GLEIM Chapter 30,31,32,33,40

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Under the Revised Uniform Limited Partnership Act and in the absence of a contrary agreement by the partners, which of the following events is most likely to dissolve a limited partnership? A. A majority vote in favor by the partners B. A two-thirds vote in favor by the partners C. A withdrawal of a majority of the limited partners D. Withdrawal of the only general partner

D. Withdrawal of the only general partner (A limited partnership can be dissolved upon any of the following events: (1) the time or event specified in the limited partnership agreement occurs; (2) all the partners agree, in writing, to dissolve; (3) an event of withdrawal of the only general partner occurs; or (4) the limited partnership is dissolved by court order)

the partnership of Joe Baker, Art Green, and Guy Madison is insolvent. The partnership's liabilities exceed its assets by $123,000. The liabilities include a $25,000 loan from Madison. Green is personally insolvent. His personal liabilities exceed his personal assets by $13,500. Green has filed a voluntary. petition in bankruptcy. Under these circumstances, partnership creditors

will have the first claim to partnership property to the exclusion of the person creditors of Green.

Boyle, as a promoter of Delaney Corp., signed a 9-month contract with Austin, a CPA. Prior to the incorporation, Austin rendered accounting services pursuant to the contract. After rendering accounting services for an additional period of 6 months pursuant to the contract, Austin was discharged without cause by the board of directors of Delaney. Absent agreements to the contrary, who will be liable to Austin for breach of contract? A. Both Boyle and Delaney. B. Boyle only. C. Delaney only. D. Neither Boyle nor Delaney.

A. Both Boyle and Delaney.

The CPA was preparing the financial statement for a limited liability company. To which of the following would the CPA's report be addressed? A. Member B. Shareholder C. General partner D. Limited partner

A. Member (The report would be addressed to the owners of the LLC. The owners are known as members)

The IRS requested client records from a CPA who does not have possession or control of the records. According to Treasury Circular 230, the CPA must A.Notify the IRS of the identity of any person who, according to the CPA's belief, could have the records. B.Require the client to submit the records to the IRS or withdraw from the engagement. C.Obtain the records from the client and submit them to the IRS. D.Contact all third parties associated with the records, such as banks and employers, to obtain the requested records for submission to the IRS.

A.Notify the IRS of the identity of any person who, according to the CPA's belief, could have the records. (A practitioner is required to provide information regarding the identity of persons that the practitioner reasonably believes may have possession or control of the requested documents if the practitioner does not have possession or control of the documents)

Which of the following must take place before a corporation may be voluntarily dissolved? A.Passage by the board of directors of a resolution to dissolve. B.Approval by the officers of a resolution to dissolve. C.Amendment of the certificate of incorporation. D.Unanimous vote of the shareholders.

A.Passage by the board of directors of a resolution to dissolve. (A corporation that issued stock and commenced business dissolves upon (1) board approval of a dissolution resolution, (2) shareholder vote of approval, and (3) filing of articles of dissolution with the secretary of state petitioning the state to dissolve the corporation. Voluntary dissolution without a board resolution is permitted upon the unanimous vote of the shareholders. A court may prohibit an otherwise proper dissolution on the grounds that public policy required the corporation's continuation)

A partner has the power to dissociate from a partnership but may not have the right. In some circumstances, the dissociation may be wrongful. One consequence that does not follow from a wrongful dissociation from a partnership at will is the loss of the A.Payment for the partnership interest. b. Right to wind up. C.Right to continue the business. D.Right to receive the full value of the partnership interest.

A.Payment for the partnership interest.

Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues? A.The CPA takes into account the possibility that a tax return will not be audited. B.The CPA reasonably relies upon representations of the client. C.The CPA considers all relevant facts that are known. D.The CPA takes into consideration assumptions about future events related to the relevant facts.

A.The CPA takes into account the possibility that a tax return will not be audited. (A CPA is prohibited from giving written advice concerning a federal tax issue in which the CPA takes into account the possibility that a tax return will not be audited)

A shareholder's right to inspect books and records of a corporation will be properly denied if the shareholder A.Wants to use corporate shareholder records for a personal business. B.Employs an agent to inspect the books and records. C.Intends to commence a shareholder's derivative suit. D.Is investigating management misconduct.

A.Wants to use corporate shareholder records for a personal business.

Under the RMBCA, which of the following statements about involuntary dissolution of a corporation is true?

Administrative dissolution by the secretary of state may result from failure to pay franchise taxes or to deliver an annual report

Allen's estate is entitled to settlement for the value of his partnership interest.

Generally, officers of a corporation: A) Are elected by the shareholders. B) Are agents and fiduciaries of the corporation having actual and apparent authority to manage the business. C) May be removed by the board of directors without cause only if the removal is approved by a majority vote of the shareholders. D) May declare dividends or other distributions to shareholders as they deem appropriate.

Are agents and fiduciaries of the corporation having actual and apparent authority to manage the business.

Unless prohibited by the documents creating the organization, a shareholder in a publicly held corporation or the owner of a limited partnership interest has the right to

Assign his or her interst in the business.

Generally, officers of a corporation A. Are elected by the shareholders. B. Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business. C. May be removed by the board of directors without cause only if the removal is approved by a majority vote of the shareholders. D. May declare dividends or other distributions to shareholders as they deem appropriate.

B. Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business.

Which of the following documents would most likely contain specific rules for the management of a business corporation? A. Articles of incorporation. B. Bylaws. C. Certificate of authority. D. Shareholders' agreement.

B. Bylaws.

Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean may assert the rights to I. Participation in the management of TLC II. Cobb's share of TLC's partnership profits A. I only B. II only C. I and II D. Neither I nor II

B. II only (Partnership rights may be assigned without the dissolution of the partnership. The assignee is entitled only to the profits the assignor would normally receive. The assignee does not automatically become a partner and would not have the right to participate in managing the business or to inspect the books and records of the partnership. The assigning partner remains a partner with all the duties and other rights of a partner)

A valid limited partnership A. Cannot be treated as an "association" for federal income tax purposes B. May have an unlimited number of partners C. Is exempt from all Securities and Exchange Commission regulations D. Must designate in its certificate the name, address, and capital contribution of each general partner and each limited partner

B. May have an unlimited number of partners (A valid limited partnership has no maximum limit on the number of partners (limited or general). The only requirement is that it have at least one limited and one general partner. In contrast, S corporations currently have a limit of 100 shareholders)

Under Regulation D of the Securities Act of 1933, which of the following conditions apply to private placement offerings? The securities A.Cannot be sold for longer than a 6-month period. B.Cannot be the subject of an immediate unregistered reoffering to the public. C.Must be sold only to accredited institutional investors. D.May be sold to no more than 20 purchasers who are not accredited investors.

B.Cannot be the subject of an immediate unregistered reoffering to the public. (Rule 506 of Regulation D applies to securities sold under the private placement exemption created by section 4(2) of the 1933 Act. Securities sold under this exemption are restricted securities and may be resold only by registration or in a transaction exempt from registration. The securities' certificates bear a legend that the shares of stock are restricted and purchased for personal investment)

Hughes and Brody start a business as a close corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm? A.Shareholder derivative rights. B.Preemptive rights. C.Cumulative voting rights. D.Inspection rights.

B.Preemptive rights. (Preemptive rights are important to owners of a close corporation. They are options to subscribe to a new issuance in proportion to the shareholder's current interest. Thus, they limit dilution of equity)

Which of the following best describes a trend in litigation involving CPAs? A.Common law is being used more due to the difficulty of suing under securities laws. B.There are substantially more lawsuits filed against CPAs and larger judgment amounts. C.They are being held criminally liable less frequently. D.State laws are rarely used anymore because of the existence of the SEC.

B.There are substantially more lawsuits filed against CPAs and larger judgment amounts.

Blanche was Vice President of the Jupiter Corporation, a major weapons dealer. She used corporate funds to bribe a government official of a small European country. Blanche also caused advertisements to be published in the US press that defamed Jupiter's chief competitor. What is the legal effect on Blanche's actions?

Both Jupiter and Blanche are liable in tort and guilty of a crime

Rice, as a promotor of Dex Corp., signed a 9-month contract with Roe, a CPA. Prior to the incorporation, Roe rendered accounting services pursuant to the contract. After rendering accounting services for an additional period of 6 months pursuant to the contract, Roe was discharged without cause by the board of directors of Dex. Absent agreements to the contrary, who will be liable to Roe for breach of contract?

Both Rice and Dex.

Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter? I. Provision for the issuance of voting stock II. Name of the corporation A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C. Both I and II.

Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to Partnership Property Partnership Distributions A. Yes Yes B. Yes No C. No Yes D. No No

C. No Yes (A partner may assign his or her interest in the partnership but is not allowed to assign rights in specific partnership property. Thus, although a partner engaging in a legal transaction within the ordinary course and scope of partnership business has apparent authority to transfer partnership property, such transfer is wrongful against the other partners without their consent. However, unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to his or her share of partnership distributions)

John Watson entered into an agreement to purchase 1,000 shares of the Marvel Corporation, a corporation to be organized. Watson has since had second thoughts. Applying the RMBCA, which of the following is true? A. A written notice of withdrawal prior to incorporation will be valid. B. A transfer of the agreement to another party will eliminate his liability. C. Watson may not revoke the agreement for a period of 6 months. D. Watson may avoid liability if a majority of the other subscribers release him.

C. Watson may not revoke the agreement for a period of 6 months.

Which of the following penalties is usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to a client? A.Specific performance. B.Punitive damages. C.Money damages. D.Rescission.

C.Money damages. (The accountant-client contract is a personal service contract. Recovery for breach of contract is ordinarily limited to compensatory damages, and punitive damages are rarely allowed. Therefore, money damages are usually imposed against an accountant)

A client suing a CPA for negligence must prove each of the following factors except A.Breach of duty of care. B.Proximate cause. C.Reliance. D.Injury.

C.Reliance. (A client suing an accountant for the unintentional tort of negligence must establish the following elements: (1) the accountant owed the client a duty, (2) the accountant breached this duty, (3) the accountant's breach actually and proximately caused the client's injury, and (4) the client suffered damages. Reasonable reliance on a misrepresentation is an element of the intentional tort of fraud)

In which of the following circumstances would a tax return preparer be prohibited from disclosing a client's tax return information? A.The information will be needed for a peer review. B.The information will be provided in response to a court order. C.The information will be provided to a section 501(c)(3) charity. D.The information will be used to prepare state or local tax returns.

C.The information will be provided to a section 501(c)(3) charity. (There is no exception to the penalty for disclosure if the disclosure was made to a 501(c)(3) charity without the taxpayer's consent)

Which of the following most accurately states an advantage or disadvantage of preferred shareholders? A.They incur more risk than common shareholders. B.They incur less risk than bondholders. C.They have less opportunity for benefiting from the growth of the corporation than common shareholders. D.They have a stronger position upon dissolution than bondholders or common shareholders.

C.They have less opportunity for benefiting from the growth of the corporation than common shareholders

A corporation is a separate legal entity for most purposes. A significant issue is whether it is also separate from its owners for tax purposes. Which of the following is true?

Certain for-profit corporations may elect to avoid federal income taxation.

Absent a specific provision in its articles of incorporation, a corporation's board of directors has the power to do all of the following except A. Repeal the bylaws. B. Declare dividends. C. Fix compensation of directors. D. Amend the articles of incorporation.

D. Amend the articles of incorporation.

The SEC's antifraud Rule 10b-5 prohibits trading on the basis of inside information of a business corporation's stock by A. Officers and directors only. B. All officers, directors, and shareholders only. C. Officers, directors, and beneficial holders of 10% of the corporation's stock only. D. Anyone who bases his or her trading activities on the inside information.

D. Anyone who bases his or her trading activities on the inside information. (Rule 10b-5 is the SEC rule under the Securities Exchange Act of 1934 that prohibits any person from engaging in manipulative or deceptive acts in the purchase or sale of any security. It prohibits trading on the basis of material inside information and applies to anyone who has not made a full disclosure of the inside information. However, mere possession of inside information about stock to be traded is not always a basis for liability. For example, transactions may have been arranged prior to the insider's obtaining the information)

The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as the A. Clean hands doctrine. B. Full disclosure rule. C. Responsible person doctrine. D. Business judgment rule.

D. Business judgment rule.

Baker sold an automobile to Bob's Old Autos, where Fuller is a manager. Fuller took $100 from Baker for encouraging the sale. What duty to Bob's Old Autos did Fuller violate? A. Reasonable care. B. Reimbursement. C. Obedience. D. Loyalty.

D. Loyalty.

Case Corp. is incorporated in State A. Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B? A. Maintaining bank accounts in State B. B. Collecting corporate debts in State B. C. Hiring employees who are residents of State B. D. Maintaining an office in State B to conduct intrastate business.

D. Maintaining an office in State B to conduct intrastate business.

Jeri Fairwell is executive vice-president and treasurer of Wonder Corporation. She was named as a party in a shareholder derivative action in connection with certain activities she engaged in as a corporate officer. In the lawsuit, she was held liable for negligence in performance of her duties. Fairwell seeks indemnity from the corporation. The board of directors would like to indemnify her, but the articles of incorporation do not contain any provisions regarding indemnification of officers and directors. Indemnification A. Is not permitted because the articles of incorporation do not so provide. B. Is permitted only if Fairwell is found not to have been grossly negligent. C. Cannot include attorney's fees because Fairwell was found to have been negligent. D. May be permitted by court order although Fairwell was found to be negligent.

D. May be permitted by court order although Fairwell was found to be negligent.

In general, which of the following must be contained in articles of incorporation? A. Names of states in which the corporation will be doing business. B. Name of the state in which the corporation will maintain its principal place of business. C. Names of the initial officers and their terms of office. D. Number of shares of stock authorized to be issued by the corporation.

D. Number of shares of stock authorized to be issued by the corporation.

Which of the following corporate actions is subject to shareholder approval? A. Election of officers. B. Removal of officers. C. Declaration of cash dividends. D. Removal of directors.

D. Removal of directors.

A corporate director commits a breach of duty if A. The director's exercise of care and skill is minimal. B. A contract is awarded by the company to an organization owned by the director. C. An interest in property is acquired by the director without prior approval of the board. D. The director's action, prompted by confidential information, results in an abuse of corporate opportunity.

D. The director's action, prompted by confidential information, results in an abuse of corporate opportunity.

Under the Revised Model Business Corporation Act (RMBCA), which of the following must be contained in a corporation's articles of incorporation? A. Quorum voting requirements. B. Names of shareholders. C. Provisions for issuance of par and no-par shares. D. The number of shares the corporation is authorized to issue.

D. The number of shares the corporation is authorized to issue.

Knox, president of Quick Corp., contracted with Tine Office Supplies, Inc., to supply Quick's stationery on customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick's board of directors that Knox was a majority shareholder in Tine. Quick's contract with Tine is A. Void because of Knox's self-dealing. B. Void because the disclosure was made after execution of the contract. C. Valid because of Knox's full disclosure. D. Valid because the contract is fair to Quick.

D. Valid because the contract is fair to Quick.

Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation formation? A. When the bylaws of the corporation expressly adopt all preincorporation contracts without novation. B. When the corporation unknowingly accepts the benefits of the contract. C. When the contracting party verbally agrees to relieve the promoter. D. When the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter.

D. When the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter.

Delegation of the powers of the board of directors is generally A.Prohibited. B.Allowed with regard to any matter upon which the board may act. C.Prohibited except when required by an outside agency, for example, a stock exchange that requires members to have audit committees. D.Allowed except with regard to specified important transactions.

D.Allowed except with regard to specified important transactions.

Under the Securities Exchange Act of 1934, a corporation whose common stock is 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 shareholders. D.Is subject to having the registration of its securities suspended or revoked.

D.Is subject to having the registration of its securities suspended or revoked. (The SEC is authorized by the 1934 act to impose sanctions to enforce its provisions. The SEC may deny, suspend, or revoke registration, or it may suspend trading of the securities. These sanctions are in addition to civil and criminal liability imposed by the federal securities laws)

Baker sold an automobile to Bob's Old Autos, where Fuller is a manager. Fuller took $100 from Baker for encouraging the sale. What duty to Bob's Old Autos did Fuller violate? A.Reasonable care. B.Reimbursement. C.Obedience. D.Loyalty.

D.Loyalty. (A director or officer must act in good faith and with the conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries. The duty of loyalty can be breached either by engaging in a conflicting-interest transaction or usurping a corporate opportunity)

Case Corp. is incorporated in State A. Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B? A.Maintaining bank accounts in State B.B.Collecting corporate debts in State B. C.Hiring employees who are residents of State B. D.Maintaining an office in State B to conduct intrastate business.

D.Maintaining an office in State B to conduct intrastate business. (A state may exercise authority over a foreign corporation if the corporation has at least minimum contacts with the state. The minimum contacts might consist of activity that is not isolated and that is purposefully directed towards the state, or places a product in the stream of interstate commerce)

Shareholder voting A.Is required to be cumulative in most states .B.May usually be accomplished by oral or written proxy. C.May usually be by proxy, but the agency thus created is generally limited to a specific issue. D.May be by proxy, but a proxy may be revoked if the shareholder signs a later proxy.

D.May be by proxy, but a proxy may be revoked if the shareholder signs a later proxy.

How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB? A.One audit. B.More than 10 audits. C.More than 50 audits. D.More than 100 audits.

D.More than 100 audits. (The PCAOB annually inspects registered CPA firms that regularly provide audit reports for more than 100 issuers. It inspects at least triennially firms that regularly provide audit reports for 100 or fewer issuers)

Portavoy and Bredstock are the major shareholders of and active participants in the management of Port-a-Stock Corporation. Mann is an investor who owns 10% of the shares but is otherwise uninvolved. Kalik is a promoter and 5% shareholder who has no voice in management. Unfortunately, Port-a-Stock was defectively formed and does not even qualify as a de facto corporation. The RMBCA would impose personal liability A.On all the shareholders. B.Only on Portavoy, Bredstock, and Kalik. C.On no one. D.Only on those purporting to act on behalf of Port-a-Stock.

D.Only on those purporting to act on behalf of Port-a-Stock.

Which of the following is most likely a service that an auditor may provide to a public client? A.Internal audit outsourcing. B.Legal services. C.Management consulting services. D.Tax compliance services.

D.Tax compliance services.

All of the following are legal rights of shareholders in U.S. publicly traded companies except the right to A.Vote on major mergers and acquisitions. B.Receive dividends if declared. C.Vote on charter and bylaw changes. D.Vote on major management changes.

D.Vote on major management changes. (A corporation is owned by shareholders who elect a board of directors to manage the company. The board of directors then hires managers to supervise operations. Shareholders do not vote on major management changes because the powers of the board include selection and removal of officers and the setting of management compensation. Shareholders in publicly traded U.S. corporations have the right to (1) vote on fundamental corporate changes (such as mergers and consolidations), (2) receive declared dividends and annual reports, (3) vote on other matters, (4) exercise any preemptive right that may have been granted, (5) attend meetings, (6) inspect corporate records, and (7) bring shareholder suits)

The Bankruptcy Code allows for all but which of the following proceedings? A. Equity receivership. B. Reorganization. C. Regular income adjustment plan. D. Liquidation.

Equity receivership.

JBR Corporation was organized in the United States and incorporated in State Q. It wishes to do business in State R. The shareholders all reside in State X. From State R's perspective, the corporation is best described as

Foreign.

Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the rights to I. Participate in the management of TLC. II. Cobb's share of TLC's partnership profits. Bean is correct as to which of these rights?

II only

May be permitted by court order although Fairwell was found to be negligent.

a valid limited partnership

May have an unlimited number of partners.

Limited liability of shareholders is one of the advantages of incorporation. Generally, a shareholder is personally liable

Only for his or her investment in the corporation.

A federal bankruptcy judge A. Decides all issues that affect the debtor's estate. B. Has no authority to order the appointment of a permanent trustee. C. Presides over core proceedings specified by statute. D. Collects, preserves, and distributes the debtor's assets.

Presides over core proceedings specified by statute.

A surety paid the creditor upon default and then brought suit against the principal debtor for the amount paid. The surety exercised the right of A. Subrogation. B. Contribution. C. Exoneration. D. Reimbursement.

Reimbursement.

bonnie was a very bright and mature 16-year-old who invented a new wangle. She persuaded the following persons to meet one afternoon: her rich aunt (on furlough form a mental hospital), to contribute money; her uncle, who was a very good salesman when sober; and the president of Ultra Corporation, which had the capability to manufacture the wangles. These four decided to form a partnership to manufacture and sell the wangles. They all signed a partnership agreement, although the uncle was extremely intoxicated at the time, and the president signed on behalf of Ultra Corporation. Who could become a partner?

Ultra Corporation

Under the Revised Model Business Corporation Act, a dissenting shareholder's appraisal right generally applies to which of the following corporate actions? (1) consolidations? (yes or no) (2) Short-Form Mergers? (yes or no)

Yes Yes

Absent any contrary provisions in the agreement, under which of the following circumstances will a limited partnership be dissolved?

a general partner retires all the remaining general partners do not consent to continue

in a general partnership, which of the following acts must be approved by all the partners?

admission of a partner

delegation of the powers of the board of directors is generaly

allowed except with regard to specified important transactions

Absent a specific provision in its articles of incorporation, a corporation's board of directors has the power to do all of the following except: a) repeal the bylaws b) declare the dividends c) fix compensation of directors d) amend the articles of incorporation

amend the articles of incorporation

A corporate shareholder is entitled to

approve dissolution

shares of stock without par value may be issued for such consideration (in dollars) as may be fixed by a corporation's

board of directors

A corporation is a operate legal entity for most purposes. A significant issue is whether it is also separate from its owners for tax purposes. Which of the following is true?

certain for-profit corporations may elect to avoid federal income taxation.

A partnership agreement provides that upon death or dissociation, a partner is entitled to the carrying amount of his or her partnership interest and the partnership shall continue. This provision

eliminates the need to wind up upon dissociation of a partner by express will

An officer-shareholder of a corporation could be held personally liable for which of the following debts?

federal payroll taxes that were withheld from the employees' wages but never remitted to the IRS

JBR Corporation was organized in the US and incorporated in State Q. It wishes to do business in State R. The shareholders all reside in State X. From State R's perspective, the corporation is best described as

foreign

which of the following statements about financing a for-profit corporation is true

large corporations usually have a blend of debt and equity financing

the shares actually held by shareholders are best described as

outstanding shares

A corporate director commits a breach of duty if

the director's action, prompted by confidential information, results in an abuse of corporate opportunity

For what purpose will a shareholder of a publicly held corporation be permitted to file a shareholder derivative suit in the name of the corporation?

to recover damages from corporate management for an ultra vires management act

the apparent authority of a partner to bind the partnership in dealing with third parties

will be effectively limited by the filing of a statement of partnership authority

Which of the following events must be reported to the SEC under the reporting provisions of the Securities Exchange Act of 1934? 1. Tender Offers 2. Insider Trading 3. Solicitation of Proxies A. 1.Yes 2.Yes 3.Yes B. 1.Yes 2.Yes 3.No C. 1.Yes 2.No 3.Yes D. 1.No 2.Yes 3.Yes

A. 1.Yes 2.Yes 3.Yes (The Securities Exchange Act of 1934 governs dealings in securities subsequent to their initial issuance. It requires all regulated publicly held companies to register with the SEC. The act requires disclosure of matters concerning tender offers, insider trading, and the solicitation of proxies)

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA? A.Gross negligence in applying generally accepted auditing standards. B.Ordinary negligence in applying generally accepted accounting principles. C.Identified third party users. D.Scienter.

A.Gross negligence in applying generally accepted auditing standards. (Scienter is a prerequisite to liability for fraud. Scienter generally means that the person knowingly made a representation. For constructive fraud, the scienter requirement is shown by gross negligence (reckless disregard for the truth))

Shareholder action on fundamental changes in a large publicly held corporation generally requires that a meeting be convened. Under the RMBCA, and unless the articles or bylaws stipulate otherwise, A.Holders of not less than 10% of the voting shares may call a special meeting. B.Action on extraordinary transactions may only be taken at the annual meeting. C.Notice of a special but not an annual meeting must include an agenda if extraordinary transactions are to be approved. D.Action on extraordinary transactions taken at special but not annual meetings is void absent notice, waiver of notice, or attendance without objection.

A.Holders of not less than 10% of the voting shares may call a special meeting.

Surplus of a corporation means A.Net assets in excess of stated capital. B.Liquid assets in excess of current needs. C.Total assets in excess of total liabilities. D.Contributed capital.

A.Net assets in excess of stated capital. (Surplus of a corporation is traditionally defined as the excess of net assets over stated capital (par value or stated value of no par stock). This amount is also equivalent to the total of capital surplus (excess of selling price over par or stated value) and earned surplus (retained earnings). Net assets equal total assets minus total liabilities)

An organization that is neither a de jure nor a de facto corporation has attempted to exercise corporate powers. It may be treated as a corporation if I. The other party demonstrates fair and equitable conduct. II. Injustice can be avoided only by treating the business as a corporation. III. A good-faith but unsuccessful effort to comply with the incorporation statute has been made. A. I only. B. I and II only. C. II and III only. D. I, II, and III.

B. I and II only.

Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, preincorporation contractual obligations? A. Assignment. B. Novation. C. Delegation. D. Accord and satisfaction.

B. Novation.

When a party deals with a partner who lacks actual or apparent authority, a general partnership will be bound by the resulting contract if the other partners Ratify the Contract Amend the Partnership Agreement A. YesYes B. YesNo C. NoYes D. NoNo

B. YesNo (A general partnership is bound on a contract made by a partner acting within the scope of his or her actual authority (either express or implied) or by the apparent authority a third party reasonably believes an agent has. A partnership also may be liable on an unauthorized contract by ratification. Ratification is approval after the fact of an unauthorized act and binds the partnership as if the partner had been initially authorized. Ratification may be express or implied from conduct of the principal. However, amending the partnership agreement alone would not imply ratification)

Which of the following statements is true with respect to ownership, possession, or access to a CPA firm's audit working papers? A.Working papers may never be obtained by third parties unless the client consents. B.Working papers are not transferable to a purchaser of a CPA practice unless the client consents. C.Working papers are subject to the privileged communication rule, which, in most jurisdictions, prevents any third-party access to the working papers. D.Working papers are the client's exclusive property.

B.Working papers are not transferable to a purchaser of a CPA practice unless the client consents. (Transferring working papers to a purchaser of a practice constitutes communication of the information they contain and violates the AICPA's Conduct Rule 301, Confidential Client Information. However, this rule does not prohibit review of the CPA's practice, including a review in conjunction with the purchase, sale, or merger of the practice)

A surety is best defined as one who A. Insures against a risk in return for compensation. B. Holds an interest in collateral that secures payment or performance of an obligation. C. Promises to answer to a third person for the debt or performance of another. D. Signs an instrument in any capacity for the purpose of lending his or her name to it.

C. Promises to answer to a third person for the debt or performance of another.

Corporations that are exempt from registration under the Securities Exchange Act of 1934 are subject to the act's A. Provisions dealing with the filing of annual reports. B. Provisions imposing periodic audits. C. Antifraud provisions. D. Proxy solicitation provisions.

