REG 7

Question 1

REG 7-1 Agency - What are the requirements to create an agency?

Answer 1

Consent of both parties; and Capacity of the principal. Note: Consideration is not required and a writing is necessary only if the agent is to purchase land on behalf of the principal or if the agency cannot be performed within one year. Note also that the agent need not have contractual capcaity (a minor can serve as an agent).

Question 2

REG 7-2 Agency - What are the duties of the agent to the principal?

Answer 2

Loyalty, Obedience, Reasonable care, Duty to account

Question 3

REG 7-3 Agency - What are the duties of principal to the agent?

Answer 3

Compensation, Reimbursement

Question 4

REG 7-4 Agency - What types of agency relations cannot be unilaterally terminated by the principal?

Answer 4

A principal may not unilaterally terminate an agency coupled with an interest.

Question 5

REG 7-5 Agency - Define actual (real) authority?

Answer 5

Actual authority is that which an agent reasonably thinks he possesses based on communications from the principal.

Question 6

REG 7-6 Agency - What are the two types of actual authority?

Answer 6

The two types of actual authority are implied authority (e.g. from position, past acts, circumstances) and express authority (authority specifically granted by the principal).

Question 7

REG 7-7 Agency - Define apparent authority.

Answer 7

Apparent authority is that which a third party believes an agent possesses as a result of the principal’s communications with the third party.

Question 8

REG 7-8 Agency - If a principal tells a purchasing agent not to spend more than $500 on each purchase, but tells the agent not to disclose this ceiling amount to third parties, has the principal effectively limited the agent’s apparent authority?

Answer 8

No. Secret limiting instructions are sufficient to limit actual authority, but do not limit apparent authority because apparent authority is based on the third party’s reasonable belief in the agent’s authority. An instruction of which the third party is unaware can have no effect on the third party’s beliefs.

Question 9

REG 7-9 Agency - Would the manager of a retail business generally have implied authority to: hire employees? Purchase merchandise? Sell the store’s trade fixtures?

Answer 9

A manager generally has implied authority to hire and fire employees, Whether the manager would have implied authority to buy merchandise depends on the nature of the business and the customs of the industry, A manager generally has no implied authority to sell his store’s trade fixtures because the manager’s apparent authority is limited to running the business, not dissolving it.

Question 10

REG 7-10 Agency - What is the difference between a general agent and a special agent?

Answer 10

A general agent is one who is authorized to engage in a series of transactions involving a continuity of service.; A special agent is one who is authorized only to engage in a single transaction or a single type of transaction.

Question 11

REG 7-11 Agency - Under what conditions may a principal ratify an unauthorized transaction?

Answer 11

The agent must have indicated that he was acting on behalf of the principal. The principal also must: Know all the material facts surrounding the transaction, and Accept the entire transaction. In addition, the third party must not have already revoked.

Question 12

REG 7-12 Agency - Describe the differences between a disclosed, partially disclosed, and undisclosed principal.

Answer 12

A disclosed principal is one whose existence and identity are disclosed to the third party with whom an agent deals.; A partially disclosed principal is one whose existence is disclosed, but whose identity is not disclosed.; An undisclosed principal is one whose existence and identity are not disclosed to the third party with whom the agent deals.

Question 13

REG 7-13 Agency - Who is liable to third parties in the case of an undisclosed or partially disclosed principal?

Answer 13

Both the agent and the principal are liable. Only the principal is liable if the principal is fully disclosed.

Question 14

REG 7-14 Agency - What elements are necessary to establish a principal’s liability under respondeat superior?

Answer 14

An employer-employee relationship; Act committed within the scope of employment

Question 15

REG 7-15 Agency - What is an employer’s liability for independent contractors?

Answer 15

The general rule is that an employer is not liable for torts committed by independent contractors, but there are certain situations in which the employer can be held liable for torts of independent contractors: Ultrahazardous activities; Authorized misrepresentation.

Question 16

REG 7-16 Bankruptcy - Under the federal Bankruptcy Code, is a trustee required for Chapter 7, Chapter 11, and Chapter 13?

Answer 16

A trustee is required for Chapter 7 and Chapter 13; A trustee is not required for Chapter 11

Question 17

REG 7-17 Bankruptcy - What two groups may file voluntary bankruptcy, but may not be the subject of involuntary bankruptcy?

Answer 17

Farmers; Nonprofit charitable organizations

Question 18

REG 7-18 Bankruptcy - How many creditors must join in filing a petition to commence an involuntary bankruptcy case: if the debtor has 12 or more creditors? -if the debtor has fewer than 12 creditors?

Answer 18

If the debtor has 12 or more creditors, at least three creditors with aggregate unsecured claims of at least $14,425 must join in the petition.; If the debtor has fewer than 12 creditors, any one creditor with an unsecured claim of at least $14,425 may file the petition alone.

Question 19

REG 7-19 Bankruptcy - What is the automatic stay?

