Chapter 5 Practice Questions
1. Bring-down due diligence is best described as which of the following?
A. Due diligence undertaken by outside auditors, intended to confirm the accuracy of the company’s financial statements
B. Due diligence undertaken by outside lawyers, intended to confirm that company management has observed corporate formalities and that legal records are in order
C. Due diligence undertaken before agreeing to be retained by a potential client, intended to avoid potential conflicts of interest
D. Due diligence undertaken before a deal is finalized, intended to confirm that prior information is still valid
2. A person is asserting a due diligence defense against liability for false statements contained in a registration statement. The person claims to have conducted a reasonable investigation. Which of the following is not a “relevant circumstance” for determining that person’s liability?
A. For an issuer, whether the issuer could reasonably have learned of a misstatement in a registration statement
B. For an underwriter, what type of underwriting arrangement the underwriter has with the issuer
C. For an individual officer of an issuer, what office the person holds
D. For a proposed director of an issuer, whether the individual could reasonably have learned of a misstatement in a registration statement
3. Which of the following is an example of an investment bank performing financial and accounting due diligence on a company?
A. Requesting that the company’s accountant provide a comfort letter stating that the company’s financial statements are accurate
B. Conducting a site visit of the company’s main facility
C. Searching public records for any pending litigation against the company
D. Reviewing previous due diligence just before a deal is finalized
4. An investment bank is performing due diligence on a potential client, in the hope of becoming the underwriter for the com