C. Antifraud provisions. (A corporation required to register under the 1934 act must comply with its reporting requirements. The antifraud provisions of the act apply to any person who performs a prohibited act in connection with the purchase or sale of any security, whether or not the security is registered)

Blue-sky laws are A. Federal laws that make it unlawful to use deceptive practices in the sale of securities. B. Federal laws that limit the amount of air pollution in a specific geographic area. C. State laws that regulate the sale of securities. D. State laws that regulate the environment.

C. State laws that regulate the sale of securities. (Blue-sky laws are state laws designed to prevent fraudulent or misleading security issues. The name came from the fact that some of the earliest laws prohibited "everything under the blue-skies which is fraudulent.")

In which type of business entity is the entire ownership interest most freely transferable? A.General partnership. B.Limited partnership. C.Corporation. D.Limited liability company.

C.Corporation (Simply acquiring a corporation's stock gives an individual an ownership interest. Shares can be freely bought and sold, usually without any restriction)

What defense must an accountant establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the Act? A.Lack of gross negligence. B.Exercise of due care. C.Good faith and lack of knowledge of the statement's falsity. D.Lack of privity with an injured party.

C.Good faith and lack of knowledge of the statement's falsity. (Section 18(a) imposes liability for making or causing a false or misleading statement (or omission) of a material fact in any filing with the SEC under the Act. A defense to a suit based on Section 18(a) is to prove that the defendant acted in good faith and had no knowledge that the statement was false or misleading. Good faith is an absence of an intent to deceive)

The shares actually held by shareholders are best described as A. Authorized shares. B. Issued shares. C. Treasury shares. D. Outstanding shares.

D. Outstanding shares.

Generally, a corporation's articles of incorporation must include all of the following except the A. Name of the corporation's registered agent. B. Name of each incorporator. C. Number of authorized shares. D. Quorum requirements.

D. Quorum requirements.

Spiffy Manufacturing plans to offer a new issue of voting stock to the investing public. Assuming that it properly takes advantage of an exemption from registration under the 1933 act, Spiffy A.Is also exempt from the antifraud rules of the federal securities laws. B.Need not supply any offerees and purchasers with any material information about itself or the stock being sold. C.Need not register with any state securities regulators. D.Must adhere to both federal antifraud rules and state law.

D.Must adhere to both federal antifraud rules and state law.

Prior to making payment, cosureties may seek the remedy of A. Contribution. B. Reimbursement. C. Subrogation. D. Exoneration.

Exoneration.

A general partner will not be personally liable for which of the following acts or transactions

a personal mortgage loan obtained by one of the other partners on his residence to which that partner, without authority, signed the partnership name on the note.

lien

a statutory right that often gives creditors priority

Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to: Partnership property (1) yes/no Partnership distributions (2) yes/no

no/yes

A limited partner

may not withdraw his or her capital contribution absent sufficient limited-partnership property to pay all general creditors.

When Congress passed the Sarbanes-Oxley Act of 2002, it imposed greater regulation on public companies and their auditors and required increased accountability. Which of the following is not a provision of the act? A.Executives must certify the appropriateness of the financial statements. B.The act provides criminal penalties for fraud. C.Auditors may not provide certain nonaudit services for their audit clients .D.Audit firms must be rotated on a periodic basis.

.D.Audit firms must be rotated on a periodic basis.

Which of the following statements is true concerning the similarities between a limited partnership and a corporation? A. Each is created under a statute and must file a copy of its organizational document with the proper state authorities. B. All corporate shareholders and all partners in a limited partnership have limited liability. C. Both are recognized for federal income tax purposes as taxable entities. D. Both are allowed statutorily to have perpetual existence.

A. Each is created under a statute and must file a copy of its organizational document with the proper state authorities.

An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer A. File an offering circular with the SEC. B. Sell only to accredited investors. C. Provide investors with the prior 4 years' audited financial statements. D. Provide investors with a proxy registration statement.

A. File an offering circular with the SEC. (Under Regulation A, a small public issue of securities is exempt from full registration with the SEC if certain requirements are met. Regulation A applies to issuances not exceeding $5 million if the issuer (1) files an offering statement with the SEC, which includes a notification and an offering circular; (2) provides the circular to each offeree and purchaser; and (3) observes the 20-day waiting period. However, investment companies and issuers that must report under the 1934 act may not claim the exemption)

Under the Revised Model Business Corporation Act (RMBCA), which of the following statements regarding a corporation's bylaws is (are) true? I. A corporation's initial bylaws shall be adopted by either the incorporators or the board of directors. II. A corporation's bylaws are contained in the articles of incorporation. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

A. I only.

Gold, CPA, expressed an unmodified opinion on the financial statements of Eastern Power Co. Silver purchased Eastern bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included the financial statements. Gold is being sued by Silver under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements. To prevail, Silver must prove Scienter Reliance A. No No B. No Yes C. Yes No D. Yes Yes

A. No No (The plaintiff's case has the following elements: The plaintiff purchased securities subject to a registration statement, the plaintiff suffered a loss, and a part of the registration statement for which the defendant was responsible contained a misstatement or omission of a material fact. The plaintiff and the defendant need not have been in privity of contract; the plaintiff need not have relied on the misstatement or omission; and the defendant need not have intended to deceive, manipulate, or defraud anyone)

Pursuant to Regulation D of the Securities Act of 1933, Pate Corp. is offering $3 million of its securities solely to accredited investors. Under Regulation D, Pate is A. Not required to provide any specified information to the accredited investors. B. Required to provide the accredited investors with audited financial statements for the 2 most recent fiscal years. C. Permitted to make a general solicitation. D. Not eligible for an exemption if the securities are debentures.

A. Not required to provide any specified information to the accredited investors (Rule 504 of Regulation D does not apply to this offering because it exceeds $1 million. But Rules 505 ($5 million limit) and 506 (no dollar limit) may be relevant. Under Rules 505 and 506 of Regulation D, no financial disclosure is necessary if all investors are accredited. But, if some are nonaccredited, they must receive certain material information)

Under the Revised Model Business Corporation Act (RMBCA), a corporate director is authorized to A. Rely on information provided by the appropriate corporate officer. B. Serve on the board of directors of a competing business. C. Sell control of the corporation. D. Profit from insider information.

A. Rely on information provided by the appropriate corporate officer.

A basic purpose of the securities laws in the United States is to regulate the issuance of investment securities by A. Requiring disclosure of all relevant information so that investors can make informed decisions. B. Prohibiting the issuance of non-investment grade securities. C. Ensuring that all shareholders have an equal vote in the election of a board of directors. D. Providing a regulatory framework for those states that do not have their own securities laws.

A. Requiring disclosure of all relevant information so that investors can make informed decisions. (The basic purpose of the federal securities laws in the United States, primarily the Securities Act of 1933 and the Securities Exchange Act of 1934, is to provide complete and fair disclosure to potential investors. The emphasis is on disclosure that allows informed investors to make intelligent decisions.)

Which of the following statements concerning the prospectus required by the Securities Act of 1933 is true? A. The prospectus is a part of the registration statement. B. The prospectus should enable the SEC to pass on the merits of the securities. C. The prospectus must be filed after an offer to sell. D. The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy of facts embodied therein.

A. The prospectus is a part of the registration statement. (A prospectus is prepared as part of the registration statement. A prospectus is a written document proposing a sale of securities to potential investors. The prospectus contains most of the information in the registration statement. It must be furnished to each potential investor prior to the time of delivery of the securities)

Which of the following statements about the directors of a corporation is true? A. Under the Revised Model Business Corporation Act, a corporation may dispense with a board of directors in certain circumstances. B. Directors may serve only annual terms. C. Directors may be elected by the shareholders only. D. The number of directors may not exceed the number of shareholders.

A. Under the Revised Model Business Corporation Act, a corporation may dispense with a board of directors in certain circumstances.

Under the Revised Model Business Corporation Act, a dissenting shareholder's appraisal right generally applies to which of the following corporate actions? Consolidations Short-Form Mergers A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes (Shareholders participate indirectly in corporate policy and management by (1) electing directors and (2) voting on formal resolutions of the board of directors to approve fundamental corporate changes, including all mergers or consolidations. Shareholders who disagree with the fundamental corporate changes may have appraisal (dissenter's) rights. A shareholder demanding appraisal must (1) have the right to vote on the action to which (s)he objects, (2) not vote in favor of the proposed action, and (3) make written demand before the vote that the corporation purchase his or her stock if the petition is approved. If the conditions are met, the corporation must pay dissenters the fair value of their stock within 60 days. Generally, shares traded on a stock exchange are excluded from appraisal rights)

Which of the following is least likely to be considered a security under the Securities Act of 1933? A.General partnership interests. B.Limited partnership interests. C.Stock options. D.Warrants.

A.General partnership interests. (A security is defined very broadly by the Securities Act of 1933, as interpreted by the Supreme Court. In general, a security is an investment in a common enterprise with an expectation of profits based solely on the efforts of others. A general partner is entitled to participate directly in the management of the business. Thus, return on the investment in the partnership might be attributed to his or her own efforts)

Brown, CPA, helped Cook organize a partnership that was actually an abusive tax shelter. Brown induced clients to participate by making false statements concerning the allowability of deductions and tax credits. As a result of these activities, Cook derived $100,000 gross income, and Brown derived $50,000 gross income. What is Brown's federal statutory liability under the provision of the Internal Revenue Code specifically relating to promoting abusive tax shelters? A.$1,000 B.$10,000 C.$50,000 D.$100,000

A.$1,000 (A person who promotes an abusive tax shelter is subject to a penalty equal to the lesser of $1,000 or 100% of the gross income derived or to be derived from the activity (IRC Sec. 6700). The IRS may also seek to enjoin the promoter from engaging in further acts subject to the penalty [IRC Sec. 7408(a)])

Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive officer (CEO), chief financial officer (CFO), chief accounting officer (CAO), or controller of an audit client that files reports with the Securities and Exchange Commission. How many annual audit period(s) must be completed before such employment can be accepted? A.1 B.2 C.3 D.5

A.1 (A provision of SOX prohibits the conflict of interest that arises when the CEO, CFO, CAO, controller, or any person in an equivalent position was employed by a public client's audit firm during the 1-year period preceding the audit)

Which of the following statements is correct regarding the liability of a CPA for services performed? A.A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner. B.A CPA is negligent for exercising only that degree of care a reasonably competent CPA would exercise under the circumstances. C.A CPA's liability for negligence extends only to the client and no further. D.A CPA's liability for fraud extends only to the client and no further.

A.A CPA's work is not guaranteed to be accurate even though the CPA acted in a reasonably competent and professional manner. (An accountant has a duty to exercise reasonable care and diligence. This does not guarantee that the CPA's work will be accurate)

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? A.A bank that is considering a loan to the accountant's client and is waiting for the financial statements on which to base its decision. B.A bank when the accountant was aware financial statements would be sent to many banks as part of loan applications by the client. C.A shareholder of the client. D.A general trade creditor of the client.

A.A bank that is considering a loan to the accountant's client and is waiting for the financial statements on which to base its decision.

Which of the following securities is exempt from registration under the Securities Act of 1933? A.A class of stock given in exchange for another class by the issuer to its existing shareholders without the issuer's payment of a commission. B.Limited partnership interests sold for the purpose of acquiring funds to invest in bonds issued by the United States. C.Corporate debentures that were previously subject to an effective registration statement, provided they are convertible into shares of common stock. D.Shares of nonvoting common stock, provided their par value is less than $1.00.

A.A class of stock given in exchange for another class by the issuer to its existing shareholders without the issuer's payment of a commission. (If securities are transferred between the issuer and its existing shareholders without payment of commissions or other consideration, the transaction is exempt from registration. Hence, stock dividends and stock splits are exempt. Securities issued in mergers and reorganizations are also exempt if no cash is involved and the securities are given solely for other securities)

Which of the following can a CPA firm legally do? A.Accept a competing company in the same industry as another of its clients. B.Establish an association of CPAs for the purpose of determining minimum fee schedules. C.Effectively disclaim liability to third parties for any and all torts. D.Effectively establish an absolute dollar limitation on its liability for a given engagement.

A.Accept a competing company in the same industry as another of its clients. (Although a CPA contracts with a client to perform services, (s)he is an independent contractor and may also work for others. A CPA firm can legally accept a competing company in the same industry as another client. This practice is advantageous because it permits CPAs to "specialize" and become more knowledgeable and efficient, as well as to be of more assistance to clients)

Boyle, as a promoter of Delaney Corp., signed a 9-month contract with Austin, a CPA. Prior to the incorporation, Austin rendered accounting services pursuant to the contract. After rendering accounting services for an additional period of 6 months pursuant to the contract, Austin was discharged without cause by the board of directors of Delaney. Absent agreements to the contrary, who will be liable to Austin for breach of contract? A.Both Boyle and Delaney. B.Boyle only. C.Delaney only. D.Neither Boyle nor Delaney.

A.Both Boyle and Delaney (A promoter who contracts for a nonexistent corporation is personally liable on such contracts. Delaney is also liable because it impliedly adopted the contract by accepting Austin's performance)

The Larkin Corporation is contemplating a two-for-one stock split of its common stock. Its $4 par value common stock will be reduced to $2 after the split. It has two million shares issued and outstanding out of a total of three million authorized. The distribution of the additional shares to the shareholders requires A.Both authorization by the board of directors and approval by the shareholders. B.The recipients to recognize a taxable dividend. C.That surplus equal to the par value of the existing number of shares issued and outstanding be transferred to the stated capital account. D.The trustees of trust recipients of the additional shares to allocate them ratably between income and corpus.

A.Both authorization by the board of directors and approval by the shareholders. (The effect of the stock split is to increase the number of shares issued and outstanding from two million to four million, which will exceed the number of authorized shares. Such a transaction is a fundamental change in the corporate financial structure and therefore must be approved by the shareholders as well as by the board of directors)

Holly Corp. engaged Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly was required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover the omission of a fact material to the statements. A purchaser of Holly's securities may recover from Yost under Section 11 of the Securities Act of 1933 only if the purchaser A.Brings a civil action within 1 year of the discovery of the omission and within 3 years of the offering date. B.Proves that the registration statement was relied on to make the purchase. C.Proves that Yost was negligent. D.Establishes privity of contract with Yost.

A.Brings a civil action within 1 year of the discovery of the omission and within 3 years of the offering date. (The statute of limitations on an action by a purchaser of securities relying on the Securities Act of 1933 is 1 year after the false statements or omissions of material fact were discovered or should have been discovered. The latest the suit may be brought is within 3 years after the security was first offered to the public.)

A corporation is a separate legal entity for most purposes. A significant issue is whether it is also separate from its owners for tax purposes. Which of the following is true? A.Certain for-profit corporations may elect to avoid federal income taxation. B.Corporations file information returns but are not taxpayers. C.All for-profit corporations pay federal taxes on their income. D.If the corporation pays tax on its income, dividends distributed out of that income are not taxable.

A.Certain for-profit corporations may elect to avoid federal income taxation.

Clark, a professional tax return preparer, prepared and signed a client's federal income tax return that resulted in a $600 refund. Which one of the following statements is true with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client's refund check? A.Clark will be subject to the penalty if Clark endorses and cashes the check. B.Clark may endorse and cash the check without penalty if Clark is enrolled to practice before the Internal Revenue Service. C.Clark may not endorse and cash the check without penalty because the check is for more than $500. D.Clark may endorse and cash the check without penalty if the amount does not exceed Clark's fee for preparation of the return.

A.Clark will be subject to the penalty if Clark endorses and cashes the check. (Sec. 6695(f) of the Internal Revenue Code provides that any income tax return preparer who endorses or otherwise negotiates any check made in respect of income taxes that is issued to a taxpayer will be subject to a penalty of $500 with respect to each such check. This does not apply to the deposit by a bank in the taxpayer's account)

Which of the following statements is correct regarding both debt and common shares of a corporation? A.Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest. B.Common shareholders and debt holders have an ownership interest in the corporation. C.Common shares typically have a fixed maturity date, but debt does not. D.Common shares have a higher priority on liquidation than debt.

A.Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest. (Common shares are equity securities. Thus, they are ownership interests. In contrast, debt holders do not have ownership interests. Rather, debt holders have claims on the corporation's assets. In the event of a liquidation, the debt holders' claims must be satisfied before any distribution to common shareholders)

A CPA will most likely be negligent when the CPA fails to A.Correct errors discovered in the CPA's previously issued audit reports. B.Detect all of a client's fraudulent activities. C.Include a negligence disclaimer in the CPA's engagement letter. D.Warn a client's customers of embezzlement by the client's employees.

A.Correct errors discovered in the CPA's previously issued audit reports. (A CPA has a duty to correct his or her audit report if (s)he subsequently discovers the report is erroneous. The CPA should disclose the new information to any user relying on the previous report. But an attorney should be consulted)

Pick, CPA, was engaged by Edge Corp. to audit Edge's financial statements. Pick, in performing the audit and rendering an unmodified opinion, intentionally ignored several material omissions in the financial statements. Edge included Pick's auditor's report in its annual filing with the SEC and in its annual stockholders' report. Drane purchased shares of Edge stock based on Drane's review of the past performance of the stock and current-year financial statements. When the omissions in the financial statements became known, the value of Edge stock declined and Drane suffered a loss. Under the provisions of Rule 10b-5 of the Securities Exchange Act of 1934, what will be the result of a suit by Drane against Pick? A.Drane will win because Pick acted with intent. B.Drane will win because Pick was negligent. C.Drane will lose because only Edge is liable. D.Drane will lose because the stock purchased was not part of a new issue.

A.Drane will win because Pick acted with intent. (Rule 10b-5 states that it is illegal for any person, directly or indirectly, to use interstate commerce or a national securities exchange to defraud anyone in connection with the purchase or sale of any security, whether or not required to be registered. It is most often applied to insider trading and corporate misstatements. A person may violate Rule 10b-5 without actively participating in the purchase or sale of the security. All that is required is that the party's activity be connected with the purchase or sale. Liability is only to actual purchasers or sellers. They need not be in privity with the defendant. The SEC or a private party may sue. A plaintiff must prove each of the following: (1) an oral or written misstatement or omission of a material fact or other fraud; (2) its connection with any purchase or sale of securities; (3) the defendant's intent to deceive, manipulate, or defraud (scienter); (4) reliance on the misstatement (but a private plaintiff ordinarily need not prove reliance in omission cases); and (5) loss caused by the reliance. Accordingly, the auditor is liable for fraud because (s)he intentionally ignored material omissions in the financial statements that constituted written misstatements of material facts related to a purchase of securities that resulted in loss)

Which of the following statements is true concerning the similarities between a limited partnership and a corporation? A.Each is created under a statute and must file a copy of its organizational document with the proper state authorities. B.All corporate shareholders and all partners in a limited partnership have limited liability. C.Both are recognized for federal income tax purposes as taxable entities. D.Both are allowed statutorily to have perpetual existence.

A.Each is created under a statute and must file a copy of its organizational document with the proper state authorities. (Neither corporations nor limited partnerships are nonstatutory business organizations. They are artificial legal entities that are recognized only if they are formed under authority of a state statute. Filing an organizational document (articles of incorporation or certificate of limited partnership) with applicable state authorities is a requirement for legal entity status for each)

Tiffany Grandiose secured an option to purchase a tract of land for $100,000. She then organized the Dunbar Company and subscribed to 51% of the stock of the corporation. It was issued for her 3-month promissory note for $100,000. As the controlling director, she had the corporation authorize the purchase of the land for $200,000. She then promptly redeemed the promissory note. A disgruntled shareholder subsequently brought suit against Grandiose on the corporation's behalf. Which of the following is a true statement? A.Grandiose breached a fiduciary duty to the corporation. B.The judgment of the board of directors was conclusive. C.Grandiose is entitled to retain the profit because she controlled the corporation. D.The giving of the promissory note was not payment for the shares.

A.Grandiose breached a fiduciary duty to the corporation (Grandiose is a fiduciary with respect to the newly organized corporation, but breached this fiduciary obligation as a promoter. She had a duty to (1) act in good faith, (2) make full disclosure, and (3) not make a secret profit at the expense of the corporation. The corporation can recover the profits for violation of this duty)

Which of the following circumstances may permit the piercing of the corporate veil of a closely held corporation and thus may cause its shareholders to be held personally liable? I. The corporation is thinly capitalized. II. The corporation borrows money from a shareholder without giving the shareholder a security interest in corporate assets. A.I only. B.II only. C.Both I and II. D.Neither I nor II.

A.I only. (Typically, the corporate veil is pierced when a court finds that the corporation is merely the alter ego of a shareholder, for example, when (1) it is undercapitalized, (2) the assets of the corporation and the shareholders are commingled, (3) corporate formalities are ignored, or (4) the corporation is established for a sham purpose. However, barring contrary language in the articles of incorporation, a corporation may make contracts, give guarantees, incur liabilities, issue debt, or give security interests. Thus, the law does not prohibit borrowing from a shareholder or other creditor even if a security interest is given)

Assuming no agreement on the matter between the buyer and seller of stock, who is entitled to a declared dividend? A.If the stock is listed on a stock exchange, the buyer if the purchase was 6 days before the record date. B.If the stock is not listed on a stock exchange, the seller if the purchase was between the ex dividend and record dates. C.If the stock is listed on a stock exchange, the buyer if the purchase was after the record date. D.If the stock is not listed on a stock exchange, the shareholder of record at the ex dividend date.

A.If the stock is listed on a stock exchange, the buyer if the purchase was 6 days before the record date.

Jay Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally expressed an unmodified opinion on the financial statements even though material misstatements were discovered. The financial statements and Jay's unmodified opinion were included in a registration statement and prospectus for an original public offering of Maco stock. Which of the following statements is true 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 unmodified 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.

A.Jay will be liable if the purchaser relied on Jay's unmodified opinion on the financial statements. (A CPA can be held liable for a misstatement or omission of a material fact relied upon by a purchaser or seller of a security. The intent to deceive, manipulate, or defraud (called scienter) must be proven in a private action under Rule 10b-5, and the wrongful act must have caused the plaintiff's damages. Under Section 10(b), the reliance element is present if the purchaser or seller would not have invested given correct or additional information. Causation exists if (s)he was damaged in some way by investing)

A major impact of the Foreign Corrupt Practices Act of 1977 is that registrants subject to the Securities Exchange Act of 1934 are now required to A.Keep records that reflect the transactions and dispositions of assets and to maintain a system of internal accounting controls. B.Provide access to records by authorized agencies of the federal government. C.Prepare financial statements in accord with international accounting standards. D.Produce full, fair, and accurate periodic reports on foreign commerce and/or foreign political party affiliations.

A.Keep records that reflect the transactions and dispositions of assets and to maintain a system of internal accounting controls. (The main purpose of the FCPA is to prevent bribery by firms that do business in foreign countries. A major ramification is that it requires all companies that must register with the SEC under the Securities Exchange Act of 1934 to maintain adequate accounting records and a system of internal accounting control)

Dart Corp. engaged CPA Firm to assist in a public stock offering. CPA Firm audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Firm's opinion was included in Dart's registration statement. Kelly purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. In a suit against CPA Firm under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Kelly must prove all of the following except that A.Kelly was an intended user of the false registration statement. B.Kelly relied on the false registration statement. C.The transaction involved some form of interstate commerce. D.CPA Firm acted with intentional disregard of the truth.

A.Kelly was an intended user of the false registration statement. (A CPA can be held liable for a misstatement or omission of a material fact relied upon by a purchaser or seller of a security, provided the misconduct involves interstate commerce, the mails, or a national securities exchange. The intent to deceive, manipulate, or defraud (called scienter) must be shown in a private action under Rule 10b-5, and the wrongful act must have caused the plaintiff's damages. Liability runs to any actual purchaser or seller who incurs a loss that results from the reliance)

Bird Corp. made a $5 million exempt common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. Thus, the shares were restricted securities. As the issuer of restricted securities, Bird must A.Make a reasonable effort to determine that purchasers are buying for themselves and not for others. B.Publicly advertise that the shares are not registered. C.Provide information to all purchasers as to how they can register their shares so that resale will be permitted. D.Apply to the SEC for contingent exemptions so that purchasers may resell their shares as exempt.

A.Make a reasonable effort to determine that purchasers are buying for themselves and not for others. (Exemption from the 1933 act requirements under Rules 505 and 506 of Regulation D applies to particular transactions, not the securities offered and sold. Securities sold under one of these exemptions are restricted. An issuer of restricted securities is therefore required to make a reasonable effort to determine that purchasers are not underwriters and that they are purchasing strictly for their own investment purposes)

Which of the following securities is exempt from registration under the Securities Act of 1933? A.Municipal bonds. B.Securities sold by a discount broker. C.Pre-incorporation stock subscriptions. D.One-year notes issued to raise working capital.

A.Municipal bonds. (The 1933 act exempts certain securities or transactions from registration. Thus, it specifically exempts securities of domestic governments used for a governmental purpose, for example, municipal bonds)

Frey, Inc., intends to make a $2 million common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. Frey A.Must notify the SEC within 15 days after the first sale of the offering. B.May sell the stock to an unlimited number of nonaccredited investors. C.May make the offering through a general advertising. D.Must provide all investors with a prospectus.

A.Must notify the SEC within 15 days after the first sale of the offering. (Rule 505 provides exemption from the requirements of the 1933 act to all issuers other than investment companies for sales of securities up to $5 million in any 12-month period. Under Rule 505, securities may be sold to no more than 35 nonaccredited investors and to an unlimited number of accredited investors. Rule 505 also provides that the issuer must notify the SEC within 15 days after the first offering)

The registration provisions of the Securities Exchange Act of 1934 require disclosure of all of the following information except the A.Names of owners of at least 5% of any class of nonexempt equity security. B.Bonus and profit-sharing arrangements. C.Financial structure and nature of the business. D.Names of officers and directors.

A.Names of owners of at least 5% of any class of nonexempt equity security. (Registration under the 1934 act requires disclosure of (1) corporate organization; (2) financial structure; (3) description of all securities; (4) names of officers, directors, and underwriters; (5) names of all owners of more than 10% of any class of nonexempt equity security; (6) description of the nature of the business; (7) financial statements; and (8) bonus and profit-sharing arrangements)

Ritz Corp. wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale. Based on the audited financial statements and Fein's unmodified opinion, Ritz acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by $500,000. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that the inventory was overstated. Which of the following two causes of action would provide Ritz with proper bases upon which Ritz will most likely prevail? A.Negligence and breach of contract. B.Negligence and gross negligence. C.Negligence and fraud. D.Gross negligence and breach of contract.

A.Negligence and breach of contract. (An accountant's nonstatutory liability to a client can be based upon breach of contract, negligence, or fraud. A breach of contract occurs when an accountant fails to perform duties required under a contract. These duties can either be express or implied. All contracts carry the implied duty to perform in a nonnegligent manner. To prevail in an action for negligence, the client must prove that the accountant did not act with the same degree of skill and judgment possessed by accountants in the locality. In an action for fraud, the client must prove scienter (intent to deceive or a reckless disregard for the truth). Ritz would most likely prevail on an action brought for negligence or breach of contract if Fein failed to perform with the knowledge, skill, and judgment commonly possessed by CPAs in the area)

The firm Meek & Co., CPAs was engaged by Reed, the president of Sulk Corp, to express by June 15 an opinion on Sulk's financial statements for the fiscal year ended March 31. Meek's engagement and its fee of $20,000 were approved by Sulk's board of directors. Meek did not express its opinion until June 30 because of Sulk's failure to supply Meek with the necessary information to complete the audit. Sulk refuses to pay Meek. If Meek sues Sulk, Meek will A.Prevail based on the contract. B.Prevail based on quasi-contract. C.Lose, because it breached the contract. D.Lose, because the June 15 deadline was a condition precedent to Sulk's performance.

