R7 Questions

Question 1

A principal and agent relationship requires a

a. Written agreement.
b. Power of attorney.
c. Meeting of the minds and consent to act.
d. Specified consideration.

Answer 1

C. It’s important to note that the only two things required to form an agency is contractual capacity of the principal (not the agent) and consent of the parties.

Question 2

10. 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 twenty-one years of age.
    II. Post would be liable to Trent if the collection was destroyed before Trent found a purchaser.
    a. I only.
    b. II only.
    c. Both I and II.
    d. Neither I nor II.

Answer 2

D. I chose B. It’s important to realize that the principal doesn’t have to pay Trent for the work because the contract is terminated if the subject matter i gone.

Only the principal need to have contractual compacity when entering into an agency relationship. The agent doesn’t need it. the los or destruction of the subject matter terminates the agency relationship.

Question 3

15. Ames, claiming to be an agent of Clar Corporation, makes a contract with Trimon in the name of Clar Corporation. Later, Clar Corporation, for the first time, learns what Ames has done and notifies Trimon of the truth that Ames was not an agent of Clar Corporation. Which of the following statements is incorrect?
    a. Clar Corporation may ratify this contract if it does so with the entire contract.
    b. Trimon may withdraw from the contract before Clar attempts to ratify it.
    c. Clar Corporation may ratify this contract by performing under the contract without stating that it is ratifying.
    d. Trimon may enforce this contract even if Clar Corporation does not wish to be bound.

Answer 3

D. Ames doesn’t have any actual authority, so Trimon cannot enforce the contract against Clar.

Question 4

20. 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 has 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.

Answer 4

A. I chose D. It’s important to realize that a Principal can only be bound by apparent authority when the principal is disclosed to the third party. Here, it is not disclosed to the third party, so the principal is not liable. The principal is bound because of the actual authority he gave the broker.

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.

Question 5

22. When a valid contract is entered into by an agent on the principal’s behalf, in a nondisclosed principal situation, which of the following statements concerning the principal’s liability is correct?
    The principal may be held liable once disclosed The principal must ratify the contract to be held liable a. Yes Yes b. Yes No c. No Yes d. No No

Answer 5

B. Once the principal is disclosed to the third party, the third party can chose to sue the principal. A contract cannot be ratified unless 1) The agent indicated that they were acting on behalf of the principal (PRINCIPAL HAS TO BE DISCLOSED!!)

2) All material facts must be disclosed to the principal
3) The principal must ratify the entire transaction–no partial ratification

Question 6

24. Able, as agent for Baker, an undisclosed principal, contracted with Safe to purchase an antique car. In payment, Able issued his personal check to Safe. Able could not cover the check but expected Baker to give him cash to deposit before the check was presented for payment. Baker did not do so and the check was dishonored. Baker’s identity became known to Safe. Safe may not recover from
    a. Baker individually on the contract.
    b. Able individually on the contract.
    c. Baker individually on the check.
    d. Able individually on the check.

Answer 6

C. The agent was given actual authority, so the principal is liable to the third party ONCE DISCLOSED. In regards to the check, if your name is not on the instrument, you cannot be held liable.

Question 7

Which of the following eents will follow the filing of the Chapter 7 involuntary petition?

A trustee will be appointed ; A stay against creditor collection proceedings will go into effect

A. yes; yes
B. yes; no
C. no; yes
D. no; no

Answer 7

A. Once a valid petition in bankruptcy is filed, this automatically stays other legal proceedings against the debtor’s estate. Also, the court appoints an interim trustee.

Question 8

Which of the following statements represent(s) a principal’s duty to an agent who works on a commission basis?
I.The principal is required to maintain pertinent records, account to the agent, and pay the agent according to the terms of their agreement.
II.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.
a. I only.
b. Both I and II.
c. Neither I nor II.
d. II only.

Answer 8

B. I chose D. 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.

I guess you can think of account to the agent as “let the agent know how much sales they brought in”

Question 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. Principal and agent have mutually agreed to end their relationship.
b. Time set forth in the agreement creating the agency relationship has expired.
c. Agent has fulfilled the purpose for which the agency relationship was created.
d. Principal has received a discharge in bankruptcy under the liquidation provisions of the Bankruptcy Code.

Answer 9

D. I chose C. It’s important to realize that even though the purpose is fulfilled, the third party has no way of knowing what the actual duty was in the first place. The only way for apparent authority to terminate is through actual notice to existing customers and constructive notice to new costumers.

The only time that apparent authority can terminate without constructive/actual notice is when the operation of law happens. Bankruptcy is one of these.

