8.2 Agency Homework Questions

Question 1

Question CPA-01299

Lee repairs high-speed looms for Sew Corp., a clothing manufacturer. Which of the following circumstances best indicates that Lee is an employee of Sew and not an independent contractor?

1. Lee’s work requires a high degree of technical skill.
2. Lee’s work is not supervised by Sew personnel.
3. Lee’s tools are owned by Lee.
4. Lee is paid weekly by Sew.

Answer 1

Explanation

Choice ‘‘d’’ is correct. A clear example of an employee is one who works full time for the employer, uses the employer’s tools, is compensated on a time basis, and is subject to supervision of the employer in the details of the work. A clear example of an independent contractor is one who has a calling of his own, who uses his own tools, is hired for a particular job, is paid a given amount for the job, and follows his own discretion. Thus, payment on a weekly basis is an indication that a person is an employee rather than an independent contractor.

Choice ‘‘b’’ is incorrect. If Lee’s work is not supervised by Sews personnel, per the above, that would be an indication of independent contractor status.

Choice ‘‘c’’ is incorrect. Per the above, Lee’s ownership of his own tools would indicate that he is an independent contractor.

Choice ‘‘a’’ is incorrect. Work that requires a high degree of skill might be considered a calling or might be difficult to supervise. In any case, it would be indicative of independent contractor status.

Question 2

Question CPA-01303

Blue, a used car dealer, appointed Gage as an agent to sell Blue’s cars. Gage was authorized by Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a sub-agent. To whom does Vond owe a fiduciary duty?

1. Neither Blue nor Gage.
2. Blue only.
3. Both Blue and Gage.
4. Gage only.

Answer 2

Explanation

Choice ‘‘c’’ is correct. A subagent is one who assists the agent in the performance of his or her duties. When a subagent is appointed by an agent with authority to appoint a subagent, the subagent owes a duty to both the agent and the principal. Thus, choices ‘‘d’’, ‘‘b’’, and ‘‘a’’ are incorrect.

Question 3

Question CPA-01307

Which of the following statements is(are) correct regarding the relationship between an agent and a nondisclosed principal?

1. The principal is required to indemnify the agent for any contract entered into by the agent within the scope of the agency agreement.
2. The agent has the same actual authority as if the principal had been disclosed.
3. Neither I nor II.
4. I only.

C. II only.

1. Both I and II.

Answer 3

Explanation

Choice ‘‘d’’ is correct. A principal owes her agent the duty of indemnification, which is a type of reimbursement for costs and liabilities incurred by the agent as a result of authorized acts on behalf of the principal.

Actual authority is the authority that the agent reasonably believes she possesses because of the principal’s communications to the agent. The agent has the same actual authority whether the principal is disclosed or undisclosed.

Question 4

Question CPA-01309

Which of the following statements represent(s) a principal’s duty to an agent who works on a commission basis?

1. The principal is required to maintain pertinent records, account to the agent, and pay the agent according to the terms of their agreement.
2. The principal is required to reimburse the agent for all authorized expenses incurred unless the agreement calls for the agent to pay expenses out of the commission.
3. Neither I nor II.
4. II only.
5. Both I and II.
6. I only.

Answer 4

Explanation

Choice ‘‘c’’ is correct. A principal is required to pay its commissioned agent as agreed and thus must maintain sufficient records in order to do so. Therefore, statement I is true. Statement II is also true. Generally, a principal must indemnify an agent for all expenses the agent reasonably incurs on the principal’s behalf unless the parties have agreed otherwise.

Question 5

Question CPA-01311

Trent was retained, in writing, to act as Post’s agent for the sale of Post’s memorabilia collection. Which of the following statements is correct?

1. To be an agent, Trent must be at least 21 years of age.
2. Post would be liable to Trent if the collection was destroyed before Trent found a purchaser.
3. Neither I nor II.
4. Both I and II.
5. I only.
6. II only.

Answer 5

Explanation

Choice ‘‘a’’ is correct. I is incorrect because while a principal must have capacity, an agent need not have capacity; a minor may serve as an agent. II is incorrect because destruction of the subject matter of the agency constitutes a change in circumstances that will terminate the agency by operation of law and release the parties from their relationship.

Question 6

Question CPA-01312

Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to place purchase orders with Ogden’s suppliers. Thorp placed an order with Datz, Inc. on Ogden’s behalf after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of Ogden’s incapacity. Which of the following statements is correct concerning Ogden’s liability to Datz?

