Q&A Hero

Q: If a stockholder sues a CPA for common law 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 stockholder lacked privity to sue. B. The false statements were immaterial. C. The CPA did not financially benefit from the alleged fraud. D. The client contributed to the negligence.

Q: A(n) _____ fraud applies when a professional misstates a material fact and recklessly or grossly negligently fails to ascertain the truth of the statement. A. constructive B. scienter C. Ultramares D. fabrication

Q: Brown & Co., a CPA, issued an unqualified opinion on the financial statement 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 common law fraud against Brown, then to be successful, Safe must prove that in addition to other elements it: A. was in privity of contract with Brown. B. was not contributorily negligent. C. was in privity of contract with King. D. justifiably relied on the financial statements.

Q: Which of the following tests requires a professional to know the name of the nonclient who will use his/her work product and the particular purpose for which that person will use the work product? A. Restatement test B. Primary benefit test C. Foreseeable users test D. Scienter test

Q: In a state that has adopted the Ultramares rule and uses the primary benefit test, who amongst the following may hold an accountant liable for common law negligence? A. Only the client. B. Only the client and a third party that the accountant knew would rely on the accountant's work for a particular purpose. C. Only the client. A third party that the accountant knew would rely on the accountant's work for a particular purpose, and others who are in the same limited class as that third party. D. Any third party that is a foreseeable user of the accountant's work may hold him/her liable if that third party suffers a loss as a direct result of the accountant's negligence.

Q: In a state that uses the Restatement (Second) of Torts of 1965, who amongst the following may hold an accountant liable for common law negligence? A. Only the client. B. Only the client and a third party that the accountant knew would rely on the accountant's work for a particular purpose. C. Only the client. A third party that the accountant knew would rely on the accountant's work for a particular purpose, and others who are in the same limited class as that third party. D. Any third party that is a foreseeable user of the accountant's work may hold him/her liable if that third party suffers a loss as a direct result of the accountant's negligence.

Q: If a client establishes fraud against a professional, he/she is more likely to receive: A. compensatory and consequential damages. B. punitive and consequential damages. C. compensatory and punitive damages. D. only consequential damages.

Q: Professionals are sued under securities law usually by: A. clients. B. brokers. C. partners. D. third parties.

Q: In which of the following contexts is a professional most likely to experience a nonclient action? A. An accountant who prepares and audits financial statements of companies. B. A consultant who gives advice to companies for improving performance. C. A securities broker who provides investment advice to retail investors. D. An attorney who advises companies on corporation and business laws.

Q: The central requirement for the primary benefit test is: A. breach of contract. B. fraud. C. privity of contract. D. breach of trust.

Q: Which of the following is sufficient to establish that a professional has acted with scienter for purposes of common law fraud? A. The professional's careless consideration for the accuracy of his/her work. B. The professional's reckless ignorance of facts. C. The professional's failure to exercise due diligence. D. The professional's negligent misstatement of fact.

Q: In which of the following statements concerning a CPA firm's action is scienter or its equivalent absent? A. Having actual knowledge of fraud. B. Performing substandard auditing procedures. C. Reckless disregard for accuracy in one's work. D. Intent to profit by concealing fraud.

Q: A client may receive _____ damages for a breach of contract or negligence. A. only consequential B. only punitive C. consequential and punitive D. only compensatory

Q: Ritz Co. wished to acquire Smart Inc. In conjunction with its plan of acquisition, Ritz hired Felix, a CPA, to audit the financial statements of Smart. Based on the audited financial statements and Felix's unqualified opinion, Ritz acquired Smart. Within six months, it was discovered that the inventory of Smart had been overstated by $500,000. Ritz commenced an action against Felix. Ritz believes that Felix failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is unable to prove that Felix either intentionally deceived it or showed a reckless disregard for the truth. Ritz is also unable to prove that Felix had any knowledge that the inventory was overstated. Which of the following would provide Ritz with a proper basis for prevailing in a lawsuit against Felix? A. Negligence and breach of contract B. Gross negligence and fraud C. Negligence and fraud D. Gross negligence and breach of contract

Q: Which of the following is authorized to conduct periodic inspections of nonprivate company auditors in order to assess whether they are complying with the requirements of the Sarbanes-Oxley Act? A. The Public Company Accounting Oversight Board B. The Securities Exchange Commission C. The Federal Trade Commission D. The Internal Revenue Service

Q: A professional is not liable for breach of contract if the: A. professional lacks the required educational qualifications. B. client has opposed delegation of duties. C. client obstructs the performance of the contract. D. professional has not included such liability in the contract.