A.Prevail based on the contract. (Meek's failure to meet the deadline did not result in a breach of contract. Rather, the failure of performance was caused by Sulk's failure to supply Meek with the necessary information to complete the audit. Every contract contains an implied promise each party will not interfere with the other party's performance. Consequently, Meek can enforce the contract because Meek was not in breach)

A CPA who fraudulently performs an audit of a corporation's financial statements will A.Probably be liable to any person who suffered a loss as a result of the fraud. B.Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements. C.Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements. D.Be liable only to third parties in privity of contract with the CPA.

A.Probably be liable to any person who suffered a loss as a result of the fraud. (Because fraud entails moral turpitude, the courts permit all reasonably foreseeable users of an accountant's work product to bring suit. The distinctive feature of fraud is scienter, that is, intentional misrepresentation or reckless disregard for the truth (sometimes found in gross negligence))

Walters & Whitlow, CPAs, failed to discover a fraudulent scheme used by Davis Corporation's head cashier to embezzle corporate funds during the past 5 years. Walters & Whitlow would have discovered the embezzlements promptly if they had not been negligent in their annual audits. Under the circumstances, Walters & Whitlow will normally not be liable for A.Punitive damages. B.The fees charged for the years in question. C.Losses occurring after the time the fraudulent scheme should have been detected. D.Losses occurring prior to the time the fraudulent scheme should have been detected that could have been recovered had it been so detected.

A.Punitive damages. (If the CPAs have merely been negligent, they will not be liable for punitive damages. Punitive damages are awarded only when the situation presents a case of extreme or aggravated circumstances)

Able, CPA, was engaged by Wedge Corp. to audit Wedge's financial statements. Wedge intended to use the audit report to obtain a $10 million loan from Care Bank. Able and Wedge's president agreed that Able would give an unmodified opinion on Wedge's financial statements in the audit report even though there were material misstatements in the financial statements. Care refused to make the loan. Wedge then gave the audit report to Ranch to encourage Ranch to purchase $10 million worth of Wedge common stock. Ranch reviewed the audit report and relied on it to purchase the stock. After the purchase, Able's agreement with Wedge's president was revealed. As a result, Wedge stock lost half its value, and Ranch sued Able for fraud. What will be the result of Ranch's suit? A.Ranch will win because Able intentionally gave an unmodified opinion on Wedge's materially misstated financial statements. B.Ranch will win because Able is strictly liable for errors made in auditing Wedge's financial statements. C.Ranch will lose because Ranch is not a foreseen user of Able's audit report. D.Ranch will lose because Ranch is not in privity with Able.

A.Ranch will win because Able intentionally gave an unmodified opinion on Wedge's materially misstated financial statements. (Fraud is an intentional misrepresentation. An accountant is liable for losses that result from his or her commission of fraud. Liability for fraud is to all reasonably foreseeable users of the work product. A foreseeable user is any person that the accountant should have reasonably foreseen would have been injured by justifiable reliance on the misrepresentation. Since Able intentionally gave a false unmodified opinion on Wedge's materially misstated financial statements and because Ranch is a foreseeable user, Ranch will win his suit against Able)

Which of the following statements is true with respect to criminal prosecution under the securities acts? A.Reckless disregard for the truth may be a sufficient basis for a criminal conviction. B.Personal monetary gain from the alleged criminal conduct is required in order to be convicted. C.The antifraud provisions of the Securities Acts are the only basis upon which a person can be indicted and convicted. D.Corporations are not subject to criminal prosecution.

A.Reckless disregard for the truth may be a sufficient basis for a criminal conviction. (Criminal liability under the federal securities laws is based on willful violation. A reckless disregard for the truth or falsity of a statement is sometimes deemed a willful or intentional act)

Jones, a member of the AICPA, prepared Smith's federal income tax return and appropriately signed the preparer's declaration. Several months later, Jones learned that Smith improperly altered several figures before mailing the tax return to the IRS. Jones should communicate disapproval of this action to Smith and A.Take no further action with respect to the current year's tax return but consider the implications of Smith's actions for any future relationship. B.Inform the IRS of the unauthorized alteration. C.File an amended tax return. D.Refund any fee collected, return all relevant documents, and refuse any further association with Smith.

A.Take no further action with respect to the current year's tax return but consider the implications of Smith's actions for any future relationship. (When the member discovers an error, (s)he must inform the taxpayer and recommend the corrective measures to be taken. It is then the taxpayer's responsibility to correct the error. If the IRS is likely to bring criminal charges, the taxpayer should be advised to seek legal counsel. If the error is not corrected, "the member should consider whether to withdraw from preparing the return and whether to continue a professional or employment relationship with the taxpayer" (SSTS No. 6))

While conducting an audit, a CPA failed to detect material misstatements included in his or her client's financial statements. The CPA's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. In a suit by a purchaser against the CPA for common law fraud, the CPA's best defense would be that A.The CPA did not have actual or constructive knowledge of the misstatements. B.The CPA's client knew or should have known of the misstatements. C.The CPA did not have actual knowledge that the purchaser was an intended beneficiary of the audit. D.The CPA was not in privity of contract with his or her client.

A.The CPA did not have actual or constructive knowledge of the misstatements. (To recover for the tort of fraud, a plaintiff must prove that the defendant made a misrepresentation, with knowledge that it was false or with a reckless disregard for the truth, with intent that it should be relied upon, and regarding a material fact that was actually relied upon by the third party to his or her detriment. The CPA's reckless disregard for the truth can satisfy the scienter element even when the CPA was without knowledge of a misstatement)

A CPA prepares a client's tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA's lack of inquiry? A.The CPA may be assessed a tax return preparer penalty. B.The CPA may be charged with preparing a fraudulent return. C.The client will not owe an understatement penalty if the return is audited and the expenses disallowed. D.The client will not be subject to a fraud penalty.

A.The CPA may be assessed a tax return preparer penalty. (A tax return preparer penalty may be assessed if a CPA prepares a client's tax return containing business travel expenses without inquiring about the existence of documentation for the expenses)

A company engaged a CPA to perform the annual audit of its financial statements. The audit failed to reveal an embezzlement scheme by one of the employees. Which of the following statements best describes the CPA's potential liability for this failure? A.The CPA's adherence to generally accepted auditing standards (GAAS) may prevent liability. B.The CPA will not be liable if care and skill of an ordinary reasonable person was exercised. C.The CPA may be liable for punitive damages if due care was not exercised. D.The CPA is liable for any embezzlement losses that occurred before the scheme should have been detected.

A.The CPA's adherence to generally accepted auditing standards (GAAS) may prevent liability. (A CPA may avoid liability for negligence if the accountant can prove that (s)he exercised reasonable care. Compliance with the relevant professional standards (i.e., GAAS) is evidence, but not necessarily sufficient proof, that the accountant exercised the diligence due under the circumstances)

Mix & Associates, CPAs, expressed an unmodified opinion on the financial statements of Glass Corp. for the current year. Glass is not a public company. It was determined later that Glass's treasurer had embezzled $300,000 from Glass during the year. Glass sued Mix because of Mix's failure to discover the embezzlement. Mix was unaware of the embezzlement. Which of the following is Mix's best defense? A.The audit was performed in accordance with GAAS. B.The treasurer was Glass's agent and, therefore, Glass was responsible for preventing the embezzlement. C.The financial statements were presented in conformity with GAAP. D.Mix had no actual knowledge of the embezzlement.

A.The audit was performed in accordance with GAAS. (To determine whether financial statements are in conformity with GAAP, the CPA must follow GAAS in an audit of a nonpublic company. The auditors do not guarantee that all material errors or fraud will be detected. Following GAAS does not eliminate the possibility of negligence, but it is strong evidence of adherence to the due care standard, which is the CPA's best defense)

A member of the AICPA who is engaged to prepare an income tax return has a duty to prepare it in such a manner that the tax is A.The legal minimum. B.Computed in conformity with generally accepted accounting principles. C.Supported by the client's audited financial statements. D.Not subject to change upon audit.

A.The legal minimum. (A member of the AICPA should serve to the best of his or her ability and with professional concern for the taxpayer's best interests, consistent with responsibilities to the tax system. Within the limits of the law and ethical practice, the member should strive for the legal minimum tax, not for tax evasion)

A requirement of a private action to recover damages for violation of the registration requirements of the Securities Act of 1933 is that A.The plaintiff acquired the securities in question. B.The issuer or other defendants committed either negligence or fraud in the sale of the securities. C.A registration statement was filed. D.The securities were purchased from an underwriter.

A.The plaintiff acquired the securities in question. (The Securities Act of 1933 permits a civil action by an acquirer of securities if (1) the required registration was not made; (2) a registered security was sold, but a prospectus was not delivered; (3) a security was sold using a prospectus that was not current; or (4) an offer to sell was made before a required registration. Section 11 allows an acquirer to sue on the basis of misstatements or omissions of material facts in the registration statement)

Fact Pattern: The AICPA's Tax Executive Committee in Statements on Standards for Tax Services (SSTSs) has issued enforceable rules. Statements 1-8 have been issued (codification prefix TS). The AICPA's Code of Professional Conduct requires that members comply with SSTSs. In accordance with the AICPA's Statements on Standards for Tax Services, when a reasonable basis exists for omission of an answer to an applicable question on a tax return, A.The preparer need not provide an explanation for the omission on the return. B.A brief explanation of the reason for the omission must be provided on the return. C.The question should be marked as nonapplicable. D.A note on the return should state that the answer will be provided if the information is requested.

A.The preparer need not provide an explanation for the omission on the return. (According to TS 200, the member should sign the preparer's declaration when a question has not been answered only if (s)he has made "a reasonable effort to obtain from the taxpayer the information necessary to provide appropriate answers to all questions on a tax return." Given reasonable grounds for the omission, the member is not required to provide an explanation on the return, although (s)he must consider whether the omission may cause the return to be incomplete)

Which of the following transactions is subject to registration requirements of the Securities Act of 1933? A.The public sale by a corporation of its negotiable 10-year notes. B.The public sale by a charitable organization of 10-year bearer bonds. C.The sale across state lines of municipal bonds issued by a city. D.Issuance of stock by a publicly traded corporation to its shareholders because of a stock split.

A.The public sale by a corporation of its negotiable 10-year notes. (Under the 1933 act, any offer or sale of a security to the public requires registration unless a specific exemption applies. Negotiable 10-year rates are securities because they provide evidence of indebtedness. Moreover, no exemption applies. For example, these notes are not commercial paper)

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933? A.The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer. B.The securities are nonvoting preferred stock. C.The issuing corporation was closely held prior to the offering. 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.

A.The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer. (Under Section 4(1) of the 1933 act, an initial offering of securities is exempt from registration if the sale is made by an ordinary investor, that is, a person who is not an issuer, an underwriter, or a dealer)

If the directors of the Garrett Co. wish to call a special meeting of shareholders to consider a proposed merger, A.The shareholders must be given specific notice of the meeting and the issues on the agenda. B.At least 1 week's notice must be given. C.If notice is not given to shareholders entitled to vote at the record date, action taken at the meeting will be invalid even if all the shareholders attend and participate in the meeting. D.A majority of shareholders entitled to vote must be represented in person at the meeting to be a quorum, unless otherwise provided in the articles.

A.The shareholders must be given specific notice of the meeting and the issues on the agenda.

A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to the company? A.The tax preparer is responsible for disclosing both penalties to the company. B.The tax preparer is responsible for disclosing only the accuracy-related penalty to the company. C.The tax preparer is responsible for disclosing only the late-payment penalty to the company. D.The tax preparer has no responsibility for disclosing any potential penalties to the company because the position will probably be sustained on audit.

A.The tax preparer is responsible for disclosing both penalties to the company. (Tax advisors should provide clients with the highest quality representation concerning federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the IRS. Best practices include advising the client regarding the importance of the conclusions reached, including, for example, whether a taxpayer may avoid or incur accuracy-related penalties and late-payment penalties under the IRC if the taxpayer acts in reliance on the advice)

A.Wants to use corporate shareholder records for a personal business. (Every shareholder has a right to inspect specified corporate books and records. But the right must be exercised (1) for a proper purpose, (2) in good faith, (3) upon prior written notice, and (4) during regular business hours. Use of corporate shareholder records for a personal business is not a proper purpose)

Hark, CPA, failed to follow generally accepted auditing standards in auditing the financial statements of Long Corp., a nonpublic company. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the traditional doctrine, if Third sues Hark, Hark will A.Win because there was no privity of contract between Hark and Third. B.Lose because Hark knew that banks would be relying on the financial statements. C.Win because Third was contributorily negligent in granting the loan. D.Lose because Hark was negligent in performing the audit.

A.Win because there was no privity of contract between Hark and Third. (An accountant is not liable to all persons who are damaged by his or her negligence. Lack of privity is still a defense in some states. For example, under the holding in the Ultramares case, an accountant is liable for negligence only if the plaintiff was in privity of contract with the accountant or a primary beneficiary of the engagement. Under the primary benefit test, the accountant must have been aware that (s)he was hired to produce a work product to be used and relied upon by a particular third party. Because Long's management did not specifically name Third Bank to Hark, Hark will not be liable. However, most courts now extend a CPA's liability to anyone in a class of foreseen (but not necessarily individually identified) third parties who the CPA knows will use the information)

Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA? A.Working papers may not be transferred to another accountant without the client's permission. B.Working papers may not be turned over to a CPA quality review team without the client's permission. C.Working papers may not be disclosed under a federal court subpoena without the client's permission. D.Working papers may not be disclosed to any third parties without the client's permission.

A.Working papers may not be transferred to another accountant without the client's permission. (The accountant may be liable for malpractice if the accountant allows a third party, including a purchaser of his or her practice, access to working papers absent specific consent of the client)

Under the Securities and 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 for Monetary Damages Criminal Liability for a Fine A.YesYes B.YesNo C.NoYes D.NoNo

A.YesYes (Section 10(b) of the 1934 act and SEC Rule 10b-5 are antifraud provisions. They make it unlawful for any person to employ, in connection with the purchase or sale of any security, any manipulative or deceptive device or any contrivance in contravention of SEC rules and regulations. Any buyer or seller of any security who suffers a monetary loss may bring a private civil suit to rescind the transaction or to receive monetary damages. Punitive damages are not recoverable. The 1934 act also provides for criminal sanctions for willful violations. Liability is imposed for false material statements in applications, reports, documents, registration statements, and press releases. For an individual, the penalty is a fine not to exceed $5 million, 20 years in prison, or both. An individual who proves (s)he had no knowledge of the rule or regulation will not be imprisoned. If the person is not a natural person (e.g., a corporation), the maximum fine is $25 million)

The Securities Act of 1933 provides an exemption from registration for Bonds issued by a municipality for governmental purposes Securities issued by a not-for-profit charitable organization A.YesYes B.YesNo C.NoYes D.NoNo

A.YesYes (Unless a specific exemption applies, the Securities Act of 1933 regulates the initial offering of securities by requiring the filing of a registration statement with the SEC prior to sale or an offer to sell. The act specifically exempts securities of domestic governments used for a governmental purpose and securities of not-for-profit organizations)

Shareholders representing a majority of the voting shares of Nadier, Inc. have transferred their shares to Thomasina Trusty to hold and vote irrevocably for 10 years. Trusty has issued certificates to the shareholders and pays over to them the dividends received. The agreement A.Is an illegal voting trust and is void because it is against public policy. B.Is valid if entered into pursuant to a written voting trust agreement. C.Need not be filed with the corporation. D.May be revoked because it is in essence a proxy.

B.Is valid if entered into pursuant to a written voting trust agreement.

B approached L and proposed they form a partnership to exploit a profitable idea of B's. L declined, citing the risk of unlimited liability. B then proposed that L lend B $50,000 and that B go into the business as a sole proprietor. L would receive half the profits and the right to veto any of B's decisions. The debt would have a long-term maturity date to facilitate operation of the business during its development stage. If L accepts the above proposition, the likely result is that

B and L have formed a partnership even if they did not intend to

Under the Revised Model Business Corporation Act (RMBCA), which of the following statements is true regarding corporate officers of a public corporation? A. An officer may not simultaneously serve as a director. B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by shareholders. C. Shareholders always have the right to elect a corporation's officers. D. An officer of a corporation is required to own at least one share of the corporation's stock.

B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by shareholders.

Seymore was recently invited to become a director of Buckley Industries, Inc. If Seymore accepts and becomes a director, Seymore, along with the other directors, will not be personally liable for A. Lack of reasonable care. B. Honest errors of judgment. C. Declaration of a dividend that the directors know will impair legal capital. D. Diversion of corporate opportunities to themselves.

B. Honest errors of judgment.

Smith was an officer of CCC Corp. As an officer, the business judgment rule applied to Smith in which of the following ways? A. Because Smith is not a director, the rule does not apply. B. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused. C. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid. D. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.

B. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.

Integral Corp., with assets in excess of $4 million, has issued common and preferred stock and has 350 shareholders. Its stock is sold on the New York Stock Exchange. Under the Securities Exchange Act of 1934, Integral must be registered with the SEC because A. It issues both common and preferred stock. B. Its shares are listed on a national stock exchange. C. It has more than 300 shareholders. D. Its shares are traded in interstate commerce.

B. Its shares are listed on a national stock exchange. (The Securities Exchange Act of 1934 requires all regulated publicly held corporations to register with the SEC. Covered corporations either (1) list shares on a national securities exchange or (2) have at least 500 shareholders of equity securities and total gross assets exceeding $10 million)

Lobo Manufacturing, Inc., is incorporated under the laws of New Mexico. Its principal place of business is in California, and it has permanent sales offices in several other states. Under the circumstances, which of the following is true? A. California may validly demand that Lobo incorporate under the laws of the State of California. B. Lobo must obtain a certificate of authority to transact business in California and the other states in which it does business. C. Lobo is a foreign corporation in California, but not in the other states. D. California may prevent Lobo from operating as a corporation if the laws of California differ regarding organization and conduct of the corporation's internal affairs.

B. Lobo must obtain a certificate of authority to transact business in California and the other states in which it does business.

The business judgment rule is a rule that immunizes corporate A. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of management to make. B. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make. C. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of shareholders to make. D. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of shareholders to make.

B. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.

May Phillips was the principal promoter of the Waterloo Corporation, a corporation that was to have been incorporated not later than July 31. Phillips obtained written subscriptions for a total of $1.4 million of common stock from 17 individuals. She hired herself as the chief executive officer of Waterloo at $200,000 for 5 years and leased three floors of office space from Downtown Office Space, Inc. The contract with Downtown was made in the name of the corporation. Phillips had indicated orally that the corporation would be coming into existence shortly. The corporation did not come into existence, through no fault of Phillips. Which of the following is true? A. The subscribers have a recognized right to sue for and recover damages. B. Phillips is personally liable on the lease with Downtown. C. Phillips has the right to recover the fair value of her services rendered to the proposed corporation. D. The subscribers were not bound by their subscriptions until the corporation came into existence.

B. Phillips is personally liable on the lease with Downtown.

A corporation formed by a political unit to achieve a governmental purpose is best described as A. Quasi-public. B. Public. C. Not-for-profit. D. Publicly held.

B. Public.

Which one of the following laws addresses the issue of insider trading? A. Federal Trade Commission Act. B. Securities Exchange Act. C. Clayton Act. D. North American Free Trade Agreement.

B. Securities Exchange Act. (The Securities Exchange Act of 1934 addresses the issue of insider trading. Specifically, insiders must turn over to the corporation any profits earned on purchases and sales of their company's stock that fall within six months of each other. They are also prohibited from buying or selling stock based on inside information not available to the public)

A CPA prepared a tax return involving a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable? A.There was substantial authority for the position. B.It is reasonable to believe that the position would more likely than not be upheld. C.There was a reasonable possibility of success for the position. D.There was a reasonable basis for the position.

B.It is reasonable to believe that the position would more likely than not be upheld. (For tax shelters, a position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits)

The Securities and Exchange Commission is not empowered to A. Seek an injunction that will suspend trading in a given security. B. Sue for treble damages. C. Recommend criminal proceedings against accountants. D. Suspend a broker-dealer.

B. Sue for treble damages. (The SEC is not empowered to sue for damages at all. A lawsuit for treble damages is a civil remedy provided for violations of the antitrust laws, and the SEC has no jurisdiction over antitrust violations. However, the SEC can bring an action in a federal district court to impose civil penalties, for example, for insider trading. Moreover, in an action for violation of the securities laws, the SEC may seek any equitable relief that may be appropriate to benefit investors (Sarbanes-Oxley Act of 2002))

Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation? A. An independent appraiser must render to the board of directors a fairness opinion on the contract. B. The director must disclose the interest to the independent members of the board and refrain from voting. C. The shareholders must review and ratify the contract. D. The director must resign from the board of directors.

B. The director must disclose the interest to the independent members of the board and refrain from voting.

Which of the following disclosures must be contained in a securities registration statement filed under the Securities Act of 1933? A. A list of all existing shareholders. B. The principal purposes for which the offering proceeds will be used. C. A copy of the corporation's latest proxy solicitation statement. D. The names of all prospective accredited investors.

B. The principal purposes for which the offering proceeds will be used. (The purpose of registration is to provide adequate and accurate disclosure of financial and other pertinent information with which potential investors may evaluate the merits of the securities. Generally, registration calls for disclosure of a description of the registrant's business and property; a description of management; a description of the significant provisions of the security to be offered for sale, its relationship to registrant's other capital securities, and the use of the proceeds of the issuance; and the most recent certified financial statements. Disclosures must also be made about the compensation of officers and directors, their holdings of the registrant's securities, and their business dealings with the registrant)

Hobson, Jones, Carter, and Wolff are medical doctors who have worked together for several years. Their attorney formed a typical professional corporation for them. Which of the following is true? A. Such a corporation will not be recognized for federal tax purposes. B. The state in which they incorporated must have enacted professional corporation statutes. C. Upon incorporation, the doctor-shareholder is insulated from personal liability beyond his or her capital contribution. D. The majority of states prohibit the formation of professional corporations by physicians.

B. The state in which they incorporated must have enacted professional corporation statutes.

When CPAs fail in their duty to carry out their contracts for services, liability to clients may be based on Breach of Contract Strict Liability A. Yes Yes B. Yes No C. No No D. No Yes

B. Yes No (The courts and legislatures have decided that one party in certain circumstances without regard to fault is better able to bear a loss than the injured party. Thus, strict liability in tort is imposed even in the absence of negligence or intentional misconduct. For example, manufacturers may be liable for injuries caused by defective products. However, liability to clients for breach of contract is not strict)

According to the accounting profession's standards, which of the following statements is true regarding the standards a member of the AICPA should follow when recommending tax return positions and preparing tax returns? A.A member may recommend a position that (s)he concludes is frivolous if the position is adequately disclosed on the return. B.A member may recommend a position if (s)he has a good faith belief that the position has a realistic possibility of being sustained if challenged. C.A member will usually not advise the taxpayer of the potential penalty consequences of the recommended tax return position. D.A member may sign a tax return as preparer if the return takes a position that is frivolous, provided that the taxpayer wishes to take that position.

B.A member may recommend a position if (s)he has a good faith belief that the position has a realistic possibility of being sustained if challenged. (A member of the AICPA may not recommend a tax return position or prepare or sign a tax return absent a good faith belief that the position "has a realistic possibility of being sustained administratively or judicially on its merits if challenged." NOTE: According to the Small Business and Work Opportunity Act of 2007 (as amended), an undisclosed, nonabusive position must be supported by substantial authority. But for tax shelters and reportable transactions, the preparer must have a reasonable belief that the position is more likely than not to be sustained on its merits. If the position is disclosed, its tax treatment must have a reasonable basis instead of being merely not frivolous.)

Traditional concepts applicable to large publicly held corporations often do not meet the needs of closely held ones. Accordingly, the RMBCA addresses these needs. Under the RMBCA, A.A qualifying entity is automatically treated as a close corporation if it has fewer than 50 shareholders. B.A shareholder may have power to dissolve a close corporation that is similar to a partner's. C.Transfer of shares of a close corporation is restricted by means of a statutory buy-and-sell arrangement. D.A board of directors is required for a close corporation but shareholders have absolute power to restrict its discretion.

B.A shareholder may have power to dissolve a close corporation that is similar to a partner's.

Golden Enterprises, Inc., entered into a contract with Hidalgo Corporation for the sale of its mineral holdings. The transaction proved to be ultra vires. Which of the following parties may properly assert the ultra vires doctrine and why? A.Golden Enterprises to avoid performance. B.A shareholder of Golden Enterprises to enjoin the sale. C.Hidalgo Corporation to avoid performance. D.Golden Enterprises to rescind the consummated sale.

B.A shareholder of Golden Enterprises to enjoin the sale (Under the doctrine of ultra vires, a corporation may not act beyond the powers inherent in the corporate existence or provided in the articles of incorporation and the incorporation statutes. Ultra vires has been eliminated as a defense. The RMBCA states that, with certain exceptions, "the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." Those exceptions provide a cause of action in three instances in which the power to act may be questioned: (1) A shareholder can seek an injunction, (2) corporations can proceed against directors or officers, and (3) the state attorney general can proceed against the corporation)

Generally, officers of a corporation A.Are elected by the shareholders. B.Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business. C.May be removed by the board of directors without cause only if the removal is approved by a majority vote of the shareholders. D.May declare dividends or other distributions to shareholders as they deem appropriate.

B.Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business. (Officers are agents of a corporate principal, and agency law prescribes their real and apparent authority to bind the corporation. The bylaws and board resolutions may specifically limit that authority. Usual duties of an officer also define the officer's apparent authority. Any principal, including a corporation, may be prevented from asserting a lack of actual authority on the part of its officers and other employees. Officers are also fiduciaries. Like directors, they owe a duty of loyalty, good faith, and fair dealing when transacting business with or on behalf of the corporation)

Which of the following pairs of elements must a client prove to hold an accountant liable for common law negligence? A.Freedom from contributory negligence and privity. B.Breach of the accountant's duty of care and loss. C.Willful misrepresentation and breach of the accountant's duty of care. D.Scienter and a violation of GAAP.

B.Breach of the accountant's duty of care and loss. (To hold an accountant liable for negligence, the plaintiff-client must prove all of the following elements of negligence: (1) the accountant owed the client a duty of reasonable care and diligence, (2) the accountant breached this duty, (3) the accountant's breach actually and proximately caused the client's injury, and (4) the client suffered damages (loss))

A taxpayer wants to take a position on a tax return that the CPA determines is frivolous. However, the CPA and the taxpayer determine that the possibility of the return being selected for audit is remote and that even if the return is selected for audit the issue most likely will not be raised. According to the AICPA Statements on Standards for Tax Services, under these circumstances the CPA A.Can sign or prepare the return with this position as long as the CPA advises the taxpayer that the position is frivolous. B.Cannot sign or prepare the return with this position. C.Can sign or prepare the return with this position because there is a realistic possibility that the position will not be challenged. D.Can sign or prepare the return with this position if the taxpayer signs a tax preparer waiver of liability.

B.Cannot sign or prepare the return with this position. (A CPA may not exploit the audit selection process when taking a position on a tax return. An obviously frivolous position should not be taken)

Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following, except A.Sign a tax return as a preparer. B.Disclose a conflict of interest. C.Provide a client with a copy of the tax return. D.Keep a record of returns prepared.