1. Ogden will not be liable because Ogden was a nondisclosed principal.
2. Ogden will be liable because Datz was not informed of Ogden’s incapacity.
3. Ogden will be liable because Thorp acted with express authority.
4. Ogden will not be liable because Thorp’s agency ended when Ogden was declared incompetent.

Answer 6

Explanation

Choice ‘‘d’’ is correct. An agency is terminated by operation of law upon the incapacity of the principal; no notice is needed.

Choice ‘‘b’’ is incorrect. An agency is terminated by operation of law upon the incapacity of the principal; notice to the third party with whom the agent deals is not necessary.

Choice ‘‘c’’ is incorrect. An agent’s authority is terminated by operation of law upon the incapacity of the principal regardless of whether the authority was express, implied, or apparent.

Choice ‘‘a’’ is incorrect. Ogden will not be liable because of the incapacity; Ogden’s status as a disclosed “5.

undisclosed principal is irrelevant.

Question 7

Question CPA-01314

Young Corp. hired Wilson as a sales representative for six months at a salary of $5,000 per month plus 6°/o of sales. Which of the following statements is correct?

1. The agreement between Young and Wilson formed an agency coupled with an interest.
2. The agreement between Young and Wilson is not enforceable unless it is in writing and signed by Wilson.
3. Young does not have the power to dismiss Wilson during the six-month period without cause.
4. Wilson is obligated to act solely in Young’s interest in matters concerning Young’s business.

Answer 7

Explanation

Choice ‘‘d’’ is correct. An agent owes the principal a duty of loyalty, which includes the duty to act solely in the principal’s interest in matters relating to the agency.

Choice ‘‘c’’ is incorrect. A principal has the power to terminate an agency relationship at any time, although the principal might be liable for damages if the termination is in breach of contract.

Choice ‘‘b’’ is incorrect. A contract for services need not be in writing unless it cannot be performed within one year. The service contract here is for six months.

Choice ‘‘a’’ is incorrect. An agency coupled with an interest arises only when the agent is given an interest in the subject matter of the agency. A sales commission is not a sufficient interest.

Question 8

Question CPA-01315

Which of the following actions requires an agent for a corporation to have a written agency agreement?

1. Retaining an attorney to collect a business debt owed the principal.
2. Purchasing office supplies for the principal’s business.
3. Purchasing an interest in undeveloped land for the principal.
4. Hiring an independent general contractor to renovate the principal’s office building.

Answer 8

Explanation

Choice ‘‘c’’ is correct. Generally, agency power may be granted orally, even if the agent enters into contracts that must be in writing to be enforceable. However, most states require an agency agreement to be in writing if the agent is to purchase or convey interests in land.

Choice ‘‘b’’ is incorrect. Generally, agency power may be granted orally. The power to buy office supplies need not be granted in writing.

Choice ‘‘d’’ is incorrect. Generally, agency power may be granted orally. The power to hire persons to perform services need not be granted in writing. (Note that repairing a building inv0lves a service and not an interest in land.)

Choice ‘‘a’’ is incorrect. Generally, agency power may be granted orally, even if the agent is to enter into contracts that must be in writing to be enforceable. The power to hire persons to perform services need not be granted in writing.

Question 9

Question CPA-01316

Bolt Corp. dismissed Ace as its general sales agent and notified all of Ace’s known customers by letter. Young Corp., a retail outlet located outside of Ace’s previously assigned sales territory, had never dealt with Ace. Young knew of Ace as a result of various business contacts. After his dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash deposit for 20°/o of the purchase price. It was not unusual for an agent in Ace’s previous position to receive cash deposits. In an action by Young against Bolt on the sales contract, Young wiII:

1. Win, because a principal is an insurer of an agent’s acts.
2. Lose, because Ace lacked any express authority to make the contract.
3. Win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority.
4. Lose, because Ace lacked any implied authority to make the contract.

Answer 9

Explanation

Choice ‘‘c’’ is correct. Although Bolt gave known customer’s notice of Ace’s dismissal, some courts might also require a notice placed in a newspaper to terminate Ace’s apparent authority as to people, like Young, who had heard of Ace.

Choice ‘‘d’’ is incorrect. Although Ace lacked implied authority, a court might find that he had apparent authority since Bolt had held Ace out as its agent previously.

