Types of Agency relationships Flashcards
Frost’s accountant and business manager has the authority to
A. Mortgage Frost’s business property.
B. Obtain bank loans for Frost.
C. Insure Frost’s property against fire loss.
D. Sell Frost’s business.
C. Insure Frost’s property against fire loss.
An agent, such as a business manager, has implied authority to carry on the normal, day-to-day business activities of the firm. He may do things that are REASONABLY necessary to RUN THE BUSINESS, but may not take extraordinary steps without express authority.
Obtaining insurance is something that is likely to fall within this type of authority. Although it may be expensive, it is the kind of thing a prudent person does to protect property. It can be strongly argued that a person who runs a business properly takes out insurance as a matter of course
Wrong Answer
B. Obtain bank loans for Frost.
Taking out a bank loan is a fairly major commitment for the firm. An agent, such as a business manager, has implied authority to carry on the normal, day-to-day business activities of the firm. He may do things that are REASONABLY necessary to RUN THE BU.S.INESS, but may not take extraordinary steps without express authority. It is fairly clear that obtaining a loan is an extraordinary step.
Question #7 (AICPA.911111REG-BL)
Forming an agency relationship requires that
A. The agreement between the principal and agent
B. The principal and agent not be minors.
C. Both the principal and agent consent to the agency.
D. The agent’s authority be limited to the express grant of authority in the agency agreement.
C. Both the principal and agent consent to the agency.
There must be this mutual consent. A principal cannot force someone to work for him, and the agent cannot force the principal to give him a job.
Wrong Answer
A. The agreement between the principal and agent be supported by consideration.
Usually, the agent will receive compensation, and therefore the agreement will be supported by consideration. However, an agent may agree to work gratuitously. Consideration is common, but not REQUIRED.
Question #9 (AICPA.101100REG)
Which of the following terms best describes the relationship between a corporation and the CPA it hires to audit corporate books?
A. Employer and employee.
B. Employer and independent contractor.
C. Master and servant.
D. Employer and principal.
B. Employer and independent contractor.
An external auditor is an independent contractor for the audit client.
Wrong Answer
D. Employer and principal.
This choice is clearly wrong, but an external auditor is an independent contractor.
