CPA LEVEL I Regulation (REG) PRACTICE EXAM Q & A 2024, Exams of Accounting

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CPA LEVEL I

Regulation (REG)

PRACTICE EXAM Q & A

1. Which of the following statements is true about the Sarbanes-Oxley Act of 2002 (SOX)? a) It applies only to publicly traded companies in the US. b) It requires auditors to report directly to the audit committee of the board of directors. c) It prohibits auditors from providing any non-audit services to their audit clients. d) It establishes the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing profession. Answer: d) It establishes the PCAOB to oversee the auditing profession. Rationale: SOX was enacted in response to a series of accounting scandals that undermined public confidence in the reliability of financial reporting. SOX aims to enhance the quality and independence of audits, improve corporate governance and accountability, and protect investors from fraud and misconduct. SOX applies to all companies that file reports with the Securities and Exchange Commission (SEC), not just publicly traded ones. SOX requires auditors to report directly to the audit committee, but does not prohibit them from providing certain non-audit services, as long as they are pre-approved by the audit committee and disclosed in the financial statements. SOX establishes the PCAOB as a nonprofit corporation that has the authority to set auditing standards, inspect audit firms, conduct investigations and disciplinary actions, and impose sanctions on auditors.
2. Which of the following is an example of a tax avoidance

precedent in deciding cases.* Rationale: A common law system is a legal system that originated in England and is based on judicial decisions as the primary source of law. In a common law system, judges follow the principle of stare decisis, which means "to stand by things decided". This means that judges are bound by the previous rulings of higher courts on similar issues, and they must provide reasons for their decisions. A civil law system, on the other hand, is a legal system that originated in continental Europe and is based on written codes or statutes as the primary source of law. In a civil law system, judges have less discretion and more reliance on codified rules and principles in interpreting and applying the law. Customary law is a type of unwritten law that derives from long-established practices or traditions of a particular community or group. Customary law may be recognized as a source of law in some legal systems, but not in others.

4. Which of the following is an example of an administrative agency? a) The Federal Reserve Board b) The Supreme Court c) The Congress d) The President Answer: a) The Federal Reserve Board Rationale: An administrative agency is a governmental body that has the power to make rules and regulations, enforce laws, adjudicate disputes, and perform other functions within its area of jurisdiction. Administrative agencies are created by statutes enacted by legislative

bodies, such as Congress, or by executive orders issued by executive authorities, such as the President. Administrative agencies are also known as regulatory agencies, independent agencies, or quasi-governmental entities. The Federal Reserve Board is an example of an administrative agency that regulates the banking and monetary system in the US. The Supreme Court is an example of a judicial branch that interprets and applies the Constitution and federal laws. The Congress is an example of a legislative branch that makes federal laws. The President is an example of an executive branch that enforces federal laws and appoints heads of administrative agencies.

5. Which of the following is a valid contract? a) A contract that is oral and not in writing. b) A contract that is made by a minor without parental consent. c) A contract that is induced by fraud or duress. d) A contract that is for an illegal purpose or against public policy. Answer: a) A contract that is oral and not in writing. Rationale: A contract is a legally binding agreement between two or more parties that creates rights and obligations for them. A valid contract must have four essential elements: offer, acceptance, consideration, and mutual assent. A contract may be oral or written, unless the law requires a specific form, such as a statute of frauds. A contract may be void or voidable if it lacks one or more of the essential elements, or if it violates a legal rule or principle. A contract made by a minor without parental

Answer: d) All of the above Rationale: Financial regulation aims to achieve multiple objectives, including promoting transparency and accountability, ensuring fair competition, and maintaining the stability of financial systems to protect the economy.

3. Which type of regulatory compliance focuses on the prevention and detection of money laundering and terrorist financing? a) Anti-Money Laundering (AML) b) General Data Protection Regulation (GDPR) c) Basel III d) Dodd-Frank Act Answer: a) Anti-Money Laundering (AML) Rationale: AML regulations require financial institutions to establish policies and procedures to prevent and detect money laundering activities, including customer due diligence, monitoring transactions, and reporting suspicious activities.
4. Which regulatory framework sets the standards for data protection and privacy in the European Union (EU)? a) International Financial Reporting Standards (IFRS) b) General Data Protection Regulation (GDPR) c) Sarbanes-Oxley Act (SOX) d) Basel Accords Answer: b) General Data Protection Regulation (GDPR) Rationale: The GDPR is a comprehensive data protection

and privacy law that sets out the principles and requirements for the processing and transfer of personal data within the EU.

