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Regulation CPA Review > REG 7 > Flashcards

REG 7 Flashcards

1
Q

What are the requirements to create an agency?

A
  • Consent of both parties; and
  • Capacity of the principal

Note that consideration is NOT required and that 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 capacity (a minor can serve as an agent).

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2
Q

What are the duties of the agent to the principal?

A
  • Loyalty
  • Obedience
  • Reasonable care
  • Duty to Account
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3
Q

What are the duties of principal to the agent?

A
  • Compensation

- Reimbursement (indemnification)

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4
Q

What types of agency relations cannot be unilaterally terminated by the principal?

A

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

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5
Q

Define actual (real) authority.

A

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

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6
Q

What are the two types of actual authority?

A

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).

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7
Q

Define apparent authority.

A

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

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8
Q

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?

A

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.

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9
Q

Would the manager of a retail business generally have implied authority to:

  • hire employees?
  • purchase merchandise?
  • sell the store’s trade fixtures?
A
  • 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.
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10
Q

What is the difference between a general agent and a special agent?

A

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.

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11
Q

Under what conditions may a principal ratify an unauthorized transaction?

A

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

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12
Q

Describe the differences between a disclosed, partially disclosed, and undisclosed principal.

A
  • 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.
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13
Q

Who is liable to third parties in the case of an undisclosed or partially disclosed principal?

A

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

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14
Q

What elements are necessary to establish a principal’s liability under respondeat superior?

A
  • An employer-employee relationship

- Act committed in within the scope of employment

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15
Q

What is an employer’s liability for independent contractors?

A

General rule is that an employer is not liable for torts committed by independent contractors, but there are certain situations where the employer can be held liable for torts of independent contractors:

  • Ultrahazardous activities
  • Authorized misrepresentation.
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16
Q

Under the Federal Bankruptcy Code, is a trustee required for Chapter 7, Chapter 11, and Chapter 13?

A

A trustee is required for Chapter 7 and Chapter 13.

A trustee is not required for Chapter 11.

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17
Q

What two groups may file voluntary bankruptcy, but may not be the subject of involuntary bankruptcy?

A
  • Farmers

- Non-profit charitable organizations

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18
Q

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?
A
  • 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.
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19
Q

What is the automatic stay?

A

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.
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20
Q

Under the Federal Bankruptcy Code, what elements are necessary to establish a preferential payment?

A

A preferential payment is:

  • A transfer made to or for the benefit of the 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 creditor receiving more than the creditor would have received under the Bankruptcy Code.
21
Q

List at least six grounds for denial of discharge.

A
  • 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
22
Q

List at least six exceptions to discharge.

A
  • Taxes dues within 3 years of filing
  • Debts incurred by fraud
  • Debts related to luxury goods
  • Debts undisclosed in bankruptcy petition
  • Debts from embezzlement, larceny, and fiduciary’s fraud
  • Alimony, maintenance, support
  • Debts from willful and malicious injury
  • Debts from DWI
  • Debts that are government fines and penalties
  • Debts from education loans
  • Debts incurred to pay taxes
23
Q

What is the hierarchy for paying unsecured priority claims in a bankruptcy proceeding?

Hint: SAG WEG CTI

A

Support obligations to spouse and children
bankruptcy Administration expenses
Gap creditors
Wages up to $11,725 if earned within 180 days
Employee benefit plan payments up to $11,725 (reduced by wage claims) if earned within 180 days
Grain farmers’ and fishermen’s claims against storage/processing facilities up to $5,775
Consumer deposits
Taxes
Injuries caused by intoxicated driving

24
Q

In a Chapter 11 reorganization, is a trustee usually appointed?

A

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

25
Q

In general, what is the purpose of the Securities Act of 1933?

A

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.

26
Q

Describe the registration statement.

A

Contains all information that a reasonable investor would consider important in deciding whether to invest.

Part I: The prospectus
Part II: Audited Financial information and Other material facts requiring disclosure

27
Q

When does the registration statement become effective?

A

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

28
Q

What activities can take place during the waiting period regardless of whether the company is a seasoned issuer or a well known seasoned issuer?

A
  • Oral offers can be made
  • Tombstone ads may be placed
  • Preliminary (red herring) prospectuses may be placed
  • Summary prospectuses may be distributed
29
Q

What securities are exempt from registration requirements of the Securities Act of 1933?

A
  • 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 9 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
30
Q

What securities must be registered under the Securities Act of 1933?

A
  • Securities offered in connection with interstate commerce
  • Securities offered to the public
  • Securities offered by issuer, underwriter, or dealer
  • Securities not excluded by statute
31
Q

What is Regulation D?

A

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

32
Q

Generally, is a general solicitation permitted under Regulation D?

A

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

33
Q

What are the dollar and investor limitations of rules 504, 505, and 506 under Regulation D?

A

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

34
Q

What must a plaintiff prove in a case brought under Section 11 of the Securities Act of 1933?

A
  • 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.

35
Q

Does a CPA who signed off on financial information in a registration statement have any defenses to Section 11 liability?

A

Yes, due diligence.

36
Q

What companies must register under the Securities Exchange Act of 1934?

A

Generally, any company:

  • Whose shares are traded on a national exchange, or
  • Which has at least 500 shareholders in any outstanding class and more than $10 million in assets.
37
Q

What securities are exempt from registration under the Securities Exchange Act of 1934?

A
  • Securities of savings and loan institutions
  • Securities of investment companies
  • Securities of charitable or not-for-profit organizations
38
Q

What persons may be classified as insiders?

A
  • Directors
  • Officers
  • Shareholders owning more than 10% of an outstanding class of shares
  • Accountants and attorneys of the issuer
39
Q

Can a defendant be liable for negligently violating Rule 10b-5?

A

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.

40
Q

What is a tender offer?

A

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

41
Q

In what three ways can CPA legal liability arise?

A
  • 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)
42
Q

To whom may a CPA be liable for negligently performing an engagement?

A

Under the majority rule, a CPA is liable to the client and any person or limited foreseeable class of persons whom the CPA knows will by 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.

43
Q

To whom may a CPA be liable for fraudulently performing an engagement or performing an engagement with gross negligence?

A

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

44
Q

What are the defenses available to a CPA against a charge of negligence?

A
  • No duty – remote plaintiff
  • No breach – compliance with GAAS
  • No causal connection – knowledge
45
Q

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)
A
  • Breach of contract: Compensatory
  • Ordinary negligence: Compensatory
  • Constructive fraud: Compensatory and punitive
  • Fraud: Compensatory and punitive
46
Q

What are the elements of fraud?

A
  • A misrepresentation of material fact
  • Scienter/Intent or recklessness
  • An intent to induce plaintiff’s reliance on the misrepresentation
  • Actual and justifiable reliance by the plaintiff on the misrepresentation
  • Damages
47
Q

What is the difference between fraud and constructive fraud?

A

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.

48
Q

Under what conditions may a CPA disclose confidential client information without the client’s consent?

A
  • 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

Regulation CPA Review (8 decks)

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