Professional Documents
Culture Documents
CHAPTER 5
Agency
TRUE-FALSE QUESTIONS
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
3. Whether a person is an independent contractor or an employee depends on what he or she does, not
how the relationship is characterized by the parties.
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CHAPTER 5 AGENCY 63
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
5. An independent contractor is also considered an employee of the person for whom work is being
done.
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
6. The Electronic Signatures in Global and National Commerce Act provides that contracts executed by
electronic agents are invalid.
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
7. Implied ratification of an agent’s unauthorized acts can occur through the silence of the principal.
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
8. The respondeat superior doctrine typically applies to the actions of independent contractors.
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
9. The principal has the right to demand reimbursement from the agent for any damages paid to a third
party because of an agent’s negligence.
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
10. The fact that leased workers are on the payroll of an employment agency does not preclude them
from being considered employees of the company at which they are actually working on a joint
employer theory.
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
64 MANAGERS AND THE LEGAL ENVIRONMENT
11. The term “usual authority” refers to the authority that an agent has been allowed to exercise in the
past.
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
12. An agent who refuses to follow legal instructions of a principal has breached the duty of care.
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
13. An undisclosed principal will be bound by any contract the agent enters into with actual authority.
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
14. The Telephone Records and Privacy Protection Act of 2006 makes it illegal for a person to use fraud
to obtain individual customer billing records and other customer information from telephone
companies.
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
15. Principals may be held liable for the torts of independent contractors involving highly dangerous
acts.
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
16. Leased workers are precluded from being considered employees of the company for which they are
doing work because they are on the payroll of an employment agency.
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
17. The term “customary authority” refers to authority that agents must have by law.
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
18. The person hiring an independent contractor bargains both for the results and the means of achieving
the results.
ANSWER: False
CHAPTER 5 AGENCY 65
ANSWER: True
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
20. Federal law provides that electronic agents may legally bind a user to click-wrap agreements.
ANSWER: False
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
MULTIPLE-CHOICE QUESTIONS
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: D
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
3. An ________ occurs if a principal approves or accepts the benefits of the actions of an otherwise
unauthorized agent.
A. agency by ratification
B. agency by estoppel
C. agency by independent action
D. agency by intervention
ANSWER: A
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: B
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: A
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: A
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
7. Under the duty of ____________ an agent has a duty to act solely for the benefit of his or her
principal in all matters directly connected with the agency undertaking.
A. loyalty
B. subservience
C. trust
D. obedience
ANSWER: A
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
10. Once an agent is given express authority, he or she also has _______ authority to do whatever is
reasonable to complete the task he or she has been instructed to undertake.
A. implied
B. absolute
C. limited
D. contractual
ANSWER: A
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
11. Which of the following is true regarding a principal’s duty to pay unemployment taxes?
A. A principal must pay unemployment taxes for both an employee and an independent contractor.
B. A principal must pay unemployment taxes for an independent contractor but not for an employee.
C. A principal must pay unemployment taxes for an employee but not for an independent contractor.
D. A principal is not required to pay unemployment taxes for either an employee or an independent
contractor.
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
12. Unless state law is to the contrary, an agent may lawfully conceal ________ of the principal.
A. the existence
B. the identity
C. the existence and identity
D. nothing regarding
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
13. An agent may bind the principal due to the agent’s ________ authority.
A. express
B. implied
C. apparent
D. express, implied, or apparent
ANSWER: D
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
68 MANAGERS AND THE LEGAL ENVIRONMENT
14. Which of the following is true regarding situations in which an agent enters into a contract without
authority?
A. The principal is not bound nor is the agent bound.
B. The principal is bound and the agent may be personally liable.
C. The principal is not bound, but the agent may personally liable.
D. Neither the principal nor the agent is bound if the contract is oral; but if the contract is written,
both the principal and agent are bound.
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
15. The most basic legal characteristic of the employer-employee relationship is that the employer has
the right to
A. deduct taxes
B. control the conduct of the employee
C. provide health care
D. deduct taxes, control the conduct of the employee, and provide health care
ANSWER: B
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
16. Which of the following is true regarding an independent contractor’s entitlement to fringe benefits
offered by a principal?
A. An independent contractor is generally eligible for the same fringe benefits provided to
employees.