Choice ‘‘b’’ is incorrect. Although Ace lacked express authority, a court might find that he had apparent authority since Bolt had held Ace out as its agent previously.

Choice ‘‘a’’ is incorrect. A principal is not an insurer of an agent’s acts. A principal is liable only when the agent acts with authority.

Question 10

Question CPA-01317

Easy Corp. is a real estate developer and regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names without disclosing Easy’s identity or relationship to the transaction. If a broker enters into a contract with a seller on Easy’s behalf:

1. The broker will not be personally bound by the contract because the broker has express authority to act.
2. Easy will not be liable for any negligent acts committed by the broker while acting on Easy’s behalf.
3. The broker will have the same actual authority as if Easy’s identity had been disclosed.
4. Easy will be bound by the contract because of the broker’s apparent authority.

Answer 10

Explanation

Choice ‘‘c’’ is correct. Actual authority arises from the communications between the principal and the agent. Whether the agent discloses the principal to the third party with whom the agent contracts has no effect on the communications between the principal and the agent.

Choice ‘‘d’’ is incorrect. Apparent authority arises from the communications between the principal and the third party with whom the agent deals. If the principal is undisclosed, as under the facts here, the third party has no idea that there is a principal, and so there are no communications between the third party and the principal from which apparent authority can arise.

Choice ‘‘b’’ is incorrect. A principal generally is not liable for an agent’s torts, but can be liable when the torts are authorized. The fact that the principal is undisclosed has no effect on this rule.

Choice ‘‘a’’ is incorrect. When a principal is undisclosed, the third party with whom the agent deals may hold either the agent or the principal liable on contracts that the agent enters into on the principal’s behalf.

Question 11

Question CPA-01319

Noll gives Carr a written power of attorney. Which of the following statements is correct regarding this power of attorney?

1. It may limit Carr’s authority to specific transactions.
2. It must be for a definite period of time.
3. It may continue in existence after Noll’s death.
4. It must be signed by both Noll and Carr.

Answer 11

Explanation

Choice ‘‘a’’ is correct. A power of attorney is a form of agency, and like all agencies the power of attorney agency relationship may be limited in scope of authority.

Choice ‘‘d’’ is incorrect. As a general rule, no writing is required to form an agency relationship, and even where a writing is required, the writing need only be signed by the principal (the one sought to be bound).

Choice ‘‘b’’ is incorrect. A power of attorney, like other agencies, need not explicitly state a duration.

Choice ‘‘c’’ is incorrect. A power of attorney, like all agencies, is terminated by the death of either the principal or the agent.

Question 12

Question CPA-01333

Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal?

1. Election to v0id the contract after disclosure of the principal.
2. Disclosure of the principal by the agent.
3. Ratification of the contract by the principal.
4. Performance of the contract by the agent.

Answer 12

Explanation

Choice ‘‘d’’ is correct. If the principal is undisclosed, the third party with whom the agent dealt can hold the agent liable on the contract.

Choice ‘‘b’’ is incorrect. A third party has no general right to discover the identity of an undisclosed principal.

Choice ‘‘c’’ is incorrect. A third party never has the right to force a principal to ratify a contract; only a principal has a right to choose to ratify an unauthorized contract.

Choice ‘‘a’’ is incorrect. As a general rule a third party who has contracted with an agent for an undisclosed principal has no right to rescind the contract upon subsequent disclosure of the principal. Such a right exists only if the nondisclosure was fraudulent.

Question 13

Question CPA-01335

North Inc. hired Sutter as a purchasing agent. North gave Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter was told not to purchase more than 300 of each appliance. Sutter contracted with Orr Corp. to purchase 500 tape recorders. Orr had been shown Sutter’s written authorization. Which of the following statements is correct?

1. North will not be liable to Orr because Sutter’s actual authority was exceeded.
2. Sutter will not be liable to reimburse North if North is liable to Orr.
3. North will be liable to Orr because of Sutter’s apparent authority.
4. Sutter will be liable to Orr because Sutter’s actual authority was exceeded.

