at any time prior to ratification of the agent's
unauthorized acts by the principal. In this case, King notified Maple of King's withdrawal from the
agreement on May 1, six days before Maple's attempted ratification on May 7. Therefore,
Maple's action will fail.
Choice "a" is incorrect. An unauthorized transaction or agreement can be ratified only before the
third party to the transaction or agreement withdraws. Here, King withdrew before Maple ratified.
Choice "b" is incorrect. An unauthorized transaction or agreement can be ratified only if the agent
without authority claimed to be acting on behalf of the principal, but knowledge of the principal's
capacity does not prevent the third party from withdrawing once it is learned that the transaction
or agreement was unauthorized.
Choice "c" is incorrect. An unauthorized act by an agent is voidable, since the principal may ratify
the act; it is not void.
CPA-04778
Type1 M/C
A-D
Corr Ans: C
PM
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21. CPA-04778 Released 2005 Page 3
Under the agent's duty to account, which of the following acts must a gratuitous agent perform?
a.
b.
c.
d.
Commingle
Funds
Yes
Yes
No
No
Account for the
principal's property
Yes
No
Yes
No
CPA-04778
Explanation
Choice "c" is correct. An agent is required to properly account for money spent or while acting on
behalf of the principal. As part of this duty, the agent must keep the principal's money or property
separate form his own. Only choice "c" states that the agent must account for the principal's
property, but cannot commingle funds.
CPA-04786
Type1 M/C
A-D
Corr Ans: C
PM
R 7-01
22. CPA-04786 Released 2005 Page 12
Which of the following acts, if committed by an agent, will cause a principal to be liable to a third
party?
a. A negligent act committed by an independent contractor, in performance of the contract,
which results in injury to a third party.
b. An intentional tort committed by an employee outside the scope of employment, which results
in injury to a third party.
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c.
An employee's failure to notify the employer of a dangerous condition that results in injury to
a third party.
d. A negligent act committed by an employee outside the scope of employment that results in
injury to a third party.
CPA-04786
Explanation
Choice "c" is correct. An employer is liable for his or her own negligent acts. Under the doctrine
of respondeat superior, an employer is also liable for the negligence of employees committed
within the scope of employment. Failure to correct a dangerous condition that resulted in injury
would be negligence by the employer. Failure of an employee to warn the employer would also
be negligence by the employee. This would also subject the employer to liability under the
doctrine of respondeat superior.
Choice "a" is incorrect because an employer is only liable for negligent acts of employees
committed in the scope of employment. An employer is not usually liable for the negligent acts of
independent contractors.
Choices "b" and "d" are incorrect. An employer is only liable for torts committed by employees
within the scope of employment. The employer is not liable for torts committed outside the scope
of employment.
CPA-05031
Type1 M/C
A-D
Corr Ans: C
QZ#1
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23. CPA-05031 Regulation Online Quiz Page 1
Seth performs work for Stecker Corporation. Which of the following factors presents the
strongest evidence that Seth is an independent contractor?
a.
b.
c.
d.
Seth says that he works as an independent contractor.
Seth has worked for Stecker for over 15 years on a regular basis.
Stecker does not control the manner in which Seth performs his work.
Stecker allows Seth to participate in all of Stecker's benefit programs.
CPA-05031
Explanation
Choice "c" is correct. The most important factor in determining whether a person is an
independent contractor is the right to control the manner in which work is performed. An
employer has the right to control an employee's work but has little control over the work of an
independent contractor.
Choice "a" is incorrect. Where the right to control performance of work is not clear, the courts will
look to other factors in determining whether a person is an independent contractor. Seth's
statement that he is an independent contractor is some evidence that he is, but it is not as strong
as choice "c".
Choice "b" is incorrect. An independent contractor generally has a business of his own.
Evidence that a person has been working for another for 15 years would be more indicative of an
employer-employee relationship than of an independent contractor - principal relationship.
Choice "d" is incorrect. Allowing a person to participate in company benefits usually implies that
the person is an employee of the company.
CPA-05032
Type1 M/C
A-D
Corr Ans: B
QZ#2
R 7-01
24. CPA-05032 Regulation Online Quiz Page 1
Trumpette Real Properties employs Roger to buy city property for a future high-rise development.
Roger knows a good deal when he sees one and secretly buys some of the property through his
newly formed corporation, Sneak, Incorporated. Sneak later sells the property to Trumpette for
more than what Sneak purchased it for. Roger has breached the duty of:
a. Accounting.
b. Loyalty.
c. Notification.
11
2K5 Exported Questions
Becker Professional Review
d. None of the above.
CPA-05032
Explanation
Choice "b" is correct. An agent owes a duty of loyalty to his principal. This duty includes the
duties not to self-deal, usurp opportunities, or have conflicts of interest with the principal. Roger's
purchase through his corporation, Sneak, was self-dealing and usurped an opportunity belonging
to his principal.
Choice "a" is incorrect. The duty to account concerns keeping accurate records of the agent's
use of the principal's funds.
Choice "c" is incorrect. The agent has a duty to notify the principal of all issues known to the
agent.
Choice "d" is incorrect per the above explanation.
CPA-05033
Type1 M/C
A-D
Corr Ans: A
QZ#3
R 7-01
25. CPA-05033 Regulation Online Quiz Page 1
Karen sells her one-year-old Mazda RX8 sports car to her mother for $100. The next week,
Karen files for bankruptcy under Chapter 7. Regarding the sale of the car, the trustee may:
a.
b.
c.
d.
Cancel it as a fraudulent transfer.
Cancel it as a voidable preference.
Not cancel it because it is a sale, not a gift.
Not cancel it, but can sue Karen's mother for return of the $100.
CPA-05033
Explanation
Choice "a" is correct. Transfers made within one year of the filing date with an intent to hinder,
delay, or defraud creditors or any transfer where the debtor received less than equivalent value
while the debtor was insolvent are fraudulent transfers and may be set aside by the trustee. A
one year old car typically is worth far more than $100, and because Karen filed for bankruptcy the
next week, she likely was insolvent when she made the transfer.
Choice "b" is incorrect. A voidable preference is a transfer made to benefit one creditor over
other creditors. Karen's mother was not a creditor.
Choice "c" is incorrect. Although the transfer was a sale, the trustee can set it aside if it is
determined not to be an arm's length transfer.
Choice "d" is incorrect. The trustee is empowered to set aside the transfer and obtain a court
order to gain the property back from Karen's mother.
CPA-05035
Type1 M/C
A-D
Corr Ans: B
QZ#4
R 7-01
26. CPA-05035 Regulation Online Quiz Page 1
Which of the following requirements must be met for creditors to file an involuntary bankruptcy
petition under Chapter 7 of the Federal Bankruptcy Code?
a.
b.
c.
d.
The debtor must owe one creditor more than $5,000.
The debtor has not been paying its bona fide debts as they become due.
There must not be more than 12 creditors.
At least one fully secured creditor must join in the petition.
CPA-05035
Explanation
Choice "b" is correct. An involuntary petition for bankruptcy can be filed if a debtor owes more
than $12,300 in unsecured debt and is not paying its debts as they become due.
Choice "a" is incorrect. The debtor must owe at least $12,300 to all of the unsecured creditors.
There is no requirement that one creditor be owed any specified amount.
12
Becker Professional Review
2K5 Exported Questions
Choice "c" is incorrect. There can be more than 12 creditors. If there are more than 12 creditors,
at least 3 must join together in filing the petition.
Choice "d" is incorrect. There is no requirement that a secured creditor join in the petition.
CPA-05038
Type1 M/C
A-D
Corr Ans: A
QZ#5
R 7-01
27. CPA-05038 Regulation Online Quiz Page 1
KMC, Inc., is issuing $7 million of stock in a single offering. If KMC does not want to provide
investors with any material information about itself, its business, or its securities, it may only do so
if:
a.
b.
c.
d.
All of the investors are accredited.
All of the investors are sophisticated.
At least 35 investors are accredited.
Any of the investors are accredited.
CPA-05038
Explanation
Choice "a" is correct. An offering of the type described can only be made under Rule 506. Under
Rule 506 an offering can be made of any amount of securities without registering the offering if it
is made to any number of accredited investors and no more than 35 unaccredited investors who
are sophisticated in investing. If only accredited investors purchase the securities the issuer is
not required to make any disclosures, but if any unaccredited investors purchase any of the
securities, all investors must receive at least an annual report containing audited financial
statements.
Choices "b", "c", and "d" are incorrect per the above explanation.
CPA-05039
Type1 M/C
A-D
Corr Ans: A
QZ#6
R 7-01
28. CPA-05039 Regulation Online Quiz Page 1
Sam's Retail Outlet's certified public accountant prepares financial statements that omit a material
fact. The financial statements are part of Sam's registration statement. An investor purchases
Sam's stock. Under Section 11 of the Securities Act of 1933, the accountant can avoid liability by
showing that she:
a.
b.
c.
d.
Exercised due diligence in preparing the financial statements.
Lacked criminal intent in preparing the financial statements.
Was not in privity of contract with Nick.
None of the above.
CPA-05039
Explanation
Choice "a" is correct. A CPA's best defense to a 1933 Section 11 action is that the CPA
exercised due diligence by performing the audit in accordance with generally accepted auditing
standards.
Choice "b" is incorrect. It is not necessary to prove criminal intent on the part of the CPA. Thus,
lack of criminal intent is not a defense.
Choice "c" is incorrect. Privity is not necessary in a Section 11 lawsuit.
Choice "d" is incorrect per the above explanations.
CPA-05041
Type1 M/C
A-D
Corr Ans: A
QZ#7
R 7-01
29. CPA-05041 Regulation Online Quiz Page 1
Arthur Old employs Darleen, an accountant, who intentionally misstates a material fact to mislead
Arthur's bankers. The bankers justifiably relied on the misstatement to their detriment. Darleen
may be liable for:
13
2K5 Exported Questions
a.
b.
c.
d.
Becker Professional Review
Actual fraud only.
Constructive fraud only.
Actual fraud and constructive fraud.
None of the above.
CPA-05041
Explanation
Choice "a" is correct. Actual fraud requires intent (also known as scienter) in making a material
misstatement, that the plaintiff justifiably relies upon the material misstatement, and that the
plaintiff suffers damages.
Choice "b" is incorrect. Constructive fraud does not require intent. It only requires a high degree
of reckless disregard for truth or falsity.
Choices "c" and "d" are incorrect per the above explanations.
CPA-05044
Type1 M/C
A-D
Corr Ans: A
QZ#8
R 7-01
30. CPA-05044 Regulation Online Quiz Page 1
An accountant's audit documentation, created by an accountant when performing an audit for his
or her client, are owned by:
a.
b.
c.
d.
The accountant only.
The client only.
The accountant and the client jointly.
Neither the accountant nor the client.
CPA-05044
Explanation
Choice "a" is correct. The accountant's audit documentation is the sole property of the
accountant. However, the information contained within the audit documentation may be of
concern to the client and in that case is confidential for the benefit of the client.
Choices "b", "c", and "d" are incorrect per the above explanation.
CPA-05046
Type1 M/C
A-D
Corr Ans: C
QZ#9
R 7-01
31. CPA-05046 Regulation Online Quiz Page 1
Property insurance requires that the insured have an insurable interest in the property that exists:
a.
b.
c.
d.
Never.
At the time a policy is obtained.
At the time a loss occurs.
Continuously from the time a policy is obtained to the time a loss occurs.
CPA-05046
Explanation
Choice "c" is correct. An insurable interest in the property must exist at the time of the loss.
Choice "a" is incorrect. An insurable interest must exist at the time of the loss.
Choice "b" is incorrect. It is not necessary with property insurance to have an insurable interest in
the property when the policy is obtained, only at the time of loss.
Choice "d" is incorrect. The insurable interest must only exist at the time of loss and not
throughout the duration of the policy.
CPA-05048
Type1 M/C
A-D
Corr Ans: A
QZ#10
R 7-01
32. CPA-05048 Regulation Online Quiz Page 1
Smackey Incorporated requires all of their operating software buyers to purchase another
Smackey product, an Internet browser. This is:
14
Becker Professional Review
a.
b.
c.
d.
2K5 Exported Questions
An exclusive-dealing contract.
A horizontal merger.
A tying arrangement.
A vertical restraint.
CPA-05048
Explanation
Choice "c" is correct. A tying arrangement is one where a seller requires the buyer to purchase
one product to obtain another.
Choice "a" is incorrect. In an exclusive dealing contract a seller of goods requires the buyer to
promise not to deal in goods of a competitor.
Choice "b" is incorrect. A horizontal merger occurs where one competitor merges with another
competitor to establish market power or restrict competition.
Choice "d" is incorrect. Vertical restraints are agreements between industry players that are on
different marketing levels.
Bankruptcy
CPA-01343
Type1 M/C
33. CPA-01343 Lw R03 #5
A-D
Corr Ans: C
PM
R 7-02
Page 15
Under Chapter 7 of the federal Bankruptcy Code, what affect does a bankruptcy discharge have
on a judgment creditor when there is no bankruptcy estate?
a.
b.
c.
d.
The judgment creditor's claim is nondischargeable.
The judgment creditor retains a statutory lien against the debtor.
The debtor is relieved of any personal liability to the judgment creditor.
The debtor is required to pay a liquidated amount to vacate the judgment.
CPA-01343
Explanation
Choice "c" is correct. Under Chapter 7, a discharge discharges most debts of a debtor, whether
or not there is a bankruptcy estate from which to pay the debts.
Choices "a", "b", and "d" are incorrect, per the above.
CPA-01345
Type1 M/C
34. CPA-01345 Lw R03 #6
A-D
Corr Ans: B
PM
R 7-02
Page 15
A family farmer with regular annual income may file a voluntary petition for bankruptcy under any
of the following Chapters of the federal Bankruptcy Code, except:
a.
b.
c.
d.
7
9
11
13
CPA-01345
Explanation
Choice "b" is correct. Chapter 9 is for municipal debt adjustment; a family farmer cannot seek
relief under this chapter.
Choice "a" is incorrect. Chapter 7 provides for liquidation of a debtor's estate. A family farmer
with regular income may seek relief under Chapter 7.
Choice "c" is incorrect. Chapter 11 is for debt reorganization and is available to family farmers
with regular income.
Choice "d" is incorrect. Chapter 13 is for adjustment of debts of individuals with regular income,
and so is available to a family farmer with regular income.
15
2K5 Exported Questions
CPA-01348
Type1 M/C
35. CPA-01348 Lw R01 #6
Becker Professional Review
A-D
Corr Ans: A
PM
R 7-02
Page 18
Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property
acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An
example of such property is:
a. Inheritances received by the debtor within 180 days after the filing of the petition.
b. Child support payments received by the debtor within one year after the filing of the petition.
c. Social Security payments received by the debtor within 180 days after the filing of the
petition.
d. Wages earned by the debtor within one year after the filing of the petition.