B.Disclose a conflict of interest. (A return preparer is not required to disclose a conflict of interest. A preparer may represent conflicting interests before the IRS only if all directly affected parties provide informed, written consent at the time the existence of the conflict is known by the preparer; the representation is not prohibited by law; and the preparer reasonably believes that (s)he can provide competent and diligent representation to each client)

Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code (IRC) requirement in the prior-year return of a new client. Which of the following actions should Lawson take? A.Wait for the statute of limitations to expire. B.Discuss the requirements of the IRC with the client and recommend that the client amend the return. C.Contact the IRS and discuss courses of action. D.Contact the prior CPA and discuss the client's exposure.

B.Discuss the requirements of the IRC with the client and recommend that the client amend the return. (An agent who knows that a client has not complied with the revenue laws of the U.S. is required to promptly advise the client of the noncompliance as well as the consequences of noncompliance under the Code and regulations. Circular 230 does not require the agent to notify the IRS)

Which of the following terms best describes the relationship between a corporation and the CPA it hires to audit corporate books? A.Employer and employee. B.Employer and independent contractor. C.Master and servant. D.Employer and principal.

B.Employer and independent contractor. (An independent contractor generally is hired to achieve certain results without much control over his or her performance. Because a CPA must remain independent to perform an audit, an employer-independent contractor relationship arises)

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.Knew of the irregularities. B.Failed to exercise due care. C.Was grossly negligent. D.Acted with scienter.

B.Failed to exercise due care. (An accountant has a duty to exercise the skill and care that an ordinarily prudent accountant would in the same circumstances. An accountant who fails to exercise due care is negligent.)

A shareholder of a corporation A.Has no right to a stock certificate because ownership rights are intangible. B.Generally has a preemptive right to the extent permitted by the articles .C.Has an absolute right to dividends in any year when the corporation is profitable. D.Has no right to have his or her name recorded in the corporation's stock record book.

B.Generally has a preemptive right to the extent permitted by the articles

Opal Corp. declared a 9% stock dividend on its common stock. The dividend A.Requires a vote of Opal's shareholders. B.Has no effect on Opal's earnings and profits for federal income tax purposes. C.Is includible in the gross income of the recipient taxpayers in the year of receipt. D.Must be registered with the SEC pursuant to the Securities Act of 1933.

B.Has no effect on Opal's earnings and profits for federal income tax purposes. (A stock dividend is a distribution of additional shares of the corporation's stock in proportion to current holdings. Total equity is not changed. The value is transferred from earned or capital surplus to stated capital or the equivalent. Earnings and profits is a tax account that is unchanged by a stock dividend)

A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client's home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Service, except A.Endorsing the check and depositing it into the client's bank account. B.Holding the check for safe keeping and awaiting the client's return. C.Holding the check until the client is billed, then endorsing and depositing the check into the CPA's account as payment for the bill. D.Endorsing the check and depositing it into an escrow account for the client's benefit.

B.Holding the check for safe keeping and awaiting the client's return. (An agent must not negotiate, including by endorsement, any income tax refund check issued to a client. An agent can, however, receive the check and hold it for safe keeping until the client returns)

Seymore was recently invited to become a director of Buckley Industries, Inc. If Seymore accepts and becomes a director, Seymore, along with the other directors, will not be personally liable for A.Lack of reasonable care. B.Honest errors of judgment. C.Declaration of a dividend that the directors know will impair legal capital. D.Diversion of corporate opportunities to themselves.

B.Honest errors of judgment. (The directors of a corporation owe a fiduciary duty to the corporation and the shareholders. They also are expected to exercise reasonable business judgment. The law does recognize human fallibility and allows for directors to be safe from liability for honest mistakes of judgment)

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.I only B.II only. C.Both I and II. D.Neither I nor II.

B.II only. (One purpose of the Securities Act of 1933 is disclosure. The act was designed to provide complete and fair disclosure to potential investors. It applies only to the initial issuance of securities. Disclosure is accomplished through the requirement that a registration statement be filed with the SEC. Once potential investors have complete disclosure, the assumption is that they can make a reasonable decision. The second purpose is prevention, not detection of fraud, through enforcement of its antifraud provisions. Thus, although the 1933 act does not provide for evaluation of the merits of securities or examination by government auditors, its civil remedies, criminal penalties, and disclosure requirements (including financial statements audited by CPAs) help prevent fraud)

Johns owns 400 shares of Abco Corp. cumulative preferred stock. In the absence of any specific contrary provisions in Abco's articles of incorporation, which of the following statements is true? A.Johns is entitled to convert the 400 shares of preferred stock to a like number of shares of common stock. B.If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco. C.If Abco declares a dividend on its common stock, Johns will be entitled to participate with the common shareholders in any dividend distribution made after preferred dividends are paid. D.Johns will be entitled to vote if dividend payments are in arrears.

B.If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco. (The holder of preferred stock must be paid the stated dividend before a common shareholder may receive any dividends. If payment of the stated dividend is not made to a cumulative preferred shareholder in any year(s), the dividends accumulate and must be paid in full prior to payment of any dividends to common shareholders. But a dividend on any stock does not become a payment obligation (debt) of the corporation until it has been declared)

James Fisk recently acquired Valiant Corporation by purchasing all of its outstanding stock pursuant to a tender offer. Fisk demanded and obtained the resignation of the existing board of directors and replaced it with his own slate of nominees. Under these circumstances, A.Fisk had no right to demand the resignation of the existing board members; their resignations are legally ineffective, and they remain as directors. B.If Valiant is listed on a national stock exchange, Fisk must file his tender offer with the SEC. C.The former shareholders of Valiant are parties to a tax-free reorganization. Hence, they are not subject to federal income tax on their gain, if any, on transferring their stock to Fisk. D.If Valiant is engaged in interstate commerce, the acquisition is exempt under the antitrust laws because the SEC has jurisdiction.

B.If Valiant is listed on a national stock exchange, Fisk must file his tender offer with the SEC. (A tender offer is an offer to shareholders to buy their stock in order to gain control of a corporation. Under the Securities Exchange Act of 1934, anyone who makes a tender offer that would result in the purchase of more than 5% of a class of registered equity securities must file his or her tender offer with the SEC. Because Valiant is listed on a national stock exchange, its shares must be registered, and Fisk's tender offer must be filed prior to acquisition)

What is the standard that must be established to prove a violation of the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934? A.Negligence. B.Intentional misconduct. C.Criminal intent. D.Strict liability.

B.Intentional misconduct. (Rule 10b-5 states that it is illegal for any person, directly or indirectly, to use the U.S. mail or any instrumentality of interstate commerce or a national securities exchange to defraud anyone in connection with the purchase or sale of any security. A plaintiff must prove each of the following: (1) a misstatement or omission of a material fact or other fraud; (2) its connection with any purchase or sale of securities; (3) the defendant's intent to deceive, manipulate, or defraud; (4) reliance on the misstatement; and (5) loss caused by the reliance)

Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, Form 1041, he A.Must obtain the written permission of the beneficiary prior to signing as a tax return preparer. B.Is not considered a tax return preparer. C.May not sign the return unless he receives additional compensation for the tax return. D.Is considered a tax return preparer because his father is the grantor of the trust.

B.Is not considered a tax return preparer. (Joe is not considered a tax return preparer because he is a fiduciary who prepares the return for the trust)

A director of a corporation A.Must usually be a resident of the state of incorporation. B.Is often removable for cause by the other directors. C.Must ordinarily be a shareholder. D.Must usually be at least 21 years old.

B.Is often removable for cause by the other directors.

Under Treasury Circular 230, which of the following correctly represents the requirements related to the communication of fee information from a tax practitioner to a taxpayer? A.It may be communicated only through the confidential engagement letter between the tax practitioner and the taxpayer. B.It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail. C.It must be communicated as an estimate before the engagement begins, with the understanding that the actual amount of the fee will not be determined until the engagement ends. D.It may not be communicated by television, radio, or hand-delivered flyers.

B.It may be communicated in a number of ways, including in professional lists, telephone directories, mailings, and electronic mail. (Circular 230 does not prohibit communicating fees. Fees may not be unconscionable or contingent, except in certain circumstances)

A CPA who prepares clients' federal income tax returns for a fee must A.File certain required notices and powers of attorney with the IRS before preparing any returns. B.Keep a completed copy of each return for a specified period of time. C.Receive client documentation supporting all travel and entertainment expenses deducted on the return. D.Indicate the CPA's federal identification number on a tax return only if the return reflects tax due from the taxpayer.

B.Keep a completed copy of each return for a specified period of time. (A CPA who prepares clients' federal income tax returns for a fee meets the definition in the federal tax code of an income tax return preparer. An income tax return preparer is subject to penalties for certain types of failures. For example, for each failure to retain a copy of a prepared return, the penalty is $50. The copy must be retained for 3 years)

The best defense a CPA can assert in a suit brought against the CPA for common law fraud based on the CPA's unqualified opinion on materially false financial statements is A.Due diligence. B.Lack of scienter. C.Contributory negligence on the client's part. D.A disclaimer contained in the engagement letter.

B.Lack of scienter. (A plaintiff must prove each element of fraud with particularity. A finding of fraud requires proof that the misrepresentation was made with scienter (actual knowledge of fraud). Credible evidence that disproves one of the elements tends to negate liability)

Krim, president and CEO of United Co., engaged Smith, CPA, to audit United's financial statements so that United could secure a loan from First Bank. Smith issued an unqualified opinion on May 20, but the loan was delayed. On August 5, on inquiry to Smith by First Bank, Smith, relying on Krim's representation, made assurances that there was no material change in United's financial status. Krim's representation was untrue because of a material change that took place after May 20. First relied on Smith's assurances of no change. Shortly thereafter, United became insolvent. If First sues Smith for negligent misrepresentation, Smith will be found A.Not liable, because Krim misled Smith, and a CPA is not responsible for a client's untrue representations. B.Liable, because Smith should have undertaken sufficient auditing procedures to verify the status of United. C.Not liable, because Smith's opinion only covers the period up to May 20. D.Liable, because Smith should have contacted the chief financial officer rather than the chief executive officer.

B.Liable, because Smith should have undertaken sufficient auditing procedures to verify the status of United. (Under GAAS, written representations corroborate information received orally from management, but they do not substitute for the procedures necessary to afford a reasonable basis for the assurances given. Moreover, the auditor ordinarily has no responsibility for events after the end of field work. If the auditor decides to assume such responsibility, (s)he must comply with GAAS. Accordingly, the auditor will be liable for failure to exercise due care)

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? A.Purchasers only have to prove loss caused by reliance on audited financial statements. B.Privity with purchasers is not a necessary element of proof. C.Purchasers have to prove either fraud or gross negligence as a basis for recovery. D.Auditors are held to a standard of care described as "professional skepticism."

B.Privity with purchasers is not a necessary element of proof. (Under the Securities Act of 1933, a purchaser need only prove damages resulting from the purchase of securities covered by a registration statement containing a false statement or omission of a material fact in a section audited or prepared by the auditor. The auditor must then prove that (s)he was not negligent (or fraudulent), usually by showing that (s)he acted with "due diligence." To recover damages at common law based on contract or negligence, privity between the plaintiff and accountant may be required. To recover under the Securities Act of 1933, however, a purchaser of securities need not prove privity of contract with a CPA)

A CPA firm must do which of the following before it can participate in the preparation of an audit report of a company registered with the Securities and Exchange Commission (SEC)? A.Join the Public Company Auditors' Forum of the AICPA. B.Register with the Public Company Accounting Oversight Board. C.Register with the Financial Accounting Standards Board (FASB). D.Register with the SEC pursuant to the Securities Exchange Act of 1934.

B.Register with the Public Company Accounting Oversight Board. (The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) to regulate the public accounting profession. To prepare an audit report for a company registered with the Securities and Exchange Commission, the CPA firm must first register with the PCAOB)

State incorporation statutes prescribe certain formalities as conditions precedent to the forming of a corporation. Which of the following statements best describes the effect of defective formation? A.A de jure corporation is formed when all statutory provisions are not complied with, but a good faith effort was made to do so. B.The significance of the de facto incorporation doctrine has been reduced. C.A corporation by estoppel will be found when a good faith effort has been made to comply with the incorporation law. D.A de facto corporation is formed if the mandatory provisions of the statute have been complied with.

B.The significance of the de facto incorporation doctrine has been reduced.

According to the ethical standards of the profession, which of the following acts generally is prohibited? A.Accepting a contingent fee for representing a client in connection with obtaining a private letter from the Internal Revenue Service. B.Retaining client records after the client has demanded their return. C.Revealing client tax returns to a prospective purchaser of the CPA's practice. D.Issuing a modified report explaining the CPA's failure to follow a governmental regulatory agency's standards when conducting an attest service for a client.

B.Retaining client records after the client has demanded their return. (Retention of client records after the client has demanded their return is an act discreditable to the profession and a violation of Conduct Rule 501. Even if the state in which a member practices grants a lien on certain records, the ethical standard is still applicable)

The articles of incorporation of Divy Company prohibit dividends in any year in which the corporation has not earned an after-tax profit. For the year just ended, Divy had a net loss. Nevertheless, the board declared a dividend because it has a substantial surplus from prior years. Which of the following statements is true? A.The directors are personally liable only if the dividend was statutorily prohibited. B.Shareholders who knew that the dividend was improper will be liable. C.All shareholders who received a dividend will be liable. D.The directors are personally liable only if the dividend rendered the corporation insolvent.

B.Shareholders who knew that the dividend was improper will be liable.

All of the following distributions to shareholders are considered asset or capital distributions except A.Liquidating dividends. B.Stock splits. C.Property distributions. D.Cash dividends.

B.Stock splits. (A stock split is not a distribution from assets or capital. The amount of earned or capital surplus or stated capital does not change. Each share of a class of stock is merely divided into a multiple of one share. The value of each share changes, not the shareholder's proportionate ownership interest. Under the RMBCA, a distribution is "a direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedness by a corporation to or for the benefit of its shareholders in respect of any of its shares.")

Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation? A.An independent appraiser must render to the board of directors a fairness opinion on the contract. B.The director must disclose the interest to the independent members of the board and refrain from voting. C.The shareholders must review and ratify the contract. D.The director must resign from the board of directors.

B.The director must disclose the interest to the independent members of the board and refrain from voting. (To protect the corporation against self-dealing, a director is required to make full disclosure of any financial interest (s)he may have in any transaction to which both the director and the corporation may be a party. Under the RMBCA, a transaction is not voidable merely on the grounds of a director's conflict of interest if the transaction is fair to the corporation or has been approved by a majority of (1) informed, disinterested qualified directors or (2) holders of qualified shares. This rule applies even if the director was counted for the quorum and voted to approve the transaction. A qualified director does not have (1) a conflict of interest regarding the transaction or (2) a special relationship (familial, professional, financial, etc.) with another director who has a conflict of interest. Shares are qualified if they are not controlled by a person with (1) a conflict of interest or (2) a close relationship with someone who has a conflict. Thus, the director who contracts with the corporation cannot provide the vote that approves the contract)

If a shareholder sues a CPA for nonstatutory fraud based on false statements contained in the financial statements audited by the CPA, which of the following, if present, would be the CPA's best defense? A.The shareholder lacks privity to sue. B.The false statements were immaterial. C.The CPA did not financially benefit from the alleged fraud. D.The contributory negligence of the client releases the CPA from liability.

B.The false statements were immaterial. (The tort of intentional misrepresentation (fraud, deceit) consists of a material misrepresentation made with scienter and an intent to induce reliance. The misstatement also must have proximately caused damage to a plaintiff who justifiably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. The CPA's best defense would be that the false statements were immaterial)

The term "watered stock" typically refers to A.The decline in value of a share of stock following a stock split. B.The issuance of stock as fully paid in exchange for overvalued property or services. C.The issuance of stock at less than the proportionate carrying amount of the corporation's net assets. D.The difference between the amount received by the corporation and the amount subscribed.

B.The issuance of stock as fully paid in exchange for overvalued property or services.

Under the Section 10(b) Rule 10b-5 antifraud provisions of the Securities Exchange Act of 1934, which of the following conditions must a plaintiff prove to recover damages from an accountant? A.The plaintiff is in privity of contract with the accountant. B.The plaintiff relied on the accountant's intentional misstatement of material facts. C.The plaintiff is free from contributory negligence. D.The accountant acted without due diligence.

B.The plaintiff relied on the accountant's intentional misstatement of material facts. (Rule 10b-5 states that it is illegal for any person, directly or indirectly, to use the U.S. mail or any instrumentality of interstate commerce or a national securities exchange to defraud anyone in connection with the purchase or sale of any security. A plaintiff must prove each of the following: (1) a misstatement or omission of a material fact or other fraud; (2) its connection with any purchase or sale of securities; (3) the defendant's intent to deceive, manipulate, or defraud; (4) reliance on the misstatement; and (5) loss caused by the reliance)

Pursuant to Treasury Circular 230, which of the following statements about the return of a client's records is correct? A.The client's records are to be destroyed upon submission of a tax return. B.The practitioner may retain copies of the client's records. C.The existence of a dispute over fees generally relieves the practitioner of responsibility to return the client's records. D.The practitioner does not need to return any client records that are necessary for the client to comply with the client's federal tax obligations.

B.The practitioner may retain copies of the client's records. (A return preparer is required to retain a completed copy of each return or claim prepared for 3 years after the close of the return period)

Hobson, Jones, Carter, and Wolff are medical doctors who have worked together for several years. Their attorney formed a typical professional corporation for them. Which of the following is true? A.Such a corporation will not be recognized for federal tax purposes. B.The state in which they incorporated must have enacted professional corporation statutes. C.Upon incorporation, the doctor-shareholder is insulated from personal liability beyond his or her capital contribution. D.The majority of states prohibit the formation of professional corporations by physicians.

B.The state in which they incorporated must have enacted professional corporation statutes (Professionals were not permitted to incorporate under general incorporation statutes. Now most states have enacted special statutes permitting members of professions such as law, medicine, and public accounting to use the corporate form)

According to the AICPA Statements on Standards for Tax Services, which of the following identifies the requirements for a tax advisor who believes that a taxpayer penalty might be assessed related to a position on a tax return? A.The tax advisor may not sign a return if the possibility of a penalty exists and the tax position is not disclosed. B.The tax advisor should advise the taxpayer to disclose the position on the tax return, but the taxpayer is responsible for deciding whether and how to disclose. C.The tax advisor should not recommend a position that could possibly result in a taxpayer penalty. D.The tax advisor is responsible for disclosing the position on the tax return, with or without the taxpayer's permission.

B.The tax advisor should advise the taxpayer to disclose the position on the tax return, but the taxpayer is responsible for deciding whether and how to disclose. (If particular facts and circumstances lead a tax advisor to believe that a taxpayer penalty might be assessed, the tax advisor should advise the taxpayer and discuss with the taxpayer the opportunity, if any, to avoid such penalty by disclosing the position on the tax return. Although a tax advisor should advise the taxpayer with respect to disclosure, it is the taxpayer's responsibility to decide whether and how to disclose)

According to the AICPA Statements on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client? A.Whether the client will seek a second opinion. B.The tax sophistication of the client. C.The likelihood that current tax litigation will impact the advice. D.The client's business acumen.

B.The tax sophistication of the client. (Tax advice may be oral, but advice about important, unusual, or complicated transactions preferably should be in writing. Therefore, when determining whether the CPA should provide oral or written advice to a client, the CPA should consider, among other factors, the tax sophistication of the client)

According to the AICPA Statements on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client? A.The likelihood that the CPA will not assist the client in implementing the advice. B.The technical complexity of the advice. C.The amount of fees that the client is willing to pay for the service. D.Whether there is a specific agreement to update the advice for tax law changes.

B.The technical complexity of the advice. (In deciding on the form of advice provided to a taxpayer, a CPA should exercise professional judgment and should consider such factors as the technical complexity involved. Other factors that should be considered include (1) the importance of the transaction and amounts involved; (2) the specific or general nature of the taxpayer's inquiry; (3) the time available for development and submission of the advice; (4) the existence of authorities and precedents; (5) the tax sophistication of the taxpayer; (6) the need to seek other professional advice; (7) the type of transaction and whether it is subject to heightened reporting or disclosure requirements; (8) the potential penalty consequences of the tax return position for which the advice is rendered; (9) whether any potential applicable penalties can be avoided through disclosure; and (10) whether the CPA intends for the taxpayer to rely upon the advice to avoid potential penalties)

Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client Fuller. Fuller is a limited partner in each of the partnerships. The K-1s disclosed small pass-through losses allocated to Fuller. Fuller had passive income in excess of these losses from other partnerships. According to the AICPA Statements on Standards for Tax Services, assuming that no at-risk limitations apply, what is Shore's professional responsibility regarding the reporting of these partnership losses on Fuller's federal income tax return? A.To verify the client's basis by examining client's records from the initial investment to the present. B.To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect. C.To verify the initial investment in each partnership entity unless Shore has reason to believe that the information is incorrect. D.To request the complete partnership returns of the partnership entities unless Shore has reason to believe that the information is incorrect.

B.To accept the information without further inquiry unless Shore has reason to believe that the information is incorrect. (In good faith, a member may rely, without verification, on information provided by the taxpayer or third parties. Reasonable inquiries should be made if information appears to be incorrect, incomplete, or inconsistent on its face or on the basis of other facts known, and prior returns should be consulted whenever feasible (TS 300))

Ivor and Associates, CPAs, audited the financial statements of Jaymo Corporation. As a result of Ivor's negligence in conducting the audit, the financial statements included material misstatements. Ivor was unaware of this fact. The financial statements and Ivor's unqualified opinion were included in a registration statement and prospectus for an original public offering of stock by Jaymo. Thorp purchased shares in the offering. Thorp 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 Jaymo's financial statements becoming known. Under which of the following Acts is Thorp most likely to prevail in a lawsuit against Ivor? Securities Act of 1933, Section 11 Securities Exchange Act of 1934, Section 10(b), Rule 10b-5 A.Yes, Yes B.Yes, No C.No, Yes D.No, No

B.Yes, No (Under Section 11, the investor need only prove that (s)he suffered losses in a transaction involving the particular securities covered by the registration statement, and that the registration statement contained a false statement or an omission of a material fact for which the CPAs were responsible, e.g., in the audited financial statements. The investor need not show (s)he relied on the financial statements. Rule 10b-5 liability is for fraud. Scienter must be proved. Scienter (intent) is more than mere negligence)

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? 1. The Corporation has fewer than 300 Shareholders 2. The Securities are listed on a National Securities Exchange A.YesYes B.YesNo C.NoYes D.NoNo

B.YesNo (The 1934 act requires all publicly held companies to register with the SEC. Registration is required of all companies that (1) list shares on a national securities exchange or (2) have at least 500 shareholders of its equity securities and total gross assets of at least $10 million. Following registration, an issuer must file specific up-to-date and accurate reports with the SEC to ensure fair trading practices for investors. An over-the-counter issuer may terminate its registration if the holders of its registered equity securities number fewer than 300 or if the issuer has had fewer than 500 shareholders and less than $10 million in assets on closing day in each of the last 3 years)

Which of the following statements is true with respect to the general structure of a corporation? A. The corporation is treated as a legal person with rights and obligations jointly shared with its owners and managers. B. Shareholders establish corporate policies and elect or appoint corporate officers. C. A corporation is governed by shareholders who elect a board of directors and approve fundamental changes in its structure. D. The board of directors is responsible for carrying out the corporate policies in the day-to-day management of the organizations.

C. A corporation is governed by shareholders who elect a board of directors and approve fundamental changes in its structure.

The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed? A. Certificate of incorporation. B. Charter. C. Bylaws. D. Proxy statement.

C. Bylaws.

Under the Revised Model Business Corporation Act, which of the following items of information must be included in a corporation's articles of incorporation (charter)? A. Name and address of each preincorporation subscriber. B. Nature and purpose of the corporation's business. C. Name and address of the corporation's incorporator. D. Election of either C corporation or S corporation status.

C. Name and address of the corporation's incorporator.

A main provision of the Securities Act of 1933, as amended in 1934, is the requirement that A. Bonds be issued only under a trust indenture approved by the Securities and Exchange Commission (SEC). B. Public utility holding companies register with the SEC. C. New securities offered for sale in interstate commerce be registered with the SEC. D. All security brokers be licensed by the SEC.

C. New securities offered for sale in interstate commerce be registered with the SEC. (The Securities Act of 1933 was designed to provide complete and fair disclosure to potential investors. The 1933 act applies only to the initial issuance of securities. Disclosure is accomplished through the requirement that a registration statement be filed with the SEC. Given complete disclosure, the assumption is that potential investors can make reasonable decisions)

Davis, a director of Active Corp., is entitled to A. Serve on the board of a competing business. B. Take sole advantage of a business opportunity that would benefit Active. C. Rely on information provided by a corporate officer. D. Unilaterally grant a corporate loan to one of Active's shareholders.

C. Rely on information provided by a corporate officer.

The antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934 A. Apply only if the securities involved were registered under the Securities Act of 1933 or the Securities Exchange Act of 1934. B. Require that the plaintiff show negligence on the part of the defendant in misstating facts. C. Require that the wrongful act be accomplished through the mail, any other use of interstate commerce, or through a national securities exchange. D. Apply only if the defendant acted with intent to defraud.

C. Require that the wrongful act be accomplished through the mail, any other use of interstate commerce, or through a national securities exchange. (The scope of Rule 10b-5 is broad but not absolute. Rule 10b-5 prohibits any person from directly or indirectly performing fraudulent (deceptive) acts by use of any means or instrumentality of interstate commerce, the mails, or any facility of any national securities exchange, in connection with the purchase or sale of any security)

Bryan Corporation decided to purchase a plant site. Bill Shephard, a newly elected director, has owned a desirable site for many years. He purchased the property for $60,000, and its present fair value is $100,000. What would be the result if Shephard offered the property to Bryan for $100,000 in an arm's-length transaction with full disclosure at a meeting of the seven directors of the corporation? A. The sale would be proper only upon requisite approval by the appropriate number of directors and at no more than Shephard's cost, thus precluding his profiting from the sale to the corporation. B. The sale would be void under the self-dealing rule. C. The sale would be proper and Shephard would not have to account to the corporation for his profit if the sale was approved by a disinterested majority of the directors. D. The sale would not be proper, if sold for the present fair value of the property, without the approval of all of the directors in these circumstances.

C. The sale would be proper and Shephard would not have to account to the corporation for his profit if the sale was approved by a disinterested majority of the directors.

A corporate shareholder is entitled to which of the following rights? A.Elect officers. B.Receive annual dividends. C.Approve dissolution. D.Prevent corporate borrowing.