Answer 13

Explanation

Choice ‘‘c’’ is correct. Here, Sutter had no actual authority because actual authority is that authority which the agent reasonably believes he has, and here North told Sutter that he no longer had authority to make unlimited purchases. There is no requirement that actual authority granted in writing be rescinded in writing. Nevertheless, North will be bound because Sutter had apparent authority. Apparent authority arises from a third party’s reasonable beliefs based on the principal’s communications directed toward the third party. Here, North had given Sutter written authorization to make purchases for North without limitation, and Orr had been shown the written authorization. North’s secret limitation on Sutter’s authority has no effect on Sutter’s apparent authority. Thus, North is liable to Orr for the purchase of all 500 recorders because Sutter had apparent authority.

Choice ‘‘d’’ is incorrect. An agent implicitly warrants to third parties with whom the agent deals that the agent has the authority the agent purports to have. Because Sutter had apparent authority, the warranty is not breached here and North is liable on the contract. However, North can hold Sutter liable for damages caused by Sutter’s breach of duty (purchasing more than actually was authorized).

Choice ‘‘b’’ is incorrect. An agent who exceeds his actual authority is liable to his principal for any damages caused by the excess. There is no requirement that actual authority granted in writing be rescinded in writing; the oral limitation on actual authority was valid between North and Sutter.

Choice ‘‘a’’ is incorrect. Although Sutter exceeded his actual authority, North will be liable because of Sutter’s apparent authority. Apparent authority arises from a third party’s reasonable beliefs of authority based on the principal’s holding the agent out. Where the principal has given the agent written authority, the agent has apparent authority consistent with the written authority, even after actual authority is terminated, until the written authority is retrieved.

Question 14

Question CPA-01339

A general agent’s apparent authority to bind her principal to contracts with third parties will cease without notice to those third parties when the:

1. Principal has received a discharge in bankruptcy under the liquidation provisions of the Bankruptcy Code.
2. Agent has fulfilled the purpose for which the agency relationship was created.
3. Time set forth in the agreement creating the agency relationship has expired.
4. Principal and agent have mutually agreed to end their relationship.

Answer 14

Explanation

Choice ‘‘a’’ is correct. Generally, a general agent’s apparent authority does not cease unless and until notice is given. However, if the principal has received a discharge in bankruptcy, notice is not required to terminate the agent’s apparent authority.

Choice ‘‘b’’ is incorrect. Apparent authority is based on the reasonable beliefs of the third party with whom the agent deals. Since third parties have no way of knowing whether an agency purpose has been fulfilled, notice is required to terminate agency power after fulfillment of the purpose.

Choice ‘‘c’’ is incorrect. Apparent authority is based on the reasonable beliefs of the third party with whom the agent deals. Since third parties have no way of knowing how long an agency is to last, notice is required to terminate agency power after the period of the agency has elapsed.

Choice ‘‘d’’ is incorrect. Apparent authority is based on the reasonable beliefs of the third party with whom the agent deals. Since third parties have no way of knowing whether the principal and agent have terminated their relationship, notice is required to terminate agency power after the principal and agent agree to terminate the relationship.

Question 15

Question CPA-01341

Starr is an agent of a disclosed principal, Maple. On May 1, Starr entered into an agreement with King Corp. on behalf of Maple that exceeded Starr’s authority as Maple’s agent. On May 5, King learned of Starr’s lack of authority and immediately notified Maple and Starr that it (King) was withdrawing from the May 1 agreement. On May 7, Maple ratified the May 1 agreement in its entirety. If King refuses to honor the agreement and Maple brings an action for breach of contract, Maple will:

1. Lose since King notified Starr and Maple of its withdrawal prior to Maple’s ratification.
2. Prevail since Maple’s capacity as a principal was known to Starr.
3. Lose since the May 1 agreement is v0id due to Starr’s lack of authority.
4. Prevail since the agreement of May 1 was ratified in its entirety.

Answer 15

Explanation

Choice ‘‘a’’ is correct. A third party may withdraw from a transaction or agreement entered into with an agent who exceeded his or her authority at any time prior to the principal’s ratification of the agent’s unauthorized acts. In this case King notified Maple of King’s withdrawal from the agreement on May 1, six days before Maple’s attempted ratification on May 7. Therefore, Maple’s action will fail.

Choice ‘‘d’’ is incorrect. An unauthorized transaction or agreement can be ratified only before the third party to the transaction or agreement withdraws. Here, King withdrew before Maple ratified.

Choice ‘‘b’’ is incorrect. An unauthorized transaction or agreement can be ratified only if the agent without authority claimed to be acting on behalf of the principal, but knowledge of the principal’s capacity does not prevent the third party from withdrawing once the third party learns that the transaction or agreement was unauthorized.