CPA-01348
Explanation
Choice "a" is correct. The estate includes income generated from estate property and property
the debtor receives from a bequest, devise, inheritances, property settlement, divorce, or
beneficial interest in life insurance within 180 days after filing of the petition.
CPA-01350
Type1 M/C
36. CPA-01350 Lw R99 #10
A-D
Corr Ans: A
PM
R 7-02
Page 18
Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property
acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An
example of such property is:
a. Municipal bond interest received by the debtor within 180 days after the filing of the petition.
b. Alimony received by the debtor within one year after the filing of the petition.
c. Social Security payments received by the debtor within 180 days after the filing of the
petition.
d. Gifts received by the debtor within one year after the filing of the petition.
CPA-01350
Explanation
Choice "a" is correct. The bankruptcy estate includes property the debtor receives from a
bequest, devise, inheritance, property settlement, divorce decree or beneficial interest in a life
insurance policy or death benefit plan within 180 days after the filing of the petition. In addition,
the estate includes any income generated by estate property (rents, interest and dividends) after
the petition is filed. Earned income after the case commences is generally excluded.
Choice "b" is incorrect. Alimony, support or maintenance is exempt property.
Choice "c" is incorrect. Government benefits, such as social security, veterans benefits,
unemployment comp. and disability are exempt property.
Choice "d" is incorrect. Certain gifts received within 180 days after the petition is filed are
included within the estate, but the one-year period here too long.
CPA-01352
Type1 M/C
A-D
Corr Ans: D
37. CPA-01352 Lw May 95 #28 (Adapted)
PM
R 7-02
Page 16
Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the
liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.
Dart has not been paying its business debts as they became due, has defaulted on its mortgage
loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate
after the sale of all assets and payment of administration expenses is $100,000.
Dart has the following creditors:
•
•
•
Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by
Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000.
The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.
16
Becker Professional Review
•
•
2K5 Exported Questions
Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
Decoy Publications has a claim of $15,000, of which $2,000 is secured by Dart's inventory
that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.
Which of the following creditors must join in the filing of the involuntary petition?
I. JOG Office Supplies.
II. Nanstar Electric Co.
III. Decoy Publications.
a.
b.
c.
d.
I, II, & III.
II & III.
I & II.
III only.
CPA-01352
Explanation
Choice "d" is correct. If a person has fewer than 12 creditors, any one or more of them with
claims that aggregate at least $12,300 more than the value of any collateral securing the claim
may file the petition. Decoy Publications has a claim for $13,000 beyond its security. JOG Office
Suppliers' claim is for $2,000, not enough by itself to justify filing and unnecessary if Decoy files.
Similarly, Nanstar is owed only $1,200, not enough by itself to justify filing and unnecessary if
Decoy files.
CPA-01355
Type1 M/C
A-D
Corr Ans: C
38. CPA-01355 Lw May 95 #29 (Adapted)
PM
R 7-02
Page 16
Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the
liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.
Dart has not been paying its business debts as they became due, has defaulted on its mortgage
loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate
after the sale of all assets and payment of administration expenses is $100,000.
Dart has the following creditors:
•
•
•
•
•
Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by
Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000.
The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.
Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
Decoy Publications has a claim of $15,000, of which $2,000 is secured by Dart's inventory
that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.
Which of the following statements would correctly describe the result of Dart's opposing the
petition?
a.
b.
c.
d.
Dart will win because the petition should have been filed under Chapter 11.
Dart will win because there are not more than 12 creditors.
Dart will lose because it is not paying its debts as they become due.
Dart will lose because of its debt to the IRS.
CPA-01355
Explanation
Choice "c" is correct. A person may be petitioned involuntarily into bankruptcy if that person is
not paying debts as they become due.
Choice "a" is incorrect. Chapter 7 liquidations are available to liquidate a business. Chapter 11 is
used only to restructure debt.
Choice "b" is incorrect. If a debtor has fewer than 12 creditors, any one creditor owed more than
$12,300 of unsecured debt can petition the debtor into bankruptcy.
Choice "d" is incorrect. There is no special provision prohibiting opposition to an involuntary
bankruptcy petition merely because one creditor is the IRS.
17
2K5 Exported Questions
CPA-01357
Type1 M/C
Becker Professional Review
A-D
Corr Ans: A
39. CPA-01357 Lw May 95 #30 (Adapted)
PM
R 7-02
Page 15
Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the
liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.
Dart has not been paying its business debts as they became due, has defaulted on its mortgage
loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate
after the sale of all assets and payment of administration expenses is $100,000.
Dart has the following creditors:
•
•
•
•
•
Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by
Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000.
The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.
Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
Decoy Publications has a claim of $15,000, of which $2,000 is secured by Dart's inventory
that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.
Which of the following events will follow the filing of the Chapter 7 involuntary petition?
a.
b.
c.
d.
A trustee
will be
appointed
Yes
Yes
No
No
A stay against
creditor collection
proceedings will
go into effect
Yes
No
Yes
No
CPA-01357
Explanation
Choice "a" is correct. In a liquidation proceeding, after the petition is filed, a trustee will be
appointed and an automatic stay against creditor collection proceedings goes into effect.
CPA-01358
Type1 M/C
A-D
Corr Ans: A
40. CPA-01358 Lw May 95 #31 (Adapted)
PM
R 7-02
Page 21
Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the
liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.
Dart has not been paying its business debts as they became due, has defaulted on its mortgage
loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate
after the sale of all assets and payment of administration expenses is $100,000.
Dart has the following creditors:
•
•
•
•
•
Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by
Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000.
The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.
Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
Decoy Publications has a claim of $15,000, of which $2,000 is secured by Dart's inventory
that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.
For the next item assume that the bankruptcy estate was distributed.
What dollar amount would Nanstar Electric Co. receive?
a. $0
b. $800
c. $1,000
18
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2K5 Exported Questions
d. $1,200
CPA-01358
Explanation
Choice "a" is correct. Nanstar's claim was not timely filed. Late claims are paid only if there is
money left over after the general unsecured creditors whose claims were timely filed are paid.
CPA-01360
Type1 M/C
A-D
Corr Ans: C
41. CPA-01360 Lw May 95 #32 (Adapted)
PM
R 7-02
Page 25
Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the
liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.
Dart has not been paying its business debts as they became due, has defaulted on its mortgage
loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate
after the sale of all assets and payment of administration expenses is $100,000.
Dart has the following creditors:
•
•
•
•
•
Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by
Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000.
The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.
Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
Decoy Publications has a claim of $15,000, of which $2,000 is secured by Dart's inventory
that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.
For the next item assume that the bankruptcy estate was distributed.
What total dollar amount would Fracon Bank receive on its secured and unsecured claims?
a.
b.
c.
d.
$70,000
$72,000
$74,000
$75,000
CPA-01360
Explanation
Choice "c" is correct. In distributing a bankruptcy estate, first all secured claims are paid, then
priority claims are paid, and finally the remaining assets are split proportionally among the
unsecured creditors who have timely filed a claim. Thus, Fracon Bank is entitled to the $70,000
secured by the mortgage and Decoy is entitled to its $2,000 security interest first. The IRS has a
priority claim for $12,000, which will next be paid. Thus, only $16,000 remains to pay the
unsecured debt, which amounts to $20,000 ($5,000 remaining on the Fracon Bank debt, $2,000
to JOG, $13,000 to Decoy; Nanstar does not share in the distribution because it failed to file a
claim). The unsecured creditors will share in the remainder of the estate proportionally.
CPA-01362
Type1 M/C
A-D
Corr Ans: D
42. CPA-01362 Lw May 95 #33 (Adapted)
PM
R 7-02
Page 27
Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the
liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.
Dart has not been paying its business debts as they became due, has defaulted on its mortgage
loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate
after the sale of all assets and payment of administration expenses is $100,000.
Dart has the following creditors:
•
•
•
•
Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by
Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000.
The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.
Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
19
2K5 Exported Questions
•
Becker Professional Review
Decoy Publications has a claim of $15,000, of which $2,000 is secured by Dart's inventory
that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.
For the next item assume that the bankruptcy estate was distributed.
What dollar amount would the IRS receive?
a.
b.
c.
d.
$0
$8,000
$10,000
$12,000
CPA-01362
Explanation
Choice "d" is correct. In distributing a bankruptcy estate, first all secured claims are paid, then
priority claims are paid, and finally the remaining assets are split proportionally among the
unsecured creditors who have timely filed a claim. Thus, Fracon Bank is entitled to the $70,000
secured by the mortgage and Decoy is entitled to its $2,000 security interest first. After paying
these two, $28,000 remains. The IRS has the only priority claim-for $12,000. So that claim will
next be paid in full.
CPA-01364
Type1 M/C
A-D
Corr Ans: D
PM
R 7-02
43. CPA-01364 Lw May 95 #34 Page 29
Strong Corp. filed a voluntary petition in bankruptcy under the reorganization provisions of
Chapter 11 of the Federal Bankruptcy Code. A reorganization plan was filed and agreed to by all
necessary parties. The court confirmed the plan and a final decree was entered.
Which of the following parties ordinarily must confirm the plan?
a.
b.
c.
d.
1/2 of the secured
creditors
Yes
Yes
No
No
2/3 of the
shareholders
Yes
No
Yes
No
CPA-01364
Explanation
Choice "d" is correct. Technically, only the court can confirm a plan; creditors and security
interest holders vote whether to accept the plan. Moreover, unimpaired parties, such as secured
creditors are presumed to have affirmed, so their vote is not necessary. A plan need not be
affirmed by 2/3 of interested shareholders (called "equity security holders" under the Bankruptcy
Code), but rather by 2/3 of the interests (e.g., 2/3 of the outstanding shares, which may be held
by fewer than 2/3 of the shareholders). Finally, a plan may be confirmed by a court even if only
one impaired class votes to affirm through the "cram down" provision of the Bankruptcy Code.
CPA-01365
Type1 M/C
A-D
Corr Ans: D
PM
CQ #9
R 7-02
44. CPA-01365 Lw May 95 #35 Page 29
Strong Corp. filed a voluntary petition in bankruptcy under the reorganization provisions of
Chapter 11 of the Federal Bankruptcy Code. A reorganization plan was filed and agreed to by all
necessary parties. The court confirmed the plan and a final decree was entered.
Which of the following statements best describes the effect of the entry of the court's final
decree?
a. Strong Corp. will be discharged from all its debts and liabilities.
b. Strong Corp. will be discharged only from the debts owed creditors who agreed to the
reorganization plan.
c. Strong Corp. will be discharged from all its debts and liabilities that arose before the date of
confirmation of the plan.
20
Becker Professional Review
2K5 Exported Questions
d. Strong Corp. will be discharged from all its debts and liabilities that arose before the
confirmation of the plan, except as otherwise provided in the plan, the order of confirmation,
or the Bankruptcy Code.
CPA-01365
Explanation
Choice "d" is correct. Under the Bankruptcy Code, the court's final decree results in a discharge
of all debts and liabilities that arose before confirmation of the plan, except as otherwise provided
in the plan, the order of confirmation, or the Bankruptcy Code.
Choices "a" and "c" are incorrect. Nondischargeable debts are not discharged by the
reorganization.
Choice "b" is incorrect. The discharge is effective even against creditors who voted against the
plan.
CPA-01367
Type1 M/C
A-D
Corr Ans: D
PM
CQ #6
R 7-02
45. CPA-01367 Lw Nov 94 #32 Page 16
Deft, CPA, is an unsecured creditor of Golf Co. for $15,000. Golf has a total of 10 creditors, all of
whom are unsecured. Golf has not paid any of the creditors for three months. Under Chapter 11
of the Federal Bankruptcy Code, which of the following statements is correct?
a. Golf may not be petitioned involuntarily into bankruptcy because there are less than 12
unsecured creditors.
b. Golf may not be petitioned involuntarily into bankruptcy under the provisions of Chapter 11.
c. Three unsecured creditors must join in the involuntary petition in bankruptcy.
d. Deft may file an involuntary petition in bankruptcy against Golf.
CPA-01367
Explanation
Choice "d" is correct. When there are fewer than 12 unsecured creditors, any one creditor who is
owed $12,300 or more may file an involuntary petition in bankruptcy.
Choice "a" is incorrect. The fact that there are fewer than 12 unsecured creditors means that only
one creditor is needed for the involuntary petition (as long as the creditor is owed at least
$12,300).
Choice "b" is incorrect. A debtor who is not paying debts as they become due is subject to being
involuntarily petitioned into bankruptcy.
Choice "c" is incorrect. When there are fewer than 12 unsecured creditors, any one or more of
the creditors may file the involuntary petition, but the petitioner(s) must be owed at least $12,300.
CPA-01368
Type1 M/C
A-D
Corr Ans: A
PM
R 7-02
46. CPA-01368 Lw Nov 94 #33 Page 23
Which of the following claims will not be discharged in bankruptcy?
a.
b.
c.
d.
A claim that arises from alimony or maintenance.
A claim that arises out of the debtor's breach of a contract.
A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral.
A claim brought by a judgment creditor whose judgment resulted from the debtor's negligent
operation of a motor vehicle.
CPA-01368
Explanation
Choice "a" is correct. Money owed as alimony is not discharged in bankruptcy.
Choice "b" is incorrect. Contract claims are dischargeable in bankruptcy.
Choice "c" is incorrect. Debts owed to secured creditors beyond the value of the collateral are
treated like any other unsecured debt and are discharged by the bankruptcy.
21
2K5 Exported Questions
Becker Professional Review
Choice "d" is incorrect. Debts arising from negligent conduct are dischargeable in bankruptcy (if
the auto accident arose from drunk driving or the injuries were willful, the debt would not be
discharged).
CPA-01371
Type1 M/C
A-D
Corr Ans: C
PM
R 7-02
47. CPA-01371 Lw Nov 94 #34 Page 18
Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, which of the
following statements applies to a person who has voluntarily filed for and received a discharge in
bankruptcy?
a. The person will be discharged from all debts.
b. The person can obtain another voluntary discharge in bankruptcy under Chapter 7 after three
years have elapsed from the date of the prior filing.
c. The person must surrender for distribution to the creditors amounts received as an
inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition.
d. The person is precluded from owning or operating a similar business for two years.
CPA-01371
Explanation
Choice "c" is correct. The bankruptcy estate is deemed to include money inherited within 180
days after the bankruptcy petition is filed.
Choice "a" is incorrect. Not all debts are discharged by a bankruptcy. For example, alimony is
not discharged, and neither are debts arising from fraud.