5. Which regulation requires publicly traded companies in the United States to establish and maintain effective internal control over financial reporting? a) Securities Act of 1933 b) Securities Exchange Act of 1934 c) Sarbanes-Oxley Act of 2002 d) Dodd-Frank Wall Street Reform and Consumer Protection Act Answer: c) Sarbanes-Oxley Act of 2002 Rationale: The Sarbanes-Oxley Act (SOX) requires public companies to establish and maintain internal control over financial reporting, including the certification of financial statements by CEOs and CFOs.
6. Which regulatory body oversees the regulation and supervision of national banks and federal savings associations in the United States? a) Federal Deposit Insurance Corporation (FDIC) b) Federal Reserve System (Fed) c) Office of the Comptroller of the Currency (OCC) d) Consumer Financial Protection Bureau (CFPB) Answer: c) Office of the Comptroller of the Currency (OCC) Rationale: The OCC is an independent bureau within the

Protection Bureau (CFPB), which focuses on promoting fair and transparent financial practices and protecting consumers in their interactions with financial institutions.

9. Which regulatory reform aimed to address the "too big to fail" issue and strengthen the regulation of the financial industry after the 2008 financial crisis? a) Dodd-Frank Wall Street Reform and Consumer Protection Act b) Sarbanes-Oxley Act of 2002 c) Jumpstart Our Business Startups (JOBS) Act d) Gramm-Leach-Bliley Act Answer: a) Dodd-Frank Wall Street Reform and Consumer Protection Act Rationale: The Dodd-Frank Act introduced a wide range of regulatory reforms, including stricter capital requirements, enhanced oversight of systemic risks, and the establishment of the Consumer Financial Protection Bureau.
10. Which regulatory framework sets the international standards for accounting and financial reporting? a) International Financial Reporting Standards (IFRS) b) Generally Accepted Accounting Principles (GAAP) c) Basel Accords d) US Securities and Exchange Commission (SEC) rules Answer: a) International Financial Reporting Standards (IFRS) Rationale: IFRS is a set of accounting standards developed

by the International Accounting Standards Board (IASB) that aims to harmonize financial reporting worldwide and enhance comparability between different countries.

11. Which regulatory framework requires financial institutions to maintain a minimum level of capital in relation to their risk-weighted assets? a) Anti-Money Laundering (AML) b) General Data Protection Regulation (GDPR) c) Basel III d) Payment Card Industry Data Security Standard (PCI DSS) Answer: c) Basel III Rationale: Basel III establishes minimum capital requirements, including a Tier 1 capital ratio and a leverage ratio, to ensure that financial institutions maintain sufficient capital to absorb losses and support their operations.
12. Which type of regulation aims to prevent insider trading, market manipulation, and other fraudulent activities in financial markets? a) Consumer Financial Protection Act (CFPA) b) Dodd-Frank Wall Street Reform and Consumer Protection Act c) Market abuse regulations d) Volcker Rule Answer: c) Market abuse regulations Rationale: Market abuse regulations consist of rules and

fairness and efficiency in markets, protecting consumers and promoting economic growth.

15. Which regulatory framework requires companies to establish and maintain effective internal controls over financial reporting to prevent and detect fraud? a) Generally Accepted Accounting Principles (GAAP) b) International Financial Reporting Standards (IFRS) c) Sarbanes-Oxley Act of 2002 d) Payment Card Industry Data Security Standard (PCI DSS) Answer: c) Sarbanes-Oxley Act of 2002 Rationale: The Sarbanes-Oxley Act requires public companies to establish and maintain internal controls to ensure the reliability of financial reporting and prevent fraudulent activities. Which of the following best defines the concept of regulatory compliance? a) Adhering to laws and regulations that apply to a particular industry or activity b) Negotiating with regulatory bodies to achieve favorable outcomes c) Ignoring regulations that are deemed burdensome d) Seeking legal loopholes to avoid compliance Answer: a) Adhering to laws and regulations that apply to a particular industry or activity

