REG Unit 2

Question 1

The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant’s right to practice before it. What is a basis for suspension?

Answer 1

Conviction of a felony.

Question 2

Fact Pattern:
Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart’s financial statements and gave an unmodified 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.
In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Larson must prove that

Answer 2

The misstatements contained in Dart’s financial statements were material.

Question 3

Under the position taken by a majority of state courts, to which third parties will a CPA who negligently prepares a client’s tax return be liable?

Answer 3

Any foreseen or known third party who relied on the tax return.

Question 4

Under the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted

Answer 4

Without good faith.

Question 5

Which of the following most likely is a violation of federal securities law regarding communications before and during registered securities offerings?

Answer 5

A seasoned issuer files hard-copy documents with the SEC that include its registration statement and prospectus.

Question 6

Which one of the following, if present, would support a finding of constructive common law fraud on the part of a CPA?

Answer 6

Reckless disregard.

Question 7

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

Answer 7

There was a material omission or misstatement.

Question 8

Hark, CPA, failed to follow generally accepted auditing standards in auditing the financial statements of Long Corp., a nonpublic company. Hark also took several tax return positions that were not likely to be sustained on the merits because they were not supported by substantial authority. Long’s management had told Hark that the audited statements and tax returns would be submitted to several banks to obtain financing. Relying on these documents, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the traditional common law doctrine, if Third sues Hark, Hark will

Answer 8

Win because Hark and Third were not in privity of contract.

Question 9

How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors’ liability to purchasers of securities beyond that of common law?

Answer 9

Privity with purchasers is not a necessary element of proof.

Question 10

Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is true?

Answer 10

The offering would be exempt from the registration requirements of the Securities Act of 1933.

Question 11

Apogee Co. has filed with the SEC for many years, and its market capitalization is $10 billion. Perigee Co. has filed continuously with the SEC for 3 years, and its market capitalization is $75 million. Which of the following is most likely a true statement about communications prior to and during a registered offering of securities?

Answer 11

Only Apogee may make oral communications at any time if certain conditions are met.

Question 12

On May 1, Apel purchased 7% of Stork Corp.’s preferred stock traded on a national securities exchange. After the purchase, Apel owned 9% of the outstanding preferred stock. Stork is registered under the Securities Exchange Act of 1934. With respect to the purchase, Apel

Answer 12

Must file with the SEC, the issuer, and the national securities exchange information concerning the purpose of the acquisition.

Question 13

The reporting requirements of the Securities Exchange Act of 1934 and its rules

Answer 13

Apply to a corporation that registered under the Securities Act of 1933 but that did not register under the Securities Exchange Act of 1934.

Question 14

Fact Pattern:
Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart’s financial statements and gave an unmodified 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.
In a suit against Jay under the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Larson must prove all of the following except

Answer 14

Larson was an intended user of the false registration statement.

Question 15

Fact Pattern:
West & Co., CPAs, expressed an unmodified opinion on the financial statements of Pride Corp. These were included in Pride’s registration statement filed with the SEC. Subsequently, Hex purchased 500 shares of Pride’s preferred stock, which were acquired as part of a public offering subject to the Securities Act of 1933. Hex has commenced an action against West based on the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement.
Which of the following defenses is least helpful to West in avoiding liability to Hex?

Answer 15

West was not in privity of contract with Hex.

Question 16

Under the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted

Answer 16

Without good faith.

Question 17

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return?

Answer 17

Lack of scienter.

Question 18

Sun Corp. approved a merger plan with Cord Corp. Factors in approving the merger were the tax returns of Cord prepared by Frank & Co., CPAs. Sun had required Cord to disclose its tax returns and audited financial statements as a condition of the merger. Frank knew of this condition before it prepared returns that contained irregularities that later caused Sun to suffer substantial losses. For Frank to be liable for common law negligence, Sun, at a minimum, must prove that Frank

Answer 18

Failed to exercise due care.

Question 19

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 the

Answer 19

SEC
Yes
Person Defrauded
Yes

Question 20

If a shareholder sues a CPA in state court for nonstatutory fraud based on false information contained in a tax return prepared by the CPA, which of the following, if present, would be the CPA’s best defense?

Answer 20

The false information is immaterial.

Question 21

Which of the following pairs of elements must a client prove to hold a CPA liable for common law negligence?

Answer 21

Breach of the accountant’s duty of care and loss.

Question 22

In a nonstatutory action against a CPA, lack of privity is a viable defense if the plaintiff

Answer 22

Is the client’s creditor who sues the CPA for negligence.

Question 23

Petty Corp. made a public offering subject to the Securities Act of 1933. In connection with the offering, Ward & Co., CPAs, rendered an unmodified opinion on Petty’s financial statements included in the SEC registration statement. Huff purchased 500 of the offered shares. Huff has brought an action against Ward under Section 11 of the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Ward’s weakest defense is that

Answer 23

Ward was not in privity of contract with Huff.