C.Approve dissolution. (Shareholders do not have the right to manage the corporation or its business. Shareholder participation in policy and management is through electing directors. Shareholders also have the right to approve fundamental corporate changes, such as (1) amendments of the articles, (2) disposition of all or substantially all of the corporation's assets, (3) mergers, (4) consolidations, and (5) dissolutions)

Which of the following securities are corporate debt securities? Convertible Bonds Debenture Bonds Warrants A. Yes Yes Yes B. Yes No Yes C. Yes Yes No D. No Yes Yes

C. Yes Yes No (A corporation may be financed by issuing equity and debt securities. Debt securities represent a debtor-creditor relationship between the corporation and the security holder. Equity securities represent an ownership interest. A bond is a negotiable security expressing the corporation's promise to pay the amount of the bond at a future date (and interest). A convertible bond is convertible into a share or shares of stock. A debenture is an unsecured bond, backed only by the general obligation of the corporation to pay. A stock warrant is a right to purchase shares of stock at a specified price and within a specified time period. Thus, it is an equity security)

Under the Statements on Standards for Tax Services, what is a CPA's responsibility for verifying information furnished by the taxpayer or third parties? A.A CPA need not make additional inquiries if the information furnished appears to be incorrect, incomplete, or inconsistent with other facts known to the CPA. B.A CPA need not consider implications of information furnished if the information comes directly from a third party. C.A CPA may rely in good faith on information furnished by the taxpayer or by third parties without verification. D.A CPA should not refer to the taxpayer's previous tax returns unless the returns report transactions that affect the current tax period.

C.A CPA may rely in good faith on information furnished by the taxpayer or by third parties without verification. (A CPA may rely in good faith on information furnished by the taxpayer or by third parties without verification)

Which of the following statements is true regarding the proxy solicitation requirements of Section 14(a) of the Securities Exchange Act of 1934? A.A corporation does not have to file proxy revocation solicitations with the SEC if it is a reporting company under the Securities Exchange Act of 1934. B.Current unaudited financial statements must be sent to each shareholder with every proxy solicitation. C.A corporation must file its proxy statements with the SEC if it is a reporting company under the Securities Exchange Act of 1934. D.In a proxy solicitation by management relating to election of officers, all shareholder proposals must be included in the proxy statement.

C.A corporation must file its proxy statements with the SEC if it is a reporting company under the Securities Exchange Act of 1934. (Within 10 days prior to mailing a proxy statement to shareholders, a company reporting under the Securities Exchange Act of 1934 must file its proxy statements with the SEC)

Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance? A.Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. B.Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. C.A distinguishing mark of a profession is its acceptance of responsibility to the public. D.A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.

C.A distinguishing mark of a profession is its acceptance of responsibility to the public. (The AICPA Code of Professional Conduct states, "Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism." According to the accompanying explanation, "A distinguishing mark of a profession is acceptance of its responsibility to the public.)

In which of the following types of action brought against a CPA who issues an audit report containing an unmodified opinion on materially misstated financial statements may a plaintiff prevail without proving reliance on the audit report? A.An action for common law fraud. B.An action for common law breach of contract. C.An action brought under Section 11 of the Securities Act of 1933. D.An action brought under Rule 10b-5 of the Securities Exchange Act of 1934.

C.An action brought under Section 11 of the Securities Act of 1933. (To recover under Section 11, a plaintiff must prove that (1) the plaintiff acquired a security subject to registration, (2) the registration statement contained a material misstatement or omission, and (3) the plaintiff incurred a loss. The defendant's liability extends to acquirers of a security described in the registration statement or prospectus, and the acquirer need not prove reliance.)

Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client's financial report be liable? A.Only those third parties in privity of contract with the accountant. B.All third parties who relied on the report and sustained injury. C.Any foreseen or known third party who relied on the report. D.Any third party whose reliance on the report was reasonably foreseeable.

C.Any foreseen or known third party who relied on the report. (The majority rule is that the accountant is liable to foreseen (but not necessarily individually identified) third parties (foreseen users and users within a foreseen class of users))

Unless prohibited by the documents creating the organization, a shareholder in a publicly held corporation or the owner of a limited partnership interest has the right to A.Ownership of the business's assets. B.Control management of the business. C.Assign his or her interest in the business. D.An investment that has perpetual life.

C.Assign his or her interest in the business. (Either a limited partner or a shareholder in a corporation may assign his or her ownership interest. The assignee of the partnership interest is admitted as a partner only by consent of all other partners)

Shares of stock without par value may be issued for such consideration (in dollars) as may be fixed by a corporation's A.Creditors. B.Officers. C.Board of directors. D.Minority shareholders.

C.Board of directors. (The board of directors has authority to fix the amount of consideration to be received for the issuance of no-par stock, as well as all other stock. The board is obligated to act in good faith (without fraud) and to exercise reasonable business judgment. Capital surplus (additional paid-in capital) arises not only from receipt of amounts in excess of any par value but also from an allocation of amounts received for no-par shares. NOTE: The RMBCA and many states have abolished the concepts of par value, stated capital, and capital surplus. However, the RMBCA allows a company to elect to establish a par value)

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. 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. II. The auditor complied with GAAS. A.I only. B.II only. C.Both I and II. D.Neither I nor II.

C.Both I and II. (A CPA is strictly liable to investors under Section 11 but will not be liable if (s)he can prove due diligence. This defense requires proof that a reasonable investigation was conducted and that the CPA reasonably believed that the financial statements were accurate on the effective date of the registration statement. Proof of adherence to GAAP and GAAS is the usual basis for such a due diligence defense. For example, GAAS require that subsequent events procedures be performed at or shortly before the effective date of the registration statement. These procedures are intended to identify events subsequent to the report date that require adjustment of, or disclosure in, the financial statements (AU-C 925))

Beckler & Associates, CPAs, audited and expressed an unmodified 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 to recover? Beckler was negligent in conducting the audit. Mac relied on the financial statements. A.I only. B.II only. C.Both I and II. D.Neither I nor II.

C.Both I and II. (An accountant has a duty to exercise the skill and care that an ordinarily prudent accountant would in the same circumstances. An accountant who fails to exercise due care is negligent. According to the majority rule, liability for breach of the duty can be to any person who (1) is a foreseen user or within a foreseen class of users and (2) incurs damages proximately caused by the breach)

Which of the following statements, if any, is (are) true regarding the methods a target corporation may use to ward off a takeover attempt? I. The target corporation may make an offer ("self-tender") to acquire stock from its own shareholders. II. The target corporation may seek an injunction against the acquiring corporation on the grounds that the attempted takeover violates federal antitrust law. A.I only. B.II only. C.Both I and II. D.Neither I nor II.

C.Both I and II. (Managers of target corporations have implemented diverse strategies to counter hostile tender offers. Examples of anti-takeover strategies include (1) self-tender, (2) legal action, (3) persuasion, (4) creation of poison pills, (5) reverse tenders, (6) crown-jewel transfers, and (7) white knight mergers)

Fact Pattern: The AICPA's Tax Executive Committee in Statements on Standards for Tax Services (SSTSs) has issued enforceable rules. Statements 1-8 have been issued (codification prefix TS). The AICPA's Code of Professional Conduct requires that members comply with SSTSs. According to the standards of the accounting profession, which of the following sources of information should a member of the AICPA consider before signing a client's tax return? I. Information actually known to the member from the tax return of another taxpayer II. Information provided by the taxpayer that appears to be correct based on the taxpayer's returns from prior years A.I only. B.II only. C.Both I and II. D.Neither I nor II.

C.Both I and II. (TS 300 states that members who prepare tax returns are not required to examine or verify supporting data. In preparing the return, the member ordinarily may rely on information furnished by the taxpayer (including tax returns from prior years) unless it appears to be incorrect, incomplete, or inconsistent. The member also should consider relevant information actually known to that member from the tax return of another taxpayer)

Which of the following statements, if any, are true regarding the state 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.I only. B.II only. C.Both I and II. D.Neither I nor II.

C.Both I and II. (The tort of intentional misrepresentation (fraud, deceit) consists of a material misrepresentation made with scienter and an intent to induce reliance. The misstatement also must have proximately caused damage to a plaintiff who justifiably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. For constructive fraud, the scienter requirement is met by proof of gross negligence (reckless disregard for the truth))

In which type of business organization are income taxes always required to be paid by the entity on profits earned as well as by the owners upon distribution thereof? A.General partnership. B.Limited liability company. C.C corporation. D.S corporation.

C.C corporation. (A C corporation is an entity subject to the corporate income tax. Any corporation that is not an S corporation is a C corporation. An S corporation is a closely held corporation that has made an election under federal law to be taxed similarly to a partnership. Thus, an S corporation does not usually pay corporate income tax)

Under the Foreign Corrupt Practices Act (FCPA), an action may be brought that seeks A.Treble damages by a private party. B.Injunctive relief by a private party. C.Criminal sanctions against both the corporation and its officers by the Department of Justice. D.Damages and injunctive relief by the Securities and Exchange Commission.

C.Criminal sanctions against both the corporation and its officers by the Department of Justice. (The SEC may investigate violations of the FCPA, bring civil actions for its enforcement, and recommend that the Justice Department prosecute criminal violations. A director, officer, shareholder, or other agent who acts on behalf of the corporation in willful violation of the FCPA is subject to a fine of up to $100,000 and a prison term of up to 5 years or both. A corporation is subject to a fine of up to $2 million)

Acme Corp. is incorporated in Delaware. Its principal place of business is in Miami, Florida, and it does business in all 50 states. For purposes of diversity of citizenship, Acme Corp. is considered to be a citizen of A.Delaware only. B.Florida only. C.Delaware and Florida. D.All 50 states.

C.Delaware and Florida. (For the purpose of federal court jurisdiction in cases involving parties with diverse citizenship, a corporation is a citizen of the state in which it is incorporated and of the state in which it has its principal place of business. If these are different states, the corporation is a citizen of both states)

Which of the following may a CPA do only with permission of the client? A.Hire other CPAs as employees to help complete the engagement. B.Hire non-CPAs as employees to help complete the engagement. C.Delegate the engagement to another CPA. D.Receive a commission for referring the engagement to another CPA.

C.Delegate the engagement to another CPA.

Dexter, Inc., incorporated in its home state, does 20% of its business in a neighboring state in which it maintains a permanent facility. It has not filed any papers in the neighboring state. Which of the following statements is false? A.Dexter has automatically appointed the secretary of state of the neighboring state as its agent for service of process. B.Dexter will be able to bring suit in the neighboring state if it subsequently obtains a certificate of authority. C.Dexter cannot defend against a suit brought against it in the neighboring state's courts. D.The attorney general of the neighboring state can recover all back fees and franchise taxes that would have been imposed.

C.Dexter cannot defend against a suit brought against it in the neighboring state's courts. (Because of the constitutional right to due process, a corporation cannot be prevented from defending a lawsuit regardless of its failure to comply with local laws. Consequently, Dexter is permitted to defend against a lawsuit, even though it (1) did not comply with the statute governing operations of foreign corporations and (2) is not allowed to bring an action regarding its intrastate business)

At a confidential meeting, an audit client informed a CPA about the client's illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to the meeting between the CPA and the client. After receiving immunity, the CPA should do which of the following? A.Take the Fifth Amendment and not discuss the meeting. B.Cite the privileged communications aspect of being a CPA. C.Discuss the entire conversation, including illegal acts. D.Discuss only the items that have a direct connection to those items the CPA worked on for the client in the past.

C.Discuss the entire conversation, including illegal acts. (Federal law provides no broad privilege for accountant-client communications, although it does provide a limited privilege for certain tax advice. Thus, in this federal insider-trading case, the communications between accountant and client are not protected. Moreover, the CPA's testimony will not violate the Code of Professional Conduct. Conduct Rule 301 permits disclosure of confidential client information in response to a subpoena)

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.The absence of scienter on the part of the accountant. B.The absence of privity between purchasers and the accountant. C.Due diligence on the part of the accountant. D.Nonreliance by purchasers on the misstatements.

C.Due diligence on the part of the accountant. (A CPA is prima facie liable to investors under Section 11 but will not be liable if (s)he can prove due diligence. Due diligence is absence of negligence. This defense requires proof that a reasonable investigation was conducted and that the CPA reasonably believed that the financial statements were accurate on the effective date of the registration statement)

Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice? A.Requesting written evidence from a client that the fee proposal for tax advice has been approved by the board of directors. B.Recommending to the client that the advisor's tax advice be made orally instead of in a written memorandum. C.Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum. D.Requiring the client to supply a written representation, signed under penalties of perjury, concerning the facts and statements provided to the CPA for preparing a tax memorandum.

C.Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum. (Best practices include establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts)

An officer-shareholder of a corporation could be held personally liable for which one of the following debts? A.Unpaid U.S. corporate income taxes. B.A bank note signed by a shareholder in his or her capacity as president of the corporation. C.Federal payroll taxes that were withheld from the employees' wages but never remitted to the IRS. D.A judgment against the corporation stemming from a tort committed by a former employee.

C.Federal payroll taxes that were withheld from the employees' wages but never remitted to the IRS.

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? A.Report the tender offer to the SEC. B.Notify the SEC of shareholder "short-swing" profits. C.File the periodic report listing newly appointed officers. D.Report the changes in the market price of its stock.

C.File the periodic report listing newly appointed officers. (A covered corporation is required to file annual (10-K), quarterly (10-Q), and material events (8-K) reports with the SEC. Similar reports are sent to shareholders. The 10-K report contains information about the entity's business activities, securities, management, related parties, disagreements concerning accounting and disclosure, audited financial statements, etc. It is intended to bring the information in the registration statement up to date. Thus, newly appointed officers will be listed)

A CPA is subject to criminal liability A.Under the Securities Act of 1933 but not the Securities Exchange Act of 1934. B.For performing an audit in a negligent manner. C.For willfully omitting a material fact required to be stated in a registration statement. D.For willfully breaching the contract with the client.

C.For willfully omitting a material fact required to be stated in a registration statement.

C.For willfully omitting a material fact required to be stated in a registration statement. (Under the Securities Act of 1933, any person who willfully makes a false statement or omits a material fact required in a registration statement is subject to criminal liability with a maximum fine of $10,000 and/or up to 5 years of imprisonment)

Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt From Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because A.He is a member of the board of directors. B.The return does not contain a claim for a tax refund. C.He is not compensated. D.Returns for nonprofit organizations are exempt from the preparer rules.

C.He is not compensated. (A tax return preparer is anyone who prepares for compensation, or employs one or more persons to prepare for compensation, all or a substantial portion of any tax return or claim for refund under the IRC. If Louis is not compensated, he will not be considered a tax return preparer)

While preparing a tax return for a new client and reviewing the client's prior-year return, a CPA noticed an error made by the client's former tax preparer. According to Treasury Department Circular 230, which of the following is the CPA specifically required to do in this case? A.Contact the tax preparer who made the error and suggest that an amended return be prepared for the client. B.Inform the client of the error and insist that the return be amended. C.Inform the client of the error and advise of the consequences. D.Advise the client to contact the tax preparer of the prior-year return.

C.Inform the client of the error and advise of the consequences. (Section 10.21 of Treasury Department Circular 230 requires an attorney, a certified public accountant, or an enrolled agent who knows that a client has not complied with the revenue laws of the United States to promptly advise the client of the noncompliance, error, or omission and the consequences of the noncompliance, error, or omission as provided in the IRC and regulations)

Under the liability provisions of Sec. 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.

C.Intentionally preparing and filing with the SEC a reporting corporation's incorrect quarterly report. (Under Sec. 18(a) of the Securities Exchange Act of 1934, a person, including a corporation, responsible for any false or misleading statement in an application, document, or report filed with the SEC is civilly liable unless the defendant proves that the action was in good faith and without knowledge that the statement was false or misleading. Under Sec. 32(a), criminal liability is imposed for willfully and knowingly making materially false and misleading statements in a document filed with the SEC. Thus, an accountant who intentionally prepares a false quarterly report on Form 10-Q (a required filing by an issuer) is civilly liable under Sec. 18 and criminally under Sec. 32)

A member would be in violation of the Statements on Standards for Tax Services (SSTSs) if the member recommends a return position under which of the following circumstances? A.It does not meet the realistic possibility standard but is not frivolous and is disclosed on the return. B.It might result in penalties and the member advises the taxpayer and discusses avoiding such penalties through disclosing the position. C.It does not meet the realistic possibility standard but the member feels the return has a minimal likelihood for examination by the IRS. D.It meets the realistic possibility standard based on the well-reasoned opinion of the taxpayer's attorney.

C.It does not meet the realistic possibility standard but the member feels the return has a minimal likelihood for examination by the IRS. (A member has the right and responsibility to be an advocate for the taxpayer. However, a member should not recommend a tax return position without "a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits if challenged." Moreover, a member should not recommend a position that exploits the taxing authority's selection, for example, the law probability that a return will be audited. Nevertheless, a member may recommend a position that is not frivolous if (s)he makes appropriate disclosures (TS 100))

Ford & Co., CPAs, expressed an unmodified opinion on Owens Corp.'s financial statements. Relying on these financial statements, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common-law fraud action against Ford, Century must prove, in addition to other elements, that Century was A.Free from contributory negligence. B.In privity of contract with Ford. C.Justified in relying on the financial statements. D.In privity of contract with Owens.

C.Justified in relying on the financial statements. (The tort of intentional misrepresentation (fraud, deceit) consists of a material misrepresentation made with scienter and an intent to induce reliance. The misstatement also must have proximately caused damage to a plaintiff who justifiably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth)

Dart Corp. engaged CPA Firm to assist in a public stock offering. CPA Firm audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Firm's opinion was included in Dart's registration statement. Kelly purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Kelly succeeds in a Section 11 suit against Dart and the CPA firm, Kelly would be entitled to A.Damages of three times the original public offering price. B.Rescind the transaction. C.Monetary damages only. D.Damages, but only if the shares were resold before the suit was started.

C.Monetary damages only. (In a civil suit under Section 11 of the 1933 act, a purchaser's remedy is a suit for monetary damages. The damages are measured as the difference between the price paid for the securities and (1) the sales price, if the security was sold before suit; (2) the market value of the security at the time of the suit, if the security was not sold; or (3) the sales price, if the security was disposed of after suit and the sales price exceeded the market value of the security at the time the suit was brought)

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 A.Is not required to file any report or information with the SEC because Apel owns less than 10% of the preferred stock. B.Is not required to file any report or information with the SEC because the security purchased was preferred stock. C.Must file with the SEC, the issuer, and the national securities exchange information concerning the purpose of the acquisition. D.Must file only with the SEC information concerning the source of the funds used to purchase the preferred stock.

C.Must file with the SEC, the issuer, and the national securities exchange information concerning the purpose of the acquisition. (As part of its regulation of tender offers, the Securities Exchange Act of 1934 requires any person who has acquired more than 5% of any registered equity security to file reports with the issuer, the exchange on which the security is traded, and the SEC. The information reported includes the identity of the purchaser, the source of funding, the purpose of the acquisition, and the number of shares owned)

Starr, CPA, prepared and signed Cox's Year 1 federal income tax return. Cox informed Starr that Cox had paid doctors' bills of $20,000, although Cox actually had paid only $7,000 in doctors' bills during Year 1. Based on Cox's representations, Starr computed the medical expense deduction that resulted in an understatement of tax liability. Starr had no reason to doubt the accuracy of Cox's figures, and Starr did not ask Cox to submit documentation of the expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed. In connection with the preparation of Cox's Year 1 return, Starr is A.Liable to Cox for interest on the underpayment of tax. B.Liable to the IRS for negligently preparing the return. C.Not liable to the IRS for any penalty or interest. D.Not liable to the IRS for any penalty, but is liable to the IRS for interest on the underpayment of tax.

C.Not liable to the IRS for any penalty or interest. (An income tax return preparer is any person who prepares for compensation any return of tax or any claim for refund of tax imposed by Subtitle A of the IRC. The Code imposes penalties on preparers for understatement of a taxpayer's liability. A tax return preparer can in good faith rely upon information provided by the taxpayer without having to obtain third-party verification. But the preparer may not ignore implications of information furnished by the taxpayer)

West & Co., CPAs, was engaged by Sand Corp. to audit its financial statements. West expressed an unmodified opinion on Sand's financial statements. Sand has been accused of making negligent misrepresentations in the financial statements that Reed relied upon when purchasing Sand stock. West was not aware of the misrepresentations and was not negligent in performing the audit. If Reed sues West for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, West will A.Lose because the statements contained negligent misrepresentations. B.Lose because Reed relied upon the financial statements. C.Prevail because some element of scienter must be proved. D.Prevail because Reed was not in privity of contract with West.

C.Prevail because some element of scienter must be proved. (Rule 10b-5 is an antifraud provision that requires proof of scienter, that is, of an intent to deceive, manipulate, or defraud. In this context, even gross negligence probably does not satisfy the scienter requirement, although some courts have held that it does if the accountants had a fiduciary duty (such as that owed to a client) to the plaintiff. Thus, Reed cannot prove scienter, and West will prevail)

A CPA's retention of client-provided records after a demand has been made for them is an action that is A.Not addressed by the AICPA Code of Professional Conduct. B.Acceptable if sanctioned by state law. C.Prohibited under the AICPA Code of Professional Conduct. D.A violation of GAAS.

C.Prohibited under the AICPA Code of Professional Conduct. (An Interpretation of Conduct Rule 501, Acts Discreditable, defines client-provided records as "accounting or other records belonging to the client that were provided to the member by or on behalf of the client." This interpretation prohibits the retention (after a demand is made for them) of client-provided records to enforce payment or for any other purpose. Such an act is deemed to be discreditable to the profession)

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must A.Document the error in the work papers. B.Prepare an amended return within 30 days of the discovery of the error. C.Promptly advise the client of the error. D.Promptly resign from the engagement and cooperate with the successor accountant.

C.Promptly advise the client of the error. (According to Circular 230, a CPA must promptly advise the client of an error discovered regarding tax work done for a client. In addition, the practitioner must advise the client on the consequences of such an omission or error)

An owner of common stock will not have any liability beyond actual investment if the owner A.Paid less than par value for stock purchased in connection with an original issue of shares. B.Agreed but failed to perform future services for the corporation in exchange for original issue par value shares. C.Purchased treasury shares for less than par value. D.Failed to pay the full amount owed on a subscription contract for no-par shares.

C.Purchased treasury shares for less than par value. (Under traditional rules, if stated par value exceeds the amount a shareholder paid for shares at issuance, the shareholder remains liable to creditors for the difference. A purchaser of treasury shares is not liable for any such excess. Moreover, under the RMBCA, any shareholder is liable only for the authorized consideration agreed to be paid)

A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged? A.More likely than not. B.Not frivolous. C.Realistic possibility. D.Substantial authority.

C.Realistic possibility. (A member of the AICPA may not recommend a tax return position or prepare or sign a tax return absent a good faith belief that the position "has a realistic possibility of being sustained administratively or judicially on its merits if challenged." But a member may, in appropriate cases, (1) recommend a position or (2) prepare or sign the return if this standard is not met. These exceptions apply if (1) the position is reasonable and (2) the member advises disclosure [when (s)he has recommended a position], or the position is properly disclosed [when (s)he has prepared or signed the return]. However, a member may never recommend a position that "exploits the audit selection process of a taxing authority" or serves solely as a bargaining position in negotiations with the taxing authority (TS 100). NOTE: According to the Small Business and Work Opportunity Act of 2007 (as amended), an undisclosed, nonabusive position must be supported by substantial authority. But for tax shelters and reportable transactions, the preparer must have a reasonable belief that the position is more likely than not to be sustained on its merits. If the position is disclosed, its tax treatment must have a reasonable basis)

A CPA will be liable to a tax client for damages resulting from all of the following actions except A.Failing to timely file a client's return. B.Failing to advise a client of certain tax elections. C.Refusing to sign a client's request for a filing extension. D.Neglecting to evaluate the option of preparing joint or separate returns that would have resulted in a substantial tax savings for a married client.

C.Refusing to sign a client's request for a filing extension. (An accountant owes a general duty to exercise the skill and care of an ordinarily prudent accountant in the same circumstances. Moreover, the accountant is responsible to exercise independent professional judgment and to comply with law. If the CPA does not agree the client has a valid reason for obtaining an extension, (s)he will not be liable for refusing to sign the client's request)

Davis, a director of Active Corp., is entitled to A.Serve on the board of a competing business. B.Take sole advantage of a business opportunity that would benefit Active. C.Rely on information provided by a corporate officer. D.Unilaterally grant a corporate loan to one of Active's shareholders.

C.Rely on information provided by a corporate officer. (A director is a fiduciary of the corporation and its shareholders. (S)he has duties of care and loyalty. Thus, a director must perform with the care an ordinarily prudent person in a similar position would exercise under similar circumstances. But in exercising good business judgment or reasonable care, a director is entitled to rely on information provided by an officer (or professional specialist) if the director reasonably believes the officer has competence in the relevant area)

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.Federal Trade Commission Act. B.Securities Act of 1933. C.Securities Exchange Act of 1934. D.North American Free Trade Act.

C.Securities Exchange Act of 1934. (Quarterly filings under the Securities Exchange Act of 1934 are made on Form 10-Q. Under Section 18(a) of this act, a person, including a corporation, responsible for any false or misleading statement in an application, document, or report filed with the SEC is civilly liable unless the defendant proves that the action was in good faith and without knowledge that the statement was false or misleading. Under Section 32(a), criminal liability is imposed for willfully and knowingly making materially false and misleading statements in a document filed with the SEC)

The Sarbanes-Oxley Act of 2002 (SOX) has strengthened auditor independence by requiring that management of a public company A.Engage auditors to report in accordance with the Foreign Corrupt Practices Act. B.Report the nature of disagreements with former auditors. C.Select auditors through audit committees. D.Hire a different CPA firm from the one that performs the audit to perform the company's tax work.

C.Select auditors through audit committees. (The audit committee must hire and pay the external auditors. Such affiliation inhibits management from changing auditors to gain acceptance of a questionable accounting method. Also, a successor auditor must inquire of the predecessor before accepting an engagement)

Peters owned 500 shares of common stock in Kidsmart, Inc. Accordingly, Peters had the right to A.Automatically receive a dividend in any quarter in which the corporation made a profit. B.Inspect the corporate records on demand. C.Vote for the election and removal of the board of directors. D.Vote for and remove the corporate officers and set their compensation.

C.Vote for the election and removal of the board of directors. (Shareholders' primary participation is by meeting annually and electing directors. They also must approve fundamental corporate changes)

A single-member LLC engages a CPA to prepare the Year 2 income tax return. In the course of preparing the tax return, the CPA discovers that a partnership return was filed for Year 1. Under the AICPA Statements on Standards for Tax Services, which of the following statements is not true regarding the CPA's duties upon discovering an error in filing the Year 1 partnership return? A.The CPA must inform the client that an incorrect return was filed; under the AICPA standard, the CPA has the duty to report the error to the taxpayer. B.The CPA should make sure the LLC files the correct return for Year 2; under the AICPA standard, the CPA has the duty to take reasonable steps not to repeat the error. C.The CPA must inform the IRS that the LLC filed an incorrect tax return for Year 1; under the AICPA standard, the CPA has the duty to report the error to all relevant taxing agencies. D.The CPA should let the LLC decide whether it wants to correct the error; under the AICPA standard, the CPA has the duty to let the LLC make the decision to correct the error.

C.The CPA must inform the IRS that the LLC filed an incorrect tax return for Year 1; under the AICPA standard, the CPA has the duty to report the error to all relevant taxing agencies. (A practitioner who notices that a taxpayer has not complied with the revenue laws of the United States should promptly advise the client of the noncompliance, error, or omission and the consequences of the noncompliance, error, or omission as provided in the IRC and regulations. A practitioner should not inform the IRS without the taxpayer's permission, except if required by law)

Which of the following statements is true 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.