Question 10

Which of the following acts, if committed by an agent, will cause a principal to be liable to a third party?

a. An intentional tort committed by an employee outside the scope of employment, which results in injury to a third party.
b. A negligent act committed by an employee outside the scope of employment that results in injury to a third party.
c. A negligent act committed by an independent contractor, in performance of the contract, which results in injury to a third party.
d. An employee's failure to notify the employer of a dangerous condition that results in injury to a third party.

Answer 10

D. I chose C. 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.

Question 11

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. Social Security payments received by the debtor within 180 days after the filing of the petition.
b. Municipal bond interest received by the debtor within 180 days after the filing of the petition.
c. Gifts received by the debtor within one year after the filing of the petition.
d. Alimony received by the debtor within one year after the filing of the petition.

Answer 11

B. I chose C. It’s important to realize that municpal bond interest is state bond interest and that is esentially incoem generated by the estate property because it is not earned income from the debtor. Therefore, this income is included in the estate.

Also, C would have been a good answer, except that the property/income added to the estate can only be added within 6 months after the filing, not a year.

Question 12

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 $104,000.

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 $20,000, 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 trustee
will be
appointed

A stay against
creditor collection
proceedings will
go into effect

a. Yes;No
b. No; Yes
c. No; No
d. Yes; Yes

Answer 12

D. I chose A. It’s important to realize that an automatic stay will happen against creditor collections for both involuntary and voluntary petitions. The gap that arises from involuntary petitions only affects new debt that is allowed to be incurred during this period.

Question 13

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?

1/2 of the secured
creditors

2/3 of the
shareholders

a. Yes; No
b. No; No
c. No; Yes
d. Yes;Yes

Answer 13

B. I chose A. It’s important to realize that only the UNSECURED creditors will need to approve the plan (impaired) because secured creditors will be getting their money regardless. 1/2 of unsecured claims (allowed claims) would make this statement right because it’s 2/3 of the amount of debt owed to unsecured creditors.

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, through the “cram down” provision of the Bankruptcy Code a plan may be confirmed by a court even if only one impaired class votes to affirm the plan.

Question 14

The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code:

a. Stops the enforcement of judgment liens against property in the bankruptcy estate.
b. Terminates liens on exempt property.
c. Terminates all security interests in property in the bankruptcy estate.
d. Stops the debtor from incurring new debts.

Answer 14

A. i chose B. It’s important to remember that judgment liens are stopped at the filing for both voluntary & involuntary petitions. However, there is a gap between the filing date and the order for relief date for involulntary petitions that allows more debt to be incurred.

Question 15

On April 1, Roe borrowed $100,000 from Jet to pay Roe’s business expenses. On June 15, Roe gave Jet a signed security agreement and financing statement covering Roe’s inventory. Jet immediately filed the financing statement. On July 1, Roe filed for bankruptcy. Under the federal Bankruptcy Code, can Roe’s trustee in bankruptcy set aside Jet’s security interest in Roe’s inventory?

a. Yes, because Roe giving the security interest to Jet created a voidable preference.
b. Yes, because a security agreement may only cover goods actually purchased with the borrowed funds.
c. No, because the loan proceeds were used for Roe’s business.
d. No, because the security interest was perfected before Roe filed for bankruptcy.

Answer 15

A. I chose B. A trustee in bankruptcy has the power to set aside preferences, which generally may be defined as a transfer that: (i) is made for the benefit of a creditor on account of an antecedent debt, (ii) is made within 90 days of the filing of the bankruptcy petition, (iii) is made while the debtor was insolvent (presumed within the 90-day period), and (iv) enables the creditor to get more than the creditor would have received in the bankruptcy proceeding. Here, the loan was made on April 1, creating a debt as of that date. The security interest was given on June 15. So, all four requirements are present, and the security interest can therefore be set aside by the trustee.

Question 16

Which, if any, of the following statements are true under Chapter 15 of the United States Bankruptcy Code?
I.A foreign entity may file only under Chapter 15.
II.The automatic stay is not available under Chapter 15.
a. I and II.
b. Neither I nor II.
c. I only.
d. II only.

Answer 16

B. I chose C. It’s important to realize that a foreign entity may file under a Ch. 7 or 11 if they bring about a full blown bankruptcy case instead of an ancillary

Question 17

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?
I.The anti-fraud provisions of the Securities Act of 1933.
II.The anti-fraud provisions of the Securities Exchange Act of 1934.
a. I only.
b. Neither I nor II.
c. II only.
d. Both I and II.

Answer 17

D. I chose A. It’s important to realize that under the Securites Act of 1933, reliance or scienter isn’t required to hold the issuer liable for fraud, so they could deff be liable under this.

Under the Rule 10(b)-5 the Act of 1934s antifraud provision, does require the MAIDS (reliance/scienter) to be present. it says they were “intentionally omitted” so the plantiff could also hold the issuer accountable under this as well.