B. An independent contractor is generally eligible for the same medical insurance provided to
employees but not for retirement benefits.
C. An independent contractor is generally eligible for the same retirement benefits provided to
employees but not for medical benefits.
D. An independent contractor is not generally eligible for the fringe benefits provided to employees.
ANSWER: D
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: A
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
18. Which of the following is not one of the factors the law looks at in distinguishing between
employees and independent contractors?
A. The amount of experience of the worker
B. Whether the work is usually performed by a specialist without supervision
CHAPTER 5 AGENCY 69
ANSWER: A
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
19. Which of the following is true regarding whether an independent contractor is an agent of a
principal?
A. An independent contractor is always an agent of the principal.
B. An independent contractor, by definition, is not an agent of the principal.
C. An independent contractor may or may not be an agent generally depending on whether the
independent contractor has authority to enter into contracts on behalf of the hiring party.
D. An independent contractor is an agent only if the hiring party is a merchant.
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
20. Which of the following terms refers to a slight deviation from the employer’s business that is still
within the scope of employment?
A. Frolic
B. Detour
C. Errand
D. Chore
ANSWER: B
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
21. An agency by ________ occurs when a person leads another to believe that someone else is his or
her agent and is thereafter prevented from denying it.
A. ratification
B. conduct
C. agreement
D. estoppel
ANSWER: D
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
22. As referenced in the case in the text involving Hewlett-Packard in the text, what is “pretexting”?
A. A practice whereby a person pretends to be someone else, typically over the telephone, in order
to obtain information.
B. A practice whereby a person pretends to be someone else, typically through a personal visit, in
order to obtain information.
C. A practice whereby a person induces someone, often an elderly person, to sign a contract
purchasing unneeded services.
D. A practice whereby a person induces someone, often an elderly person, to sign a contract
purchasing unneeded goods.
70 MANAGERS AND THE LEGAL ENVIRONMENT
ANSWER: A
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
24. A principal may be held liable for the torts of a(n) ________ only in extraordinary circumstances,
usually involving highly dangerous acts or nondelegable duties.
A. agent
B. servant
C. employee
D. independent contractor
ANSWER: D
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: B
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
26. Which of the following was the result in EBC I, Inc. v. Goldman, Sachs, & Co., the case in the text
in which it was claimed that Goldman Sachs breached a fiduciary duty in acting as an underwriter
and in providing advice to eToys, the plaintiff’s predecessor, in regard to an initial public offering of
stock?
A. The court dismissed the case on the basis that Goldman Sachs as an underwriter could not be
considered a fiduciary based on its role in the transactions at issue.
B. The court refused to order a dismissal of the plaintiff’s claim and found that Goldman Sachs’
failure to disclose a material conflict of interest established a claim for breach of fiduciary duty.
CHAPTER 5 AGENCY 71
C. The court dismissed the case because Goldman Sachs had every right to make a profit out of the
transaction so long as no actual misrepresentations were made to the plaintiffs.
D. The court refused to order a dismissal of the plaintiff’s claim and found that Goldman Sachs’
could be held liable based on material misrepresentations made to the plaintiffs regarding the value
of the stock involved in the initial public offering.
ANSWER: B
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
27. Under the Uniform Computer Information Transactions Act, what would be the result if an
electronic agent agrees to a click-wrap agreement?
A. The user of the electronic agent would not be liable for the agreement.
B. The user of the electronic agent would be liable for the agreement only if the evidence
established that the user had an opportunity to look over the agreement and cancel it within a
reasonable length of time.
C. The use of the electronic agent would be liable for the agreement.
D. The user of the electronic agent would be liable for the agreement only if the user was a
merchant in respect to goods or services of the type purchased by the agreement.
ANSWER: C
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
28. Which of the following was the result in O’Shea v. Welch, the case in the text involving whether an
employee was acting within the scope of his employment when, while driving to deliver a vendor’s
gift (football tickets) to his employer’s office, he turned into a service station to obtain an estimate
regarding nonemergency maintenance on his car?
A. The court found that as a matter of law the employee was not acting within the scope of his
employment because he was involved in a frolic of his own.
B. The court found that as a matter of law the employee was not acting within the scope of his
employment because he was involved in a detour.