C.The accountant owns the working papers but generally may not disclose them without the client's consent or a court order. (Conduct Rule 501 states that a member's working papers, including any analyses and schedules prepared by the client at the request of the member, are the member's property, not the client's. However, the accountant may have produced supporting records, such as entries and related calculations. These records contain information not in the client's records and without which they are not complete. If supporting records are not otherwise available, they should be given to the client upon request unless fees are due. Members have an obligation to their clients not to disclose any information to the public without the client's consent or a court order)

If a purchaser of shares of an issue for which the registration statement included financial statements certified by a CPA succeeds in a Section 10(b) and Rule 10b-5 suit, the purchaser 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.

C.The amount of any loss caused by the fraud. (Section 10(b) and Rule 10b-5 do not expressly provide for a private right of action. But courts have implied such a right. Remedies for violations include rescission of the securities contract, damages, and injunctions. Courts are divided over the measure of damages recoverable from a CPA. The amount of loss caused by the fraud, however, is recoverable)

In general, which of the following statements concerning treasury stock is true? A.A corporation may not reacquire its own stock unless specifically authorized by its articles of incorporation. B.On issuance of new stock, a corporation has preemptive rights with regard to its treasury stock. C.Treasury stock may be distributed as a stock dividend. D.A corporation is entitled to receive cash dividends on its treasury stock.

C.Treasury stock may be distributed as a stock dividend. (Shares may be issued pro rata and without consideration to the shareholders by an action of the directors. Treasury shares have the status of authorized but unissued shares that may be used for stock dividends. The RMBCA, however, abolishes treasury shares. It treats reacquired shares as authorized but unissued)

Maco Limited Partnership intends to sell $6 million of its limited partnership interests. The state in which Maco was organized is also the state in which it carries on all of its business activities. If Maco intends to offer the limited partnership interests in reliance on Rule 147, the intrastate registration exception under the Securities Act of 1933, which one of the following statements is true? A.Maco may make up to five offers to nonresidents without the offering being ineligible for the Rule 147 exemption. B.The offering is not exempt under Rule 147 because it exceeds $5 million. C.Under Rule 147, certain restrictions apply to resales of the limited partnership interests by purchasers. D.Rule 147 limits to 100 the number of purchasers of the limited partnership interests.

C.Under Rule 147, certain restrictions apply to resales of the limited partnership interests by purchasers. (One exemption from registration under the Securities Act of 1933 is an intrastate issue of securities. Under the safe harbor provision of SEC Rule 147, an issue qualifies as intrastate if the issuer is organized or incorporated in the state in which the issue is made, 80% of the proceeds are to be used in that state, 80% of its assets are located there, the issuer does at least 80% of its business (gross revenues) within that state, all the purchasers and offerees are residents of the state, no resales to nonresidents occur for at least 9 months after the last sale, and steps are taken to prevent interstate distribution)

Which of the following acts by a CPA will not result in incurring an IRS penalty? A.Failing, without reasonable cause, to provide the client with a copy of an income tax return. B.Failing, without reasonable cause, to sign a client's tax return as preparer. C.Understating a client's tax liability as a result of an error in calculation. D.Negotiating a client's tax refund check when the CPA prepared the tax return.

C.Understating a client's tax liability as a result of an error in calculation. (Understating a client's tax liability as a result of an error in calculation will not result in an IRS penalty unless it is the result of gross negligence or a willful attempt to avoid tax liability)

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 A.Huff knew of the misstatements when Huff purchased the stock. B.Huff's losses were not caused by the misstatements. C.Ward was not in privity of contract with Huff. D.Ward conducted the audit in accordance with professional standards.

C.Ward was not in privity of contract with Huff. (Under Section 11, the plaintiff-purchaser of securities issued under a registration statement containing a misstatement or omission of a material fact need not prove either reliance or privity)

John Watson entered into an agreement to purchase 1,000 shares of the Marvel Corporation, a corporation to be organized. Watson has since had second thoughts. Applying the RMBCA, which of the following is true? A.A written notice of withdrawal prior to incorporation will be valid. B.A transfer of the agreement to another party will eliminate his liability. C.Watson may not revoke the agreement for a period of 6 months. D.Watson may avoid liability if a majority of the other subscribers release him.

C.Watson may not revoke the agreement for a period of 6 months (Under the RMBCA, such an agreement may not be revoked for 6 months unless (1) otherwise provided by the terms of the subscription agreement or (2) all other subscribers agree. The rationale is that the subscription agreement is an irrevocable continuing offer for the administrative convenience of the promoter)

Fact Pattern: The AICPA's Tax Executive Committee in Statements on Standards for Tax Services (SSTSs) has issued enforceable rules. Statements 1-8 have been issued (codification prefix TS). The AICPA's Code of Professional Conduct requires that members comply with SSTSs. Which of the following statements is true concerning the responsibility of a member of the AICPA when (s)he uses taxpayer estimates in preparing a tax return? A.Tax preparation requires the member to exercise judgment but prohibits the use of estimates and approximations. B.Use of taxpayer estimates in a tax return is prohibited unless they are specifically disclosed by the member. C.When all facts relating to a transaction are not accurately known because records are missing, reasonable estimates made by the taxpayer of the missing data may be used by the member. D.The member may prepare tax returns involving the use of taxpayer estimates even if it is practicable to obtain exact data.

C.When all facts relating to a transaction are not accurately known because records are missing, reasonable estimates made by the taxpayer of the missing data may be used by the member. (TS 400 permits the member to prepare tax returns involving the use of estimates if it is impracticable to obtain exact data and the amounts are reasonable. Estimates must not be presented so as to imply greater accuracy than exists. The taxpayer is responsible for the estimated amounts)

The best description of whether a CPA has met the required standard of care in conducting an audit of a client's financial statements is A.The client's expectations with regard to the accuracy of audited financial statements. B.The accuracy of the financial statements and whether the statements conform to generally accepted accounting principles. C.Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances. D.Whether the audit was conducted to investigate and discover all acts of fraud.

C.Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances. (An accountant owes a general duty to exercise the skill and care of the ordinarily prudent accountant in the same circumstances. The purpose of an independent external audit of financial statements is the expression of an opinion on whether they are fairly presented in conformity with GAAP. To achieve this objective, the CPA must follow GAAS, PCAOB standards, or other applicable professional standards. The auditor provides only reasonable assurance that the statements are free of material misstatements, whether caused by errors or fraud)

If a CPA is engaged by an attorney to assist in the defense of a criminal tax fraud case involving the attorney's client, information obtained by the CPA from the client after being engaged A.Is not privileged because the matter involves a federal issue. B.Is not privileged in jurisdictions that do not recognize an accountant-client privilege. C.Will be deemed privileged communications under certain circumstances. D.Will be deemed privileged communications provided that the CPA prepared the client's tax return.

C.Will be deemed privileged communications under certain circumstances. (The attorney-client privilege would protect the information. The defendant is the client of the attorney, and the CPA is the agent of the attorney. Hence, communications between the CPA and the defendant are, in effect, between the attorney and the defendant. However, if the defendant is the CPA's client, their communications will not be privileged in a criminal case unless the case involves a state tax matter in a jurisdiction that has enacted a statute protecting accountant-client communications)

An external auditor is not permitted to discuss confidential client information except with the specific consent of the client. This ethical proscription A.Is unenforceable. B.Will prevent the auditor from engaging another auditing firm to conduct a peer review. C.Will not preclude the auditor from complying with a validly issued court subpoena. D.Is often used by a client to blunt the auditor's efforts to modify the standard auditor's report.

C.Will not preclude the auditor from complying with a validly issued court subpoena. (The Confidential Information Rule does not prohibit a CPA from disclosing confidential client information In compliance with a validly issued and enforceable subpoena or summons, In the proper discharge of his or her professional obligations under the Compliance with Standards Rule and the Accounting Principles Rule, In a review of the CPA's professional practice under AICPA or state CPA society or board of accountancy authorization, or During the initiation of a complaint with, or in response to any inquiry made by, the professional ethics division, trial board of the AICPA, or an investigative or disciplinary body of a state society or board of accountancy)

A joint venture is A. An association limited to no more than two persons in business for profit B. An enterprise of numerous co-owners in a nonprofit undertaking C. A corporate enterprise for a single undertaking of limited duration D. An association of persons engaged as co-owners in a single undertaking for profit

D. An association of persons engaged as co-owners in a single undertaking for profit (A joint venture is similar to a partnership, but it does not carry on a business. The joint venture is an association of persons to undertake a specific business project for profit)

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove the 1. Defendant's Intent to Deceive 2. Plaintiff's Reliance on the Registration Statement A. 1.Yes 2.Yes B. 1.Yes 2.No C. 1.No 2.Yes D. 1.No 2.No

D. 1.No 2.No (Under the 1933 act, the issuer, its chief executive and directors, its chief finance and accounting officers, other signers, the underwriters, and experts who prepared or attested to the statement are liable for misstatements or omissions of material fact. In a private action, a plaintiff establishes a prima facie case under Section 11 by proving damages and that (s)he was an acquirer of a security issued under a registration statement that misstated or omitted a material fact. Intent to deceive, negligence, reliance, privity, or that the plaintiff gave value need not be proven. Exercise of due diligence in determining the accuracy of the statement is a defense. An issuer, however, cannot assert the due diligence defense, but any defendant may show that the plaintiff knew of the misstatement or omission at the time of acquisition)

Which of the following statements is true regarding the fiduciary duty? A. A director's fiduciary duty to the corporation may be discharged by merely disclosing his or her self-interest. B. A director owes a fiduciary duty to the shareholders but not to the corporation. C. A promoter of a corporation to be formed owes no fiduciary duty to anyone, unless the contract engaging the promoter so provides. D. A majority shareholder as such may owe a fiduciary duty to fellow shareholders.

D. A majority shareholder as such may owe a fiduciary duty to fellow shareholders.

Allen, Burton, and Carter were equal partners for the purpose of buying and selling real estate for profit. For convenience, title to all property purchased was taken in the name of Allen. Allen died with partnership real estate and partnership personal property valued at $250,000 and $5,000, respectively, standing in his name. The partnership had no debts. Allen had bequeathed all his personal property to his children. In this situation, A. Allen's wife has a valid dower right to all the real property held in her deceased husband's name B. Allen's wife is entitled only to his share of undistributed partnership profits C. Allen's children are entitled to one-third of all partnership personal property D. Allen's estate is entitled to settlement for the value of his partnership interest

D. Allen's estate is entitled to settlement for the value of his partnership interest (No partner has a right to use the partnership property for himself or herself even if title is in his or her name. Upon the death of a partner, the decedent's estate is entitled only to the value of the deceased partner's interest in the partnership, not any of the specific partnership real or personal property)

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. The president. B. A member of the board of directors. C. A shareholder who owns 8% of the outstanding common stock and whose spouse owns 4% of the outstanding common stock. D. An owner of 15% of the total face value of the corporation's outstanding debentures.

D. An owner of 15% of the total face value of the corporation's outstanding debentures. (For the purposes of Section 16(b), an insider is an officer, a director, or a beneficial owner of 10% or more of any class of equity securities registered under the 1934 act. The holder of debentures is not an insider because a debenture is a debt security, not an equity security)

All of the following are functions of the Securities and Exchange Commission except the A. Review of stock trades by corporate insiders. B. Regulation of interstate offerings of new securities to the public. C. Setting of rules concerning the proxy process of large public companies. D. Determination of fair trading prices for the common stock of large public companies.

D. Determination of fair trading prices for the common stock of large public companies. (The SEC is charged with enforcement of federal securities laws. Under the Securities Act of 1933, the offer or sale of a security to the public requires registration with the SEC absent a specific exemption. However, the 1933 act is essentially a disclosure statute. The SEC does not evaluate the merits of securities. Its role is to enforce the laws ensuring the public availability of information to potential investors)

Food Corp. owned a restaurant called The Ambers. The corporation's president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, "T.J. Jones for The Ambers." Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paid. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.? A. It is not liable because Jones is liable. B. It is not liable because the corporation was an undisclosed principal. C. It is liable because Jones is not liable. D. It is liable because Jones had authority to make the contract.

D. It is liable because Jones had authority to make the contract.

To which of the following parties may a CPA partnership provide its working papers without either the client's consent or a lawful subpoena? The IRS The FASB A. Yes Yes B. Yes No C. No Yes D. No No

D. No No (The AICPA Code of Professional Conduct (Conduct Rule 301) states that a member in public practice shall not disclose any confidential client information except with the specific consent of the client. However, Conduct Rule 301 does not prohibit a CPA from disclosing confidential client information In compliance with a validly issued and enforceable subpoena or summons, In the proper discharge of his or her professional obligations under Conduct Rules 202, Compliance with Standards, and 203, Accounting Principles, In a review of the CPA's professional practice under AICPA or state CPA society or board of accountancy authorization, or During the initiation of a complaint with, or in response to any inquiry made by, the professional ethics division, trial board of the AICPA, or an investigative or disciplinary body of a state society or board of accountancy. Consequently, a CPA partnership may not provide its working papers to the IRS or the FASB without client consent or a lawful subpoena because the activities of those organizations do not fall within one of the exceptions listed in 2. through 4. above)

Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn's objectives without requiring the approval of the shareholders of either corporation? A.A merger of Trend into Acorn, whereby Trend shareholders receive cash or Acorn shares. B.A sale of all the assets of Trend, outside the regular course of business, to Acorn, for cash. C.An acquisition of all the shares of Trend through a compulsory share exchange for Acorn shares. D.A cash tender offer, by which Acorn acquires at least 90% of Trend's shares, followed by a short-form merger of Trend into Acorn.

D.A cash tender offer, by which Acorn acquires at least 90% of Trend's shares, followed by a short-form merger of Trend into Acorn. (A merger, consolidation, or purchase of substantially all of a corporation's assets requires approval of the board of directors of the corporation whose shares or assets are acquired. An acquiring corporation may bypass board approval by extending a cash tender offer directly to shareholders to purchase a certain number of the outstanding shares. After obtaining control of the target corporation, the tender offeror may effect a merger or consolidation)

Which of the following statements is true regarding the fiduciary duty? A.A director's fiduciary duty to the corporation may be discharged by merely disclosing his or her self-interest. B.A director owes a fiduciary duty to the shareholders but not to the corporation. C.A promoter of a corporation to be formed owes no fiduciary duty to anyone, unless the contract engaging the promoter so provides. D.A majority shareholder as such may owe a fiduciary duty to fellow shareholders.

D.A majority shareholder as such may owe a fiduciary duty to fellow shareholders. (Directors and officers owe a fiduciary duty to the corporation to (1) act in its best interests, (2) be loyal, (3) use due diligence in carrying out their responsibilities, and (4) disclose conflicts of interest. Controlling as well as majority shareholders owe duties. Courts often protect the interests of minority shareholders by (1) ordering the payment of dividends that were withheld in bad faith or (2) compelling a seller of a controlling block of shares to distribute ratably among all shareholders any control premium paid in excess of the fair value of the stock)

A corporate director commits a breach of duty if A.The director's exercise of care and skill is minimal. B.A contract is awarded by the company to an organization owned by the director. C.An interest in property is acquired by the director without prior approval of the board. D.The director's action, prompted by confidential information, results in an abuse of corporate opportunity.

D.The director's action, prompted by confidential information, results in an abuse of corporate opportunity. (Corporate directors have a fiduciary duty to provide the corporation with business opportunities that come to them in their positions as directors of the corporation. A director who personally takes such a business opportunity has breached a fiduciary duty)

Which of the following statements is true about corporations subject to the reporting requirements of the Securities Exchange Act of 1934? A.The annual report (Form 10-K) need not include audited financial statements. B.The annual report (Form 10-K) must be filed with the SEC before the end of the corporation's fiscal year. C.A quarterly report (Form 10-Q) need only be filed with the SEC by those corporations that are also subject to the registration requirements of the Securities Act of 1933. D.A report (Form 8-K) must be filed with the SEC after a material important event occurs.

D.A report (Form 8-K) must be filed with the SEC after a material important event occurs. (Current reports must be filed on Form 8-K describing specified material events: changes in control of the registrant, the acquisition or disposition of a significant amount of assets other than in the ordinary course of business, bankruptcy or receivership, resignation of a director, a change in the firm's certifying accountant, and material changes in financial condition or operations. Also, Form 8-K is a means of making Regulation FD disclosures. This regulation requires public disclosure of material nonpublic information that the issuer discloses to certain market professionals or to shareholders likely to trade on the information. If selective disclosure is intentional, public disclosure must be simultaneous)

Which of the following corporations are subject to the accounting requirements of the Foreign Corrupt Practices Act (FCPA)? A.All corporations engaged in interstate commerce. B.All domestic corporations engaged in international trade. C.All corporations that have made a public offering under the Securities Act of 1933. D.All corporations whose securities are registered pursuant to the Securities Exchange Act of 1934.

D.All corporations whose securities are registered pursuant to the Securities Exchange Act of 1934. (The accounting requirements of the FCPA apply to all companies required to register and report under the Securities Exchange Act of 1934. These companies must maintain books, records, and accounts in reasonable detail that accurately and fairly reflect transactions. The FCPA also requires these companies to maintain a system of internal accounting control that provides certain reasonable assurances, including that corporate assets are not used for bribes)

Absent a specific provision in its articles of incorporation, a corporation's board of directors most likely has the power to do all of the following, except A.Repeal the bylaws. B.Declare dividends. C.Fix compensation of directors. D.Amend the articles of incorporation without shareholder approval.

D.Amend the articles of incorporation without shareholder approval. (Authority to formulate and implement corporate policy is vested in the board, including (1) selection of officers, (2) determining capital structure, (3) proposing fundamental changes, (4) declaring dividends, and (5) setting management compensation. Amending the articles, however, is a power reserved to the shareholders except in limited circumstances)

Rey Corp.'s management intends to solicit proxies relating to its annual meeting at which directors will be elected. Rey is subject to the registration and reporting requirements of the Securities Exchange Act of 1934. As a result, Rey must furnish its shareholders with A.A copy of its registration statement and bylaws. B.A preliminary copy of its proxy statement at the same time it is filed with the SEC. C.An annual report containing its audited statements of income for the 5 most recent years. D.An annual report containing its audited balance sheets for the 2 most recent years.

D.An annual report containing its audited balance sheets for the 2 most recent years. (Financial statements of the company must be provided only for annual meetings at which directors are to be elected (in the annual report) or if a merger or authorization to issue new shares is at issue. Audited balance sheets for the last 2 years and audited statements of income, cash flows, and changes in equity for the last 3 years should be included. Furthermore, even when no solicitation is made, management must still furnish an information statement similar to a proxy statement to all shareholders who have the right to vote at the meeting)

When no-par shares are issued by a corporation in a state that requires it to maintain a stated capital, the amount that must be allocated to capital surplus as distinct from stated capital is A.The carrying amount of the shares. B.The fair value of the shares. C.The entire amount of the consideration received. D.Any portion of the proceeds so directed by the board of directors.

D.Any portion of the proceeds so directed by the board of directors.

A CPA partnership may, without being lawfully subpoenaed or without the client's consent, make client working papers available to A.The FASB. B.The IRS. C.The SEC. D.Any surviving partner(s) on the death of a partner.

D.Any surviving partner(s) on the death of a partner. (A CPA may respond to an inquiry made by an investigative body of a state CPA society, the trial board of the AICPA, or an AICPA or state professional practice review body. A review of a member's practice includes a review associated with a potential purchase, sale, or merger of all or part of the practice (Interpretation 301-3). The CPA must also comply with a validly issued and enforceable subpoena. However, making client working papers available to any surviving partner(s) on the death of a partner generally does not constitute disclosure)

Fundamental corporate changes require shareholder approval. Under the RMBCA, which of the following is false? A.Notice must be given to shareholders whether or not entitled to vote. B.The articles may require a supermajority vote. C.The board of directors usually gives prior approval to the change. D.At least a majority of each class must approve even though the rights of a class may not be affected.

D.At least a majority of each class must approve even though the rights of a class may not be affected.

An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence to the A.Securities and Exchange Commission. B.Client's legal counsel. C.Stock exchanges on which the company's stock is traded. D.Audit committee.

D.Audit committee. (When an audit indicates the presence of errors or fraud that require a modification of the opinion and the client refuses to accept the auditor's report as modified, the auditor should withdraw and communicate the reasons for withdrawal to the audit committee of the board of directors. Withdrawal may or may not be appropriate in other circumstances, depending on the diligence and cooperation of management and the board in investigating the matter and taking action. Moreover, the Private Securities Litigation Reform Act of 1995, which applies to public companies, requires the auditor to report directly to the board these conclusions regarding lack of remedial action: (1) An illegal act materially affects the financial statements, (2) senior management has not taken appropriate remedial action, and (3) this failure will result in a modified report or the auditor's withdrawal. The company then has one business day to notify the SEC)

American Corp. retained Baker, CPA, to conduct an audit of its financial statements to obtain a bank line of credit. American signed an engagement letter drafted by Baker that included a disclaimer provision. As a result of Baker's failure to detect a material misstatement in American's financial statements, the audit report contained an unmodified opinion. Based on American's audited financial statements, National extended credit to American. American filed a petition in bankruptcy shortly thereafter. National sued Baker for damages based on common law fraud. What would be Baker's best defense? A.Baker acted with due diligence in conducting the audit. B.Baker included a disclaimer provision in the engagement letter with American. C.National was not in privity with Baker. D.Baker lacked the intent to deceive.

D.Baker lacked the intent to deceive. (A finding of fraud requires proof that the misrepresentation was made with knowledge of, or reckless disregard for, its falsity. Thus, proving that the accountant lacked the intent to deceive is the best defense to a claim of fraud)

Baner, a CPA, is preparing a tax return for Affleck, a new client. During the course of the interview, Baner asks to inspect Affleck's source documents. Affleck responds that the supporting information is not readily available but assures Baner that the summary information is reliable. Which of the following statements best describes how Baner should proceed? A.Baner cannot accept Affleck's representations. The representations must be verifiable. B.Baner can accept the representations and explain to Affleck that the IRS's audit coverage is very low. C.Baner can automatically accept the representations, because a CPA is under no obligation to verify all client information. D.Baner can accept the representations but should make reasonable inquiries to determine if the information appears to be incorrect, incomplete, or inconsistent.

D.Baner can accept the representations but should make reasonable inquiries to determine if the information appears to be incorrect, incomplete, or inconsistent. (Baner must make a reasonable inquiry if the information appears to be incorrect or incomplete)

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC's registration requirements? A.Companies with annual revenues in excess of $5 million and 300 or more shareholders. B.Companies with annual revenues in excess of $10 million and 500 or more shareholders. C.Companies with assets in excess of $5 million and 300 or more shareholders. D.Companies with assets in excess of $10 million and 500 or more shareholders.

D.Companies with assets in excess of $10 million and 500 or more shareholders. (All regulated, publicly held companies must register with the SEC. Registration is required of all companies that have at least 500 shareholders of equity securities and total gross assets exceeding $10 million)

Firms subject to the reporting requirements of the Securities Exchange Act of 1934 are required by the Foreign Corrupt Practices Act of 1977 to maintain satisfactory internal control. Moreover, the Sarbanes-Oxley Act of 2002 (SOX) requires that annual reports include (1) a statement of management's responsibility for establishing and maintaining adequate internal control and procedures for financial reporting, and (2) management's assessment of their effectiveness. According to PCAOB AS No. 5, the role of the registered auditor relative to the assessment made by management is to A.Disclaim an opinion on the assessment and controls. B.Report clients with unsatisfactory internal control to the SEC. C.Express an opinion on whether the client is subject to the Securities Exchange Act of 1934. D.Express an opinion (or disclaim an opinion) on internal control.

D.Express an opinion (or disclaim an opinion) on internal control.

Rocco Pierre was an 80% shareholder of La Bos Company, which was formed with his contribution of $2,000 of assets. His sister, Petra, provided $500 worth of assets and held the remaining stock. As the need for operating capital arose, Rocco and Petra advanced funds to the company. These advances eventually totaled $250,000. Annual sales averaged $300,000. When La Bos went into receivership, Rocco and Petra asserted their position as creditors of equal dignity with the other general creditors for the purpose of distribution of assets. They cited the existence of promissory notes signed by the corporate officers as evidence of their standing. The most likely result is that Rocco and Petra A.Have the status of creditors. B.Have no standing as creditors because loans by controlling shareholders are per se capital contributions. C.Will be liable for all the debts of the corporation. D.Have no standing as creditors under the Deep Rock doctrine.

D.Have no standing as creditors under the Deep Rock doctrine.

According to the Securities Act of 1933, which of the following statements is correct regarding an issuer of securities? A.All securities issuers must provide potential investors with a prospectus containing specified information. B.An issuer is permitted to advertise an initial offering of securities only through distribution of the prospectus. C.All securities issuers must register the securities offering with the Securities and Exchange Commission (SEC). D.If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid.

D.If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid. (A successful plaintiff is entitled only to monetary damages under Section 11. They are generally measured by the plaintiff's loss, but resale is not required to prove loss. If the purchaser sells the security back to the issuer, the purchaser will recover the price paid)

Basil Hardheart is the majority shareholder and chairman of the board of Close Corporation. Carrie Carter and Gina Kelly are respectively a minority common shareholder and a holder of nonvoting preferred stock. Basil has diverted corporate assets to personal use. Basil has also caused the board to declare and pay common stock dividends without paying preferred dividends. Under these circumstances, A.Carter may bring a representative action against Close Corporation based on Hardheart's diversion of assets .B.Kelly may bring a representative action against Close Corporation based on Hardheart's diversion of assets. C.Carter may bring a derivative action against the corporation for withholding the preferred dividends. D.Kelly may bring a representative action against the corporation for withholding the preferred dividends.

D.Kelly may bring a representative action against the corporation for withholding the preferred dividends.

Jeri Fairwell is executive vice-president and treasurer of Wonder Corporation. She was named as a party in a shareholder derivative action in connection with certain activities she engaged in as a corporate officer. In the lawsuit, she was held liable for negligence in performance of her duties. Fairwell seeks indemnity from the corporation. The board of directors would like to indemnify her, but the articles of incorporation do not contain any provisions regarding indemnification of officers and directors. Indemnification A.Is not permitted because the articles of incorporation do not so provide. B.Is permitted only if Fairwell is found not to have been grossly negligent. C.Cannot include attorney's fees because Fairwell was found to have been negligent. D.May be permitted by court order although Fairwell was found to be negligent.

D.May be permitted by court order although Fairwell was found to be negligent. (Usually, an officer or director who is liable to the corporation because of negligence in the performance of his or her duties is not entitled to indemnification. However, a court may order indemnification of an officer or director of a corporation (even though found negligent) if the court determines (s)he is fairly and reasonably entitled to it in view of all the relevant circumstances)

CPA prepared a Form 10-K for X Corporation. The report made a misleading statement with respect to a material fact. Which of the following statements is false? A.Unlike the Securities Act of 1933, the Securities Exchange Act of 1934 placed the burden of proof on the investor to prove that (s)he relied on the statement. B.The Securities Exchange Act of 1934 requires proof that the CPA made the misleading statement with the intent to deceive or defraud. Thus, good faith is a valid defense. C.The statute of limitations for the Securities Exchange Act of 1934 is the same as for the Securities Act of 1933. D.Mere negligence results in liability under the Securities Act of 1933 and the Securities Exchange Act of 1934.