Q: Which of the following professional liabilities is based on the common law concepts of negligence? A. Penal liability B. Tort liability C. Primary liability D. Contractual liability

Q: Brady, a CPA, is hired by Stanlee Inc., to audit its financial statements. Due to his negligence, Brady fails to discover that Tom, chairman the board of directors of Stanlee, has embezzled $300,000 of the company funds. Brady finishes the audit and issues an unqualified opinion. Six months later, Brady reads in the newspapers that Tom has been caught for embezzling a total of $800,000 of company funds. Tom has resigned and the company funds have been fully recovered from him. Stanlee sues Brady. How much is Brady liable for? A. $300,000 B. $1,100,000 C. $800,000 D. $500,000

Q: If a state offers a granted privilege, like accountant-client privilege then the federal courts in that jurisdiction will also allow that privilege.

Q: One of the elements necessary to hold a CPA liable to a client for conducting an audit negligently is that the CPA: A. acted with scienter or guilty knowledge. B. was a fiduciary of the client. C. failed to exercise reasonable care. D. executed a fraudulent engagement letter.

Q: Judge Blue is evaluating a case of professional negligence involving a claim against an auditor. Where will Judge Blue look to determine what the ordinary standard of care is for the auditing profession? A. The auditing industry, in particular the GAAS or Generally Accepted Auditing Standards and any other standards the industry has implemented. B. The United States Department of Labor. C. The Secretary of State office in the state where the business is incorporated. D. The shareholders of the corporation in questioned.

Q: Mr. Orange is an accountant at a publically traded corporation. In order to meet the standard of the skill of a professional account what should Mr. Orange have knowledge of? A. Calculus and trigonometry B. Generally accepted accounting principles (GAAP) C. The Professional Rules of Responsibility for Attorneys D. The advisory opinions this year of the Internal Revenue Service (IRS)

Q: By issuing a qualified opinion, an auditor escapes liability for defects in financial statements audited by the auditor. FALSE

Q: The Securities Exchange Act of 1934 does not impose any criminal liability for violation of any provision of the 1934 Act.

Q: An accountant can be required to bring his/her working papers into court and to testify as to matters involving the client's tax records and discussions with the client regarding tax matters.

Q: The work papers and documents that a professional receives from a client to perform services like auditing or accounting will remain the property of the client.

Q: Under Section 11 of the Securities Act of 1933, an auditor may escape liability by proving he/she had no reason to believe and did not believe that there were any misstatements or omissions of material fact in the financial statements he/she audited.

Q: Proof of aiding and abetting another person's securities violation is not sufficient misconduct to overcome the privity requirement of Securities Act Section 12(a)(2).

Q: Under two of the subsections of Section 17(a) of the Securities Act of 1933, an investor need prove only negligence by the accountant.

Q: Under Section 11 of the Securities Act of 1933, an underwriter is liable for errors in the entire Securities Act registration statement because an underwriter is an expert.

Q: A professional may delegate his/her duty without the consent of the client.

Q: An accountant performing an audit of a client has a specific duty to uncover an employee's embezzlement from the client.

Q: The duty of trust requires a professional to maintain confidentiality.

Q: Usually, only clients sue professionals under the securities law.

Q: Mr. Blue is a very good accountant at Supermart Inc. Mr. Blue acts with great care and accuracy. But with changing laws and various inaccurate information provided to him by other employees, Mr. Blue is responsible for a Supermart Inc. owing the IRS $50,000. The CEO of Supermart Inc. wants to discharge and sue Mr. Blue for failure to excise professional care (i.e., professional negligence). Mr. Blue based on facts is liable for professional negligence and can be discharged and sued for the mistake.

Q: Courts and legislatures in dealing with professional negligence usually defer to the members of a profession to determine what the professional standard should be.

