Identify Agency Relationships And Authority
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CPA Regulation (REG) › Identify Agency Relationships And Authority
Which of the following correctly identifies the essential elements that must exist for an agency relationship to be created?
Court approval, a written agency agreement, and registration with the state.
Consent of both the principal and the agent, the agent's agreement to act on behalf of the principal, and the principal's right to control the agent's conduct.
A written contract, compensation paid to the agent, and the agent's professional license.
A formal power of attorney, a notarized agreement, and a specific monetary consideration.
Explanation
An agency relationship requires three core elements: (1) mutual consent - both the principal and agent must agree to the relationship; (2) the agent acts on behalf of the principal - the agent represents the principal's interests; and (3) the principal has the right to control the agent's conduct. No written agreement, formal document, or compensation is required. Agency may be created by informal oral agreement. Answer A is incorrect because writing and compensation are not required. Answer C is incorrect because a power of attorney and consideration are not mandatory. Answer D is incorrect because no court approval or state registration is required.
An agent purchases office supplies on behalf of a principal. The agent's purchase contract does not mention that they are acting for anyone else. Is this an example of a disclosed, partially disclosed, or undisclosed principal situation?
No principal relationship exists because the agent did not identify the principal.
Disclosed principal, because the purchase is for a legitimate business purpose.
Partially disclosed principal, because the agent signed the contract.
Undisclosed principal, because the third party does not know the agent is acting for a principal.
Explanation
An undisclosed principal situation arises when a third party does not know that the agent is acting on behalf of any principal - they believe they are dealing with the agent personally. In this scenario, the agent purchased supplies without indicating they were acting for anyone else. The third party assumed they were dealing directly with the agent. Both the agent and the undisclosed principal may be held liable on the contract when the principal's identity is later revealed. Answer B is incorrect because business purpose has no bearing on the disclosure classification. Answer C describes a partially disclosed situation (where the third party knows there is a principal but not the principal's identity). Answer D is incorrect because the principal relationship exists even without disclosure.
Which of the following correctly identifies a 'special agent' as opposed to a 'general agent' in agency law?
A special agent must hold a government-issued license, while a general agent does not.
A general agent has limited authority to perform only one specific transaction.
A special agent has broader authority than a general agent.
A special agent is authorized to perform only a specific act or a limited category of acts on behalf of the principal, while a general agent has authority to conduct a series of transactions and manage a broader range of the principal's affairs.
Explanation
A general agent is authorized to conduct a series of transactions involving a continuity of service, such as a manager who runs a business on behalf of an absent owner. A special agent is authorized to perform only a specific transaction or a limited set of acts, such as a real estate agent retained only to sell a specific property. The scope of the special agent's authority is narrowly defined. Answer A reverses the comparison (special agents have narrower, not broader, authority). Answer B incorrectly describes the general agent. Answer D incorrectly requires licensing for special agents.
Under the law of agency, which of the following describes how an agency relationship may be terminated?
An agency relationship may only be terminated by the principal; the agent has no power to terminate.
An agency relationship terminates automatically after one year.
An agency relationship may only be terminated by mutual agreement of both parties.
An agency relationship may be terminated by: either party revoking or renouncing the relationship, completion of the agency's purpose, expiration of the agreed term, death or incapacity of either party, or certain other events such as bankruptcy.
Explanation
Agency relationships may be terminated in several ways: (1) by act of the parties - the principal may revoke the agent's authority or the agent may renounce the agency; (2) by operation of law - death or mental incapacity of either party, bankruptcy of either party in some cases, destruction of the subject matter, or a change in law making the agency purpose illegal; and (3) upon completion of the purpose for which the agency was created or expiration of the agreed term. Answer A is incorrect because agents may also terminate by renunciation. Answer B is incorrect because either party may terminate unilaterally (though this may give rise to liability for breach of contract). Answer C is incorrect because there is no automatic one-year termination.
Which of the following correctly describes the concept of 'agency by estoppel'?
Agency by estoppel arises when a formal agency agreement is later modified by the agent without the principal's knowledge.
Agency by estoppel (also called apparent authority or ostensible agency) arises when a principal's conduct causes a third party to reasonably believe that an agent has authority, and the third party relies on that belief to their detriment; the principal is estopped from denying the agency.
Agency by estoppel is a criminal law doctrine that holds agents liable for the principal's crimes.
Agency by estoppel arises automatically when a person performs services for another without compensation.
Explanation
Agency by estoppel is closely related to apparent authority. It arises when a principal's words or conduct reasonably lead a third party to believe that an agent has authority, and the third party relies on this belief to their detriment. The principal is then estopped (barred) from denying that an agency existed. This prevents principals from benefiting from third parties' reasonable reliance while disclaiming the agency relationship. Answer A incorrectly describes a modification scenario. Answer C is incorrect because gratuitous services do not automatically create agency by estoppel. Answer D is incorrect because this is a civil, not criminal, doctrine.