Choice ‘‘c’’ is incorrect. An unauthorized transaction or agreement by an agent is v0idable by the third party if the third party cancels the tranaction or agreement prior to the principal’s ratifying the transaction or agreement.

Because the principal may ratify (before the third party cancels) the transaction or agreement, the transaction or

agreement is not v0id.

Question 16

Question CPA-01819

Kent, without authority, contracted to buy computer equipment from Fox Corp. for Ace Corp. Kent told Fox that Kent was acting on Ace’s behalf. For Ace to ratify the contract with Fox,

1. Kent must have acted reasonably and in Ace’s best interest.
2. Kent must be a general agent of Ace.
3. Ace must know all material facts relating to the contract at the time it is ratified.
4. Ace must notify Fox that Ace intends to ratify the contract.

Answer 16

Explanation

Choice ‘‘c’’ is correct. In order to ratify the contract (ratification of an entire unauthorized act) between Kent and Fox, Ace (principal) must have knowledge of all material facts of the transaction (and want to ratify it) at the time of the ratification.

Choice ‘‘b’’ is incorrect. Ratification of an unauthorized act does not require that the party acting be a general agent.

Choice ‘‘d’’ is incorrect. The principal (Ace) need not give notice of the intent to ratify because the third party already presumed the principal was bound through the agent’s act.

Choice ‘‘a’’ is incorrect. There is no requirement that the agent must have acted reasonably and in the principal’s best interest; the principal is given the option to ratify even if the agent acted recklessly and in his own interest.

Question 17

Question CPA-04786

Which of the following acts, if committed by an agent, will cause a principal to be liable to a third party?

1. A negligent act committed by an employee outside the scope of employment that results in injury to a third party.
2. A negligent act committed by an independent contractor, in performance of the contract, which results in injury to a third party.
3. An intentional tort committed by an employee outside the scope of employment, which results in injury to a third party.
4. An employee’s failure to notify the employer of a dangerous condition that results in injury to a third party.

Answer 17

Explanation

Choice ‘‘d’’ is correct. An employer is liable for his or her own negligent acts. Under the doctrine of respondeat superior, an employer is also liable for the negligence of employees committed within the scope of employment. Failure to correct a dangerous condition that resulted in injury would be negligence by the employer. Failure of an employee to warn the employer would also be negligence by the employee. This would also subject the employer to liability under the doctrine of respondeat superior.

Choice ‘‘b’’ is incorrect because an employer is only liable for negligent acts of employees committed in the scope of employment. An employer is not usually liable for the negligent acts of independent contractors.

Choices ‘‘c’’ and ‘‘a’’ are incorrect. An employer is only liable for torts committed by employees within the scope of employment. The employer is not liable for torts committed outside the scope of employment.

Question 18

Question CPA-05031

Seth performs work for Stecker Corporation. Which of the following factors presents the strongest evidence that Seth is an independent contractor?

1. Stecker allows Seth to participate in all of Stecker’s benefit programs.
2. Seth has worked for Stecker for over 15 years on a regular basis.
3. Stecker does not control the manner in which Seth performs his work.
4. Seth says that he works as an independent contractor.

Answer 18

Explanation

Choice ‘‘c’’ is correct. The most important factor in determining whether a person is an independent contractor is the right to control the manner in which work is performed. An employer has the right to control the manner in which an employee performs his or her work but has little control over the manner in which work is performed by the work of an independent contractor.

Choice ‘‘d’’ is incorrect. Where the right to control performance of work is not clear, the courts will look to other factors in determining whether a person is an independent contractor. Seth’s statement that he is an independent contractor is some evidence that he is, but it is not as strong as choice ‘‘c’’.

Choice ‘‘b’’ is incorrect. An independent contractor generally has a business of his own. Evidence that a person has been working for another for 15 years \/1/0uld be more indicative of an employer-employee relationship than of an independent contractor-principal relationship.

Choice ‘‘a’’ is incorrect. Allowing a person to participate in company benefits usually implies that the person is an employee of the company.