Question 24

One traditional test of whether a third party can recover from an accountant for negligence is the primary benefit test. Which of the following has standing under the primary benefit test?

Answer 24

A bank that is considering a loan to the accountant’s client and is waiting for the tax returns on which to base its decision.

Question 25

A CPA’s defenses to liability under Section 11 of the Securities Act of 1933 do not include which of the following?

Answer 25

The plaintiff was unaware of the misstatement or omission in a registration statement.

Question 26

Under the position taken by a majority of state courts, to which third parties will a CPA who negligently prepares a client’s tax return be liable?

Answer 26

Any foreseen or known third party who relied on the tax return.

Question 27

The antifraud provision of the Securities Exchange Act of 1934 is Section 10(b). The SEC’s Rule 10b-5 issued under the antifraud provision most often is applied to

Answer 27

Insider trading.

Question 28

Integral Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. For its current fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed officers of the corporation. Integral did not notify the SEC of shareholder “short-swing” profits, report that a competitor made a tender offer to Integral’s shareholders, and report changes in the price of its stock as sold on the New York Stock Exchange. Under the SEC reporting requirements, which of the following was Integral required to do?

Answer 28

File the periodic report listing newly appointed officers.

Question 29

Under the traditional doctrine rule, to which of the following parties will a CPA be liable for common law negligence?

Answer 29

Parties in privity = yes

Foreseen parties = no

Question 30

Zack Limited Partnership intends to sell $6 million of its limited partnership interests. Zack conducts all of its business activities in the state in which it was organized. Zack intends to use the offering proceeds to acquire municipal bonds. Which of the following statements is true concerning the offering and the registration exemptions that might be available to Zack under the Securities Act of 1933?

Answer 30

If Zack complies with the requirements of Regulation D, Zack may make an unlimited number of offers to sell the limited partnership interests.

Question 31

Which of the following statements is correct regarding disclosure of working papers prepared by a CPA related to tax practice?

Answer 31

Working papers may not be transferred to another accountant without the client’s permission.

Question 32

Under the common law, which of the following statements is generally true regarding the liability of a CPA who negligently prepares a client’s tax return?

Answer 32

The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.

Question 33

Burt, CPA, issued an unmodified opinion on the financial statements of Midwest Corp. These financial statements were included in Midwest’s annual report, and Form 10-K was filed with the SEC. As a result of Burt’s reckless disregard for GAAS, material misstatements in the financial statements were not detected. Subsequently, Davis purchased stock in Midwest in the secondary market without ever seeing Midwest’s annual report or Form 10-K. Shortly thereafter, Midwest became insolvent, and the price of the stock declined drastically. Davis sued Burt for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Burt’s best defense is that

Answer 33

Davis did not rely on the financial statements or Form 10-K.

Question 34

Which one of the following laws addresses the issue of insider trading?

Answer 34

Securities Exchange Act.

Question 35

An offering made under the provisions of Regulation A Tier 1 requires that the issuer

Answer 35

File an offering statement with the SEC.

Question 36

The Securities Act of 1933 provides an exemption from registration for offers and sales of securities made only to accredited investors. Federal securities laws and regulations are violated if the exemption is claimed and

Answer 36

The SEC is not informed of exempt sales.

Question 37

Which of the following statements is true with respect to ownership, possession, or access to a CPA firm’s working papers related to its tax practice?

Answer 37

Working papers are not transferable to a purchaser of a CPA practice unless the client consents.

Question 38

Under the Securities Exchange Act of 1934, willfully making a materially false or misleading statement or omission in any SEC filing results in all of the following except

Answer 38

Liability for negligence.

Question 39

Which of the following is incorrect regarding an engagement letter?

Answer 39

The engagement letter need not include specific descriptions of services to be performed.

Question 40

Universal Corp. intends to sell its common stock to the public in an interstate offering that will be registered under the Securities Act of 1933. Under the act,

Answer 40

Universal’s filing of a registration statement with the SEC does not automatically result in compliance with the “blue-sky” laws of the states in which the offering will be made.

Question 41

Alfalfa Corporation, a publicly traded company, is in the business of manufacturing and selling farm equipment. Members of the board of directors for Alfalfa Corporation include the following:
Tim, CEO of Alfalfa Corporation
Melinda, CFO of Alfalfa Corporation
Bill, president of Apollo Airlines
Denny, director of the county’s agricultural services
David, retired, former CFO and president of Alfalfa Corporation
Julie, executive vice president of Mirage Investment Management
Marcy, litigation partner with Haddrill Law
Peter, CFO of Redding Manufacturing, a global leader in oil drilling
Which board member meets all of the requirements defined by the Sarbanes-Oxley Act of 2002 (SOX) to serve on the audit committee of Alfalfa?

Answer 41

Peter
This answer is correct.
SOX requires that each member of the audit committee, including at least one who is a financial expert, be an independent member of the issuer’s board. Peter is a chief financial officer (CFO) for a global leader manufacturing company (in an unrelated field). Thus, Peter is independent and a financial expert.
Bill.