Choice "b" is incorrect. After a Chapter 7 bankruptcy, the debtor may not obtain another
bankruptcy for six years.
Choice "d" is incorrect. There is no limitation on the types of businesses a debtor may own after
bankruptcy.
CPA-01373
Type1 M/C
A-D
Corr Ans: B
PM
R 7-02
48. CPA-01373 Lw Nov 94 #37 Page 29
Under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code, after a
reorganization plan is confirmed, and a final decree closing the proceedings entered, which of the
following events usually occurs?
a. A reorganized corporate debtor will be liquidated.
b. A reorganized corporate debtor will be discharged from all debts except as otherwise
provided in the plan and applicable law.
c. A trustee will continue to operate the debtor's business.
d. A reorganized individual debtor will not be allowed to continue in the same business.
CPA-01373
Explanation
Choice "b" is correct. After the reorganization plan is confirmed, the debtor is released from
debts except as provided in the plan or by law.
Choice "a" is incorrect. The goal of a reorganization is to allow the debtor's business to continue;
it is not dissolved at the conclusion.
Choice "c" is incorrect. Generally in a reorganization the debtor remains in possession and there
is no trustee. In any event, a trustee would not be left in place after the reorganization is
complete. The goal of Chapter 11 is to allow the debtor's business to continue.
Choice "d" is incorrect. The goal of a reorganization is just the opposite: to allow the debtor's
business to continue.
CPA-01374
Type1 M/C
A-D
Corr Ans: D
49. CPA-01374 Lw Nov 93 #27 Page 17
22
PM
R 7-02
Becker Professional Review
2K5 Exported Questions
The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code:
a.
b.
c.
d.
Terminates liens on exempt property.
Terminates all security interests in property in the bankruptcy estate.
Stops the debtor from incurring new debts.
Stops the enforcement of judgment liens against property in the bankruptcy estate.
CPA-01374
Explanation
Choice "d" is correct. The filing of a petition in bankruptcy invokes an automatic stay against all
attempts to collect on most debts of the bankrupt.
Choice "a" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all
attempts to collect on most debts of the bankrupt. It does not terminate liens, but merely stays
them (i.e., temporarily prevents their enforcement).
Choice "b" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all
attempts to collect on most debts of the bankrupt. It does not terminate security interests but
rather merely stays them (i.e., temporarily prevents their enforcement).
Choice "c" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all
attempts to collect on most debts of the bankrupt. It does not prevent then debtor from incurring
new debts.
CPA-01375
Type1 M/C
A-D
Corr Ans: B
PM
R 7-02
50. CPA-01375 Lw Nov 93 #28 Page 16
Which of the following requirements must be met for creditors to file an involuntary bankruptcy
petition under Chapter 7 of the Federal Bankruptcy Code?
a.
b.
c.
d.
The debtor must owe one creditor more than $5,000.
The debtor has not been paying its bona fide debts as they become due.
There must not be more than 12 creditors.
At least one fully secured creditor must join in the petition.
CPA-01375
Explanation
Choice "b" is correct. An involuntary petition for bankruptcy can be filed if a debtor owes more
than $12,300 in unsecured debt and is not paying its debts as they become due.
Choice "a" is incorrect. The debtor must owe at least $12,300 because the petition must be filed
by unsecured creditors owed at least that much, but creditors can aggregate their claims. There
is no requirement that the debtor owe one creditor $5,000.
Choice "c" is incorrect. There can be more than 12 creditors. If there are, at least three must join
in the petition.
Choice "d" is incorrect. There is no requirement of a secured creditor joining in the petition. In
fact, a secured creditor cannot be counted as one of the required petitioners to the extent that the
security covers the obligation owed.
CPA-01376
Type1 M/C
A-D
Corr Ans: D
PM
CQ #5
R 7-02
51. CPA-01376 Lw Nov 93 #29 Page 15
Which of the following conditions, if any, must a debtor meet to file a voluntary bankruptcy petition
under Chapter 7 of the Federal Bankruptcy Code?
a.
b.
c.
d.
Insolvency
Yes
Yes
No
No
Three or more creditors
Yes
No
Yes
No
23
2K5 Exported Questions
Becker Professional Review
CPA-01376
Explanation
Choice "d" is correct. A debtor need not be insolvent to file a voluntary petition, but merely need
owe debts. Since debts must be owing, there is a requirement of at least one creditor, but three
creditors are not required.
CPA-01377
Type1 M/C
A-D
Corr Ans: D
PM
CQ #7
R 7-02
52. CPA-01377 Lw Nov 93 #30 Page 19
Which of the following transfers by a debtor, within ninety days of filing for bankruptcy, could be
set aside as a preferential payment?
a.
b.
c.
d.
Making a gift to charity.
Paying a business utility bill.
Borrowing money from a bank secured by giving a mortgage on business property.
Prepaying an installment loan on inventory.
CPA-01377
Explanation
Choice "d" is correct. A transfer of the debtor's property to or for the benefit of a creditor for an
antecedent debt at a time when the debtor was insolvent and within 90 days of filing the
bankruptcy petition constitutes a preference if the transfer gives the transferee more than the
transferee would have obtained under the Bankruptcy Code. Prepayment of an installment loan
falls within this description. This does not qualify for the exception for payment of ordinary
business because the prepayment is not under the usual terms of the contract.
Choice "a" is incorrect. Although the gift to the charity here is voidable, it is voidable as a
fraudulent transfer (a trustee in bankruptcy has the power to avoid transfers of property where the
debtor did not receive reasonably equivalent value). This is not a preference because a
preference occurs where there is a payment of an antecedent debt.
Choice "b" is incorrect. A transfer is not voidable as a preference to the extent that it was made
in the ordinary course of the business of the debtor, according to the ordinary business terms,
and for the purpose of repaying a debt incurred in the ordinary course of the debtor's business.
Payment of a utility bill falls within this exception.
Choice "c" is incorrect. A transfer is not voidable by the trustee where there is a
contemporaneous exchange for value. Here, money was given in exchange for the mortgage.
CPA-01378
Type1 M/C
A-D
Corr Ans: B
PM
R 7-02
53. CPA-01378 Lw Nov 93 #31 Page 22
Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor's
discharge?
I. Failure to list one creditor.
II. Failure to answer correctly material questions on the bankruptcy petition.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01378
Explanation
Choice "b" is correct. Bankruptcy Code section 727(d) sets out the reasons for revoking a
discharge. The grounds include failing to answer a material question on the bankruptcy petition if
the question has been approved by the court, unless the fifth amendment privilege against selfincrimination is appropriately claimed. Thus, II. could be a ground for revocation. The grounds
do not include failure to list one creditor. Thus, I. is not a possible ground.
CPA-01379
Type1 M/C
A-D
Corr Ans: C
24
PM
R 7-02
Becker Professional Review
2K5 Exported Questions
54. CPA-01379 Lw Nov 93 #32 Page 28
Robin Corp. incurred substantial operating losses for the past three years. Unable to meet its
current obligations, Robin filed a petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Which of the following statements is correct?
a.
b.
c.
d.
The creditors' committee must select a trustee to manage Robin's affairs.
The reorganization plan may only be filed by Robin.
A creditors' committee, if appointed, will consist of unsecured creditors.
Robin may continue in business only with the approval of a trustee.
CPA-01379
Explanation
Choice "c" is correct. The creditors' committee, if appointed, is made up of unsecured creditors.
Choice "a" is incorrect. A trustee usually is not appointed in a reorganization.
Choice "b" is incorrect. Robin has a right to file the first plan of reorganization, but creditors can
also file a plan.
Choice "d" is incorrect. In a reorganization, there is a presumption that the debtor will remain in
possession.
CPA-01380
Type1 M/C
A-D
Corr Ans: A
PM
R 7-02
55. CPA-01380 Lw Nov 93 #33 Page 15
A reorganization under Chapter 11 of the Federal Bankruptcy Code requires all of the following,
except the:
a.
b.
c.
d.
Liquidation of the debtor.
The filing of a reorganization plan.
Confirmation of the reorganization plan by the court.
Opportunity for each class of claims to accept the reorganization plan.
CPA-01380
Explanation
Choice "a" is correct. There is no requirement of liquidation in a reorganization.
Choice "b" is incorrect. In a reorganization, a plan of reorganization must be filed.
Choice "c" is incorrect. In a reorganization, the plan of reorganization must be approved by the
court.
Choice "d" is incorrect. In a reorganization, each class of claimants has an opportunity to accept
the plan (although it need not be accepted by all classes, such as unimpaired classes of security
holders).
CPA-01381
Type1 M/C
A-D
Corr Ans: D
PM
R 7-02
56. CPA-01381 Lw Nov 93 #34 Page 15
Which of the following statements is correct with respect to the reorganization provisions of
Chapter 11 of the Federal Bankruptcy Code?
a.
b.
c.
d.
A trustee must always be appointed.
The debtor must be insolvent if the bankruptcy petition was filed voluntarily.
A reorganization plan may be filed by a creditor anytime after the petition date.
The commencement of a bankruptcy case may be voluntary or involuntary.
CPA-01381
Explanation
Choice "d" is correct. Under Bankruptcy Code Section 303, a chapter 11 petition for
reorganization may be filed involuntarily.
Choice "a" is incorrect. The general rule in a reorganization is that a trustee is not appointed.
25
2K5 Exported Questions
Becker Professional Review
Choice "b" is incorrect. There is no requirement of insolvency for filing a voluntary reorganization
petition.
Choice "c" is incorrect. A creditor must wait 120 days to file plan unless a trustee has been
appointed.
CPA-01382
Type1 M/C
A-D
Corr Ans: A
PM
CQ #8
R 7-02
57. CPA-01382 Lw Nov 93 #39 Page 25
Which of the following types of claims would be paid first in the distribution of a bankruptcy estate
under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code if the petition was
filed July 15, 1993?
a.
b.
c.
d.
A secured debt properly perfected on March 20, 1993.
Inventory purchased and delivered August 1, 1993.
Employee wages due April 30, 1993.
Federal tax lien filed June 30, 1993.
CPA-01382
Explanation
Choice "a" is correct. All perfected security interests are paid first. Since the security interest
here was filed more than 90 days before the bankruptcy, this does not constitute a voidable
preference.
Choice "b" is incorrect. The creditor is a general unsecured creditor and is last to be paid.
Choice "c" is incorrect. Wage claims for wages earned within 90 days of the bankruptcy have a
third priority. Older wage claims are treated as general unsecured claims and are paid last. In
either case, the wage claims are subordinate to a perfected security interest.
Choice "d" is incorrect. If the federal government obtains a lien for taxes against the debtor's
estate before the bankruptcy petition is filed, the federal tax lien is treated as a secured interest.
This interest is subordinate to the March 20 secured claim, however, because the March 20
interest was perfected before the tax lien attached.
CPA-04782
Type1 M/C
A-D
Corr Ans: D
PM
R 7-02
58. CPA-04782 Released 2005 Page 19
Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in
bankruptcy not have?
a. The power to prevail against a creditor with an unperfected security interest.
b. The power to require persons holding the debtor's property at the time the bankruptcy petition
is filed to deliver the property to the trustee.
c. The right to use any grounds available to the debtor to obtain the return of the debtor's
property.
d. The right to avoid any statutory liens against the debtor's property that were effective before
the bankruptcy petition was filed.
CPA-04782
Explanation
Choice "d" is correct. A trustee in bankruptcy is treated as a hypothetical lien creditor on all of the
debtor's property as of the date the bankruptcy petition is filed. The trustee is subordinate to all
prior perfected security interests to specifically include statutory liens that were effective prior to
the bankruptcy petition being filed.
Choice "a" is incorrect. An unperfected security interest would be unprotected against other 3rd
parties who had a valid interest in the debtor's property to include the trustee in bankruptcy.
Choice "b" is incorrect. The trustee in bankruptcy is treated as a lien creditor in the debtor's
property as of the date of the filing for bankruptcy. Thus, the trustee would have the power to
force persons holding the debtor's property to deliver it to the trustee, just as any secured creditor
would.
26
Becker Professional Review
2K5 Exported Questions
Choice "c" is incorrect. Since the trustee becomes a lien creditor in the debtor's property as of
the date of the filing, the trustee would have the same rights the debtor would have.
Securities Regulation
CPA-01383
Type1 M/C
59. CPA-01383 Lw R03 #7
A-D
Corr Ans: B
PM
R 7-03
Page 34
Tork purchased restricted securities that were issued pursuant to Regulation D of the Securities
Act of 1933. Which of the following statements is correct regarding Tork's ability to resell the
securities?
a. Tork may resell the securities so long as the sale does involve interstate commerce.
b. Tork may resell the securities as part of another transaction exempt from registration.
c. Tork may not resell the securities if the certificates contain a legend indicating that they are
unregistered securities.
d. Tork may not resell the securities unless Tork obtains a written SEC exemption.
CPA-01383
Explanation
Choice "b" is correct. Under Regulation D of the Securities Act of 1933, Tork may only resell if
the resale transaction continues to fall under the registration exemptions found in Section 3 of the
1933 Act.
Choice "a" is incorrect. Regulation D prohibits immediate reoffering to the public regardless of
whether it is an interstate transaction or not.
Choices "c" and "d" are incorrect; there are no such rules.
CPA-01384
Type1 M/C
60. CPA-01384 Lw R03 #8
A-D
Corr Ans: B
PM
R 7-03
Page 36
The prospectus for the sale of securities of a not-for-profit corporation contained material
misrepresentations due to the negligence of the person who prepared the financial statements.
As a result of the misrepresentations, purchasers of the shares lost their investment. Do the antifraud provisions of the Securities Act of 1933 apply in this situation?
a.
b.
c.
d.
Yes, because the securities are required to be registered.
Yes, because the misrepresentations were material.
No, because the securities are exempt from registration.
No, because only the issuer was negligent.
CPA-01384
Explanation
Choice "b" is correct. While the securities of a not-for-profit corporation are indeed exempt from
registration (making choice "c" a tempting choice), where a prospectus is issued and contains
material misrepresentations, liability an be imposed under Section 12(a)(2) of the 1933 Act.
Choice "a" is incorrect. Securities of not-for-profit corporations need not be registered.
Choice "c" is incorrect. See above explanation.
Choice "d" is incorrect. Section 12(a)(2) imposes liability on the negligent issuer for making
material misrepresentations in any written offer, and a prospectus is considered to be a written
offer under the 1933 Act.
CPA-01385
Type1 M/C
61. CPA-01385 Lw R03 #9
A-D
Corr Ans: C
PM
R 7-03
Page 35
An original issue of transaction exempt securities was sold to the public based on a prospectus
containing intentional omissions of material facts. Under which of the following federal securities
laws would the issuer be liable to a purchaser of the securities?