Question 19

Question CPA-05032

Trumpette Real Properties employs Roger to buy city property for a future high-rise development. Roger knows a good deal when he sees one and secretly buys some of the property through his newly formed corporation, Sneak, Incorporated. Sneak later sells the property to Trumpette for more than Sneak paid for it. Roger has breached the duty of:

1. None of the above.
2. Notification.
3. Indemnification.
4. Loyalty.

Answer 19

Explanation

Choice ‘‘d’’ is correct. An agent owes a duty of loyalty to his principal. This duty includes the duties not to self­ deal, usurp opportunities, or have conflicts of interest with the principal. Roger’s purchase through his corporation, Sneak, was self-dealing and usurped an opportunity belonging to his principal.

Choice ‘‘c’’ is incorrect. The duty of indemnification is the duty to hold the agent harmless for liabilities the agent incurs on behalf of the principal.

Choice ‘‘b’’ is incorrect. The agent has a duty to notify the principal of all issues known to the agent. Choice ‘‘a’’ is incorrect per the above explanation.

Question 20

Question CPA-05556

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?

1. Ratification.
2. Estoppel.
3. Respondeat superior.
4. Ultra vires.

Answer 20

Explanation

Choice ‘‘c’’ is correct. 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.

Choice ‘‘d’’ is incorrect. Ultra vires is a doctrine limiting a corporation’s power to act outside the scope of the corporation’s stated purposes or statutory powers.

Choice ‘‘b’’ is incorrect. Corporation by estoppel prevents (stops) a party to a lawsuit from successfully arguing that an entity is not a corporation on account of the failure of the entity to comply fully and timely with all the provisions of state law with respect to the formation and operation of a corporation. The party is so prevented (‘‘estopped’’) on account of that party’s previously treating the entity as if the entity had been a properly-formed and properly-operated corporation.

Choice ‘‘a’’ is incorrect. Ratification occurs when a principal agrees to be bound by a previously unauthorized contract entered into by an agent on the principal’s behalf.

Question 21

Question CPA-05996

Which of the following is a prerequisite for the creation of an agency relationship?

1. The agency-principal relationship agreement must be in writing.
2. Consideration must be given.
3. The agent must have capacity.
4. The principal must have capacity.

Answer 21

Explanation

Choice ‘‘d’’ is correct. Creation of an agency relationship requires the consent of the parties and that the principal be competent (not a minor and not incompetent).

Choice ‘‘b’’ is incorrect. Consideration is not required to create an agency relationship.

Choice ‘‘c’’ is incorrect. The agent need not have capacity; only the principal need have capacity.

Choice ‘‘a’’ is incorrect. A writing to establish an agency-principal agreement is generally not needed unless: (i) the agent is to buy/sell land on behalf of the principal and/or (ii) the agency relationship cannot be performed within one year.

Question 22

Question CPA-06524

Which of the following terms best describes the relationship between a corporation and the CPA it hires to audit corporate books?

1. Employer and principal.
2. Employer and independent contractor.
3. Master and servant.
4. Employer and employee.

Answer 22

Explanation

Choice ‘‘b’’ is correct. An employer/independent contractor relationship arises when an employer hires someone to do a job but does not have control over the manner in which the work is performed. In performing and audit, a CPA must have independence with regard to how the audit is performed. Thus, an employer/independent contractor relationship arises.

Choice ‘‘d’’ is incorrect. An employer has control over the manner in which an employee performs his work. An employer does not have control over the methods that a CPA uses to perform an audit. Thus, the CPA is an independent contractor rather than an employee.

Choice ‘‘c’’ is incorrect. Master/servant is older terminology for employer/employee. Thus, this choice is wrong for the same reason that choice b is wrong.

Choice ‘‘a’’ is incorrect. An employer is a principal; the employee is the agent. In an agency relatinship there must be both a principal and an agent. There cannot be a principal/principal relationship.

Question 23

Question CPA-06899

Under agency law, which of the following statements best describes ratification?

1. A principal’s disav0wal of an agent’s unauthorized act.
2. A principal’s approval in advance of an agent’s acts.
3. A principal’s affirmation of an agent’s authorized act.
4. A principal’s affirmation of an agent’s unauthorized act.

Answer 23

Explanation

Choice ‘‘d’’ is correct. If (i) a person acts without authority but purportedly on behalf of a principal, (ii) the principal subsequently becomes aware of all of the material facts regarding the transaction, and (iii) the principal either expressly or by implication (e.g., by retaining the benefits of the transaction when he or she could have declined or returned the benefits) affirms the person’s unauthorized acts, a ratification has occurred.