Q: Under the Sarbanes-Oxley Act of 2002, public accounting firms that audit financial statements of public companies are required to register with the Public Company Accounting Oversight Board and submit to its rules.

Q: Professionals' tort liability to their clients may be based only on the common law concepts of negligence and fraud.

Q: Which of the following could be considered as an "insider" under the 1934 Securities and Exchange Act? A. Directors of the corporation B. Any employee entrusted with information that is being held secret to the public C. The Secretary of State D. Both A & B

Q: Mel is a securities broker who holds shares in Beanbag Inc. Mel does not disclose this to his customer Kim, whom he advises to buy Beanbag shares. Mel hopes that by not disclosing his conflict of interest, he will influence Kim to buy the shares. Kim, believing the information on Beanbag shares is given from Mel's disinterested point of view, declares that buying Beanbag shares "sounds like an excellent idea" and purchases the shares. Which of the following statements is most accurate? A. Kim cannot hold Mel liable because Mel did not make a misstatement of material fact. B. Kim will have to prove that Mel acted negligently in order to prove a Rule 10b-5 violation. C. Kim will most likely be able to make a successful claim against Mel under Rule 10b-5. D. Mel did not have a duty to disclose his conflict of interest to Kim.

Q: The general duty of professionals requires them to be guarantors of the accuracy of their work.

Q: The professional's duty to exercise reasonable care is a subset of the negligence standard of tort law.

Q: Joe Smith is a recent graduate from Sunset College. While at Sunset College he majored in Business. In his interview for an auditor position at Supermart Inc. Mr. Smith convinced the hiring manager he knew enough accounting to perform the job, but in fact Mr. Smith does not understand Generally Accepted Auditing Standards (GAAS). Mr. Smith has failed to show professional care and could be liable for his actions as an auditor because of his lack of skills.

Q: Which of the following is true about shareholder proposals and eligibility of shareholders to get their proposals included by a corporation in its proxy statement? A. A shareholder must own at least 0.5 percent of the securities to be voted at the shareholders' meeting. B. An eligible shareholder may submit only one proposal per shareholder meeting. C. The shareholder proposal and its supporting statement may not exceed 1500 words. D. A shareholder must own at least $1,000 of the securities to be voted at the shareholders' meeting.

Q: Section 404 of the Sarbanes-Oxley Act of 2002 is considered controversial because: A. sensitive corporate information has to be published which may be detrimental to a company. B. a company has to significantly increase its budget to comply with Section 404. C. the procedure for complying with Section 404 is lengthy, complicated, and time consuming. D. Section 404 results in diminished corporate responsibility of the officers of a company.

Q: Baronet Company is a publicly owned company whose shares are traded on the NYSE. Baronet acquired a small manufacturing plant in Nevada as part of its strategic growth plan. Under the 1934 Act, which of the following reports must Baronet file with the SEC within four business days of this event? A. The 10-K B. The 8-Q C. The 10-Q D. The 8-K

Q: To prove his/her due diligence defense under Securities Act Section 11 with regard to audited financial statements, an officer of the issuer must prove which of the following? A. The officer made a reasonable investigation into the accuracy of the audited financial statements. B. The officer believed the financial statements did not omit or misstate a material fact. C. The officer had no intent to misstate or omit a material fact in the audited financial statements. D. The officer had no reason to believe the financial statements omitted or misstated a material fact.

Q: In a due diligence meeting, officers and experts confer with each other for the purpose of: A. increasing corporate transparency and responsibility. B. ascertaining that the registration statement contains no misstatements or omissions of material fact. C. creating strategies for maximizing capital raised from public issue of securities. D. issuing a proxy solicitation document for issuance of securities.

Q: Barchrome Company issued debentures in November 1996 to raise capital to finance a new manufacturing plant. John was one of the small investors who bought those debentures. In December 2000, John discovered that Barchrome's registration statement contained material misstatements (it had overstated current assets by 11 percent and sales by 8 percent). John sued Barchrome in January 2001. Is Barchrome liable? A. Yes, Barchrome is liable under Section 12(a)(2) of the 1933 Act. B. No, Barchrome is not liable because the statute of limitations under Section 12(a)(2) has run out. C. No, Barchrome is not liable because the statute of limitations under Section 11 has run out. D. Yes, Barchrome is liable under Section 11 of the 1933 Act.