D.Mere negligence results in liability under the Securities Act of 1933 and the Securities Exchange Act of 1934. (Section 18(a) of the 1934 act applies to misleading or false statements in reports to the SEC. To hold the CPA civilly liable, proof of scienter (intent to deceive, manipulate, or defraud) is required. Thus, mere negligence is not sufficient for recovery under Section 18(a) of the 1934 act. Under Section 11 of the 1933 act, the plaintiff need not show reliance, privity, negligence, or scienter if a registration statement misstated or omitted a material fact)

Dee is the owner of 12% of the shares of common stock of D&M Corporation that she acquired in Year 1. She is the treasurer and a director of D&M. The corporation registered its securities in Year 2 and made a public offering pursuant to the Securities Act of 1933. If Dee decides to sell part of her holdings in Year 9, the shares A.Would be exempt from registration because the corporation previously registered them within 3 years. B.Must be registered regardless of the amount sold or manner in which they are sold. C.Would be exempt from registration because she is not an issuer. D.Must be registered if Dee sells 50% of her shares through her broker to the public.

D.Must be registered if Dee sells 50% of her shares through her broker to the public (In general, any offer to sell securities in interstate commerce is subject to registration unless the securities or the transaction is exempt. Most transactions are exempt because they involve sales by persons other than issuers, underwriters, or dealers, e.g., transactions by ordinary investors selling on their own account. Dee, however, is considered an issuer because she is a controlling person, that is, one who owns more than 10% of the company's stock and who has the direct or indirect ability to control the company. A sale of 6% of D&M's common stock to the public in the ordinary course of business (e.g., through a broker) would not qualify for an exemption under the Securities Act of 1933 and would be subject to SEC registration)

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.I only. B.II only. C.Both I and II. D.Neither I nor II.

D.Neither I nor II. (Conduct Rule 501 states that a member shall not commit an act discreditable to the profession. Under an Ethics Ruling, after the relationship of a member who is not an owner of the firm is terminated, the member may not take or retain copies or originals from the firm's client files or proprietary information without permission)

D.No, No, No (TS 100, Tax Return Positions, states that a member has the right and the responsibility to be an advocate for the taxpayer regarding tax return positions that meet the standards described in TS 100. An advocate cannot also be independent. Furthermore, independence standards apply only to attestation services. Hence, an accountant may prepare a tax return or issue a compilation report when (s)he lacks independence. Neither service requires attestation by the accountant)

Phillip, CPA, was engaged by Veda, Inc., to audit Veda's financial statements. Phillip was told that the financial statements and the audit report were to be shown to Ryan, a potential investor. As a result of the audit, Phillip issued an audit report containing an unqualified opinion on Veda's financial statements. After seeing the financial statements and audit report, Ryan made a substantial investment in Veda shares. Although Phillip exercised reasonable care in performing the audit, inaccuracies in the financial statements were later discovered, causing Veda share prices to fall. Ryan claimed that, had he known of the inaccuracies, he would not have purchased the shares. Will Ryan succeed in a suit against Phillip for negligence? A.Yes, because Ryan is a third-party beneficiary of the contractual relationship between Veda and Phillip. B.Yes, because Ryan relied on Phillip's unqualified opinion. C.No, because Phillip owed no duty to Ryan. D.No, because Phillip exercised reasonable care in performing the audit.

D.No, because Phillip exercised reasonable care in performing the audit. (An accountant has a duty to exercise reasonable care and diligence. The accountant should have the degree of skill commonly possessed by other accountants in the same or similar circumstances, but an accountant is not a guarantor of the work. Philip exercised reasonable care in performing the audit and therefore can make a defense case against negligence claims)

Brown & Co., CPAs, expressed an unqualified opinion on the financial statements of its client, King Corp. Based on the strength of King's financial statements, Safe Bank loaned King $500,000. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used in obtaining a loan by King. King defaulted on the loan. If Safe commences an action for negligence against Brown and Brown is able to prove that it conducted the audit in conformity with GAAS, Brown will A.Be liable to Safe because Safe relied on the financial statements. B.Be liable to Safe because the statute of frauds has been satisfied. C.Not be liable to Safe because there is a conclusive presumption that following GAAS is the equivalent of acting reasonably and with due care. D.Not be liable to Safe because of a lack of privity of contract.

D.Not be liable to Safe because of a lack of privity of contract. (The auditors could not be held liable for fraud or gross negligence because they followed GAAS. Gross negligence or fraud involves an intentional or reckless failure to exercise due care, but adherence to GAAS indicates at least a good faith effort to apply professional standards. Thus, the auditors are liable at most for ordinary negligence. In most jurisdictions, however, a party who is merely a foreseeable user and not (1) a foreseen user, (2) a member of a class of foreseen users, or (3) in privity of contract will have no standing to bring suit for ordinary negligence)

You are a CPA retained by the manager of a cooperative retirement village to do "write-up work." You are expected to prepare unaudited financial statements with each page marked "unaudited" and accompanied by a disclaimer of opinion stating no audit was made. In performing the work, you discover that there are no invoices to support $25,000 of the manager's claimed disbursements. The manager informs you that all the disbursements are proper. What should you do? A.Submit the expected statements but omit the $25,000 of unsupported disbursements. B.Include the unsupported disbursements in the statements because you are not expected to make an audit. C.Obtain from the manager a written statement that you informed him or her of the missing invoices and his or her assurance that the disbursements are proper. D.Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.

D.Notify the owners that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved. (This situation describes the 1136 Tenants' Corporation case. A CPA doing compilation work was held liable for not pursuing an investigation of a situation that appeared questionable on its face. Although the CPA need not audit the information, (s)he is responsible to take further action on information that is incorrect, incomplete, or otherwise unsatisfactory. Such action includes communication with the owners)

In general, which of the following must be contained in articles of incorporation? A.Names of states in which the corporation will be doing business. B.Name of the state in which the corporation will maintain its principal place of business. C.Names of the initial officers and their terms of office. D.Number of shares of stock authorized to be issued by the corporation.

D.Number of shares of stock authorized to be issued by the corporation (Articles of incorporation must contain (1) the name of the corporation, (2) the number of authorized shares, (3) the address of the initial registered office of the corporation, (4) the name of its first registered agent at that address, and (5) the names and addresses of the incorporators. The articles also may include (1) names and addresses of the initial directors; (2) purpose and duration of the corporation; (3) par value of shares; (4) provisions for managing the corporation and regulating its internal affairs; (5) powers of the corporation, its board, and its shareholders; (6) liability of shareholders for corporate debts; (7) a provision limiting directors' liability (except for certain intentional wrongs); and (8) any provision that may be set forth in the bylaws)

A major characteristic of the corporation is its recognition as a separate legal entity. As such, it is capable of withstanding attempts to "pierce the corporate veil." The corporation that is least likely to resist such attempts successfully is one that A.Was formed for tax savings. B.Was formed to insulate its owners from personal liability. C.Is a wholly owned subsidiary. D.Only holds assets to defraud creditors.

D.Only holds assets to defraud creditors (A corporation is a separate legal entity that may be organized and used for a variety of purposes. The corporate form may be disregarded, however, if it is used in a manner contrary to public policy, e.g., to defraud creditors)

Inspections performed by the PCAOB focus on quality control of registered CPA firms that perform audits of public companies (issuers). As required by the Sarbanes-Oxley Act, inspections determine all of the following except that A.The lead partner of a client is rotated every 5 years .B.A second partner review is performed. C.Independence is maintained by audit staff. D.Only staff with prior experience work on audits.

D.Only staff with prior experience work on audits.

Laser Corporation lent $5,000 to Mr. Jackson, a member of its board of directors. Mr. Jackson was also vice-president of operations. The board of directors, but not the shareholders, of Laser authorized the loan on the basis that the loan would benefit the corporation. The loan made to Mr. Jackson is A.Improper because Mr. Jackson is both a director and an employee. B.Improper because Mr. Jackson is an employee. C.Improper because Mr. Jackson is a director. D.Proper.

D.Proper. (Approval of a loan to a fellow director is not a per se violation of the director's fiduciary obligation to the corporation. Subject to that obligation and the duty to act with reasonable care, the directors may approve a loan that in their judgment would benefit the corporation. It would be inappropriate for Jackson to vote on the loan resolution, but his vote would not necessarily make it voidable. The shareholders need not authorize the loan. A conflicting interest transaction will not (1) result in sanctions (e.g., damages), (2) be enjoined by a court, or (3) be set aside if it is fair to the corporation or if it is approved after required disclosure by a majority of disinterested directors or of shares voted by disinterested parties)

Under Regulation D, Rule 505, of the Securities Act of 1933, which of the following statements is correct regarding a $3,000,000 stock offering sold only to accredited investors? A.The issuer may sell the stock to only 35 accredited investors. B.The issuer may make the offering through a general advertising. C.The issuer must supply all accredited investors with financial information. D.The issuer must notify the SEC within 15 days after the first sale of the offering.

D.The issuer must notify the SEC within 15 days after the first sale of the offering. (Various procedural rules generally must be followed to qualify for an exemption under Regulation D, some of which do not apply to certain exemptions. However, a requirement to notify the SEC by filing Form D within 15 days of the first offering applies to all 3 exemptions (Rule 504, Rule 505, and Rule 506))

Given evidence of a violation of the federal securities laws, the SEC lacks the power to A.Subpoena witnesses. B.Compel the production of books and records anywhere in the United States. C.Determine responsibility for a violation in an administrative hearing and impose certain sanctions. D.Prosecute criminal cases.

D.Prosecute criminal cases. (The SEC is a federal administrative agency with both quasi-legislative and quasi-judicial authority. It issues rules and regulations under the securities laws, but it is also empowered to enforce these laws. Its powers include the ability to subpoena witnesses, books, and records and to conduct administrative hearings to adjudicate cases involving alleged breaches of the rules and regulations. It can also issue cease-and-desist orders directed against potential as well as actual violations. Because administrative agencies cannot impose criminal sanctions, the Justice Department must prosecute criminal cases involving violations of the securities laws)

The partnership of Rodgers & Higgs, CPAs, performed audits of Alt Corp., a publicly-traded company, for the past several years. After issuing the current year's audit report, the CFO of Alt confessed to having committed fraud against Alt. Under which of the following statutes would the investors most likely bring suit against Rodgers & Higgs? A.Securities Act of 1933, if they can prove ordinary negligence. B.Securities Act of 1933, if they can prove gross negligence. C.Securities Exchange Act of 1934, if they can prove ordinary negligence. D.Securities Exchange Act of 1934, if they can prove scienter.

D.Securities Exchange Act of 1934, if they can prove scienter. (The Securities Exchange Act of 1934 requires that the plaintiff prove there is (1) an oral or written misstatement or omission of a material fact or other fraud, (2) a connection with any purchase or sale of securities, (3) the defendant's intent to deceive (scienter), (4) reliance on the misstatement or indirect reliance (fraud-on-the-market), and (5) loss caused by the reliance. If the investors have lost money and can prove scienter on the part of the CPAs, they will have satisfied all the requirements of the Securities Exchange Act of 1934)

If a corporation wishes to issue securities to the public, it must comply with the applicable securities laws. Which of the following statements is true? A.The enactment of federal securities laws preempted state regulation. B.Few states have adopted the Uniform Securities Act. C.A sale of securities may not be concurrently subject to both state and federal regulation. D.Some states have statutes permitting regulators to pass on the merits of securities.

D.Some states have statutes permitting regulators to pass on the merits of securities.

In a state jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over working papers without a client's permission? A.Purchaser of the CPA's practice. B.State tax authorities. C.State court. D.State CPA society quality control panel.

D.State CPA society quality control panel. (The AICPA Code of Professional Conduct (Rule 301) states that a member shall not disclose any confidential client information except with the specific consent of the client. But this rule does not preclude a CPA from responding to an investigative body of a state CPA society, the trial board of the AICPA, or an AICPA or state quality review body, or pursuant to a valid subpoena. In the minority of states that protect confidential accountant-client communications by statute, disclosure to a state CPA quality control panel would not be prohibited)

The essential difference between a stock dividend and a stock split is that a A.Stock split will increase the amount of equity. B.Stock split will increase a shareholder's percentage of ownership. C.Stock dividend must be paid in the same class of stock as held by the shareholder. D.Stock dividend of newly issued shares will result in a decrease in retained earnings.

D.Stock dividend of newly issued shares will result in a decrease in retained earnings. (A stock dividend is an issuance of additional shares of the company's stock proportionate to current holdings. Total equity is unaffected because it is merely represented by a greater number of shares. Generally accepted accounting principles require a transfer from retained earnings to contributed capital of the fair value of the shares distributed as a stock dividend. A stock split differs in that par value rather than retained earnings is reduced, and the number of authorized shares is increased)

The board of directors of Wilcox, Inc., has noted a 7% drop in the market price of its preferred stock and decides to purchase 100,000 shares of the stock for an amount below the redemption price of the stock. Under these circumstances, which of the following is a true statement? A.The corporation will realize a taxable gain as a result of the transaction. B.The preferred stock so acquired must be retired and may not be held as treasury stock. C.The corporation may not acquire its own shares unless the articles of incorporation so provide. D.Such shares may be purchased by the corporation to the extent of unreserved and unrestricted retained earnings.

D.Such shares may be purchased by the corporation to the extent of unreserved and unrestricted retained earnings. (A corporation may reacquire its own stock (a redemption), provided certain conditions are met. Under the RMBCA, the redemption of stock must not render the corporation insolvent, and the total assets after the distribution may not be less than the sum of total liabilities and liquidation preferences. Thus, redemptions may be made out of retained earnings that is not restricted)

Under the common law, which of the following defenses, if used by a CPA, would best avoid liability in an action for negligence brought by a client? A.The client was contributorily negligent. B.The client was comparatively negligent. C.The accuracy of the CPA's report was not guaranteed. D.The CPA's negligence was not the proximate cause of the client's losses.

D.The CPA's negligence was not the proximate cause of the client's losses. (A plaintiff-client must prove all of the following elements of negligence: (1) the accountant owed the client a duty, (2) the accountant breached this duty, (3) the accountant's breach actually and proximately caused the client's injury, and (4) the client suffered damages. Proximate cause is a chain of causation that is not interrupted by a new, independent cause. Moreover, the injury would not have occurred without the proximate cause. However, actual causation is insufficient. The injury also must have been reasonably foreseeable. Thus, the concept of proximate cause limits liability to foreseeable damages. Accordingly, lack of proof of proximate cause precludes any recovery of damages)

With respect to privileged communications of accountants, which of the following is true? A.A state statutory privilege will be recognized in a case being tried in a federal court involving a federal question. B.Most courts recognize a common law privilege between an accountant and the client. C.As a result of legislative enactment and court adoption, the client-accountant privilege is recognized in the majority of jurisdictions. D.The privilege will be lost if the party asserting the privilege voluntarily submits part of the privileged communications into evidence.

D.The privilege will be lost if the party asserting the privilege voluntarily submits part of the privileged communications into evidence. (When the accountant-client privileged communication rule exists (if a state's statutes so provide), it is lost if any part of the privileged communication is voluntarily submitted. The privileged communication rule is technical and must be adhered to strictly)

Which of the following transactions is subject to registration requirements of the Securities Act of 1933? A.The public sale of stock of a trucking company regulated by the Interstate Commerce Commission. B.A public sale of municipal bonds issued by a city government. C.The issuance of stock by a publicly traded corporation to its existing shareholders because of a stock split. D.The public sale by a corporation of its negotiable 10-year notes.

D.The public sale by a corporation of its negotiable 10-year notes. (The 1933 Act defines the term "security" to include almost any offering that constitutes an investment, including a corporation's negotiable 10-year notes. Any offer or sale of a security to the public requires registration unless a specific exemption applies. A corporation's negotiable 10-year notes are not exempt from registration under the 1933 Act)

Taso Limited Partnership intends to offer $400,000 of its limited partnership interests under Rule 504 of Regulation D of the Securities Act of 1933. These interests are registered under state law. Which of the following statements is true? A.The exemption under Rule 504 is not available to an issuer of limited partnership interests. B.The limited partnership interests may be sold only to accredited investors. C.The total number of nonaccredited investors who purchase the limited partnership interests may not exceed 35. D.The resale of the limited partnership interests by a purchaser generally will not be restricted.

D.The resale of the limited partnership interests by a purchaser generally will not be restricted. (A purchaser of securities under Rules 505 and 506 of Regulation D may not immediately resell without being considered an underwriter. Thus, the exemption from registration for transactions by a person not an issuer, underwriter, or dealer is inapplicable. Moreover, the issuer must take steps to prevent nonexempt, unregistered resale and must notify the SEC of the sale. After the securities have been held for 1 year, limited resales are allowed under SEC Rule 144 without registration. Unlimited resales by a nonaffiliate purchaser are allowed after 2 years. However, these limits on resale do not apply to the exemption under Rule 504. Securities issued under Rule 504 are unrestricted and may be resold without federal registration if they are registered under a state law that requires delivery of a substantive disclosure document)

For what purpose will a shareholder of a publicly held corporation be permitted to file a shareholder derivative suit in the name of the corporation? A.To compel payment of a properly declared dividend. B.To enforce a right to inspect corporate records. C.To compel dissolution of the corporation. D.To recover damages from corporate management for an ultra vires management act.

D.To recover damages from corporate management for an ultra vires management act. (A derivative suit is a cause of action brought by one or more shareholders on behalf of the corporation to enforce a right belonging to the corporation. Shareholders may bring such an action when the board of directors refuses to act on the corporation's behalf. Generally, the shareholder must show (1) (s)he owned stock at the time of the wrongdoing, (2) (s)he made a demand to the corporation to bring suit or take other appropriate action, and (3) a bad-faith refusal of the board of directors to pursue the corporation's interest. The recovery, if any, belongs to the corporation. An action to recover damages from corporate management for an ultra vires act is an example of a derivative suit. An ultra vires act is one beyond the limits of the corporate purposes defined in the articles of incorporation)

Iago and Des are the sole directors, officers, and shareholders of the ID Corporation, a theatrical group incorporated in Florida. They regularly hold board meetings outside of Florida or by videoconferencing. Recently, without a meeting, Des increased compensation of the directors and declared the regular dividend. Iago later filed in the minutes a signed, written consent to the actions taken. If the articles and by-laws are silent on these matters, A.Board meetings must be held in the state of incorporation or where the corporation has its principal business and must be conducted in person. B.The board may declare dividends but may not fix its own compensation. C.ID is in violation of the Revised Model Business Corporation Act because it has fewer than three directors. D.Unanimous written consent of all directors may substitute for a meeting.

D.Unanimous written consent of all directors may substitute for a meeting.

Which of the following acts is most likely to cause a court to pierce the corporate veil? A.Failure to designate a registered agent in the articles of incorporation (Charter). B.Retention of excess capital. C.Failure to conduct a significant portion of business in the chartering state. D.Using corporate assets for the owner's personal purposes.

D.Using corporate assets for the owner's personal purposes.

D.Using corporate assets for the owner's personal purposes. (Typically, the corporate veil is pierced when a court finds that the corporation is merely the alter ego of a shareholder, for example, when (1) it is undercapitalized, (2) the assets of the corporation and the shareholders are commingled, (3) corporate formalities are ignored, or (4) the corporation is established for a sham purpose)

Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation? A.When the bylaws of the corporation expressly adopt all preincorporation contracts without novation. B.When the corporation unknowingly accepts the benefits of the contract. C.When the contracting party verbally agrees to relieve the promoter. D.When the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter.

D.When the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter. (If the promoter, the third party, and the corporation enter into a novation substituting the corporation for the promoter, only the corporation is liable and the promoter is released)

Pym, CPA, was engaged to audit Silo Co.'s financial statements. During the audit, Pym discovered that Silo's inventory contained stolen goods. Silo was indicted, and Pym was subpoenaed to testify at the criminal trial. Silo claimed accountant-client privilege to prevent Pym from testifying. Silo will be able to prevent Pym from testifying A.If the action is brought in a federal court. B.About the nature of the work performed in the audit. C.Due to the common law in the majority of the states. D.Where a state statute has been enacted creating a client-accountant privilege of confidentiality.

D.Where a state statute has been enacted creating a client-accountant privilege of confidentiality. (Although communication between lawyers and clients is privileged, no common law concept extends this privilege to the accountant-client relationship. A minority of states have enacted statutes recognizing as privilege confidential communication between an accountant and client)

Tax preparers who aid and abet federal tax evasion are subject to Injunction to Be Prohibited from Acting as Tax Preparers General Federal Criminal Prosecution A.No, No B.Yes, No C.No, Yes D.Yes, Yes

D.Yes, Yes (Any act that constitutes a willful attempt to evade federal tax liability (even of another) is subject to criminal penalty, even imprisonment (26 USC Sec. 7201). Furthermore, any person who willfully aids or assists in preparation or presentation of a materially false or fraudulent return is guilty of a felony [26 USC Sec. 7206(2)]. Violations of tax preparer rules may result in disciplinary action by the director of the IRS. The IRS may seek an injunction to prohibit the violator from acting as a tax return preparer)

Which of the following is the most accurate statement of a reason for using a surety? A. All work done for a governmental entity must be protected by a surety. B. The costs of using a secured transaction may be excessive. C. The contracts of a minor may be ratified when (s)he reaches his/her majority and certain other contracts are enforceable in spite of the party's infancy. D. A building contractor for a commercial project may seek a performance bond to protect against failure of the owner to pay the contract price.

The costs of using a secured transaction may be excessive.

unless prohibited by the documents creating the organization, a shareholder in a publicly held corporation or the owner of a limited partnership interest has the right to

assign his or her interest in the business

A shareholder of a corporation

generally has a preemptive right to the extent permitted by the articles

question 42-1

gustavo is wrong

has the right to participate in QVM's management

A director of a corporation

is often removable for cause by the other directors

shareholder voting

may be by proxy, but a proxy may be revoked if the shareholder signs a later proxy

what must take place before a corporation may be voluntarily dissolved?

passage by the board of directors of a resolution to dissolve

A corporation formed by a political unit to achieve a governmental purpose is best described as

public

if a corporation wishes to issue securities to the public, it must comply with the applicable securities laws. which of the following statements is true?

some states have statutes permitting regulators to pass on the merits of securities

Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?

the director must disclose the interest to the independent members of the board and refrain from voting

the term "watered stock" typically refers to

the issuance of stock as fully paid in exchange for overvalued property or services

if the directors of the Garrett Co. wish to call a special meeting of shareholders to consider a proposed merger,

the shareholders must be given specific notice of the meeting and the issues on the agenda

A shareholders right to inspect books and records of a corporation will be properly denied if the shareholder

wants to use corporate shareholder records for a personal business

traditional concepts applicable to large publicly held corporations often do not meet the needs of closely held ones. Accordingly, the RMBCA addresses these needs. Under the RMBCA,

a shareholder may have power to dissolve a close corporation that is similar to a partner's

50% of the profits and share management equally with Trip

when a party deals with a partner who lacks actual or apparent authority, a general partnership will be bound by the resulting contract if the other partners (1) Ratify the contract (yes or no) (2) Ament the Partnership Agreement (yes or no)

(1) yes (2) no

A shareholder of Golden Enterprises to enjoin the sale.

Smith and James were partners in S and J Partnership. The partnership agreement stated that all profits and losses were allocated 60% to Smith and 40% to James. The partners decided to terminate and wind up the partnership. The following was the balance sheet for S and J on the day of the windup: Cash$40,000Accounts receivable12,000Property and equipment38,000Total assets$90,000Accounts payable$24,000Smith, capital30,000James, capital36,000Total liabilities and capital$90,000Of the total accounts receivable, $10,000 was collected, and the remainder was written off as bad debt. All liabilities of S and J were paid by the partnership. The property and equipment are sold for $32,000. Under the Revised Uniform Partnership Act, what amount of cash was distributed to Smith? A. $25,200 B. $26,000 C. $30,000 D. $34,800

A. $25,200 (During the winding up process, all assets of the entity are sold, the creditors are paid, any remaining assets are distributed, and the entity is dissolved. The loss on accounts receivable is $2,000 ($12,000 - $10,000 collected). The loss on property and equipment is $6,000 ($38,000 - $32,000 collected). Thus, the partnership must recognize $8,000 in losses. After paying the creditors, the total cash to be distributed is $58,000 ($40,000 + $10,000 - $24,000 + $32,000). Accordingly, the amount distributed to Smith is $25,200 [$30,000 capital - ($8,000 loss × 60%)]. The amount distributed to James is $32,800 [$36,000 capital - ($8,000 loss × 40%)])

Stanley Kowalski is a well-known retired movie personality who purchased a limited partnership interest in Terrific Movie Productions upon its initial syndication. Which of the following is true? A. If Stanley permits his name to be used in connection with the business and is held out as a participant in the management of the venture, he will be liable as a general partner B. The sale of these limited partnership interests is not subject to SEC registration C. This limited partnership may be formed with the same informality as a general partnership D. The general partners are prohibited from also owning limited partnership interests

A. If Stanley permits his name to be used in connection with the business and is held out as a participant in the management of the venture, he will be liable as a general partner (A limited partner who permits his or her name to be used in the name of the partnership or in connection with the business is liable to creditors who give credit without actual knowledge that (s)he is not a general partner. Such a limited partner forfeits limited liability because the use of his or her name may lead unsuspecting creditors to believe that (s)he is a general partner with unlimited liability)

Which of the following statements about the form of a general partnership agreement is true? A. It must be in writing if the partnership is to last for longer than 1 year B. It must be in writing if partnership profits would not be equally divided C. It must be in writing if any partner contributes more than $500 in capital D. It could not be oral if the partnership would deal in real estate

A. It must be in writing if the partnership is to last for longer than 1 year (Most oral agreements to enter into a partnership are valid. If the partnership agreement is for a definite period in excess of 1 year. However, the majority of states require that the partnership agreement be in writing to be enforceable. If the statute of frauds is not complied with, a partnership at will results)

A limited partner A. May not withdraw his or her capital contribution absent sufficient limited-partnership property to pay all general creditors B. Must not own limited-partnership interests in other competing limited partnerships C. Is automatically an agent for the partnership with apparent authority to bind the limited partnership in contract D. Has no liability to creditors even if (s)he takes part in the control of the business as long as (s)he is held out as being a limited partner

A. May not withdraw his or her capital contribution absent sufficient limited-partnership property to pay all general creditors (Outside creditors have priority over liabilities to limited partners for the return of their capital contributions. Thus, a limited partner may not withdraw his or her capital contribution if the effect is to impair the creditors' rights)

A limited partner's capital contribution to the limited partnership A. Results in the limited partner's having an intangible personal property right B. Can be withdrawn at the limited partner's option at any time prior to the filing of a petition in bankruptcy against the limited partnership C. Can only consist of cash or marketable securities D. Must be indicated in the limited partnership's certificate

A. Results in the limited partner's having an intangible personal property right (The limited partner's interest is an investment in the entity as a whole. The interest is personal property. It is an intangible because the limited partner has no right to specific partnership property)

The apparent authority of a partner to bind the partnership in dealing with third parties A. Will be effectively limited by the filing of a statement of partnership authority B. Will be effectively limited by a formal resolution of the partners of which third parties are unaware C. Would permit a partner to submit a claim against the partnership to arbitration D. Must be derived from the express powers and purposes contained in the partnership agreement

A. Will be effectively limited by the filing of a statement of partnership authority (Each partner in a general partnership is an agent of the partnership. The partners may not limit partnership liability to third parties by agreement among the partners alone. But apparent authority is effectively limited to the extent a third party knows of limitations imposed on a partner's authority. The RUPA provides for filing of a statement of authority that may give notice of limitations on the authority of a partner)