C. The court found that as a matter of law the employee was acting within the scope of his
employment because he was involved in only a detour, not a frolic on his own.
D. The court found that the jury should determine whether the employee was acting within the
scope of his employment during the time period at issue.
ANSWER: D
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
29. Which of the following are autonomous computer programs that can be dispatched by the user to
execute certain tasks?
A. Electronic agents
B. Software identifiers
C. Click programs
D. Fortran identifiers
ANSWER: A
SKILL LEVEL: Technology
OBJECTIVE: AICPA: Legal
72 MANAGERS AND THE LEGAL ENVIRONMENT
ANSWER: A
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
31. Maureen owns a business that makes kites. Maureen’s agent Bob entered into an agreement with
Alice to purchase some land for a new kite factory. Maureen’s agency relationship with Bob was
not memorialized by any writing. The day after Bob signs the papers finalizing the sale, Maureen
learned of the purchase, was furious with Bob, and said that she wanted out of the deal. Assuming
that Bob was legally considered the agent of Maureen in making the purchase, which of the
following is Maureen’s best argument?
A. That the agency agreement with Bob was not in writing and that under the equal dignities rule
she should not be bound.
B. That agency agreements may not extend to the purchase of land.
C. That under the exclusion principle, Bob was not authorized to purchase land unless expressly
authorized by Maureen.
D. That she did not need land and that therefore she should not be bound because Bob was
mistaken.
ANSWER: A
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
Candy owns a nail and hair salon. She reaches an agreement with Todd, an independent contractor,
allowing him to do nails in her salon three days per week. Todd has a sign on his desk informing his
customers that he is an independent contractor of the shop. After working for a month, Todd asks
Candy if she has been paying appropriate social security taxes for him. He also informs Candy that
Phyllis, a customer, is preparing to sue both Todd and Candy based upon a nasty nail fungus she
developed after having her nails done by Todd.
32. Refer to fact pattern 5-1. Which of the following is true regarding the duty of Candy, if any, to pay
social security taxes for Todd?
A. Candy must pay all of Todd’s social security taxes.
B. Candy is responsible for 50% of Todd’s social security taxes, and he is responsible for 50%.
C. Candy is responsible for all of Todd’s social security taxes only if he works at least 30 hours per
week; otherwise, Todd is responsible for all of the taxes.
D. Candy is not responsible for any of Todd’s social security taxes.
ANSWER: D
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
33. Refer to fact pattern 5-1. Which of the following is true regarding legal responsibility to Phyllis
assuming negligence on the part of Todd can be established?
CHAPTER 5 AGENCY 73
A. Both Candy and Todd are responsible to Phyllis with Candy being primarily responsible meaning
that if Todd pays then he can recover any payments from Candy.
B. Both Candy and Todd are responsible to Phyllis with Todd being primarily responsible meaning
that if Candy pays then she can recover any payments from Todd.
C. Candy owes 50% of any payments due Phyllis, and Todd owes 50%; but neither Candy nor Todd
can recover against the other.
D. Candy does not owe Phyllis any amounts.
ANSWER: D
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
Billy owns a used car lot. Samantha works for Billy selling used cars. Billy fully directs and
controls her work, sets her hours, and pays her an hourly salary as well as a commission. Belinda
comes to the lot to buy a used car. Samantha, however, tells Belinda that she needs to sell her
mother’s used vehicle and that if Belinda will meet her after hours, she will give Belinda an
excellent deal. Belinda meets Samantha after work and ends up buying the car belonging to
Samantha’s mother. The next day, Samantha, acting within the scope of her employment, is moving
a car. She, however, is in a hurry and in a grossly negligently manner backs it over the foot of
Wesley, another customer. While waiting for the ambulance to come for Wesley, Belinda storms
onto the lot complaining about the condition of the vehicle she purchased from Samantha’s mother.
Billy fires Samantha on the spot based on her obviously intoxicated condition and the fact that she
arranged for the sale of her mother’s vehicle. Samantha informs him that she has been an excellent
employee and that he has no reason to be unhappy with her.