Rationale: Regulatory compliance entails following the laws and regulations that pertain to a specific industry or activity to ensure ethical and legal operations. What is the primary purpose of the Securities and Exchange Commission (SEC) in the United States? a) Protecting investors and maintaining fair, orderly, and efficient markets b) Maximizing profits for publicly traded companies c) Minimizing government intervention in financial markets d) Enforcing strict regulations to stifle market innovation Answer: a) Protecting investors and maintaining fair, orderly, and efficient markets Rationale: The SEC's primary role is to safeguard investors and ensure the integrity and transparency of the securities markets. Which of the following is a key aspect of corporate governance as it relates to regulation? a) Ensuring compliance with environmental regulations b) Overseeing the day-to-day operations of the company c) Safeguarding the interests of shareholders and stakeholders d) Minimizing employee benefits to reduce costs Answer: c) Safeguarding the interests of shareholders and stakeholders Rationale: Corporate governance involves establishing

Rationale: The FDIC is tasked with insuring deposits, examining and supervising financial institutions for safety and soundness, and resolving failed banks. What is the purpose of the Dodd-Frank Wall Street Reform and Consumer Protection Act? a) Deregulating the financial industry to promote risk- taking b) Enhancing consumer protection and imposing regulations on the financial sector c) Privatizing government oversight of financial markets d) Promoting speculative trading and high-risk investments Answer: b) Enhancing consumer protection and imposing regulations on the financial sector Rationale: Dodd-Frank aims to prevent a recurrence of the 2008 financial crisis by promoting financial stability, enhancing transparency, and protecting consumers from abusive financial practices. Which of the following best describes the concept of regulatory arbitrage? a) Exploiting regulatory differences between jurisdictions to minimize compliance costs b) Aiming for universal compliance with all regulations across multiple jurisdictions c) Lobbying for the repeal of industry-specific regulations d) Ignoring regulations in favor of self-regulation by

industry participants Answer: a) Exploiting regulatory differences between jurisdictions to minimize compliance costs Rationale: Regulatory arbitrage involves taking advantage of variations in regulations across different jurisdictions to reduce compliance expenses or gain competitive advantages. What is the primary objective of the Food and Drug Administration (FDA) in the United States? a) Promoting the sale of untested and unsafe pharmaceuticals b) Ensuring the safety, efficacy, and security of human and veterinary drugs c) Allowing manufacturers to make unverified health claims about their products d) Minimizing the oversight of food and drug production processes Answer: b) Ensuring the safety, efficacy, and security of human and veterinary drugs Rationale: The FDA's core mission is to protect public health by regulating the safety and effectiveness of drugs, biological products, and medical devices. What is the purpose of the Sarbanes-Oxley Act (SOX) in the context of corporate governance? a) Relaxing financial reporting requirements for publicly traded companies

degradation b) Enforcing regulations to safeguard human health and the environment c) Allowing industries to operate without environmental oversight d) Encouraging the release of harmful chemicals into the environment Answer: b) Enforcing regulations to safeguard human health and the environment Rationale: The EPA's core mission is to protect human health and the environment by enforcing regulations that address pollution, waste management, and environmental hazards. Which of the following best describes the purpose of the General Data Protection Regulation (GDPR) in the European Union? a) Allowing unrestricted collection and processing of personal data b) Protecting the privacy and personal data of EU residents c) Limiting individuals' control over their personal information d) Facilitating the transfer of personal data to non-EU countries without consent Answer: b) Protecting the privacy and personal data of EU residents Rationale: The GDPR seeks to protect the privacy and

personal data of individuals within the EU by imposing stringent requirements on data controllers and processors. What is the primary goal of the Occupational Safety and Health Administration (OSHA) in the United States? a) Allowing employers to disregard workplace safety and health standards b) Enforcing regulations to ensure safe and healthy working conditions for employees c) Limiting employees' rights to a safe work environment d) Encouraging cost-cutting measures that compromise workplace safety Answer: b) Enforcing regulations to ensure safe and healthy working conditions for employees Rationale: OSHA aims to promote safe and healthful working conditions by setting and enforcing standards and by providing training, outreach, education, and assistance. Which regulatory body is responsible for overseeing the regulation of telecommunications and broadcasting in the United States? a) Federal Communications Commission (FCC) b) Department of Justice (DOJ) c) National Telecommunications and Information Administration (NTIA) d) Federal Trade Commission (FTC) Answer: a) Federal Communications Commission (FCC)