27
2K5 Exported Questions
Becker Professional Review
I. The anti-fraud provisions of the Securities Act of 1933.
II. The anti-fraud provisions of the Securities Exchange Act of 1934.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01385
Explanation
Choice "c" is correct. The issuer could be liable for issuing securities by means of a false
statement under section 12(a)(2) of the 1933 Act and can be liable for making false statements
under Section 10(b) of the 1934 Act.
Choices "a", "b", and "d" are incorrect. Each of these choices incorrectly addresses either I
and/or II.
CPA-01386
Type1 M/C
62. CPA-01386 Lw R02 #15
A-D
Corr Ans: C
PM
R 7-03
Page 37
Dean, Inc., a publicly traded corporation, paid a $10,000 bribe to a local zoning official. The bribe
was recorded in Dean's financial statements as a consulting fee. Dean's unaudited financial
statements were submitted to the SEC as part of a quarterly filing. Which of the following federal
statutes did Dean violate?
a.
b.
c.
d.
Federal Trade Commission Act.
Securities Act of 1933.
Securities Exchange Act of 1934.
North American Free Trade Act.
CPA-01386
Explanation
Choice "c" is correct. Publicly traded corporations must register with the SEC and make certain
periodic reports under the 1934 Act. These reports include business reports (10K, 10Q & 8K),
insider trading tender offers & proxy solicitations.
CPA-01388
Type1 M/C
63. CPA-01388 Lw R99 #11
A-D
Corr Ans: B
PM
R 7-03
Page 37
Under the Securities Exchange Act of 1934, which of the following conditions generally will allow
an issuer of securities to terminate the registration of a class of securities and suspend the duty to
file periodic reports?
a.
b.
c.
d.
The corporation
has fewer than
300 shareholders
Yes
Yes
No
No
The securities are
listed on a national
securities exchange
Yes
No
Yes
No
CPA-01388
Explanation
Choice "b" is correct. The reporting requirements of the 1934 act apply to any company:
1. Whose shares are traded on a national exchange
or
2. Which has at least 500 shareholders and more than $10 million in assets.
CPA-01389
Type1 M/C
64. CPA-01389 Lw R96 #6
A-D
Corr Ans: A
Page 30
28
PM
R 7-03
Becker Professional Review
2K5 Exported Questions
Under the registration requirements of the Securities Act of 1933, which of the following items is
(are) considered securities?
a.
b.
c.
d.
Investment
contracts
Yes
Yes
No
No
Collateral-trust
certificates
Yes
No
Yes
No
CPA-01389
Explanation
Choice "a" is correct. A collateral trust certificate is a bond secured by collateral and deposited
with a trustee. Like other bonds, it is considered a security. Under the securities laws,
"investment contracts" are specifically deemed to be securities. While not defined in the
securities laws, an investment contract generally is defined as any financial scheme in which the
investor expects to make a profit through the management of others.
CPA-01390
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
65. CPA-01390 Lw Nov 94 #41 Page 31
Under the Securities Act of 1933, which of the following statements most accurately reflects how
securities registration affects an investor?
a. The investor is provided with information on the stockholders of the offering corporation.
b. The investor is provided with information on the principal purposes for which the offering's
proceeds will be used.
c. The investor is guaranteed by the SEC that the facts contained in the registration statement
are accurate.
d. The investor is assured by the SEC against loss resulting from purchasing the security.
CPA-01390
Explanation
Choice "b" is correct. One piece of information required in a registration statement is a statement
of how the funds received will be used.
Choice "a" is incorrect. Generally, the registration statement need not include a list of the issuer's
current shareholders.
Choice "c" is incorrect. The SEC does not guarantee the accuracy of the facts contained in a
registration statement.
Choice "d" is incorrect. The SEC does not assess the financial merit of registered securities.
CPA-01391
Type1 M/C
A-D
Corr Ans: D
PM
R 7-03
66. CPA-01391 Lw Nov 94 #42 Page 32
Which of the following securities would be regulated by the provisions of the Securities Act of
1933?
a.
b.
c.
d.
Securities issued by not-for-profit, charitable organizations.
Securities guaranteed by domestic governmental organizations.
Securities issued by savings and loan associations.
Securities issued by insurance companies.
CPA-01391
Explanation
Choice "d" is correct. There is an exemption for insurance policies [SA 3(a)(8)], but other
securities issued by insurance companies must generally be registered.
Choice "a" is incorrect. Securities Act 3(a)(4) exempts securities of not-for-profit organizations.
Choice "b" is incorrect. Securities Act 3(a)(2) exempts securities guaranteed by domestic
governmental organizations.
29
2K5 Exported Questions
Becker Professional Review
Choice "c" is incorrect. Securities Act 3(a)(5) exempts securities issued by a savings and loan
association.
CPA-01392
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
67. CPA-01392 Lw Nov 94 #43 Page 31
Which of the following requirements must be met by an issuer of securities who wants to make an
offering by using shelf registration?
Original
registration
statement must
be kept updated
a.
Yes
b.
Yes
c.
No
d.
No
The offeror
must be a
first-time issuer
of securities
Yes
No
Yes
No
CPA-01392
Explanation
Choice "b" is correct. Shelf registrations are permitted when the corporation is frequently issuing
securities on a national exchange. The original registration statement must be kept current in
order to provide accurate information to investors, and the SEC will not allow a company to use
shelf registrations unless they have a history of issuing shares. SA Rule 415
CPA-01393
Type1 M/C
A-D
Corr Ans: D
PM
R 7-03
68. CPA-01393 Lw Nov 94 #44 Page 33
Under the Securities Act of 1933, which of the following statements concerning an offering of
securities sold under a transaction exemption is correct?
a.
b.
c.
d.
The offering is exempt from the anti-fraud provisions of the 1933 Act.
The offering is subject to the registration requirements of the 1933 Act.
Resales of the offering are exempt from the provisions of the 1933 Act.
Resales of the offering must be made under a registration or a different exemption provision
of the 1933 Act.
CPA-01393
Explanation
Choice "d" is correct. A transaction exemption applies only to the particular transaction.
Subsequent sales must qualify for their own exemption or they must be registered.
Choice "a" is incorrect. Exemption from the registration requirements does not exempt a security
from the anti-fraud provisions.
Choice "b" is incorrect. If a security is exempt, it is not subject to registration.
Choice "c" is incorrect. A transaction exemption applies only to the transaction at hand.
Subsequent sales must qualify for their own exemption.
CPA-01394
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
69. CPA-01394 Lw Nov 94 #45 Page 37
Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934.
Which of the following situations would require Link to be subject to the reporting provisions of the
1934 Act?
a.
Shares listed
on a national
securities exchange
Yes
More than one
class of stock
Yes
30
Becker Professional Review
b.
c.
d.
2K5 Exported Questions
Yes
No
No
No
Yes
No
CPA-01394
Explanation
Choice "b" is correct. A company must register under the 1934 Act if it is registered on a national
exchange, but having more than one class of stock does not require registration.
CPA-01395
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
70. CPA-01395 Lw Nov 94 #46 Page 38
Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934.
Which of the following documents must Link file with the SEC?
a.
b.
c.
d.
Quarterly reports
Proxy
(Form 10-Q)
statements
Yes
Yes
Yes
No
No
Yes
No
No
CPA-01395
Explanation
Choice "a" is correct. A corporation registered under the 1934 Act must file quarterly reports
(Form 10-Q) and proxy solicitations by management.
CPA-01396
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
71. CPA-01396 Lw Nov 94 #47 Page 38
Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934.
Which of the following reports must also be submitted to the SEC?
a.
b.
c.
d.
Report by any
party making a
tender offer to
purchase
Link's stock
Yes
Yes
No
No
Report of proxy
solicitations by
Link stockholders
Yes
No
Yes
No
CPA-01396
Explanation
Choice "a" is correct. SEA 13 requires persons making a tender offer to shareholders of a
registered corporation to file a report with the SEC, and §14 prohibits anyone from soliciting
proxies in a registered company without filing a report with the SEC.
CPA-01397
Type1 M/C
A-D
Corr Ans: C
PM
R 7-03
72. CPA-01397 Lw Nov 94 #48 Page 33
Which of the following facts will result in an offering of securities being exempt from registration
under the Securities Act of 1933?
a. The securities are nonvoting preferred stock.
b. The issuing corporation was closely held prior to the offering.
c. The sale or offer to sell the securities is made by a person other than an issuer, underwriter,
or dealer.
d. The securities are AAA-rated debentures that are collateralized by first mortgages on
property that has a market value of 200% of the offering price.
31
2K5 Exported Questions
Becker Professional Review
CPA-01397
Explanation
Choice "c" is correct. The 1933 Act generally is concerned with sales by issuers, underwriters, or
dealers. Sales by other persons are exempt.
Choice "a" is incorrect. There is no exemption from registration for issuances of nonvoting stock.
Choice "b" is incorrect. The fact that the issuer was closely held prior to the public offering does
not qualify the offering for an exemption.
Choice "d" is incorrect. The fact that securities appear to be relatively valuable does not provide
an exemption from the registration requirements.
CPA-01398
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
73. CPA-01398 Lw Nov 94 #52 Page 33
Which of the following statements concerning an initial intrastate securities offering made by an
issuer residing in and doing business in that state is correct?
a. The offering would be exempt from the registration requirements of the Securities Act of
1933.
b. The offering would be subject to the registration requirements of the Securities Exchange Act
of 1934.
c. The offering would be regulated by the SEC.
d. The shares of the offering could not be resold to investors outside the state for at least one
year.
CPA-01398
Explanation
Choice "a" is correct. Intrastate securities offerings are exempt from the registration requirements
of the Securities Act of 1933.
Choice "b" is incorrect. The 1934 Act does not apply to initial offerings. It controls exchanges
once the securities are in the market.
Choice "c" is incorrect. Intrastate offerings are exempt from the Securities Act.
Choice "d" is incorrect. Shares exempt under the intrastate offering exemption may not be resold
for nine months.
CPA-01399
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
74. CPA-01399 Lw May 94 #31 Page 31
Which of the following statements concerning the prospectus required by the Securities Act of
1933 is correct?
a.
b.
c.
d.
The prospectus is a part of the registration statement.
The prospectus should enable the SEC to pass on the merits of the securities.
The prospectus must be filed after an offer to sell.
The prospectus is prohibited from being distributed to the public until the SEC approves the
accuracy of the facts embodied therein.
CPA-01399
Explanation
Choice "a" is correct. The registration statement is divided into two parts. Part I is the
prospectus.
Choice "b" is incorrect. The SEC never passes on the merits of a security. The prospectus
merely gives an investor information on which to make an investment decision.
Choice "c" is incorrect. The registration statement, including the prospectus, must be filed before
any offer to sell may be made.
Choice "d" is incorrect. The SEC does not review the accuracy of the prospectus, but merely
assures that it contains the required information.
32
Becker Professional Review
CPA-01400
Type1 M/C
2K5 Exported Questions
A-D
Corr Ans: D
PM
R 7-03
75. CPA-01400 Lw May 94 #32 Page 32
A preliminary prospectus, permitted under SEC Regulations, is known as the:
a.
b.
c.
d.
Unaudited prospectus.
Qualified prospectus.
"Blue-sky" prospectus.
"Red-herring" prospectus.
CPA-01400
Explanation
Choice "d" is correct. The regulations allow the use of "red herring" prospectuses in certain
circumstances. A "red herring" prospectus may be missing certain information that is not yet
available.
Choice "a" is incorrect. There is no provision for an unaudited prospectus.
Choice "b" is incorrect. There is no provision for a qualified prospectus.
Choice "c" is incorrect. "Blue sky" is the general name given to state securities laws, derived
from the idea that without the laws, people could be lured into investing in the "blue sky."
CPA-01401
Type1 M/C
A-D
Corr Ans: D
PM
R 7-03
76. CPA-01401 Lw May 94 #33 Page 32
A tombstone advertisement:
a. May be substituted for the prospectus under certain circumstances.
b. May contain an offer to sell securities.
c. Notifies prospective investors that a previously offered security has been withdrawn from the
market and is therefore effectively "dead."
d. Makes known the availability of a prospectus.
CPA-01401
Explanation
Choice "d" is correct. A tombstone ad can be placed before a registration statement is effective.
Only certain information may be included in the ad, such as the nature of the security, price, and
the availability of a prospectus.
Choice "a" is incorrect. A tombstone ad is merely a brief advertisement. It cannot replace the
prospectus.
Choice "b" is incorrect. A tombstone ad may indicate the nature of the securities to be issued, the
price, and the availability of a prospectus; it may not make an offer to sell.
Choice "c" is incorrect. A tombstone ad is used before a registration statement for newly issued
securities is effective; it does not announce the death of an old offering.
CPA-01402
Type1 M/C
A-D
Corr Ans: B
PM
CQ #12
R 7-03
77. CPA-01402 Lw May 94 #34 Page 37
Which of the following factors, by itself, requires a corporation to comply with the reporting
requirements of the Securities Exchange Act of 1934?
a.
b.
c.
d.
Six hundred employees.
Shares listed on a national securities exchange.
Total assets of $2 million.
Four hundred holders of equity securities.
CPA-01402
Explanation
33
2K5 Exported Questions
Becker Professional Review
Choice "b" is correct. A corporation must register under the 1934 Act if its securities are traded
on a national exchange or if it has 500 or more shareholders and more than $10 million in assets.
Choice "a" is incorrect. The number of employees is irrelevant to whether a corporation must
register under the 1934 Act.
Choice "c" is incorrect. The fact that a corporation has $2 million in assets does not invoke the
registration requirement.
Choice "d" is incorrect. The fact that a corporation has 400 shareholders does not invoke the
registration requirement.
CPA-01403
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
78. CPA-01403 Lw May 94 #35 Page 38
Which of the following events must be reported to the SEC under the reporting provisions of the
Securities Exchange Act of 1934?
a.
b.
c.
d.
Tender
offers
Yes
Yes
Yes
No
Insider
trading
Yes
Yes
No
Yes
Soliciting
proxies
Yes
No
Yes
Yes
CPA-01403
Explanation
Choice "a" is correct. Tender offers, insider trading, and soliciting proxies must be reported under
the 1934 Act.
CPA-01406
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
79. CPA-01406 Lw May 94 #37 Page 33
Which of the following transactions will be exempt from the full registration requirements of the
Securities Act of 1933?
a.
b.
c.
d.
All intrastate offerings.
All offerings made under Regulation A.
Any resale of a security purchased under Regulation D offering.
Any stockbroker transaction.
CPA-01406
Explanation
Choice "b" is correct. Regulation A provides an exception from the full registration requirements.
