CPA Regulation (REG) : Agency Relationships

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Agency Relationships

Clarett, who owned a retail business, left a note on a desk Clarett thought was occupied by Franklen. The note stated, "Please contract to purchase 20,000 widgets at the best possible price from Eisen Corp. for delivery in March." The desk was actually being used by Saranz, who made a contract for the purchase of the widgets as specified. Saranz had little negotiating experience and contracted for a high price. Which of the following statements is correct regarding the authority held by Saranz?

Possible Answers:

Saranz had authority by ratification, so the contract is enforceable by Eisen.

Saranz did not have any authority to make the contract, so the contract is not enforceable by Eisen.

Saranz had actual authority to make the contract, so the contract is enforceable by Eisen.

Saranz had apparent, but not actual, authority to make the contract, so the contract is not enforceable by Eisen.

Correct answer:

Saranz had actual authority to make the contract, so the contract is enforceable by Eisen.

Explanation:

Since the note did not specify the intended agent (Franklen) and was left on Saranz’s desk, the note granted actual authority to Saranz to act on Clarett’s behalf as an agent. The agent’s skill in negotiating has no bearing on whether the contract is enforceable when actual authority has been given to the agent.

Example Question #2 : Agency Relationships

Tim’s Real Estate, Inc., employs David to buy city property for a future apartment complex. Through Construction Co., David’s own corporation, David secretly purchases a city property that David discovered while searching for property for Tim. David later arranges to have Construction Co. sell the property to Tim for more than Construction Co. paid for it. David has breached the duty of:

Possible Answers:

Loyalty

Indemnification

Care

Notification

Correct answer:

Loyalty

Explanation:

The duty of loyalty requires than an agent not engage in self-dealing or competing against the principal. The only other option that is a defined duty of an agent is care, in which the agent must carry out the agency by avoiding negligence.

Example Question #3 : Agency Relationships

Wilson gives Sussex power of attorney. In general, the power of attorney:

Possible Answers:

Must be signed by both Wilson and Sussex.

May limit Sussex’s authority to specific transactions.

May continue in existences after Wilson’s death.

Will be valid only if Sussex is a licensed attorney at law.

Correct answer:

May limit Sussex’s authority to specific transactions.

Explanation:

Power of attorney is generally used to provide an agent with authority to perform specific tasks. A power of attorney may be anyone, and only the principal must sign the power of attorney. Power of attorney lapses upon the death of the principal.

Example Question #4 : Agency Relationships

What is the doctrine under which a corporation is made liable for the torts of the corporation’s employees when the torts are committed within the scope of employment?

Possible Answers:

Ultra vires

Ratification

Estoppel

Respondeat superior

Correct answer:

Respondeat superior

Explanation:

Under the doctrine of respondeat superior, a principal, including a corporation can be held liable for an employee’s tort committed within the scope of employment.

Example Question #5 : Agency Relationships

Which of the following conditions must be met to form an agency?

Possible Answers:

The principal must possess contractual capacity

An agency agreement must be signed by both parties

The principal must furnish legally adequate consideration for the agent’s services

An agency agreement must be in writing

Correct answer:

The principal must possess contractual capacity

Explanation:

Formation of an agency relationship requires a principal who has contractual capacity.

Example Question #6 : Agency Relationships

Usually, an agent will be liable under a contract with a third party when the agent is acting on the behalf of who?

Possible Answers:

Disclosed principal

Undisclosed principal

Both

Neither

Correct answer:

Undisclosed principal

Explanation:

Generally, the agent would not be held liable on the contract that he or she makes on the principal’s behalf if the principal is disclosed however the agent would be personally liable on contracts made when the principal is undisclosed.

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