CPA Regulation Reg Quiz: Identify Agency Relationships And Authority

What this quiz covers

This quiz focuses on Identify Agency Relationships And Authority, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Regulation Reg.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. A written contract, compensation paid to the agent, and the agent's professional license.
2. 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. (correct answer)
3. A formal power of attorney, a notarized agreement, and a specific monetary consideration.
4. Court approval, a written agency agreement, and registration with the state.

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.

Question 2

1. Undisclosed principal, because the third party does not know the agent is acting for a principal. (correct answer)
2. Disclosed principal, because the purchase is for a legitimate business purpose.
3. Partially disclosed principal, because the agent signed the contract.
4. No principal relationship exists because the agent did not identify the 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.

Question 3

1. A special agent has broader authority than a general agent.
2. A general agent has limited authority to perform only one specific transaction.
3. 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. (correct answer)
4. A special agent must hold a government-issued license, while a general agent does not.

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.

Question 4

1. An agency relationship may only be terminated by the principal; the agent has no power to terminate.
2. An agency relationship may only be terminated by mutual agreement of both parties.
3. An agency relationship terminates automatically after one year.
4. 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. (correct answer)

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.

Question 5

1. Agency by estoppel arises when a formal agency agreement is later modified by the agent without the principal's knowledge.
2. 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. (correct answer)
3. Agency by estoppel arises automatically when a person performs services for another without compensation.
4. Agency by estoppel is a criminal law doctrine that holds agents liable for the principal's crimes.

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.

Question 6

1. A power of attorney that cannot be revoked by the principal.
2. 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. (correct answer)
3. A power of attorney that automatically renews every year.
4. A power of attorney that grants broader authority than a standard power of attorney.

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.

Question 7

1. 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. (correct answer)
2. An agent who has worked for the principal for more than five years.
3. An agent who has been given a power of attorney.
4. An agent who performs services for free and has a moral interest in helping the principal.

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.

Question 8

1. An agent must obey all instructions from the principal without exception, even if the instructions require illegal conduct.
2. 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. (correct answer)
3. An agent may ignore any instruction they personally disagree with.
4. 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.

Question 9

1. The agent owes only the duty of loyalty; all other duties may be waived by agreement.
2. 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). (correct answer)
3. The agent owes duties to third parties first and to the principal only secondarily.
4. 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.

Question 10

1. 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. (correct answer)
2. A disclosed principal is one who has publicly registered their agency relationships with the state.
3. A disclosed principal is one who personally co-signs all contracts made by their agent.
4. A disclosed principal is only bound by contracts made by agents who carry official identification.

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.

Question 11

1. The principal is only liable for misrepresentations the principal personally made.
2. The principal is never liable for the agent's misrepresentations because agents act independently.
3. The principal may be liable for the agent's misrepresentation if it was made within the scope of authority or within the scope of apparent authority created by the principal, even if the principal did not authorize or know of the specific misrepresentation. (correct answer)
4. The principal is liable only if the misrepresentation was made in writing.

Explanation: A principal may be vicariously liable for an agent's fraudulent or negligent misrepresentation if the misrepresentation was made within the scope of actual or apparent authority. The principal creates the situation enabling the agent to make representations, and the third party who relies on those representations may hold the principal responsible. Answer A is incorrect because vicarious liability extends to agent misrepresentations within scope. Answer B is incorrect because vicarious liability is a fundamental principle of agency law. Answer D is incorrect because oral misrepresentations within scope can also bind the principal.

Question 12

1. Gratuitous agents have no authority to bind the principal because they receive no compensation.
2. Gratuitous agents are not bound by any fiduciary duties because no contract exists.
3. Gratuitous agents are not recognized under the law because agency requires consideration.
4. A gratuitous agent has the same authority to bind the principal and owes the same fiduciary duties as a compensated agent; no consideration is required for an agency relationship. (correct answer)

Explanation: Agency does not require compensation (consideration). A gratuitous agent is legally recognized as an agent and has the same power to bind the principal within the scope of their authority. The gratuitous agent also owes the same fiduciary duties (loyalty, care, obedience) as a compensated agent. However, a gratuitous agent may have a lower standard of care in some jurisdictions because they are performing services as a favor. Answer A is incorrect because authority is not contingent on compensation. Answer B is incorrect because fiduciary duties exist regardless of compensation. Answer C is incorrect because agency does not require consideration.

Question 13

1. The sale is void because the agent lacked authority.
2. The sale is binding on the principal and the agent owes no duty to compensate the principal.
3. The sale is binding because the buyer acted in good faith.
4. The sale may be binding on the principal if the buyer had no notice of the price restriction (apparent authority), but the agent is liable to the principal for breaching their actual authority and any resulting loss. (correct answer)

Explanation: Even though the agent exceeded their actual authority (sell for no less than $200,000) by accepting$180,000, if the third party (buyer) was unaware of the price restriction, the principal may be bound under apparent authority principles. The agent had apparent authority to sell based on their role. However, the agent has breached their duty to the principal by violating the express restriction, and the principal may recover damages from the agent for the $20,000 shortfall. Answer A is incorrect because the contract is not automatically void if apparent authority existed. Answer B is incorrect because the agent breached their duty. Answer C is the right outcome (the sale may bind) but doesn't address the agent's breach.

Question 14

1. Authority that a third party reasonably believes the agent has based on the principal's conduct.
2. Authority that the agent reasonably believes they have based on the principal's communications or conduct toward the agent, whether express or implied. (correct answer)
3. Authority that exists only when confirmed in a written power of attorney.
4. Authority that an agent acquires after practicing in a particular profession for five years.