A power of attorney is a written instrument by which a principal appoints an agent. What is a 'durable' power of attorney?
A power of attorney that automatically renews every year.
A power of attorney that cannot be revoked by the principal.
A power of attorney that grants broader authority than a standard power of attorney.
A power of attorney that remains effective even if the principal subsequently becomes incapacitated or incompetent, because it contains language specifically stating that it survives the principal's incapacity.
Explanation
A durable power of attorney (DPOA) is a power of attorney that contains specific language (such as 'this power of attorney shall not be affected by my subsequent disability or incapacity') that allows the agent's authority to survive the principal's later incapacity. Under common law, a principal's incapacity would automatically terminate the agency; the DPOA is an exception created by statute in all states. Answer A is incorrect because a DPOA is still revocable by a competent principal. Answer C is incorrect because DPOAs do not automatically renew. Answer D is incorrect because the scope of authority granted is separate from the durability feature.
Which of the following circumstances would create an 'agency coupled with an interest,' making the agency irrevocable?
An agent who has a personal financial interest in the subject matter of the agency itself (not just an interest in receiving compensation for services), such as a lender who is given authority to collect debts on the borrower's behalf to repay the lender's own loan.
An agent who has been given a power of attorney.
An agent who performs services for free and has a moral interest in helping the principal.
An agent who has worked for the principal for more than five years.
Explanation
An agency coupled with an interest is one where the agent has a property interest in the subject matter of the agency itself (not merely an interest in earning compensation). This makes the agency irrevocable - the principal cannot terminate it without the agent's consent. A classic example is when a creditor is given authority to sell the debtor's property and apply the proceeds to the debt - the creditor has a direct financial interest in the subject matter (the property and the proceeds). Answer B (long service) does not create irrevocability. Answer C (power of attorney) is generally revocable unless it is both durable and coupled with an interest. Answer D (moral interest) does not create an irrevocable agency.
Under agency law, which of the following describes the agent's duty to obey the principal's instructions?
An agent must obey all instructions from the principal without exception, even if the instructions require illegal conduct.
An agent must follow all reasonable, lawful instructions from the principal; the agent need not and must not follow instructions that require illegal or unethical conduct.
An agent may ignore any instruction they personally disagree with.
The duty to obey applies only to written instructions; oral instructions may be disregarded.
Explanation
An agent owes the principal a duty to obey reasonable and lawful instructions. The agent is obligated to act in accordance with the principal's direction within the scope of the agency. However, this duty does not require the agent to perform illegal acts or acts that violate professional ethics. An agent must refuse instructions that are illegal or unethical. Answer A is incorrect because illegal or unethical instructions need not be followed. Answer C is incorrect because personal disagreement with a lawful instruction does not justify non-compliance. Answer D is incorrect because the duty to obey applies to oral instructions as well.
Which of the following correctly describes the duties an agent owes to the principal in an agency relationship?
The agent owes only the duty of loyalty; all other duties may be waived by agreement.
The agent owes fiduciary duties including: loyalty (acting in the principal's best interests), care (performing competently), obedience (following lawful instructions), and accounting (maintaining accurate records of the principal's property).
The agent owes duties to third parties first and to the principal only secondarily.
An agent's only duty is to complete the specific task they were assigned.
Explanation
An agent owes the principal several fiduciary duties: (1) duty of loyalty - to act solely in the principal's best interests and avoid conflicts; (2) duty of care - to act with reasonable skill and competence; (3) duty to obey - to follow lawful and reasonable instructions; (4) duty of accounting - to account for all money or property belonging to the principal; and (5) duty to inform - to communicate information relevant to the agency. Answer A is incorrect because loyalty is just one of several duties. Answer C is incorrect because agents owe primary fiduciary duties to the principal. Answer D incorrectly limits the duties to task completion only.
Which of the following correctly describes a 'disclosed principal' in an agency transaction?
A disclosed principal is one who personally co-signs all contracts made by their agent.
A disclosed principal is one whose identity is known to the third party at the time the agent makes the contract, so the third party knows they are dealing with an agent acting for a named or identified principal.
A disclosed principal is only bound by contracts made by agents who carry official identification.
A disclosed principal is one who has publicly registered their agency relationships with the state.
Explanation
A disclosed principal is one whose existence and identity are known to the third party at the time the contract is made. The third party knows they are dealing with an agent acting on behalf of a specific, identified principal. In this situation, the contract is generally between the principal and the third party, and the agent is not personally liable (absent personal guarantees). Answer B is incorrect because no public registration is required. Answer C is incorrect because co-signing is not required. Answer D is incorrect because there is no requirement for official identification.