Question 18

Under the registration requirements of the Securities Act of 1933, which of the following items is (are) considered securities?
Investment
contracts
Collateral-trust
certificates
	a.	
Yes
Yes
	b.	
Yes
No
	c.	
No
No
	d.	
No
Yes

Answer 18

A. I chose B.

It’s important to realize that a security is anything where the investor is making money passively. In an investment contract, the investor is contracted to make a profit a little at a time. Collateral trust certificates are essentially a bond, so that is a security as well.

Question 19

What is a collateral trust certificate

Answer 19

Security. A corporate bond backed by other securities, usually a parent corporation borrowing against securities of its subsidiaries.

Question 20

What is an investment contract?

Answer 20

Security. Generally is defined as any financial contract, investment, or scheme in which the investor expects to make a profit solely through the management by others.

Question 21

Which of the following securities would be regulated by the provisions of the Securities Act of 1933?
a.
Securities issued by savings and loan associations.
b.
Securities issued by not-for-profit, charitable organizations.
c.
Securities issued by insurance companies.
d.
Securities guaranteed by domestic governmental organizations.

Answer 21

C. I chose D. It’s important to realize that domestic governmental organizations are made for GOVERNMENTAL purposes, so they will be exempt from the Act of 1933.

Also, insurance policies are EXEMPT, but insurance companies are not

Question 22

Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct?

a. The offering is exempt from the anti-fraud provisions of the 1933 Act.
b. Resales of the offering are exempt from the provisions of the 1933 Act.
c. Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act.
d. The offering is subject to the registration requirements of the 1933 Act.

Answer 22

C. I chose B. It’s important to read the question carefully. It says TRANSACTION exemption. With transaction exemptions, it applies only to the particular transaction. Subsequent sales must qualify for their own exemption, or they must be registered.

Question 23

Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following reports must be submitted to the SEC?
Report by any
party making a
tender offer to 
purchase
Link's stock;
Report of proxy
solicitations by
Link stockholders
	a.	
No
No
	b.	
Yes
No
	c.	
No
Yes
	d.	
Yes
Yes

Answer 23

D. I chose C. It’s important to realize that there needs to always been a report of the proxy solicitations to the SEC

The 1934 Act (section 13) requires persons making a tender offer to shareholders of a registered corporation to file a report with the SEC, and the 1934 Act (section 14) prohibits anyone from soliciting proxies in a registered company without filing a report with the SEC.

Question 24

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.

Answer 24

D.
‘Tombstone advertisment is allowed during the waiting period of 20 days from the time the registration is sent, but before it becomes effective. therefore, no sales occur.
This advertisement gets its name from its black border and heavy black print. The tombstone provides investors with “bare bones” information, usually directing prospective investors to where they can find a red herring/prospectus.

Question 25

Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933?
	a.	
Any stockbroker transaction.
	b.	
All intrastate offerings.
	c.	
All offerings made under Regulation A.
	d.	
Any resale of a security purchased under Regulation D offering.

Answer 25

C. I chose B. It’s important to realize that not all intrastate offerings are exempt. Only intrastate offerings made by issuer’s doing 80% or more of their business in that state are exempt from registration.

Question 26

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.
Must submit Form 10-K to the SEC except in those years in which the corporation has made a public offering.
c.
Must distribute copies of Form 10-K to its stockholders.
d.
Is subject to having the registration of its securities suspended or revoked.

Answer 26

D. i chose B. It’s important to realize that public companies have to sbmit their financial statements (10-K) even during the IPO stage. A reporting company is subject to having its registration revoked for willful violation of the securities laws.

Question 27

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.
Intentionally preparing and filing with the SEC a reporting corporation’s incorrect quarterly report.
b.
Negligently filing a reporting corporation’s tax return with the IRS.
c.
Intentionally failing to notify a reporting corporation’s audit committee of defects in the verification of accounts receivable.
d.
Negligently approving a reporting corporation’s incorrect internal financial forecasts.

Answer 27

A. I chose C. It’s important to realize that Section 18 subjects a defendant to liability for false or misleading information in the registration statement or other required reports (i.e., 10K, 10Q, or 8K).

Choice C is an example of ordinary negligence, just a lack of reasonable care, not fraud.

The defendant is not liable if the defendant can prove a lack of scienter. Because 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.

Question 28

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.	
Neither I nor II.
	b.	
II only.
	c.	
Both I and II.
	d.	
I only.

Answer 28

B. I chose A. It’s important to realize that even though the SEC isn’t LIABLE for inaccurate information, their goal is to provide that

The principal purpose of the Securities Act of 1933 is to provide investors with sufficient information to make an informed investment decision. The act accomplishes this goal by requiring registration of new issues of securities. Thus, II is a correct statement. The SEC does not guarantee the accuracy of this information, evaluate the offering’s financial merits or give assurances against loss. Thus, I is an incorrect statement.