Choice ‘‘c’’ is incorrect. For a ratification to occur, the agent must have acted without authority.

Choice ‘‘b’’ is incorrect. If a principal approves the agent’s acts in advance, the agent acts with authority; ratification inv0lves a situation in which the agent acts without authority.

Choice ‘‘a’’ is incorrect. Disav0wal of an agent’s unauthorized act is the opposite of ratification.

Question 24

Question CPA-08225

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

1. The principal must possess contractual capacity.
2. An agency agreement must be in writing.
3. An agency agreement must be signed by both parties.
4. The principal must furnish legally adequate consideration for the agent’s services.

Answer 24

Explanation

Choice ‘‘a’’ is correct. Formation of an agency relationship requires a principal who has contractual capacity. Choice ‘‘b’’ is incorrect. Formation of an agency relationship may be oral; a writing is not required.

Choice ‘‘c’’ is incorrect. Because an agency relationship may be formed without a writing, the agreement need not be signed by both parties.

Choice ‘‘d’’ is incorrect. Formation of an agency relationship requires consent of the parties, but consideration is not required.

Question 25

Answer 25

Explanation

Choice ‘‘c’’ is correct. If an agent breaches her fiduciary duty, the principal can terminate the agency and receive the remedy of a constructive trust to ensure that the principal can recover secret profits obtained by the agent because of the wrongful conduct.

Question 26

Question CPA-01313

When a valid contract is entered into by an agent on the principal’s behalf, in a nondisclosed principal situation, which of the following statements concerning the principal’s liability is correct?

Answer 26

Explanation

Choice ‘‘b’’ is correct. Once disclosed, an undisclosed principal can be held liable on a contract made on the principal’s behalf by an agent if the agent had authority. There is no need to ratify. In fact, an undisclosed principal can never ratify because a principal can ratify only when a person represents that the person is an agent acting with authority on the principal’s behalf when, in fact, the person lacks authority. When a principal is undisclosed, there is no representation of agency, and so, a prerequisite for ratification is missing.

Question 27

Question CPA-01318

An agent will usually be liable under a contract made with a third party when the agent is acting on behalf of a(an):

Answer 27

Explanation

Choice ‘‘d’’ is correct. An agent generally is not liable on contracts that the agent makes on the principal’s behalf if the principal is disclosed, but the agent is personally liable on contracts the agent makes on behalf of the principal when the principal is undisclosed.

Question 28

Question CPA-01331

Generally, a disclosed principal will be liable to third parties for its agent’s unauthorized misrepresentations if the agent is an:

Answer 28

Explanation

Choice ‘‘d’’ is correct. An employer is liable for torts of employees committed within the scope of employment. Employers are generally not liable for the torts of independent contractors.

Question 29

Question CPA-01337

Neal, an employee of Jordan, was delivering merchandise to a customer. On the way, Neal’s negligence caused a traffic accident that resulted in damages to a third party’s automobile. Who is liable to the third party?

Answer 29

Explanation

Choice ‘‘d’’ is correct. A tortfeasor is liable for the damages caused by his negligence. Thus, Neal is liable. Additionally, if the tortfeasor is an employee operating within the scope of his employment, his employer also is liable under the doctrine of repondeat superior. Thus, since Neal was Jordan’s employee and was delivering Jordan’s merchandise at the time of the accident, Jordan is also liable for the accident.

Question 30

Question CPA-04778

Under the agent’s duty to account, which of the following acts must a gratuitous agent perform?

Answer 30

Explanation

Choice ‘‘b’’ is correct. An agent is required to account timely and properly for money the agent spent while acting on behalf of the principal. As part of this duty, the agent must keep the principal’s money or property separate from the agent’s own money. Only choice ‘‘b’’ states that the agent must account for the principal’s property, but cannot commingle funds.

Question 31

Question CPA-05285

Part agreed to act as Young’s agent to sell Young’s land. Part was instructed to disclose that Part was acting as an agent but not to disclose Young’s identity. Part contracted with Rice for Rice to purchase the land. After Rice discovered Young’s identity, Young refused to fulfill the contract. Against whom does Rice have a cause of action?

Answer 31

Explanation

Choice ‘‘d’’ is correct. Once an undisclosed principal becomes known to the third party, the third party can elect to hold either the agent or the principal liable for breach of contract. Thus, both Part and Young can be held liable.