It provides a more simplified form of registration.
Choice "a" is incorrect. Intrastate offerings are completely exempt from registration. (The
examiners apparently intended "exempt from full registration" to mean that the transaction was
subject to some registration.)
Choice "c" is incorrect. Resales must qualify for their own exemption. The fact that the securities
were purchased pursuant to a Regulation D offering does not mean that a resale would
necessarily be exempt from the registration requirements.
Choice "d" is incorrect. Stockbroker transactions are exempt only if the transaction (i) is on a
customer's order, (ii) is through an exchange or over-the-counter market, and (iii) constitutes a
usual brokerage function.
CPA-01407
Type1 M/C
A-D
Corr Ans: D
80. CPA-01407 Lw May 94 #38 Page 30
34
PM
R 7-03
Becker Professional Review
2K5 Exported Questions
Under the Securities Exchange Act of 1934, which of the following types of instruments is
excluded from the definition of "securities?"
a.
b.
c.
d.
Investment contracts.
Convertible debentures.
Nonconvertible debentures.
Certificates of deposit.
CPA-01407
Explanation
Choice "d" is correct. Securities issued by a bank are exempt from registration. A certificate of
deposit is an instrument issued by a bank noting a deposit of funds and containing a promise to
repay them at a later date.
Choice "a" is incorrect. There is no exemption for investment contracts.
Choice "b" is incorrect. There is no exemption for debentures.
Choice "c" is incorrect. There is no exemption for debentures.
CPA-01410
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
81. CPA-01410 Lw May 94 #39 Page 35
If securities are exempt from the registration provisions of the Securities Act of 1933, any fraud
committed in the course of selling such securities can be challenged by:
a.
b.
c.
d.
SEC
Yes
Yes
No
No
Person defrauded
Yes
No
Yes
No
CPA-01410
Explanation
Choice "a" is correct. The anti-fraud provisions of the 1933 Act are not limited to registered
securities. An action can be brought under sections 12 or 17 by either a private citizen or the
SEC.
CPA-01412
Type1 M/C
A-D
Corr Ans: D
PM
R 7-03
82. CPA-01412 Lw Nov 93 #37 Page 36
One of the elements necessary to recover damages if there has been a material misstatement in
a registration statement filed under the Securities Act of 1933 is that the:
a.
b.
c.
d.
Issuer and plaintiff were in privity of contract with each other.
Issuer failed to exercise due care in connection with the sale of the securities.
Plaintiff gave value for the security.
Plaintiff suffered a loss.
CPA-01412
Explanation
Choice "d" is correct. Under Section 11, all a plaintiff must prove is a false statement in the
registration statement and damages.
Choice "a" is incorrect. Under Section 11, all a plaintiff must prove is a false statement in the
registration statement and damages. Privity is not required.
Choice "b" is incorrect. Under Section 11, all a plaintiff must prove is a false statement in the
registration statement and damages. Due diligence is a defense, but it must be proved by the
defendant.
Choice "c" is incorrect. Under Section 11, all a plaintiff must prove is a false statement in the
registration statement and damages. The plaintiff could have received the securities as a gift.
35
2K5 Exported Questions
CPA-01413
Type1 M/C
Becker Professional Review
A-D
Corr Ans: A
PM
R 7-03
83. CPA-01413 Lw Nov 93 #40 Page 33
An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that
the issuer:
a.
b.
c.
d.
File an offering circular with the SEC.
Sell only to accredited investors.
Provide investors with the prior four years' audited financial statements.
Provide investors with a proxy registration statement.
CPA-01413
Explanation
Choice "a" is correct. Under Regulation A, an offering circular must be filed with the SEC.
Choice "b" is incorrect. Under Regulation A, sales can be made to any number of investors as
long as sales do not exceed $5 million.
Choice "c" is incorrect. There is no requirement of providing investors with four years' audited
financial statements.
Choice "d" is incorrect. There is no requirement under Regulation A that investors be provided
with proxy registrations.
CPA-01416
Type1 M/C
A-D
Corr Ans: C
PM
R 7-03
84. CPA-01416 Lw Nov 93 #41 Page 37
Adler, Inc. is a reporting company under the Securities Exchange Act of 1934. The only security
it has issued is voting common stock. Which of the following statements is correct?
a. Because Adler is a reporting company, it is not required to file a registration statement under
the Securities Act of 1933 for any future offerings of its common stock.
b. Adler need not file its proxy statements with the SEC because it has only one class of stock
outstanding.
c. Any person who owns more than 10% of Adler's common stock must file a report with the
SEC.
d. It is unnecessary for the required annual report (Form 10K) to include audited financial
statements.
CPA-01416
Explanation
Choice "c" is correct. Persons who own more than 10% of a corporation's stock must file an
annual report with the SEC.
Choice "a" is incorrect. Corporations are not exempted from registering new issues under the
1933 Act simply because they report under the 1934 Act.
Choice "b" is incorrect. All proxy statements must be filed, even if there is only one class of
stock.
Choice "d" is incorrect. 10Ks must include audited financials.
CPA-01418
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
85. CPA-01418 Lw Nov 93 #42 Page 37
Which of the following persons is not an insider of a corporation subject to the Securities
Exchange Act of 1934 registration and reporting requirements?
a.
b.
c.
d.
An attorney for the corporation.
An owner of 5% of the corporation's outstanding debentures.
A member of the board of directors.
A stockholder who owns more than 10% of the outstanding common stock.
CPA-01418
Explanation
36
Becker Professional Review
2K5 Exported Questions
Choice "b" is correct. Officers, directors, and more than 10% stockholders are required to
register and report under Section 16(a) of the 1934 Act. Holders of debt securities are not
considered insiders and are not subject to the registration and reporting requirements.
Choice "a" is incorrect. An attorney can be an insider, at least for purposes of Rule 10b-5.
Choice "c" is incorrect. Officers, directors, and 10% equity holders are required to register and
report under Section 16(a) of the 1934 Act.
Choice "d" is incorrect. Officers, directors, and 10% equity holders are required to register and
report under Section 16(a) of the 1934 Act.
CPA-01419
Type1 M/C
A-D
Corr Ans: D
PM
CQ #10
R 7-03
86. CPA-01419 Lw Nov 93 #43 Page 35
Pix Corp., is making a $6,000,000 stock offering. Pix wants the offering exempt from registration
under the Securities Act of 1933.
Which of the following provisions of the Act would Pix have to comply with for the offering to be
exempt?
a.
b.
c.
d.
Regulation A.
Regulation D, Rule 504.
Regulation D, Rule 505.
Regulation D, Rule 506.
CPA-01419
Explanation
Choice "d" is correct. Rule 506 allows offerings of an unlimited amount to be made.
Choice "a" is incorrect. Regulation A offerings are limited to $5 million.
Choice "b" is incorrect. Rule 504 offerings are limited to $1 million.
Choice "c" is incorrect. Rule 505 offerings are limited to $5 million.
CPA-01422
Type1 M/C
A-D
Corr Ans: B
PM
CQ #11
R 7-03
87. CPA-01422 Lw Nov 93 #44 Page 35
Pix Corp., is making a $6,000,000 stock offering. Pix wants the offering exempt from registration
under the Securities Act of 1933.
Which of the following requirements would Pix have to comply with when selling the securities?
a.
b.
c.
d.
No more than 35 investors.
No more than 35 nonaccredited investors.
Accredited investors only.
Nonaccredited investors only.
CPA-01422
Explanation
Choice "b" is correct. There can be no more than 35 unaccredited investors under a Rule 506
offering.
Choice "a" is incorrect. Although there can be no more than 35 unaccredited investors under
Rule 506, there can be any number of accredited investors.
Choice "c" is incorrect. There can be unaccredited investors under a Rule 506 offering, but no
more than 35 unaccredited investors.
Choice "d" is incorrect. There can be no more than 35 unaccredited investors under Rule 506
and any number of accredited investors.
CPA-01423
Type1 M/C
A-D
Corr Ans: C
88. CPA-01423 Lw Nov 93 #45 Page 34
37
PM
R 7-03
2K5 Exported Questions
Becker Professional Review
Frey, Inc. intends to make a $2,000,000 common stock offering under Rule 505 of Regulation D
of the Securities Act of 1933. Frey:
a.
b.
c.
d.
May sell the stock to an unlimited number of investors.
May make the offering through a general advertising.
Must notify the SEC within 15 days after the first sale of the offering.
Must provide all investors with a prospectus.
CPA-01423
Explanation
Choice "c" is correct. Under Regulation D, the SEC must be notified within 15 days after the first
sale of the offering.
Choice "a" is incorrect. Rule 505 offerings can be sold to an unlimited number of accredited
investors, but there can be no more than 35 unaccredited investors.
Choice "b" is incorrect. General solicitation generally is prohibited under Regulation D.
Choice "d" is incorrect. Under Rule 505, a balance sheet is required if there are unaccredited
investors, but a prospectus is not required.
CPA-01426
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
89. CPA-01426 Lw May 93 #29 Page 31
Which of the following disclosures must be contained in a securities registration statement filed
under the Securities Act of 1933?
a.
b.
c.
d.
A list of all existing stockholders.
The principal purposes for which the offering proceeds will be used.
A copy of the corporation's latest proxy solicitation statement.
The names of all prospective accredited investors.
CPA-01426
Explanation
Choice "b" is correct. Under sections 6 and 7 of the 1933 Act, a registration statement must
include specific financial information such as a balance sheet and a profit and loss statement, and
"other material facts." One such material fact is the use to which the proceeds of the issuance
will be put.
Choice "a" is incorrect. The registration statement need not include a list of current stockholders.
Choice "c" is incorrect. A registration statement need not include a corporation's latest proxy
statement.
Choice "d" is incorrect. The registration statement need not include the names of all prospective
investors; indeed, there might not be any prospective investors at the time the registration
statement is filed since preregistration solicitation is limited.
CPA-01429
Type1 M/C
A-D
Corr Ans: C
PM
R 7-03
90. CPA-01429 Lw May 93 #30 Page 30
Which of the following is least likely to be considered a security under the Securities Act of 1933?
a.
b.
c.
d.
Stock options.
Warrants.
General partnership interests.
Limited partnership interests.
CPA-01429
Explanation
Choice "c" is correct. An investment is a security if it is generally recognized as a security,
mentioned in the Securities Act, or represents a profit-making scheme whereby one invests in a
business and expects to make a profit from the efforts of others. A general partnership interest is
38
Becker Professional Review
2K5 Exported Questions
not included within this definition since the partners take part in running the business and are not
passive investors.
Choice "a" is incorrect. Stock options generally are recognized as securities.
Choice "b" is incorrect. Warrants generally are recognized as securities.
Choice "d" is incorrect. An investment is a security if it is generally recognized as a security,
mentioned in the Securities Act, or represents a profit-making scheme whereby one invests in a
business and expects to make a profit from the efforts of others. A limited partnership interest is
a security since the limited partner does not take part in management of the firm, but rather is
very much like a stockholder of a corporation.
CPA-01431
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
91. CPA-01431 Lw May 93 #31 Page 39
Corporations that are exempt from registration under the Securities Exchange Act of 1934 are
subject to the Act's:
a.
b.
c.
d.
Antifraud provisions.
Proxy solicitation provisions.
Provisions dealing with the filing of annual reports.
Provisions imposing periodic audits.
CPA-01431
Explanation
Choice "a" is correct. The Securities Exchange Act's antifraud provisions apply to all schemes to
sell stock in interstate commerce and are not limited to registered corporations.
Choice "b" is incorrect. A company must follow the proxy provisions of the Securities Exchange
Act only if it is subject to the Act's registration requirements.
Choice "c" is incorrect. A company must file annual reports under the Securities Exchange Act
only if it is subject to the Act's registration requirements.
Choice "d" is incorrect. A company is subject to the periodic audit requirements of the Securities
Exchange Act only if it is subject to the Act's registration requirements.
CPA-01434
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
92. CPA-01434 Lw May 93 #32 Page 37
Under the Securities Exchange Act of 1934, a corporation with common stock listed on a national
stock exchange:
a. Is prohibited from making private placement offerings.
b. Is subject to having the registration of its securities suspended or revoked.
c. Must submit Form 10-K to the SEC except in those years in which the corporation has made
a public offering.
d. Must distribute copies of Form 10-K to its stockholders.
CPA-01434
Explanation
Choice "b" is correct. A reporting company is subject to having its registration revoked for willful
violation of the securities laws.
Choice "a" is incorrect. A company can make a private placement even if it has stock listed on a
national exchange.
Choice "c" is incorrect. Even though form 10K contains information similar to that required under
form S-1 under the 1933 Act, there is no exemption from filing a 10K merely because a public
offering was made that year.
Choice "d" is incorrect. Form 10K must be submitted to the SEC, not to the shareholders.
39
2K5 Exported Questions
CPA-01435
Becker Professional Review
Type1 M/C
A-D
Corr Ans: A
PM
R 7-03
93. CPA-01435 Lw May 93 #33 Page 32
The Securities Act of 1933 provides an exemption from registration for:
a.
b.
c.
d.
Bonds issued by
a municipality
for governmental
purposes
Yes
Yes
No
No
Securities issued
by a not-for-profit
charitable
organization
Yes
No
Yes
No
CPA-01435
Explanation
Choice "a" is correct. The 1933 Securities Act exempts from regulation both bonds issued by
municipalities for governmental purposes and securities issued by not-for-profit charitable
organizations.
CPA-01436
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
94. CPA-01436 Lw May 93 #35 Page 34
Regulation D of the Securities Act of 1933:
a.
b.
c.
d.
Restricts the number of purchasers of an offering to 35.
Permits an exempt offering to be sold to both accredited and nonaccredited investors.
Is limited to offers and sales of common stock that do not exceed $1.5 million.
Is exclusively available to small business corporations as defined by Regulation D.
CPA-01436
Explanation
Choice "b" is correct. Under Regulation D rules 504, 505, and 506, sales may be made to both
accredited and nonaccredited investors, although under rules 505 and 506 the nonaccredited
investors may not number more than 35.
Choice "a" is incorrect. The 35 investor limit refers to the number of unaccredited investors under
rules 505 and 506. There may be an unlimited number of investors under rule 504 of Regulation
D and an unlimited number of accredited investors under rules 505 and 506 under Regulation D.
Choice "c" is incorrect. Under rule 505 under Regulation D there may be up to $5 million in sales.
Sales under rule 506 are unlimited in amount.
Choice "d" is incorrect. Regulation D is for limited offerings, not small businesses.