Answer 19

Automatic stay: When bankruptcy proceedings commence, a creditor may not pursue remedies against the debtor or his assets.; The automatic stay goes into effect the moment a bankruptcy petition is filed.

Question 20

REG 7-20 Bankruptcy - Under the federal Bankruptcy Code, what elements are necessary to establish a preferential payment?

Answer 20

A preferential payment is: A transfer made to or for the benefit of a creditor; On account of an antecedent debt of the debtor; Made within 90 days prior to the filing (one year if the creditor is an insider, such as an officer of the debtor organization or a close relative of the debtor); Made while the debtor was insolvent; and Results in the ccreditor receiving more than the creditor would have received under the Bankruptcy Code.

Question 21

REG 7-21 Bankruptcy - List at least six grounds for denial of discharge.

Answer 21

Debtor not individual; Fraudulent transfers or concealment of property; Failure to keep books and records; Commission of bankruptcy crime; Failure to explain loss of assets; Refusal to obey orders or answer questions Improper conduct in an insider’s case; Prior discharge within eight years; Individual debtor’s failure to complete financial management course; Waiver

Question 22

REG 7-22 Bankruptcy - List at least six exceptions to discharge.

Answer 22

1. Taxes due within three years of filing 2. Debts incurred by fraud 3. Debts related to luxury goods 4. Open-ended credit debts of consumers 5. Debts undisclosed in bankruptcy petition 6. Debts from embezzlement, larceny, and fiduciary’s fraud 7. Alimony, maintenance, support 8. Debts from willful and malicious injury 9. Debt from DWI 10. Debts that are government fines and penalties 11. Debts from education loans 12. Debts denied discharge in a prior bankruptcy 13 Debts incurred to pay taxes 14 Debts incurred due to violations of securites laws 15. Condo, co-op, and homeowners’association fees 16. Restitution for federal crimes 17. Prisoner’s court fees 18. Fines for federal election law violations 19. Debt owed to pension or profit-sharing plan.

Question 23

REG 7-23 Bankruptcy - What is the hierarchy for paying unsecured priority claims in a bankruptcy proceeding?

Answer 23

Secured creditors then SAG WEG CTI: S = Support obligations to spouse and children, A = Administration expenses from Bankruptcy, G = Gap creditors; W = Wages up to $11,725 if earned within 180 days, E = Employee benefit plan payments up to $11,725 (reduced by wage claims) if earned within 180 days, G = Grain farmers’and fishermen’s claims against storage/processing facilities up to %5,775; C = Consumer deposits, T = Taxes, I = Injuries cuased by intoxicated driving.

Question 24

REG 7-24 Bankruptcy - In a Chapter 11 reorganization, is a trustee usually appointed?

Answer 24

A trustee usually is not appointed in a Chapter 11 case; the debtor usually remains in possession of the estate’s assets.

Question 25

REG 7-25 Bankruptcy - The order for preliminary relief is the principal door to bankruptcy proceedings for a foreign debtor. True or false?

Answer 25

False. The main door is a petition for recognition, which is filed by the foreign representative.

Question 26

REG 7-26 Securities Regulation - In general, what is the purpose of the Securites Act of 1933?

Answer 26

The securities Act of 1933 regulates the original distribution of securities. Its goal is to assure that investors have sufficient information on which to make an informed investment decision, but the SEC does not judge the merits of the investment.

Question 27

REG 7-27 Securities Regulation - Describe the registration statement.

Answer 27

Contains all information that a reasonable investor would consider important in deciding whether to invest. Part I The prospectus; Part II Audited Financial information, Other material facts requiring disclosure

Question 28

REG 7-28 Securities Regulation - When does the registration statement become effective?

Answer 28

Twenty days after filing unless the SEC issues a refusal or stop order, or unless it is made effective earlier by an SEC acceleration order.

Question 29

REG 7-29 Securities Regulation - What activities can take place during the waiting period regardless of whether the company is a seasoned issuer or a well-known seasoned issuer?

Answer 29

Oral offers can be made; Tombstone ads may be placed; Preliminary (red herring) prospectuses may be placed; Summary prospectuses may be distributed

Question 30

REG 7-30 Securities Regulation - What securities are exempt from registration requirements of the Securities Act of 1933?

Answer 30

Securities of banks and savings and loans; Securities of not-for-profit organizations; Securities issued by a government for governmental purposes; Securities of regulated common carriers; Short-term commercial paper (maturity in less than nine months); Insurance policies; Securities issued under Chapter 11 of the Bankruptcy Code; Securities issued by a church plan or similar entity that is not an investment company.

Question 31

REG 7-31 Securities Regulation - What securities must be registered under the Securities Act of 1933?

Answer 31

Securities offered in connection with interestate commerce; Securities offered to the public; Securities offered by issuer, underwriter, or dealer; Securities not excluded by statute.

Question 32

REG 7-32 Securities Regulation - What is Regulation D?