Q: What section of the 1933 Securities Act provides for criminal liability for securities violations under the act? A. Section 24 B. Section 5 C. Section 7 D. Section 31

Q: Which of the following issuers must register securities with the SEC under the 1934 Act? A. An issuer with total assets of $12 million, whose debentures are traded in interstate commerce and are held by 600 holders. B. An issuer with total assets of $9 million, whose stocks are traded in intrastate commerce and are held by 700 holders. C. An issuer with total assets of $14 million, whose debentures are traded in interstate commerce and are held by 300 holders. D. An issuer with total assets of $8 million, whose stocks are traded in intrastate commerce and are held by 400 holders.

Q: 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 which of the following? A. Defendant's intent to deceive: yes; Plaintiff's reliance on the registration statement: yes. B. Defendant's intent to deceive: yes; Plaintiff's reliance on the registration statement: no. C. Defendant's intent to deceive: no; Plaintiff's reliance on the registration statement: yes. D. Defendant's intent to deceive: no; Plaintiff's reliance on the registration statement: no.

Q: A plaintiff wishes to recover damages from the issuer for losses resulting from material misstatements in a securities registration statement. In order to be successful under Section 11 of the 1933 Act, one of the elements the plaintiff must prove is that the: A. plaintiff was in privity of contract with the issuer. B. plaintiff relied on the misstatement or omission in the registration statement. C. issuer acted negligently. D. issuer is in one of the classes of persons liable under Section 11.

Q: Under Section 11 of the Securities Act of 1933, a defendant (other than the issuer) may establish a defense to liability if the defendant can prove that he/she acted: A. with due diligence. B. with scienter. C. without scienter. D. without due diligence.

Q: An offering circular is a disclosure document required under Regulation A of the SEC for a(n) _____ offering exemption from the registration provisions of the 1933 Act. A. intrastate B. interstate C. private D. small

Q: Eastern Company wants to make an offering of securities exempt from registration under Rule 504 of the Securities Act of 1933. Which of the following is a requirement of Rule 504? A. Eastern may sell to no more than 35 unaccredited purchasers. B. Eastern must sell only to investors who are able to protect themselves by making informed investment decisions. C. Eastern must be a nonpublic issuer under the Securities Exchange Act. D. Eastern may not make any general solicitations of investors.

Q: Carmen Company wants to make an offering of securities exempt from registration under Rule 505 of the Securities Act of 1933. In order to do this, Carmen: A. may sell to 50 unaccredited purchasers. B. may sell to any number of accredited purchasers. C. may only sell to purchasers sophisticated in investment matters. D. cannot restrict resale of securities for one year.

Q: Northern Company is a small issuer who wishes to solicit investors to buy its securities during the pre-filing period. As the advertising budget of the company is not large, Northern has decided to advertise during the pre-filing period by using a Website. This solicitation of shares is: A. in violation of the Prohibition of Solicitation Act. B. permitted as the Internet has strong potential for attracting investors. C. in violation of Rule 505 and Rule 506 of Regulation D. D. allowed provided SEC gives written permission.

Q: As per Section 4(2) of the 1993 Act, registration is not required for: A. transactions which are done by non-charitable organizations. B. transactions by agricultural corporations. C. interstate securities transactions. D. transactions by an issuer which does not involve a public offering.

Q: The SEC has defined the intrastate offering exemption more precisely in Rule 147. According to this rule: A. intrastate resale of such securities is permitted for nine months. B. interstate resale of such securities is permitted for nine months. C. intrastate resale of such securities is permitted for twelve months. D. interstate resale of such securities is permitted for twelve months.