CPA-04777
Type1 M/C
A-D
Corr Ans: C
PM
R 7-03
95. CPA-04777 Released 2005 Page 30
Under the liability provisions of Section 18 of the Securities Exchange Act of 1934, for which of
the following actions would an accountant generally be liable?
a. Negligently approving a reporting corporation's incorrect internal financial forecasts.
b. Negligently filing a reporting corporation's tax return with the IRS.
c. Intentionally preparing and filing with the SEC a reporting corporation's incorrect quarterly
report.
d. Intentionally failing to notify a reporting corporation's audit committee of defects in the
verification of accounts receivable.
CPA-04777
Explanation
Choice "c" is correct. Section 18 of the Securities Exchange Act of 1934 subjects a defendant to
liability for false or misleading questions in the registration statement or other required reports
(i.e., 10K, 10Q, or 8K). The defendant is not liable if the defendant can prove a lack of scienter.
40
Becker Professional Review
2K5 Exported Questions
Since quarterly reports (10Q) are required under the 1934 Act, a defendant who intentionally
prepared and filed an incorrect quarterly report would be liable under Section 18.
Choices "a" and "b" are incorrect because they do not deal with registration statements or reports
required under the 1934 Act. Additionally, they specify that the accountant acted negligently.
The 1934 Act requires scienter or intentional action.
Choice "d" is incorrect because it does not deal with registration statements or reports required
under the 1934 Act.
CPA-04780
Type1 M/C
A-D
Corr Ans: B
PM
R 7-03
96. CPA-04780 Released 2005 Page 30
Under the Securities Act of 1933, which of the following statements is(are) correct regarding the
purpose of registration?
I.
The purpose of registration is to allow for the detection of management fraud and prevent a
public offering of securities when management fraud is suspected.
II. The purpose of registration is to adequately and accurately disclose financial and other
information upon which investors may determine the merits of securities.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-04780
Explanation
Choice "b" is correct. The principal purpose of the Securities Act of 1933 is to provide investors
with sufficient information to make an informed investment decision. It accomplishes this goal by
requiring registration of new issues of securities. Thus Roman numeral II is a correct statement.
The SEC does not guarantee the accuracy of this information, evaluate the offerings financial
merits or give assurances against loss. Thus, Roman numeral I is incorrect because the SEC
does not require registration to detect fraud.
CPA Legal Liability
CPA-01437
Type1 M/C
97. CPA-01437 Lw R02 #3
A-D
Corr Ans: D
PM
R 7-04
Page 46
Which of the following statements is (are) correct regarding a CPA employee of a CPA firm taking
copies of information contained in client files when the CPA leaves the firm?
I.
A CPA leaving a firm may take copies of information contained in client files to assist another
firm in serving that client.
II. A CPA leaving a firm may take copies of information contained in client files as a method of
gaining technical expertise.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01437
Explanation
Choice "d" is correct. Information contained in client files "workpapers" are the property of the
CPA firm. Although the accounting firm owns the workpapers, the firm and its employees are
generally prohibited from showing the workpapers to anyone without the client's permission.
Furthermore, an employee of a CPA firm may not take information contained in client files when
leaving the firm. Workpapers produced by the firm for, or on behalf of a client, may not be copied
and removed by an employee for personal use.
41
2K5 Exported Questions
CPA-01439
Becker Professional Review
Type1 M/C
98. CPA-01439 Lw R02 #4
A-D
Corr Ans: C
PM
R 7-04
Page 46
Which of the following statements is correct regarding an accountant's working papers?
a. The accountant owns the working papers and generally may disclose them as the accountant
sees fit.
b. The client owns the working papers but the accountant has custody of them until the
accountant's bill is paid in full.
c. The accountant owns the working papers but generally may not disclose them without the
client's consent or a court order.
d. The client owns the working papers but, in the absence of the accountant's consent, may not
disclose them without a court order.
CPA-01439
Explanation
Choice "c" is correct. While a CPA owns his or her workpapers, the ownership rights are very
limited. Generally, a CPA may not reveal client workpapers to third parties without the client's
consent.
CPA-01440
Type1 M/C
99. CPA-01440 Lw R01 #1
A-D
Corr Ans: A
PM
CQ #13
R 7-04
Page 44
Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following
must a plaintiff prove to hold a CPA liable?
I.
II.
a.
b.
c.
d.
The misstatements contained in the financial statements certified by the CPA were material.
The plaintiff relied on the CPA's unqualified opinion.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01440
Explanation
Choice "a" is correct. Under Section 11 of the '33 Act, the plaintiff merely needs to prove a
material misstatement of fact in a registration statement signed by the defendant and damages.
CPA-01441
Type1 M/C
100. CPA-01441
A-D
Lw R01 #2
Corr Ans: D
PM
R 7-04
Page 46
To which of the following parties may a CPA partnership provide its working papers without either
the client's consent or a lawful subpoena?
a.
b.
c.
d.
The IRS
Yes
Yes
No
No
The FASB
Yes
No
Yes
No
CPA-01441
Explanation
Choice "d" is correct. An accountant is prohibited from showing the workpapers to anyone
without the client's permission, except:
1.
2.
3.
4.
5.
Lawful subpoena.
Surviving member of the firm.
Quality control panel.
AICPA/State Trial Board.
Court proceedings.
42
Becker Professional Review
CPA-01443
Type1 M/C
101. CPA-01443
2K5 Exported Questions
A-D
Lw R99 #2
Corr Ans: C
PM
R 7-04
Page 43
Which of the following statements is(are) correct regarding the common law elements that must
be proven to support a finding of constructive fraud against a CPA?
I. The plaintiff has justifiably relied on the CPA's misrepresentation.
II. The CPA has acted in a grossly negligent manner.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01443
Explanation
Choice "c" is correct.
The elements of constructive fraud:
1.
2.
3.
4.
5.
Misrepresentation of a material fact.
Defendant acts with gross negligence or recklessly.
Intent to induce plaintiff's reliance.
Justifiable reliance by plaintiff.
Damages.
Actual fraud requires intent ("scienter").
CPA-01444
Type1 M/C
102. CPA-01444
A-D
Lw R99 #3
Corr Ans: C
PM
R 7-04
Page 44
Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to
establish the defense of due diligence if:
I.
II.
a.
b.
c.
d.
The auditor performed an additional review of the audited statements to ensure that the
statements were accurate as of the effective date of a registration statement.
The auditor complied with GAAS.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01444
Explanation
Choice "c" is correct. Due diligence is an affirmative defense that requires the CPA to prove that
they made a reasonable investigation and had reasonable grounds to believe that the FS's were
true and that no material facts were omitted. In essence, the CPA must prove that they followed
the standards of the profession GAAP/GAAS.
CPA-01445
Type1 M/C
103. CPA-01445
A-D
Lw R97 #1
Corr Ans: C
PM
CQ #14
R 7-04
Page 42
Which of the following statements is generally correct regarding the liability of a CPA who
negligently gives an opinion on an audit of a client's financial statements?
a. The CPA is only liable to those third parties who are in privity of contract with the CPA.
b. The CPA is only liable to the client.
c. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the
opinion.
d. The CPA is liable to all possible foreseeable users of the CPA's opinion.
CPA-01445
Explanation
43
2K5 Exported Questions
Becker Professional Review
Choice "c" is correct. The majority rule (the law followed in the majority of the states) is that
accountants are liable to anyone in a class (such as potential lenders or investors) of third parties
who the CPA knows will rely on the opinion of the financial statements.
Choice "a" is incorrect. This describes a more limited extent of CPA liability than is the case
under the majority rule.
Choice "b" is incorrect. In all states the CPA's liability extends beyond the client.
Choice "d" is incorrect. This describes a broader extent of liability than is the case under the
majority rule.
CPA-01446
Type1 M/C
104. CPA-01446
A-D
Lw Nov 95 #8
Corr Ans: B
PM
R 7-04
Page 42
Under the "Ultramares" rule, to which of the following parties will an accountant be liable for
negligence?
a.
b.
c.
d.
Parties in privity
Yes
Yes
No
No
Foreseen parties
Yes
No
Yes
No
CPA-01446
Explanation
Choice "b" is correct. Ultramares limits the accountants' liability for negligence to parties in
privity; parties who are merely "foreseen" cannot recover.
CPA-01447
Type1 M/C
105. CPA-01447
A-D
Lw Nov 95 #9
Corr Ans: C
PM
R 7-04
Page 43
When performing an audit, a CPA will most likely be considered negligent when the CPA fails to:
a.
b.
c.
d.
Detect all of a client's fraudulent activities.
Include a negligence disclaimer in the client engagement letter.
Warn a client of known internal control weaknesses.
Warn a client's customers of embezzlement by the client's employees.
CPA-01447
Explanation
Choice "c" is correct. A CPA has a duty to warn clients of known weaknesses in internal controls.
The failure to communicate the known weakness to the client constitutes negligence.
Choice "a" is incorrect. A CPA is not required to actively search for frauds. The CPA is not liable
for failure to discover all frauds.
Choice "b" is incorrect. While the disclaimer probably would not be effective, in itself, the
disclaimer does not constitute negligence, i.e., a departure from the ordinary due care for CPAs.
Choice "d" is incorrect. A CPA is not expected to warn outsiders of client matters. In fact, the
CPA would violate the understanding of confidential information.
CPA-01448
Type1 M/C
106. CPA-01448
A-D
Corr Ans: D
PM
R 7-04
Lw Nov 95 #10 Page 43
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud
based on its unqualified opinion on materially false financial statements?
a.
b.
c.
d.
Contributory negligence on the part of the client.
A disclaimer contained in the engagement letter.
Lack of privity.
Lack of scienter.
44
Becker Professional Review
2K5 Exported Questions
CPA-01448
Explanation
Choice "d" is correct. A suit for common law fraud may succeed only if the accountant acted with
scienter (knew that the statement was wrong or recklessly disregarded the truth).
Choice "a" is incorrect. Contributory negligence is a defense to negligence in some jurisdictions,
but it is not a defense to fraud.
Choice "b" is incorrect. A disclaimer against committing fraud would violate public policy and
would not be enforceable.
Choice "c" is incorrect. Privity is not required in an action for fraud.
CPA-01449
Type1 M/C
107. CPA-01449
A-D
Corr Ans: D
PM
R 7-04
Lw Nov 95 #11 Page 39
Under the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA
may be liable if the CPA acted:
a.
b.
c.
d.
Negligently.
With independence.
Without due diligence.
Without good faith.
CPA-01449
Explanation
Choice "d" is correct. Section 10(b) prohibits fraud in connection with the sale of securities. If a
CPA acts without good faith, the CPA is probably acting fraudulently.
Choice "a" is incorrect. Section 10(b) is violated by fraudulent conduct; negligence is not
sufficiently culpable.
Choice "b" is incorrect. Section 10(b) prohibits fraud in connection with the sale of securities.
Lack of independence is not tantamount to fraud.
Choice "c" is incorrect. Section 10(b) prohibits fraud in connection with the sale of securities.
Lack of due diligence probably indicates negligence, but does not necessarily constitute fraud.
CPA-01450
Type1 M/C
108. CPA-01450
A-D
Corr Ans: C
PM
CQ #15
R 7-04
Lw Nov 95 #13 Page 44
Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result
of Ocean's negligence in conducting the audit, the financial statements included material
misstatements. Ocean was unaware of this fact. The financial statements and Ocean's
unqualified opinion were included in a registration statement and prospectus for an original public
offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the
prospectus prior to the purchase but did not read it. The shares declined in value as a result of
the misstatements in Drain's financial statements becoming known. Under which of the following
Acts is Sharp most likely to prevail in a lawsuit against Ocean?
a.
b.
c.
d.
Securities Exchange
Act of 1934,
Section 10(b),
Rule 10b-5
Yes
Yes
No
No
Securities Act
of 1933,
Section 11
Yes
No
Yes
No
CPA-01450
Explanation
Choice "c" is correct. A plaintiff under rule 10b-5 must prove reliance on a misstatement and that
the defendant acted with scienter (knowledge or, probably, reckless disregard for truth). Here,
45
2K5 Exported Questions
Becker Professional Review
neither one can be proved because Sharp did not read the offering statement (and so could not
have relied on it) and Ocean did not act with scienter since the CPA did not know of the error and
made it negligently. An action under Section 11 will be successful, because the plaintiff need
only show a misstatement in the registration statement and damages. Since Ocean acted
negligently, it cannot prove the defense of due diligence.
CPA-01452
Type1 M/C
109. CPA-01452
A-D
Corr Ans: D
PM
CQ #16
R 7-04
Lw Nov 95 #14 Page 46
Which of the following statements is correct regarding a CPA's working papers? The working
papers must be:
a. Transferred to another accountant purchasing the CPA's practice even if the client hasn't
given permission.
b. Transferred permanently to the client if demanded.
c. Turned over to any government agency that requests them.
d. Turned over pursuant to a valid federal court subpoena.
CPA-01452
Explanation
Choice "d" is correct. Client working papers must be turned over pursuant to a valid federal court
subpoena because generally there is no federal privilege in client working papers.
Choice "a" is incorrect. Working papers cannot be turned over to a successor purchasing the
CPA's practice if the client objects.
Choice "b" is incorrect. Client working papers belong to the accountant, not to the client. They
need not be turned over to the client.
Choice "c" is incorrect. Unless subpoenaed, the working papers cannot be turned over to a
government agency without the client's permission.
CPA-01453
Type1 M/C
110. CPA-01453
A-D
Corr Ans: A
PM
R 7-04
Lw Nov 95 #15 Page 46
Thorp, CPA, was engaged to audit Ivor Co.'s financial statements. During the audit, Thorp
discovered that Ivor's inventory contained stolen goods. Ivor was indicted and Thorp was
subpoenaed to testify at the criminal trial. Ivor claimed accountant-client privilege to prevent
Thorp from testifying. Which of the following statements is correct regarding Ivor's claim?
a. Ivor can claim an accountant-client privilege only in states that have enacted a statute
creating such a privilege.
b. Ivor can claim an accountant-client privilege only in federal courts.
c. The accountant-client privilege can be claimed only in civil suits.
d. The accountant-client privilege can be claimed only to limit testimony to audit subject matter.
CPA-01453
Explanation
Choice "a" is correct. The accountant-client privilege can be claimed only in those few states that
recognize the privilege.
Choice "b" is incorrect. Generally, there is no federal accountant-client privilege. (There is a
limited federal privilege for tax practitioners in noncriminal proceedings, but here the engagement
was for audit services and the proceeding is criminal.)
Choice "c" is incorrect. Except in federal tax cases, where the privilege exists, it is not limited to
civil cases.
Choice "d" is incorrect. Where the privilege exists, it would prevent testimony about the audit, not
limit testimony to the audit.