Question 29

Under the Securities Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the Act?
Civil liability of
monetary damages
Criminal liability
of a fine
	a.	
Yes
Yes
	b.	
No
No
	c.	
No
Yes
	d.	
Yes
No

Answer 29

A. “Violation of rule 10(b)-5 can result in civil damages, an SEC injunction action, or criminal fines and penalties—>not punitive damages.

Question 30

Which of the following circumstances is a defense to an accountant’s liability under Section 11 of the Securities Act of 1933 for misstatements and omissions of material facts contained in a registration statement?
a.
Nonreliance by purchasers on the misstatements.
b.
Due diligence on the part of the accountant.
c.
The absence of privity between purchasers and the accountant.
d.
The absence of scienter on the part of the accountant.

Answer 30

B. I chose A. It’s important to remember that with Section 11 under Act of 1933, you only need “MAL”…reliance and scienter are not required. No privity of contract is needed either, so B is the correct answer

To establish a case under Section 11, a plaintiff need only prove that the plaintiff acquired the stock; there was a material misstatement in a registration statement signed by the defendant, and damages. However, an accountant can avoid liability by raising the defense of due diligence.

Question 31

34. Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart’s financial statements and gave an unqualified opinion, despite knowing that the financial statements
    contained misstatements. Jay’s opinion was included in Dart’s registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known.
    If Larson succeeds in the Section 10(b) and Rule 10b-5 suit, Larson would be entitled to
    a. Only recover the original public offering price.
    b. Only rescind the transaction.
    c. The amount of any loss caused by the fraud.
    d. Punitive damages.

Answer 31

C. Punitive damages are not given under this rule. The accountant doesn’t have to personally award damages for the wrong

Question 32

39. A CPA is permitted to disclose confidential client information without the consent of the client to
    I. Another CPA who has purchased the CPA’s tax practice.
    II. Another CPA firm if the information concerns suspected tax return irregularities.
    III. A state CPA society voluntary quality control review board.
    a. I and III only.
    b. II and III only.
    c. II only.
    d. III only.

Answer 32

D. Can’t transfer information to another CPA firm.

Question 33

40. 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.

Answer 33

A. Federal law doesn’t allow accountant-client privilege. If a state statute has been created the accounting-client priviledge, they could have used this to stop him from testifying. Under common law, such a priveldge doens’t exist.

If allowed, it will enforceable in both criminal and civil cases.

Question 34

41. A violation of the profession’s ethical standards most likely would have occurred when a CPA
    a. Issued an unqualified opinion on the 2002 financial statements when fees for the 2001 audit were unpaid.
    b. Recommended a controller’s position description with candidate specifications to an audit client.
    c. Purchased a CPA firm’s practice of monthly write-ups for a percentage of fees to be received over a three-year period.
    d. Made arrangements with a financial institution to collect notes issued by a client in payment of fees due for the current year’s audit.

Answer 34

A

Question 35

51. Which of the following nonattest services are auditors allowed to perform for a public company?
    a. Bookkeeping services.
    b. Appraisal services.
    c. Tax services.
    d. Internal audit services.

Answer 35

C

Question 36

54. Under the Sarbanes-Oxley Act, which of the following individuals are required personally to certify to the accuracy of financial statements filed with the SEC?
    a. The chief financial officer and the chief executive officer.
    b. The chief financial officer, the chief executive officer, and the controller.
    c. The audit partner and the chief executive officer.
    d. The chairman of the board, the chief executive officer, and the chief financial officer.

Answer 36

A

Question 37

56. The Sarbanes-Oxley Act of 2002 requires rotation of the audit partner on a public company audit at least every
    a. 3 years.
    b. 5 years.
    c. 7 years.
    d. 10 years.

Answer 37

B

Question 38

68. In general, if the IRS issues a 30-day letter to an individual taxpayer who wishes to dispute the assessment, the taxpayer
    a. May, without paying any tax, immediately file a petition that would properly commence an action in Tax Court.
    b. May ignore the 30-day letter and wait to receive a 90-day letter.
    c. Must file a written protest within 10 days of receiving the letter.
    d. Must pay the taxes and then commence an action in federal district court.

Answer 38

B

Question 39

According to the standards of the profession, which of the following sources of information should a CPA consider before signing a client’s tax return?
I. Information actually known to the CPA from the tax return of another client.
II. Information provided by the client that appears to be correct based on the client’s returns from prior years.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.

Answer 39

C

Question 40

75. According to Treasury Department Circular 230, a practitioner may
    a. Charge a contingent fee for preparing a client’s original tax return.
    b. Charge any amount of fixed fee for tax work.
    c. Retain a client’s records for nonpayment of fees.
    d. Charge a contingent fee for representing a client in connection with a judicial proceeding.

Answer 40

D.