Explanation: Actual authority is authority that the agent reasonably believes they have as a result of the principal's manifestations to the agent, either expressly (through spoken or written words) or impliedly (through the circumstances or course of dealing). It is defined from the agent's perspective based on the principal's communications. Answer A describes apparent authority, which is determined from the third party's perspective based on the principal's conduct. Answer C is incorrect because actual authority does not require a written power of attorney. Answer D is incorrect because years of practice do not create actual authority.

Question 15

1. An agent signs a contract specifically authorized by the principal in a written agreement.
2. A third party believes the agent has authority because the agent has a professional-looking business card.
3. A manager of a retail store orders inventory from suppliers even though no express authorization to order was given, because such ordering is customary and necessary for a store manager. (correct answer)
4. A principal ratifies an unauthorized contract after the fact.

Explanation: Implied actual authority arises from the circumstances of the agency relationship and what is reasonably necessary or customary to carry out the agent's expressly granted duties. A store manager who is authorized to manage the store has implied authority to order inventory, hire staff, and perform other tasks customarily done by store managers, even without specific authorization for each task. Answer A describes express actual authority. Answer B describes apparent authority (based on third-party impression). Answer D describes ratification, not implied authority.

Question 16

1. An employee asks their employer for permission to act on the employer's behalf and receives no response.
2. An agent contracts with a third party believing it would be beneficial for the principal.
3. A principal grants an agent express authority through a signed contract.
4. A cargo ship's captain, unable to reach the ship's owners, sells perishable cargo to prevent total loss when the refrigeration system fails at sea. (correct answer)

Explanation: Agency by necessity arises in emergency situations where a person must act on another's behalf to prevent harm or loss, and there is no opportunity to consult with the actual principal. A ship's captain who sells perishable cargo to prevent total loss when unable to reach the owners is acting under necessity to protect the owner's interests. The authority arises from the emergency, not from any express or implied grant. Answer A describes a failed attempt to create express authority. Answer B describes implied authority or a belief-based action. Answer C is express authority.

Question 17

1. The principal would be bound under the doctrine of ratification.
2. The principal would not be bound because the agent exceeded actual authority.
3. The principal would be bound under the doctrine of respondeat superior.
4. The principal would most likely be bound under apparent authority, since the agent was authorized to negotiate leases (which creates apparent authority to do so) and the landlord had no notice of the internal restriction. (correct answer)

Explanation: The agent was given actual authority to negotiate leases, which creates apparent authority to enter into leases on standard commercial terms. The $5,000 limitation was an internal restriction unknown to the landlord. Under apparent authority, the principal is bound by the agent's contract because the landlord reasonably believed the agent had authority to negotiate the lease. The principal's remedy is against the agent for breaching actual authority. Answer A is incorrect because ratification applies to unauthorized acts adopted after the fact, not to apparent authority situations. Answer B ignores apparent authority. Answer C describes tort liability, not contract authority.

Question 18

1. An employee is always an independent contractor and the employer is the principal.
2. An employee is an agent only if the employee has signing authority.
3. An employee is not considered an agent of the employer because they are paid a salary.
4. An employee is a type of agent whose principal is the employer; the employer has the right to control not only the result of the employee's work but also the manner and means of performance. (correct answer)

Explanation: Under agency law, an employee is a type of agent. The employer-employee relationship satisfies the agency elements: the employee acts on behalf of the employer (principal), and the employer has the right to control not only the result of the work but also how the work is performed. This control over manner and means distinguishes employees from independent contractors. As agents, employees can bind the employer within the scope of their authority. Answer A is incorrect because employees are not independent contractors. Answer B is incorrect because signing authority is not required for agency. Answer C is incorrect because salary is irrelevant to agency classification.

Question 19

1. The principal owes no duties to the agent; the relationship is entirely one-sided.
2. The principal owes the agent duties including: to compensate the agent as agreed (if compensation was promised), to reimburse the agent for authorized expenses incurred on the principal's behalf, and to indemnify the agent for losses suffered while acting within authority. (correct answer)
3. The principal's only duty is to provide the agent with instructions.
4. The principal must provide the agent with unlimited authority to bind the principal.

Explanation: The agency relationship creates obligations that run both ways. The principal owes the agent: (1) to pay agreed compensation; (2) to reimburse reasonable expenses incurred in conducting the agency business; (3) to indemnify the agent against losses suffered or liability incurred while acting within authority; and (4) not to interfere with the agent's performance. Answer A is incorrect because the relationship creates mutual duties. Answer C is incorrect because instructions alone are not the only duty. Answer D is incorrect because the principal defines the scope of authority and is not required to provide unlimited authority.

Question 20

1. All existing leases are automatically void because the original agent's authority has terminated.
2. The existing leases remain binding on the principal only if the new agent re-signs them.
3. The existing leases remain fully binding on the principal because termination of the agent's authority does not affect contracts previously made within authority. (correct answer)
4. The existing leases are binding only until the new agent has been in place for 90 days.

Explanation: The termination of an agent's authority has no effect on contracts that were validly entered into while the agent had actual authority. The principal is bound by those past contracts regardless of subsequent changes in agency. Only future transactions are affected by the termination. Answer A is incorrect because past authorized contracts are not affected by termination. Answer B is incorrect because re-signing is not required. Answer D invents a 90-day rule that does not exist.