CPA-01454
Type1 M/C
A-D
Corr Ans: B
46
PM
R 7-04
Becker Professional Review
111. CPA-01454
2K5 Exported Questions
Lw May 95 #5 Page 46
A CPA is permitted to disclose confidential client information without the consent of the client to:
I. Another CPA firm if the information concerns suspected tax return irregularities.
II. A state CPA society voluntary quality control review board.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01454
Explanation
Choice "b" is correct. A member in public practice may not disclose any confidential client
information without the specific consent of the client except in the following instances:
1) to comply with a validly issued and enforceable subpoena or summons,
2) as part of a review of a member's professional practice under AICPA or state CPA society or
Board of Accountancy authorization,
3) in issuing a complaint with, or responding to any inquiry made by, the professional ethics
division or trial board of the Institute or a duly constituted investigative or disciplinary body of
a state CPA society or Board of Accountancy.
ET 301.01
CPA-01455
Type1 M/C
112. CPA-01455
A-D
Lw Nov 94 #9
Corr Ans: A
PM
R 7-04
Page 43
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
a. Is the client's creditor who sues the accountant for negligence.
b. Can prove the presence of gross negligence that amounts to a reckless disregard for the
truth.
c. Is the accountant's client.
d. Bases the action upon fraud.
CPA-01455
Explanation
Choice "a" is correct. A creditor of a client generally cannot sue the client's accountant for
negligence unless the accountant had reason to know that the creditor would be relying on the
accountant's work.
Choice "b" is incorrect. If the plaintiff can prove gross negligence, privity is not a defense; the
accountant generally is liable to anyone who is injured by gross negligence.
Choice "c" is incorrect. The client is always in privity of contract with the accountant.
Choice "d" is incorrect. If the action is based on fraud, privity is not a defense; the accountant
generally can be held liable to anyone who is injured by the accountant's fraud.
CPA-01456
Type1 M/C
113. CPA-01456
A-D
Corr Ans: C
PM
R 7-04
Lw Nov 94 #10 Page 44
Under common law, which of the following statements most accurately reflects the liability of a
CPA who fraudulently gives an opinion on an audit of a client's financial statements?
a.
b.
c.
d.
The CPA is liable only to third parties in privity of contract with the CPA.
The CPA is liable only to known users of the financial statements.
The CPA probably is liable to any person who suffered a loss as a result of the fraud.
The CPA probably is liable to the client even if the client was aware of the fraud and did not
rely on the opinion.
CPA-01456
Explanation
47
2K5 Exported Questions
Becker Professional Review
Choice "c" is correct. A CPA who commits fraud is liable to anyone who is injured by the fraud.
Choice "a" is incorrect. A CPA's liability for fraud is not limited by privity.
Choice "b" is incorrect. A CPA's liability for fraud is not limited to known users of the CPA's work
product.
Choice "d" is incorrect. Actual and justifiable reliance are necessary elements of fraud.
CPA-01457
Type1 M/C
114. CPA-01457
A-D
Corr Ans: A
PM
R 7-04
Lw Nov 94 #11 Page 44
Under the provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934,
which of the following activities must be proven by a stock purchaser in a suit against a CPA?
I.
II.
a.
b.
c.
d.
Intentional conduct by the CPA designed to deceive investors.
Negligence by the CPA.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01457
Explanation
Choice "a" is correct. Under Rule 10b-5, a purchaser must prove an intent to deceive; negligence
is insufficient to establish scienter.
CPA-01459
Type1 M/C
115. CPA-01459
A-D
Corr Ans: D
PM
R 7-04
Lw Nov 94 #13 Page 44
Under Section 11, which of the following must be proven by a purchaser of the security?
a.
b.
c.
d.
Reliance on the
financial statements
Yes
Yes
No
No
Fraud by
the CPA
Yes
No
Yes
No
CPA-01459
Explanation
Choice "d" is correct. Under Section 11, a plaintiff need only prove that there was a material
misstatement in the financial statements included in the registration statement that was signed by
the defendant and that damages were incurred. The purchaser need not prove reliance or fraud.
CPA-01462
Type1 M/C
116. CPA-01462
A-D
Corr Ans: B
PM
R 7-04
Lw May 94 #9 Page 44
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA
will be liable to third parties who are unknown to the CPA based on:
a.
b.
c.
d.
Negligence.
Gross negligence.
Strict liability.
Criminal deceit.
CPA-01462
Explanation
Choice "b" is correct. Reckless departure from standards of due care constitutes gross
negligence, which is also called constructive fraud. A CPA who commits constructive fraud is
liable to all foreseeable plaintiffs, not just those with whom the CPA dealt or knew of.
48
Becker Professional Review
2K5 Exported Questions
Choice "a" is incorrect. Negligence connotes less of a departure from due care than
recklessness. If a CPA is merely negligent, liability is limited to clients and persons whom the
CPA knew would be relying on the CPA's work.
Choice "c" is incorrect. Strict liability imposes liability without fault. CPAs generally are not
strictly liable for departures from the standard of due care. Moreover, a fault standard
(recklessness) is involved here.
Choice "d" is incorrect. Criminal acts give rise to criminal liability. Only the government can
impose liability for criminal acts. Private parties must rely on a tort theory to hold a CPA liable.
CPA-01465
Type1 M/C
117. CPA-01465
A-D
Lw Nov 93 #1
Corr Ans: C
PM
R 7-04
Page 42
Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements
of Queen Co. The financial statements contained misstatements that resulted in a material
overstatement of Queen's net worth. Queen provided the audited financial statements to Mac
Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial
statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to
recover for its losses associated with Queen's default. Which of the following must Mac prove in
order to recover?
I.
II.
a.
b.
c.
d.
Beckler was negligent in conducting the audit.
Mac relied on the financial statements.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01465
Explanation
Choice "c" is correct. Although a CPA generally is liable to third parties only for fraud or
constructive fraud (gross negligence), where the CPA knows that the third party will be relying on
the audit, the CPA can be liable to the third party for mere negligence (the CPA owes the third
party a duty of care since the third party is an intended beneficiary of the engagement). An action
for negligence requires both reliance on a misstatement and negligence.
CPA-01468
Type1 M/C
118. CPA-01468
A-D
Lw Nov 93 #6
Corr Ans: A
PM
R 7-04
Page 44
Jay and Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally gave an
unqualified opinion on the financial statements even though material misstatements were
discovered. The financial statements and Jay's unqualified opinion were included in a registration
statement and prospectus for an original public offering of Maco stock. Which of the following
statements is correct regarding Jay's liability to a purchaser of the offering under Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934?
a. Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial
statements.
b. Jay will be liable if Jay was negligent in conducting the audit.
c. Jay will not be liable if the purchaser's loss was under $500.
d. Jay will not be liable if the misstatement resulted from an omission of a material fact by Jay.
CPA-01468
Explanation
Choice "a" is correct. To make out a private cause of action under rule 10b-5, a purchaser must
show reliance.
Choice "b" is incorrect. Rule 10b-5 prohibits fraud in the sale of stock. It does not impose liability
for mere negligence.
Choice "c" is incorrect. Rule 10b-5 has no minimum liability threshold.
49
2K5 Exported Questions
Becker Professional Review
Choice "d" is incorrect. Rule 10b-5 liability can arise both from false statements of material fact
and from omissions of statements necessary to make statements made not misleading.
CPA-01470
Type1 M/C
119. CPA-01470
A-D
Lw Nov 93 #7
Corr Ans: B
PM
R 7-04
Page 43
Which of the following is the best defense a CPA firm can assert in defense to a suit for common
law fraud based on their unqualified opinion on materially false financial statements?
a.
b.
c.
d.
Lack of privity.
Lack of scienter.
Contributory negligence on the part of the client.
A disclaimer contained in the engagement letter.
CPA-01470
Explanation
Choice "b" is correct. Common law fraud requires a showing of intent to deceive, which is
scienter.
Choice "a" is incorrect. Privity is not required in a common law fraud action.
Choice "c" is incorrect. Contributory negligence is a defense to a negligence cause of action in
some jurisdictions, but it is not a defense to an action for fraud.
Choice "d" is incorrect. One cannot contractually limit liability for intentional torts.
CPA-01473
Type1 M/C
120. CPA-01473
A-D
Corr Ans: B
PM
R 7-04
Lw May 93 #1 Page 42
Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in approving
the merger was the financial statements of Cord that were audited by Frank & Co., CPAs. Sun
had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed
to discover certain irregularities that later caused Sun to suffer substantial losses. For Frank to
be liable under common law negligence, Sun at a minimum must prove that Frank:
a.
b.
c.
d.
Knew of the irregularities.
Failed to exercise due care.
Was grossly negligent.
Acted with scienter.
CPA-01473
Explanation
Choice "b" is correct. For a cause of action for negligence, the client must prove at least that the
CPA failed to exercise due care.
Choice "a" is incorrect. Knowledge of the irregularities without reporting them to the client would
constitute fraud. This is not the minimum that must be proved for negligence.
Choice "c" is incorrect. A client can maintain a cause of action against a CPA for simple
negligence; gross negligence need not be proved.
Choice "d" is incorrect. Scienter (intent) is not required for negligence.
CPA-01474
Type1 M/C
121. CPA-01474
A-D
Corr Ans: A
PM
R 7-04
Lw May 93 #2 Page 42
A CPA will most likely be negligent when the CPA fails to:
a.
b.
c.
d.
Correct errors discovered in the CPA's previously issued audit reports.
Detect all of a client's fraudulent activities.
Include a negligence disclaimer in the CPA's engagement letter.
Warn a client's customers of embezzlement by the client's employees.
50
Becker Professional Review
2K5 Exported Questions
CPA-01474
Explanation
Choice "a" is correct. It would be negligent (i.e., a failure to exercise due care) to not correct
discovered errors.
Choice "b" is incorrect. An auditor does not have a duty to discover all of a client's fraudulent
activities.
Choice "c" is incorrect. It would not be negligent to omit a negligence disclaimer in an
engagement letter. The inclusion of such a disclaimer would probably be ineffective because it in
essence would be an attempt to avoid responsibility to perform the audit with due care.
Choice "d" is incorrect. A CPA must warn a client of an employee's embezzlement only if the
CPA discovers the embezzlement.
CPA-01475
Type1 M/C
122. CPA-01475
A-D
Corr Ans: B
PM
R 7-04
Lw May 93 #10 Page 44
An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 only if the plaintiff proves that:
a.
b.
c.
d.
The accountant was negligent.
There was a material omission.
The security involved was registered.
The security was part of an original issuance.
CPA-01475
Explanation
Choice "b" is correct. Among other things to prove a cause of action under Rule 10b-5, a plaintiff
must prove that the defendant made a material false statement or omission in connection with the
purchase or sale of securities.
Choice "a" is incorrect. Negligence is not a high enough standard; Rule 10b-5 requires scienter
(an intent to deceive) or reckless disregard for the truth.
Choice "c" is incorrect. Section 10(b) and Rule 10b-5 apply to all sales of securities involving
interstate commerce, not just those registered.
Choice "d" is incorrect. Section 10(b) of the 1934 Act primarily governs post-issuance
transactions; issuance of securities generally is governed by the 1933 Act. Although Section
10(b) and Rule 10b-5 could be applied to the issuance of securities, it certainly is not a
requirement that the securities involved be part of an original issuance.
CPA-04790
Type1 M/C
123. CPA-04790
A-D
Corr Ans: C
PM
R 7-04
Released 2005 Page 42
A client suing a CPA for negligence must prove each of the following factors, except:
a.
b.
c.
d.
Breach of duty of care.
Proximate cause.
Reliance.
Injury.
CPA-04790
Explanation
Choice "c" is correct. Negligence has 4 elements: duty of care, breach (which is lack of due
care), causality and injury.
Choices "a", "b", and "d" are elements of negligence. Only choice "c" is not.
Property Insurance
CPA-01861
Type1 M/C
A-D
Corr Ans: B
51
PM
R 7-05
2K5 Exported Questions
124. CPA-01861
Becker Professional Review
Lw R01 #10
Page 48
A building was purchased for $350,000 and insured under a $300,000 fire insurance policy
containing an 80% coinsurance clause. Several years later, the building, having a fair market
value of $500,000, sustained fire damage of $40,000. What is the amount recoverable from the
insurance company?
a.
b.
c.
d.
$28,000
$30,000
$32,000
$40,000
CPA-01861
Explanation
Choice "b" is correct.
300,000
× 40,000 = 30,000
80% × 500,000
CPA-01866
Type1 M/C
125. CPA-01866
A-D
Lw R99 #17
Corr Ans: C
PM
R 7-05
Page 48
In 1992, King bought a building for $250,000. At that time, King took out a $200,000 fire
insurance policy with Omni Insurance Co. and a $50,000 fire insurance policy with Safe
Insurance Corp. Each policy contained a standard 80% coinsurance clause. In 1996, when the
building had a fair market value of $300,000, a fire caused $200,000 in damage. What dollar
amount would King recover from Omni?
a.
b.
c.
d.
$100,000
$150,000
$160,000
$200,000
CPA-01866
Explanation
Choice "c" is correct.
Omni
Safe
Total Insurance
$200,000
50,000
$250,000
Face amount of policy(s) Partial
×
loss
80% × FMV
200,000
250,000
× 200,000 = Max
80% × 300,000
recovery
Omni
200,000/250,000 = 80% × 200,000 = 160,000. Choice "c".
Safe
50,000/250,000 = 20% × 200,000 = 40,000.
Recovery is limited to the lesser of the face value of the policy(s) or amount of the loss.
CPA-01872
Type1 M/C
126. CPA-01872
A-D
Lw R96 #10
Corr Ans: B
PM
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Page 49
Which of the following losses, resulting from a fire, generally may be recovered under a standard
fire insurance policy?
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Becker Professional Review
a.
b.
c.
d.
Water damage
resulting from
extinguishing
the fire
Yes
Yes
No
No
2K5 Exported Questions
Loss of
income due
to business
interruption
Yes
No
Yes
No
CPA-01872
Explanation
Choice "b" is correct. A standard fire insurance policy usually covers the damages from the fire
and from putting the fire out. Thus, damages caused by water used in extinguishing a fire are
recoverable. Loss of income from business interruption, however, is too speculative and remote
to be included as damages under the fire policy.
CPA-01904
Type1 M/C
127. CPA-01904
A-D
Corr Ans: A
PM
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Lw Nov 95 #60 Page 47
Which of the following statements correctly describes the requirement of insurable interest
relating to property insurance? An insurable interest:
a.
b.
c.
d.
Must exist when any loss occurs.
Must exist when the policy is issued and when any loss occurs.
Is created only when the property is owned in fee simple.
Is created only when the property is owned by an individual.
CPA-01904
Explanation
Choice "a" is correct. An insurable interest need only exist as to property insurance at the time of
the loss.