34. Refer to fact pattern 5-2. Did Samantha breach any fiduciary duties owed to Billy?
A. Yes, only the duty of loyalty
B. Yes, only the duty of care
C. Yes, both the duty of loyalty and the duty of care
D. No
ANSWER: C
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
35. Refer to fact pattern 5-2. Who is liable for Wesley’s injured foot?
A. Only Billy
B. Only Samantha
C. Both Billy and Samantha with Billy having he right to recover from Samantha any amounts paid
D. Both Billy and Samantha with Samantha having he right to recover from Billy any amounts paid
ANSWER: C
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
ESSAY QUESTIONS
1. Agents owe a fiduciary duty to the principal. Describe the specific responsibilities that are generated
by this duty. Discuss fully.
ANSWER: Students should fully discuss the duties of loyalty, obedience, and care. The duty of
loyalty involves an agent’s duty to act solely for the benefit of his or her principal in all matters
74 MANAGERS AND THE LEGAL ENVIRONMENT
directly connected with the agency undertaking. Under the duty of obedience, an agent is obligated
to obey all reasonable orders of his or her principal. The duty of care includes a duty to avoid
mistakes, whether through negligence, recklessness, or intentional misconduct.
2. Sam is an employee of Binky, Inc. While delivering a truckload of binkies to a local retailer, Sam
decided to stop at his bank to deposit his paycheck. The bank is three blocks from the retailer and it
takes approximately 15 minutes to deposit a check. While Sam is in the bank, the truck rolled down
the street because Sam negligently forgot to set the parking brake. The truck crashed through the
window of Market, killing two people and causing $500,000 in damage. Discuss the issues involved
in determining whether Binky, Inc. is liable for the damages at issue. If Binky, Inc. is liable, can it
recover against Sam for the damages?
ANSWER: Market would have to prove that Sam should be considered as acting within the scope of
his employment. At issue is whether Sam was on a detour, for which Binky, Inc. would have
liability or a frolic, for which Binky, Inc. would not have liable. If Binky, Inc. is held liable, it can
recover the judgment from Sam.
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
3. Carl is a contractor that is building a home for Orel. Pam is one of Orel’s neighbors. One day Pam
was walking in the neighborhood. As she passed the construction site, a piece of lumber fell from the
partially finished garage roof and hit her in the head, injuring her severely. The lumber was left
negligently on the roof by Carl. Pam now wishes to sue Orel. Should Orel be held liable to Pam?
Discuss.
4. Molly wants to buy a vacant lot that is for sale in her neighborhood. The problem is that she had a
skirmish with the current owner, Ben, over his dog barking at all hours of the night. Molly asks Sam
if he will purchase the lot on her behalf without telling Ben that she will be the true owner. Sam
agrees and reaches an agreement with Ben. A few months after the purchase, Molly begins to do
some work on the lot. Ben sees her and asks what she is doing. Molly tells him that she was the true
purchaser. Ben becomes furious and yells at her that he will have the sale rescinded and sue both
Molly and Sam for fraud. What will be the likely result if Ben sues Molly and Sam?
ANSWER: Ben will lose as to both Molly and Sam because an agent may lawfully conceal the
existence of a principal.
SKILL LEVEL: Reflective Thinking
OBJECTIVE: AICPA: Critical Thinking
5. Discuss the elements that are considered in determining whether a worker is an employee or an
independent contractor.
ANSWER: Considerations include the amount of control the employer exercises; whether the
employed person engages in an occupation distinct from that of the employer; whether the kind of
CHAPTER 5 AGENCY 75
work being done is usually performed under the direction of an employer or by a specialist without
supervision; the degree of skill the work requires; whether the employer provides tools and a place
of work; the length of time the worker is employed; whether the worker is paid on the basis of time
or by the job; and whether the worker offers his or her services to the public at large.
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
6. What factors do courts consider in determining whether an act of an agent was within the scope of
employment?
ANSWER: Courts consider (1) whether the employee’s act was authorized by the employer, (2) the
extent to which the employer’s interests were advanced by the act, (3) whether the employer
furnished the instrumentality (for example, truck or machine) that caused the injury, and (4) whether
the employer had reason to know the employee would perform the act.
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal
ANSWER: To determine an agent’s implied authority, courts look to the usual and customary
authority of the agent. Usual authority is the authority that the agent has been allowed to exercise in
the past. Customary authority consists of the authority that agents of that type normally would have.
SKILL LEVEL: Analytic
OBJECTIVE: AICPA: Legal