Answer 32

Regulation D exempts certain issuances of securities from the registration requirements of the Securities Act of 1933.

Question 33

REG 7-33 Securities Regulation - Generally, is a general solicitation permitted under Regulation D?

Answer 33

General solicitation (e.g., a newspaper or magazine ad) is prohibited in most cases under Regulation D.

Question 34

REG 7-34 Securities Regulation - What are the dollar and investor limitations of the rules 504, 505, and 506 under Regulation D?

Answer 34

Rule 504 = $1 million/any number of investors; Rule 505 = $5 million/up to 35 un accredited investors unlimited accredited investors; Rule 506 = Amount unlimited/up to 35 sophisticated unaccredited investors, unlimited accredited investors.

Question 35

REG 7-35 Securities Regulation - What must a plaintiff prove in a case brought under Section 11 of the Securities Act of 1933?

Answer 35

A material misstatement of fact was made in the registration statement signed by the defendant; Damages; Note: A plaintiff need not prove fraudulent conduct, negligence or reliance on the statement.

Question 36

REG 7-36 Securities Regulation - Does a CPA who signed off on financial information in a registration statement have any defenses to Section 11 liability?

Answer 36

Yes. Due diligence.

Question 37

REG 7-37 Securities Regulation - What companies must register under the Securities Exchange Act of 1934?

Answer 37

Generally any company: Whose shares are traded on a national exchange; Which has at least 500 shareholders in any outstanding class and more than $10 million in assets.

Question 38

REG 7-38 Securities Regulation - What securities are exempt from registration under the Securities Exchange Act of 1934?

Answer 38

Securities of savings and loan institutions; Securities of investment companies; Securities of charitable or not-for-profit organizations.

Question 39

REG 7-39 Securities Regulation - What persons may be classified as insiders?

Answer 39

Directors; Officers; Shareholders owing more than 10% of an outstanding class of shares; Accountants and attorneys of the issuer

Question 40

REG 7-40 Securities Regulation - Can a defendant be liable for negligently violating Rule 10b-5?

Answer 40

No. Rule 10b-5 requires the plaintiff to prove that the defendant intended to deceive the plaintiff and that the plaintiff relied on the deception and was deceived into buying or selling securities. Proving reckless disregard for truth might also be sufficient intent.

Question 41

REG 7-41 Securities Regulation - What is a tender offer?

Answer 41

A tender offer is an offer made to all stockholders to purchase stock for a specified price for a specified period of time.

Question 42

REG 7-42 CPA Legal Liability - In what three ways can CPA legal liability arise?

Answer 42

Breach of contract; Commission of a tort (negligence, fraud, or constructive fraud); Violation of a statute (e.g., Section 11, Rule 10b-5, or tax law liability)

Question 43

REG 7-43 CPA Legal Liability - To whom may a CPA be liable for negligently performing an engagement?

Answer 43

Under the majority rule, a CPA is liable to the client and any person or limited foreseable class of persons whom the CPA knows will be relying on the CPA’s work. Under the minority Ultramares decision, a CPA can only be liable to the client and intended third parties shown to be in privity of contract with the CPA.

Question 44

REG 7-44 CPA Legal Liability - To whom may a CPA be liable for fraudulently performing an engagement or performing an engagement with gross negligence?

Answer 44

Anyone who relied on the CPA’s work and incurred damages as a result.

Question 45

REG 7-45 CPA Legal Liability - What are the defenses available to a CPA against a charge of negligence?

Answer 45

No duty-remote plaintiff; No breach-compliance with GAAS; No causal connection-knowledge

Question 46

REG 7-46 CPA Legal Liability - State whether the plaintiff can recover compensatory or punitive damages from a CPA in each of the following types of action. -Breach of contract -Ordinary Negligence -Fraud -Constructive fraud (Gross negligence)

Answer 46

Breach of contract = compensatory; Ordinary negligence = compensatory; Fraud = compensatory and punitive; Constructive fraud = compensatory and punitive

Question 47

REG 7-47 CPA Legal Liability - What are the elements of fraud?

Answer 47

A misrepresentation of material fact; Scienter/intent to deceive or reckless disregard for truth; An intent to induce plaintiff’s reliance on the misrepresentation; Actual and justifiable reliance by the plaintiff on the misrepresentation; Damages

Question 48

REG 7-48 CPA Legal Liability - What is the difference between fraud and constructive fraud?

Answer 48

Constructive fraud has the same elements as actual fraud, except instead of intentionally deceiving, the defendant acts recklessly (i.e. without regard for professional procedures or standards), which constitutes gross negligence.

Question 49

REG 7-49 CPA Legal Liability - Under what conditions may a CPA disclose confidential client information without the client’s consent?

Answer 49

To defend against a lawsuit brought by the client (court proceeding); In response to a subpoena or summons; As part of a review of a member’s professional practice; To a surviving member of the accountant’s firm