Q: Section 4(2) of the 1933 Act covers the _____ offering exemption from the registration provisions. A. intrastate B. interstate C. private D. small

Q: What is the term for the period of time when a security may be offered and sold to the public under section 5 of the 1933 Securities Act? A. The waiting period B. The post-effective period C. The pre-filing period D. The mediation phase

Q: Which of the following is an example of a transaction exemption from the registration requirements of the 1933 Act? A. Securities issued by municipal governments in the United States and offered solely to banks. B. Securities issued by nonprofit charitable organizations and offered solely to institutional investors. C. Securities issued by banks and offered solely to investors sophisticated in investment matters. D. Securities issued by for-profit corporations and offered solely to intrastate investors.

Q: Jargons Company is a well-known and seasoned public issuer of securities. It is going to file a registration statement with the SEC on February 1, 2012 for a new security offering. Rule 163 of the 1933 Act will allow it to use a _____ in January 2012. A. final prospectus B. Communications Not Deemed a Prospectus C. free-writing prospectus D. preliminary prospectus

Q: Under the 1933 Act, which of the following is allowed to state the price at which the securities will be offered? A. A notice about a prospective offering published during the pre-filing period B. A tombstone ad C. A free-writing prospectus D. A preliminary prospectus

Q: Section 5 of the 1933 Act permits the securities to be offered but not sold during the _____ period. A. pre-filing B. quiet C. waiting D. post-effective

Q: What federal law has established three important time periods in the filing of shares to public shareholders? A. Securities Act of 1933 B. Dodd Frank Act of 2010 C. Sarbanes Oxley Act of 2002 D. Homeland Security Act of 2002

Q: A(n) _____ is the basic selling document of a security offering registered under the 1933 Act. A. prospectus B. investment letter C. registration statement D. suitability letter

Q: _____ creates three important periods of time in the life of a securities offering: (1) the pre-filing period, (2) the waiting period, and (3) the post-effective period. A. Section 3 of the 1934 Act B. Section 17 of the 1933 Act C. Section 12 of the 1934 Act D. Section 5 of the 1933 Act

Q: Baronial Company plans to make a registered offering of its preferred shares pursuant to the Securities Act of 1933. After filing a registration statement with the Securities and Exchange Commission but prior to its effective date, which of the following will violate Section 5 of the Securities Act of 1933? A. Sending letters to 50 prospective investors noting that projected earnings are up 15 percent. B. An oral offer at a sales meeting attended by 50 prospective investors. C. An oral offer to sell the shares made by telephone to 50 prospective investors. D. In-person oral offers to sell the shares to 50 prospective investors.

Q: One of the two principal regulatory components of the 1933 Act is: A. distribution provisions. B. restricted provisions. C. registration provisions. D. disclosure provisions.

Q: Under the Securities Act of 1933, the registration of securities which are offered to the public in interstate commerce is: A. directed toward minimizing investor exposure to financially risky securities. B. not required unless the issuer is a corporation. C. mandatory unless the cost to the issuer is "prohibitive" as defined in the SEC regulations. D. required unless the offering or the securities are exempt from registration.

Q: The _____ underwriting is typically used only to sell common shares to existing shareholders pursuant to a preemptive rights offering. A. standby B. sponsorship C. best efforts D. firm commitment

Q: The _____ underwriting is used when an issuer is not well established and the underwriter is unwilling to risk being unable to sell the securities. A. standby B. sponsorship C. best efforts D. firm commitment

Q: The classic underwriting arrangement is a _____ underwriting. A. standby B. sponsorship C. best efforts D. firm commitment

Q: The Securities Act of 1933 and the Securities Exchange Act of 1934 are what kind of law? A. Federal statutes B. State statutes C. Administrative rules D. Common Law decisions

Q: Which of the following instruments is NOT considered as security? A. Mortgage notes B. Treasury stock C. Certificate of interest D. Investment contract

Q: The judicial branch of the SEC: A. promulgates rules and regulations. B. decides whether a person has violated the securities laws. C. makes new laws regulating securities. D. brings enforcement actions against alleged violators.

Q: The SEC does NOT have the power to: A. direct a defendant to stop violating the securities laws. B. impose fines for violation of securities laws. C. desist a defendant from future violations of securities laws. D. issue injunctions against alleged violators of securities laws.

Q: As per the test laid down by the Supreme Court (in United States v. Chiarella), the definition of insiders includes not only officers and directors of the company but also anyone who has been entrusted with corporate information for a corporate purpose.