Choice "b" is incorrect. An insurable interest need only exist as to property insurance at the time
of the loss.
Choice "c" is incorrect. An insurable interest does not require fee simple ownership; a lessee has
an insurable interest, as does the buyer of goods identified to the contract for their sale.
Choice "d" is incorrect. Insurable interests are not limited to individuals.
CPA-01906
Type1 M/C
128. CPA-01906
A-D
Corr Ans: B
PM
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Lw May 95 #59 Page 48
Clark Corp. owns a warehouse purchased for $150,000 in 1990. The current market value is
$200,000. Clark has the warehouse insured for fire loss with Fair Insurance Corp. and Zone
Insurance Co. Fair's policy is for $150,000 and Zone's policy is for $75,000. Both policies
contain the standard 80% coinsurance clause. If a fire totally destroyed the warehouse, what
total dollar amount would Clark receive from Fair and Zone?
a.
b.
c.
d.
$225,000
$200,000
$160,000
$150,000
CPA-01906
Explanation
Choice "b" is correct. If an insured has more than one policy, they are combined to determine
whether the coinsurance threshold has been exceeded. Here, the combined total of the
insurance policies is more than the value of the property, so the insurers will be liable for the
whole loss. Of course, the recovery cannot exceed the value of the property, $200,000.
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2K5 Exported Questions
CPA-01909
Becker Professional Review
Type1 M/C
129. CPA-01909
A-D
Corr Ans: C
PM
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Lw May 95 #60 Page 47
Which of the following parties has an insurable interest?
I. A corporate retailer in its inventory.
II. A partner in the partnership property.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01909
Explanation
Choice "c" is correct. For property insurance, the insured need only have some real economic
interest in the property being insured; an ownership interest is not necessary. A retailer certainly
has a sufficient interest in its inventory, and although a partner has no personal ownership
interest in partnership property, there is still an economic interest in the property so it can be
insured.
CPA-01912
Type1 M/C
130. CPA-01912
A-D
Corr Ans: C
PM
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Lw May 93 #59 Page 47
In 1988, Pod bought a building for $220,000. At that time, Pod purchased a $150,000 fire
insurance policy with Owners Insurance Co. and a $50,000 fire insurance policy with Group
Insurance Corp. Each policy contained a standard 80% co-insurance clause. In 1992, when the
building had a fair market value of $250,000, it was damaged in a fire.
How much would Pod recover from Owners if the fire caused $180,000 in damage?
a.
b.
c.
d.
$90,000
$120,000
$135,000
$150,000
CPA-01912
Explanation
Choice "c" is correct. Where an insured has multiple policies that have a coinsurance clause, the
face value of the policies are added together to determine whether the coinsurance percentage is
met. Here, Pod owned two policies with a combined face value of $200,000 ($150,000 Owners
policy and $50,000 Group policy), each with an 80% coinsurance clause. At the time of the loss,
the property was worth $250,000. Since Pod's total insurance coverage met the coinsurance
percent ($250,000 × 80% = $200,000), Pod may recover the full loss, up to the face value of the
policies. Each insurer will be liable for its pro rata share of the loss. Owner's pro rata share is ¾.
Thus, if the loss was $180,000, Owners would be liable for $135,000.
CPA-01915
Type1 M/C
131. CPA-01915
A-D
Corr Ans: B
PM
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Lw May 93 #60 Page 48
In 1988, Pod bought a building for $220,000. At that time, Pod purchased a $150,000 fire
insurance policy with Owners Insurance Co. and a $50,000 fire insurance policy with Group
Insurance Corp. Each policy contained a standard 80% co-insurance clause. In 1992, when the
building had a fair market value of $250,000, it was damaged in a fire.
How much would Pod recover from Owners and Group if the fire totally destroyed the building?
a.
b.
c.
d.
$160,000
$200,000
$220,000
$250,000
54
Becker Professional Review
2K5 Exported Questions
CPA-01915
Explanation
Choice "b" is correct. Where an insured has multiple policies that have a coinsurance clause, the
face value of the policies are added together to determine whether the coinsurance percentage is
met. Here, Pod owned two policies with a combined face value of $200,000 ($150,000 Owners
policy and $50,000 Group policy), each with an 80% coinsurance clause. At the time of the loss,
the property was worth $250,000. Since Pod's total insurance coverage met the coinsurance
percent ($250,000 × 80%=$200,000), Pod may recover the full loss, up to the face value of the
policies. Here the loss was $250,000 and the face value of the policies was $200,000. Thus,
Pod may recover $200,000.
Antitrust Law (required homework reading)
CPA-01536
Type1 M/C
132. CPA-01536
A-D
Nov 84 #32
Corr Ans: A
PM
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Page 53
Which of the following sanctions is/are available against an individual who has violated the
federal antitrust laws?
a.
b.
c.
d.
Fine
Yes
Yes
Yes
Yes
Imprisonment
Yes
Yes
No
No
Civil Damages
Yes
No
Yes
No
CPA-01536
Explanation
Choice "a" is correct. Violation of the Sherman Act provides for criminal penalties including
imprisonment. Sherman also provides for fines and civil damages. Only choice "a" indicates that
all three are available.
CPA-01539
Type1 M/C
133. CPA-01539
A-D
Nov 84 #33
Corr Ans: C
PM
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Page 50
The term "illegal per se" as it is frequently used in antitrust law:
a. Applies exclusively to illegal price fixing and other related activities by competitors.
b. Must be established by the Justice Department in order to impose criminal sanctions under
the Federal Trade Commission Act.
c. Represents anticompetitive conduct or agreements which are inherently illegal and without
legal justification.
d. Applies exclusively to illegal anticompetitive activities by competitors.
CPA-01539
Explanation
Choice "c" is correct. By definition an "illegal per se" act is one that is inherently illegal and
without legal justification.
Choice "a" is incorrect. Tying arrangements may be illegal per se when the seller has
considerable economic power in the tying product.
Choice "b" is incorrect. The Federal Trade Commission Act does not provide for criminal
penalties. Additionally, it provides for action by the FTC, not the Justice Department.
Choice "d" is incorrect. Tying arrangements are not between competitors and may be illegal per
se.
CPA-01542
Type1 M/C
134. CPA-01542
A-D
Nov 84 #34
Corr Ans: C
Page 54
55
PM
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2K5 Exported Questions
Becker Professional Review
Section 7 of the Clayton Act is the primary statutory provision used by the Department of Justice
in controlling anticompetitive mergers and acquisitions. In general, the Clayton Act is invoked
because:
a. The Sherman Act applies to asset mergers or acquisitions only and not to stock mergers or
acquisitions.
b. It provides for harsher criminal penalties than does the Sherman Act.
c. It enables the Department of Justice to proscribe mergers and acquisitions in their incipiency.
d. It provides for exclusive jurisdiction over such activities.
CPA-01542
Explanation
Choice "c" is correct. Section 7 of Clayton prohibits the merger or acquisition of a company if the
effect is to substantially lessen competition. It allows the Department of Justice to proscribe
mergers and acquisitions in their incipiency, before they develop monopoly power.
Choice "a" is incorrect. Sherman prohibits restraints on trade and monopolies. Under Sherman,
a stock merger could be opposed if it could be demonstrated that the effect unreasonably
restrained trade. Under Clayton, the government does not have to wait until the merger has that
effect, the merger can be opposed at the outset.
Choice "b" is incorrect. Only Sherman provides for criminal penalties, Clayton does not.
Choice "d" is incorrect. As indicated above, a merger could violate both Sherman and Clayton.
Thus, Clayton does not provide for exclusive jurisdiction.
CPA-01546
Type1 M/C
135. CPA-01546
A-D
Nov 84 #35
Corr Ans: A
PM
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Page 50
An agreement made among several large competitors is permissible under the antitrust laws
when the parties have:
a. Undertaken to persuade the legislature to take some action that could result in a lessening of
competition.
b. Fixed maximum resale prices.
c. Fixed minimum resale prices.
d. Used common price lists which served merely as the starting point for customer bargaining.
CPA-01546
Explanation
Choice "a" is correct. The Noerr-Pennington doctrine established by the Supreme Court permits
businessmen to join together to obtain legislative or executive action.
Choices "b", "c", and "d" are incorrect because they all involve activities that could be illegal
under antitrust law.
CPA-01550
Type1 M/C
136. CPA-01550
A-D
Nov 83 #33
Corr Ans: C
PM
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Page 53
Loop Corp. has made a major breakthrough in the development of a micropencil. Loop has
patented the product and is seeking to maximize the profit potential. In this effort, Loop can
legally:
a. Require its retailers to sell only Loop's products, including the micropencils, and not sell
similar competing products.
b. Require its retailers to take stipulated quantities of its other products in addition to the
micropencils.
c. Sell the product at whatever price the traffic will bear even though Loop has a monopoly.
d. Sell the product to its retailers upon condition that they do not sell the micropencils to the
public for less than a stated price.
CPA-01550
Explanation
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Becker Professional Review
2K5 Exported Questions
Choice "c" is correct. By its very nature a patent grants a limited monopoly to the patent holder.
The patent holder may sell the item at whatever price it desires.
Choice "a" is incorrect. Requiring retailers to sell only Loop's products and not competitors would
violate the exclusive dealing arrangements of Clayton if the effect were to substantially lessen
competition.
Choice "b" is incorrect. Requiring retailers to take stipulated quantities of its other products would
violate the tying arrangements section of Sherman and Clayton if the effect were to substantially
lessen competition.
Choice "d" is incorrect. Requiring retailers to sell at not less than a stated price is a form of
vertical price fixing and could be a violation of Sherman.
CPA-01553
Type1 M/C
137. CPA-01553
A-D
Nov 83 #34
Corr Ans: A
PM
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Page 50
Certain members of the Tri-State Railway Construction Association decided that something must
be done about the disastrous competition, which, when coupled with the depressed status of the
industry and economy, was causing financial chaos for many of its members. They met privately
after one of the association meetings and decided to allocate construction projects among
themselves based upon an historical share of the market. Under the arrangement, a certain
designated company would submit the low bid, thereby ensuring that the company would obtain
the job. Such an arrangement is:
a.
b.
c.
d.
Illegal per se, and a criminal violation of the antitrust law.
Illegal under the rule of reason, but not a criminal violation of the antitrust law.
Legally justifiable due to the economic conditions in the marketplace.
Legal under antitrust law since it does not fix prices.
CPA-01553
Explanation
Choice "a" is correct. This is an agreement between competitors to fix prices (horizontal price
fixing). Horizontal price fixing (i.e., agreements among competitors to fix prices) is a per se
violation of the Sherman Act.
Choice "b" is incorrect. Horizontal price fixing (i.e., agreements among competitors to fix prices)
is a per se violation of the Sherman Act. It is not judged under the rule of reason.
Choices "c" and "d" are incorrect. This activity is illegal, not legal.
CPA-01554
Type1 M/C
138. CPA-01554
A-D
Nov 83 #35
Corr Ans: B
PM
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Page 54
In a pure conglomerate merger:
a. The government must establish an actual restraint on competition in the marketplace in order
to prevent the merger.
b. The acquiring corporation neither competes with nor sells to or buys from the acquired
corporation.
c. The merger is prima facie valid unless the government can prove the acquiring corporation
had an intent to monopolize.
d. Some form of additional anticompetitive behavior must be established (e.g., price fixing) in
order to provide the basis for the government's obtaining of injunctive relief.
CPA-01554
Explanation
Choice "b" is correct. In a conglomerate merger, a firm acquires a company in a completely
different business (i.e., a merger between firms that neither compete nor have a
customer/supplier relationship).
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2K5 Exported Questions
Becker Professional Review
Choice "a" is incorrect. The government does not have to establish an actual restraint on
competition. They have been challenged when it is highly likely that one of the firms will enter the
market of the other.
Choice "c" is incorrect. The government does not have to prove an intent to monopolize.
Choice "d" is incorrect. The government does not have to prove some additional form of
anticompetitive behavior. They have been challenged when it is highly likely that one of the firms
will enter the market of the other or where the merged company would become substantially
large. No additional anticompetitive behavior is required.
CPA-01556
Type1 M/C
139. CPA-01556
A-D
May 82 #27
Corr Ans: C
PM
R 7-06
Page 53
The United States Department of Justice has alleged that Variable Resources, Inc., the largest
manufacturer and seller of variable speed drive motors, is a monopolist. It is seeking an
injunction ordering divestiture by Variable of a significant portion of its manufacturing facilities.
Variable denies it has monopolized the variable speed drive motor market. Which of the following
statements is correct insofar as the government's action against Variable is concerned?
a. The government must prove that Variable is the sole source of a significant portion of the
market.
b. In order to establish monopolization, the government must prove that Variable has at least
75% of the market.
c. If Variable has the power to control prices or exclude competition, it has monopoly power.
d. As long as Variable has not been a party to a contract, combination, or conspiracy in restraint
of trade, it can not be found to be guilty of monopolization.
CPA-01556
Explanation
Choice "c" is correct. Monopoly power exists when a firm has sufficient market power to control
prices or exclude competition.
Choice "a" is incorrect. The government does not have to prove Variable is the sole source of a
significant portion of the market.
Choice "b" is incorrect. Companies with market shares of between 40% and 70% may or may not
be monopolies. Companies with a market share of 70% or more are generally considered a
monopoly. 75% market share is not required.
Choice "d" is incorrect. The Sherman Act has two prominent sections. Section 1 prohibits
contracts, combinations and conspiracies that restrain trade. Section 2 prohibits monopolies and
attempts to monopolize. Variable can violate section 2 without entering into a contract or
conspiracy in restraint of trade.
CPA-01558
Type1 M/C
140. CPA-01558
A-D
May 82 #31
Corr Ans: A
PM
R 7-06
Page 55
Gould Machinery builds bulldozers. Prior to 1981, it sold on credit a substantial amount of
equipment to Mace Contractors. Mace went into bankruptcy in 1981. In order to protect its
investment, Gould took over the business of Mace. Erhart Contractors now complains that the
acquisition harms its business, on the ground that its business would have improved had not
Gould entered the market as a competitor. Erhart can:
a.
b.
c.
d.
Not recover damages under the antitrust laws.
Recover treble damages.
Recover only its actual damages.
Obtain injunctive relief ordering divestiture.
CPA-01558
Explanation
Choice "a" is correct. Since Mace was in danger of becoming insolvent, the "Failing Company"
exception applies. Under this exception, if the acquired firm is in danger of becoming insolvent
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2K5 Exported Questions
and no other purchasers are interested in acquiring it, a merger can be lawful even if the effect is
to lessen competition.
Choices "b", "c", and "d" are incorrect. All of these choices indicated there was a violation of
antitrust law.
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