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Wiley CPAexcel Exam Review 2014 Study Guide, Regulation by O. Ray Whittington

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Appendix A: Regulation Sample Examination

Testlet 1

1. Able, Bray, and Carry form a general partnership to produce and sell widgets. Able is a CPA, Bray has an MBA, and Carry has few skills. In their partnership agreement, they decide to split any profits they have in the following respective proportions: 45%, 45%, and 10%. They fail to agree on how they will share any losses. At the end of the first year of operations they have a large loss. Assuming each of the partners has sufficient assets to cover the loss of their partnership, how will they split the losses between Able, Bray, and Carry, respectively?

a. 45%, 45%, and 10%.

b. Equally.

c. It cannot be determined yet until they agree upon a loss-sharing plan.

d. A court of law will have to decide upon the way they will each share the loss.

2. CPAs must be concerned with their responsibilities in the performance of professional services. In performing an audit, a CPA

a. Is strictly liable for failure to exercise due professional care.

b. Is strictly liable for failure to detect management fraud.

c. Is not liable unless the CPA is found to be grossly negligent.

d. Is strictly liable for failure to detect illegal acts.

3. The Apex Surety Company wrote a general fidelity bond covering defalcations by the employees of Watson, Inc. Thereafter, Grand, an employee of Watson, embezzled $18,900 of company funds. When his activities were discovered, Apex paid Watson the full amount in accordance with the terms of the fidelity bond, and ...

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