Wilson and Thomas are partners. Wilson contributed $150,000 to the partnership, and Thomas contributed $50,000. Wilson does 40% of the work, and Thomas does 60%. They do not have a partnership agreement that addresses the sharing of profits and losses. By the end of the year, the partnership has earned a profit of $200,000. What is Wilson's share of the profit under the Revised Uniform Partnership Act? A. $80,000 B. $100,000 C. $120,000 D. $150,000

B. $100,000 (Unless the partners agree otherwise, profits are shared equally. Furthermore, losses are shared in the same proportion as profits. Thus, Wilson's profit share is $100,000 [$200,000 × (1 partner ÷ 2 partners)])

Gillie, Taft, and Dall are partners in an architectural firm. The partnership agreement is silent about the payment of salaries and the division of profits and losses. Gillie works full-time in the firm, and Taft and Dall each work half-time. Taft invested $120,000 in the firm, and Gillie and Dall invested $60,000 each. Dall is responsible for bringing in 50% of the business, and Gillie and Taft 25% each. How should profits of $120,000 for the year be divided? Gillie Taft Dall A. $60,000, $30,000, $30,000 B. $40,000, $40,000, $40,000 C. $30,000, $60,000, $30,000 D.$30,000, $30,000, $60,000

B. $40,000, $40,000, $40,000 (Partners are not entitled to compensation for their services performed for the partnership, except reasonable compensation for winding up the business, unless such an arrangement is explicitly provided for in the partnership agreement. The partnership agreement is silent on this point, so salaries are not paid to the partners. Profits and losses may be divided among the partners according to any formula stipulated in the partnership agreement. Without such a stipulation, partners share equally in the profits. Partners share losses in proportion to their shares of profits. Thus, each partner will receive $40,000)

What business entity can be voluntarily dissolved and terminated without filing a dissolution document with the state of organization? A. A corporation B. A general partnership C. A limited liability partnership D. A limited partnership

B. A general partnership (In a partnership at will, dissolution results from notice of a partner's express will to withdraw and certain other events. No filing is required, but a statement of dissolution may be filed by any partner who has not wrongfully dissociated)

In a general partnership, which of the following acts must be approved by all the partners? A. Dissolution of the partnership B. Admission of a partner C. Authorization of a partnership capital expenditure D. Conveyance of real property owned by the partnership

B. Admission of a partner (The rights, duties, and powers between and among partners are largely defined by the rules of law applicable to agents. Additionally, no person can become a member of a general partnership without the consent of all existing partners)

Which of the following statements is true? A. Directors owe fiduciary duties to the corporation, and limited partners owe such duties to the partnership B. Corporations and limited partnerships must be formed pursuant to a state statute. A copy of the organizational document must be filed with the proper state agency C. Shareholders may be entitled to vote on corporate matters, whereas limited partners are prohibited from voting on partnership matters D. Stock of a corporation may be subject to registration under federal securities laws, but limited partnership interests are automatically exempt from such requirements

B. Corporations and limited partnerships must be formed pursuant to a state statute. A copy of the organizational document must be filed with the proper state agency (Corporations and limited partnerships are recognized only under the authority of statutes. Common law cannot be a basis for their formation. Both require the filing with appropriate state authorities of organizational documents (articles of incorporation or certificates of limited partnership))

Ann Grand, a general partner, retired. The partnership held a testimonial dinner for her and invited 10 of its largest customers. A week later a notice was placed in various trade journals indicating that Grand had retired and was no longer associated with the partnership in any capacity. After the appropriate public notice of Grand's retirement, which of the following best describes her legal status? A. The release of Grand by the remaining partners and the assumption of all past and future debts of the partnership by them via a hold-harmless clause constitutes a novation B. Grand has the apparent authority to bind the partnership in contracts she makes with persons unaware of her retirement who have previously dealt with the partnership C. Grand has no liability to past creditors upon her retirement from the partnership if they all have been informed of her withdrawal and her release from liability D. Grand has the legal status of a limited partner for the 3 years it takes to pay her the balance of the purchase price of her partnership interest

B. Grand has the apparent authority to bind the partnership in contracts she makes with persons unaware of her retirement who have previously dealt with the partnership (Under the RUPA, a dissociated partner continues to be able to bind the partnership for up to 2 years after dissociation if other parties reasonably believe that the dissociated partner is still a partner and do not have knowledge or notice of the dissociation. A statement of dissociation must be filed by the partnership or a dissociated partner to terminate the partner's apparent authority and his or her liability for the partnership's post-dissociation obligations)

Unless otherwise provided in the certificate of limited partnership, which of the following is true if Grey, one of the limited partners, dies? A. Grey's personal representative will automatically become a substituted limited partner B. Grey's personal representative will have all the rights of a limited partner for the purpose of settling the estate C. The partnership will automatically be dissolved D. Grey's estate will be free from any liabilities incurred by Grey as a limited partner

B. Grey's personal representative will have all the rights of a limited partner for the purpose of settling the estate (The death of a limited partner does not result in dissolution of the partnership. The limited partner's estate will retain all of Grey's rights and liabilities as a limited partner, and Grey's personal representative will act as limited partner for the purpose of settling the estate)

Under the Revised Uniform Partnership Act, which of the following statements, if any, are correct regarding the effect of the assignment of an interest in a general partnership? I. The assignee is personally responsible for the assigning partner's share of past and future partnership debts. II. The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership. A. I only B. II only C. Both I and II D. Neither I nor II

B. II only (A partner's transferable interest consists of a partner's share of partnership profits and losses and the right to receive distributions. Partners may sell or otherwise transfer (assign) their interests to the partnership, another partner, or a third party without loss of the rights and duties of a partner (except the interest transferred). Moreover, unless all the other partners agree to accept the assignee as a new partner, the assignee does not become a partner in the firm. Without partnership status, the assignee has no obligation for partnership debts)

The XYZ Limited Partnership has two general partners, Smith and Jones. A provision in the partnership agreement allows the removal of a general partner by a majority vote of the limited partners. The limited partners vote to remove Jones as a general partner. Which of the following statements is true? A. The limited partners are now liable to third parties for partnership obligations B. Limited partners may vote to remove a general partner without losing their status as limited partners C. By voting to remove a general partner, the limited partners are presumed to exercise control of the business D. Limited partners may participate in management decisions without limitation if this right is provided for in the limited partnership agreement

B. Limited partners may vote to remove a general partner without losing their status as limited partners (A limited partner is not liable to third parties for partnership obligations as long as the limited partner does not take part in the control of the business. Voting on the removal of a general partner does not constitute taking part in the control of the business)

The owners of a limited liability company are known as which of the following? A. Partners B. Members C. Stockholders D. Shareholders

B. Members (An LLC combines the limited liability of the corporation with the tax advantages of the general partnership. Like a corporation, a limited partnership, and an LLP, an LLC is a legal entity separate from its owner-investors (called members) that can be created only under state law)

Joe Perone was a member of Caddy, Shack, & Perone, a general trading partnership. He died and the partnership is being liquidated in a bankruptcy proceeding, but Perone's estate is substantial. The creditors of the partnership are seeking to collect on their claims from Perone's estate. Which of the following statements is true insofar as their claims are concerned? A. The death of Perone caused a dissolution of the firm, thereby freeing his estate from personal liability B. Partnership creditors and Perone's personal creditors are on an equal footing regarding the assets of Perone's estate C. The creditors must first proceed against the remaining partners before Perone's estate can be held liable for the partnership's debts D. The liability of Perone's estate cannot exceed his capital contribution plus that percentage of the deficit attributable to his capital contribution

B. Partnership creditors and Perone's personal creditors are on an equal footing regarding the assets of Perone's estate (The partnership creditors have first claim to the assets of a bankrupt partnership. To the extent their claims are not satisfied, they are entitled to share pro rata with the general unsecured creditors of individual partners in the partners' personal assets)

The formation of a sole proprietorship A.Requires registration with the federal government's Small Business Administration. B.Requires a formal "doing business as" filing under state law if the proprietor will be conducting business under a fictitious name. C.Requires formal registration in each state the proprietor plans to do business in. D.Is not as easy and inexpensive to form as an S corporation.

B.Requires a formal "doing business as" filing under state law if the proprietor will be conducting business under a fictitious name.

D, E, F, and G formed a general partnership. Their written partnership agreement provides that the profits will be divided so that D will receive 40%; E, 30%; F, 20%; and G, 10%. There is no provision for allocating losses. At the end of its first year, the partnership has losses of $200,000. Before allocating losses, the partners' capital account balances are D, $120,000; E, $100,000; F, $75,000; and G, $11,000. G refuses to make any further contributions to the partnership. Ignore the effects of federal partnership tax law. After losses are allocated to the partners' capital accounts and all liabilities are paid, the partnership's sole asset is $106,000 in cash. How much will E receive on dissolution of the partnership? A. $29,500 B. $35,333 C. $37,000 D. $40,000

C. $37,000 (Without an agreement, the loss is allocated in the same proportion as profits (D, $80,000; E, $60,000; F, $40,000; G, $20,000). G's excess over his or her capital account balance ($9,000) must be allocated to the other partners in the same ratio as that for sharing profits (40%:30%:20%). Thus, $4,000 [$9,000 × (4 ÷ 9)] is allocated to D, $3,000 [$9,000 × (3 ÷ 9)] to E, and $2,000 [$9,000 × (2 ÷ 9)] to F. The $106,000 is allocated in full to the balance of partnership capital accounts (D, $36,000; E, $37,000; F, $33,000))

Skip & Trip decide to start a boutique selling preppy clothing. They sign a partnership agreement providing that Skip will contribute $6,000 toward the necessary $10,000 in start-up capital, and Trip will contribute $4,000. If the agreement is silent as to management and profits, Skip should receive A. 60% of the profits and share management equally with Trip B. 60% of the profits and control 60% of the management functions C. 50% of the profits and share management equally with Trip D. 50% of the profits and control 60% of the management functions

C. 50% of the profits and share management equally with Trip (Without a contrary agreement, partners have equal rights in the management and conduct of the partnership business. In addition, without an agreement to the contrary, each partner has the right to share equally in partnership profits even if their contributions are unequal. Skip and Trip had no such contrary agreement)

Absent any contrary provisions in the agreement, under which of the following circumstances will a limited partnership be dissolved? A. A limited partner dies and his or her estate is insolvent B. A personal creditor of a general partner obtains a judgment against the general partner's interest in the limited partnership C. A general partner retires and all the remaining general partners do not consent to continue D. A limited partner assigns his or her partnership interest to an outsider and the purchaser becomes a substituted limited partner

C. A general partner retires and all the remaining general partners do not consent to continue (Retirement of a general partner generally dissolves a limited partnership just as it would dissolve a general partnership. However, dissolution can be avoided if the business is continued by the remaining general partners either with the consent of all partners or pursuant to a stipulation in the partnership agreement)

What type of business organization may generally be formed without filing an organizational document or certificate with a state government agency or office? A. A corporation B. A limited liability company C. A general partnership D. A limited partnership

C. A general partnership (An advantage of the general partnership is that it can be created without any formalities. No filings are required, and the existence of the partnership may arise from a written or oral agreement)

A general partner will not be personally liable for which of the following acts or transactions? A. The gross negligence of one of the partnership's employees while carrying out the partnership business B. A contract entered into by the majority of the other partners but to which the general partner objects C. A personal mortgage loan obtained by one of the other partners on his residence to which that partner, without authority, signed the partnership name on the note D. A contract entered into by the partnership in which the other partners agree among themselves to hold the general partner harmless

C. A personal mortgage loan obtained by one of the other partners on his residence to which that partner, without authority, signed the partnership name on the note (Reasonable third parties should realize that a partner lacks apparent authority to bind the partnership for personal benefit and therefore should require proof of express authority. A partner who signs the partnership name to a note securing a mortgage on his or her personal residence is not doing so for apparently carrying on in the ordinary course of (1) the business of the partnership or (2) business of the kind carried on by the partnership)

A partnership agreement provides that upon death or dissociation, a partner is entitled to the carrying amount of his or her partnership interest and the partnership shall continue. This provision A. Is unconscionable on its face B. Prevents dissolution upon death or dissociation of a partner C. Eliminates the need to wind up upon dissociation of a partner by express will D. Is not binding upon the spouse of a deceased partner if the carrying amount is less than the fair value

C. Eliminates the need to wind up upon dissociation of a partner by express will (In a partnership at will, the partnership's notice of a partner's express will to withdraw serves not only to dissociate the partner but also to dissolve the partnership and cause the winding up of its business. Dissolution in these circumstances may be avoided by unanimous agreement of the partners (other than a wrongfully dissociating partner). Dissolution also may be forestalled by a provision in the partnership agreement)

Amanda Blake, a partner in QVM, a general partnership, wishes to withdraw from the partnership and sell her interest to Dick Nolan. All of the other partners in QVM have agreed to admit Nolan as a partner and to hold Blake harmless for the past, present, and future liabilities of QVM. As a result of Blake's withdrawal and Nolan's admission to the partnership, Nolan A. Must contribute cash or property to QVM to be admitted with the same rights as the other partners B. Is personally liable for partnership liabilities arising before and after being admitted as a partner C. Has the right to participate in QVM's management D. Acquired only the right to receive Blake's share of QVM's profits

C. Has the right to participate in QVM's management (A transferee of a partnership interest is admitted as a partner only by consent of all partners at the time. The newly admitted partner has all rights of a partner, including the right to participate in management. However, the hold-harmless agreement is effective between the parties to it but does not limit Blake's liability for the existing partnership obligations to outsiders)

Mrs. Quick has the right to receive a settlement for her husband's interest in the partnership.

Which of the following statements is correct regarding a limited liability company's operating agreement? A. It must be filed with a central state agency B. It must be in writing C. It is designed to forestall and resolve disputes among the owners D. It is necessary for a limited liability company to exist

C. It is designed to forestall and resolve disputes among the owners (The members' operating agreement may address matters such as the following: (1) management arrangements, (2) voting rights, (3) member meetings, (4) profit sharing, (5) transfer of members' interests, (6) the circumstances causing dissolution, (7) admission of members, and (8) death of a member. By addressing many common problems before they arise in the operating agreement, the use of an operating agreement should help resolve disputes among the owners)

Wichita Properties is a limited partnership created in accordance with the provisions of the Uniform Limited Partnership Act. The partners have voted to dissolve and settle the partnership's accounts. Which of the following will be the last to be paid? A. General partners for unpaid distributions B. Limited partners in respect to capital C. Limited and general partners in respect to their undistributed profits D. General partners in respect to capital

C. Limited and general partners in respect to their undistributed profits (Under the RULPA, limited and general partners are treated equally. Unless the partnership agreement provides otherwise, assets are distributed as follows: 1. Creditors (including all partners) 2. Partners for unpaid distributions (i.e., declared but not paid) 3. Partners for capital 4. Partners for remaining assets (i.e., undistributed profits) in proportions for sharing distributions)

Which of the following parties generally has the most management rights? A. Minority shareholder in a corporation listed on a national stock exchange B. Limited partner in a general partnership C. Member of a limited liability company D. Limited partner in a limited partnership

C. Member of a limited liability company (In a member-managed LLC, all members have a right to participate, and most business matters are decided by the majority. In a manager-managed LLC, each manager has equal rights, but managers are selected or removed by a majority vote of the members. An LLC is deemed to be member-managed unless the articles of organization state otherwise)

The partnership of Joe Baker, Art Green, and Guy Madison is insolvent. The partnership's liabilities exceed its assets by $123,000. The liabilities include a $25,000 loan from Madison. Green is personally insolvent. His personal liabilities exceed his personal assets by $13,500. Green has filed a voluntary petition in bankruptcy. Under these circumstances, partnership creditors A. Must proceed against the partnership and all the general partners in one lawsuit so that losses may be shared equitably among the partners B. Rank first in payment and all (including Madison) will share proportionately in the partnership assets to be distributed C. Will have the first claim to partnership property to the exclusion of the personal creditors of Green D. Do not have the right to share pro rata with Green's personal creditors in Green's personal assets.

C. Will have the first claim to partnership property to the exclusion of the personal creditors of Green (The creditors of the partnership have first priority in the distribution of the assets of the partnership. The personal creditors of Green can reach Green's transferable interest (not specific partnership assets) only through a charging order)

Under the Uniform Limited Liability Company Act, the members of an LLC may determine in their operating agreement how their business will be conducted. In the absence of a provision in the operating agreement, the act provides that A.Failure of the LLC to follow the usual formalities in the exercise of its powers results in personal liability for the members. B.The managers have personal liability for obligations of the LLC. C.A majority of the managers may exclusively decide most business matters. D.In a member-managed LLC, voting rights with respect to most business matters are in proportion to capital contributions.

C.A majority of the managers may exclusively decide most business matters.

The Revised Uniform Partnership Act (RUPA) provides for a limited liability partnership (LLP). Under the act, A.A partner of an LLP is not personally liable for any partnership obligation. B.A partnership must file a statement of qualification to become an LLP, but errors in the information filed prevent achievement of LLP status. C.An LLP's failure to file an annual report may result in revocation of LLP status, but, if an application for reinstatement is granted, the reinstatement relates back to the revocation date. D.A foreign LLP must file a statement of qualification in a state to transact business there.

C.An LLP's failure to file an annual report may result in revocation of LLP status, but, if an application for reinstatement is granted, the reinstatement relates back to the revocation date

Which of the following is not a characteristic of both a sole proprietorship and a general partnership? A.Equity capital may not be raised by selling shares of the business. B.The business's profits and losses are passed through to the owner(s). C.The death of an owner causes the termination of the business. D.A "doing business as" filing is usually required if the owner(s) will conduct business under a fictitious name.

C.The death of an owner causes the termination of the business.

What term is used to describe a partnership without a specified duration? A. A perpetual partnership B. A partnership by estoppel C. An indefinite partnership D. A partnership at will

D. A partnership at will (A partnership at will is one "in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking" (RUPA))

Buster and Rover formed a partnership to invest in real estate. However, Buster also decided to sell TVs on the side. Buster went to Harold, a wholesaler, and purchased 20 TVs on credit in the name of the partnership. Harold knew the partnership was formed for the purpose of investing in real estate because he had been solicited to be one of the partners. If Buster does not pay for the TVs,

the partnership is not liable because it is not a trading partnership.

Marshall formed a limited partnership for the purpose of engaging in the export-import business. Marshall obtained additional working capital from Franklin and Lee by selling them each a limited partnership interest. Under these circumstances, the limited partnership A. Will usually be treated as a taxable entity for federal income tax purposes B. Will lose its status as a limited partnership if it has more than one general partner C. Can limit the liability of all partners D. Can exist as such only if it is formed under the authority of a state statute

D. Can exist as such only if it is formed under the authority of a state statute (The limited partnership is not available as a form of business organization under the common law. An organization purporting to be a limited partnership but formed in a state with no statutory authority for such a form of business organization will very likely be treated as a general partnership)

Bill Daniels, Jess Beal, and Sydney Wade formed the DBW Partnership. Daniels contributed $20,000, Beal $15,000, and Wade $5,000. They also agreed that all losses exceeding capital contributed would be assumed by Daniels, and he would hold his fellow partners harmless from any additional amounts lost. If the partnership becomes insolvent and the partnership debts exceed assets by $15,000, which of the following is true? A. Daniels is a surety insofar as partnership debts in excess of $40,000 are concerned B. Those creditors who were aware of the oral agreement among the partners regarding partnership liability are bound by it C. Partnership creditors must first proceed against Daniels and have a judgment returned unsatisfied before proceeding against Beal or Wade D. Each partner is jointly and severally liable to firm creditors

D. Each partner is jointly and severally liable to firm creditors (Each member of the partnership is jointly and severally liable for the obligations of the partnership unless otherwise agreed by the claimant or provided by law. Even though Daniels has agreed to hold his fellow partners harmless with respect to losses in excess of their capital contributions, that agreement does not bind the creditors of the partnership, who may hold Beal and Wade as well as Daniels jointly and severally liable for the partnership debts. Joint and several liability means the plaintiff may sue all or some of the partners together or any partner individually and may collect equal or unequal damages from each. However, the total collected may not exceed the amount of the judgment. Moreover, the other partners may seek indemnification from Daniels)

Ms. Wall is a limited partner of the Amalgamated Limited Partnership. She is insolvent and her debts exceed her assets by $28,000. Goldsmith, one of Wall's largest creditors, is resorting to legal process to obtain the payment of Wall's debt to him. Goldsmith has obtained a charging order against Wall's limited partnership interest for the unsatisfied amount of the debt. As a result of Goldsmith's action, which of the following will happen? A. The partnership will be dissolved B. Wall's partnership interest must be redeemed with partnership property C. Goldsmith automatically becomes a substituted limited partner D. Goldsmith becomes in effect an assignee of Wall's partnership interest

D. Goldsmith becomes in effect an assignee of Wall's partnership interest (A charging order is a court order that has the effect of an involuntary assignment of the limited partner's interest to the judgment-creditor (or an independent third party called a receiver). The limited partner's interest may be temporarily assigned until the profits distributed pay off the debt, or it may be permanently assigned using its fair market value to pay off the debt)

Many states require partnerships to file the partnership name under laws known as fictitious name statutes. These statutes A. Require a proper filing as a condition precedent to the valid creation of a partnership B. Are designed primarily to provide registration for tax purposes C. Are designed to clarify the rights and duties of the members of the partnership D. Have little effect on the creation or operation of a partnership other than the imposition of a fine or other minor penalty for noncompliance

D. Have little effect on the creation or operation of a partnership other than the imposition of a fine or other minor penalty for noncompliance (Fictitious name statutes have been enacted in most states for the protection of creditors. Registration permits creditors to discover the persons liable for the debts of the enterprise. The creation and operation of a partnership is little affected by the requirement because a partnership need not adopt a name, although use of a name may help to distinguish a partnership action from that of a partner. Moreover, the use of a name does not necessarily indicate the existence of a partnership or that a named person is a member of the firm)

James Quick was a partner in the Fast, Sure, and Quick Factors partnership. He subsequently died. His will left everything to his wife, including a one-third interest in the land and building owned by Fast, Sure, and Quick. A. Mrs. Quick is a one-third owner of Fast, Sure, and Quick's land and building B. The real property in question was held by the partnership as a tenancy in common C. Mrs. Quick automatically becomes the partner of Fast and Sure upon her husband's death D. Mrs. Quick has the right to receive a settlement for her husband's interest in the partnership

D. Mrs. Quick has the right to receive a settlement for her husband's interest in the partnership (A partner's transferable interest is the partner's share of profits and losses and the right to distributions. Upon a partner's death and dissolution of the partnership, his or her estate (or beneficiaries) is entitled to the value of the decedent's transferable interest but not to any specific partnership property)

Which of the following will not result in a dissolution of a partnership? A. An event making continuation of the partnership business illegal B. In a partnership for a definite undertaking, wrongful dissociation C. In a partnership for a definite term, a partner's death D. The transfer by a partner of his or her entire partnership interest

D. The transfer by a partner of his or her entire partnership interest (A transfer by a partner of his or her interest in the partnership does not by itself dissolve the partnership or even cause the partner's dissociation. The partnership continues, and the transferee is entitled to the transferor partner's share of profits and losses and right to receive distributions. However, a partner is dissociated if the partner is expelled by unanimous vote of the other partners after a transfer of substantially all of the partner's transferable interest, other than a transfer for security purposes)

Which of the following rights would a limited partner not be entitled to assert? A. To have a formal accounting of partnership affairs whenever the circumstances render it just and reasonable B. To have the same rights as a general partner to a dissolution and winding up of the partnership C. To have reasonable access to the partnership books and to inspect and copy them D. To be elected as a general partner by a majority vote of the limited partners in number and amount

D. To be elected as a general partner by a majority vote of the limited partners in number and amount (A new general partner may be admitted to a limited partnership only with the specific written consent of each and every partner (both limited and general). The limited partners therefore do not have the power to admit new general partners, and unanimous consent is needed unless the partnership agreement provides otherwise. A limited partner has such rights as are reasonably necessary to protect his or her investment, but not those giving him or her the power to manage or control the enterprise)

unless otherwise provided in the certificate of limited partnership, which of the following is true if Grey, one of the limited partners, dies?

Grey's personal representative will have all the rights of a limited partner for the purpose fo settling the estate.

During the winding up of a general partnership, what is the order of distributions in satisfaction of the following claims? I: Amounts owed to non partner creditors II: Amounts owed partners for the excess of credits over debits in their account III: Amounts owed partners for loans to the partnership

I and II share first priority

Stanley and Martin formed a partnership to engage in the trucking business. Stanley contributed the capital and Martin was to contribute the labor. However, Stanley did not want his name associated with the partnership due to interests in other trucking businesses. Martin was involved in an accident while carrying goods on behalf of the partnership. Which of the following would Stanley not be liable for as a result of the accident?

Illegal drug activities when Martin was also carrying illegal drugs in the truck unknown to Stanley

Harry, Harriet, and Horance operate the Triple H used car lot as a general partnership. Pursuant to their agreement, each drives a Triple H vehicle to and from work, makes various business trips about the city either from home or the lot, and keeps a "for sale" sign displayed in the vehicle's windshield. Each car is for sale at all times of the day and night and at any location. One afternoon, Harriet was driving on a business trip when her car collided with one driven by Paine, who was seriously injured. Harriet's conduct was found to be criminally negligent. In a tort action by Paine against Harry, Harriet, and Horance, both as individuals and as the Triple H partnership, who is liable?

all defendants because Harriet was acting within the ordinary course of the partnership business.

modern corporations wield a wide variety of powers. A corporation

can do anything permitted by the incorporation statute.

many states require partnerships to file the partnership name under laws known as fictitious name statues. These statutes

have little effect on the creation or operation of a partnership other than the imposition of a fine or other minor penalty for noncompliance.

honest errors of judgement

A partnership may be dissolved by a judicial determination sought by a partner. Which of the following is LEAST likely to be a reason for such a dissolution?

insolvency of a partner if the partnership is at will

which of the following statements about the form of a general partnership agreement is true?

it must be in writing if the partnership is to last for longer than 1 year.

corporation generally may

make contributions for charitable, scientific, or educational purposes

Woody Wilson and Garrent Lecy entered into a partnership for a 5-year period to repair appliances. Wilson did the work in the store and Levy made the service calls. Wilson discovered the Levy has been pocketing some of the payments for the service calls and not turning them all in to the partnership. Wilson

may bring suit to demand a formal accounting and dissolution of the partnership

Partners have a fiduciary relationship with each other. Accordingly, a partner

may not earn a secret profit in dealings with the partnership or partners

limited liability of shareholders is one of the advantages of incorporation. Generally, a shareholder is personally liable

only for his or her investment in the corporation

a major characteristic of the corporation is its recognition as a separate legal entity. As such, it is capable of withstanding attempts to "pierce the corporate veil." the corporation that is least likely to resist such attempt successfully is one that

only holds assets to defraud creditors

After dissolution, the only actual authority of a partner who is winding up is that needed to liquidate winding-up partner continues with regard to which of the following persons?

persons who had no previously extended credit, knew of the partnership, and had no knowledge or notice of dissolution.

The distinction between specific partnership property and a partner's property is important not only to the partners and the partnership but also to creditors, heirs, and others. Which of the following is true?

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