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2009 R-7 Class Notes - Becker CPA Review Regulation 7 Class...

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Becker CPA Review – Regulation 7 Class Notes 1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved. REGULATION 7 CLASS NOTES This lecture covers agency, bankruptcy, securities regulation, CPA legal liability and property insurance. According to the AICPA's Content Specification Outline these items and the items found in R5 and R6 should make up between 20% and 25% of your Regulation examination. AGENCY I. Creation of an Agency A. An agency is a legal relationship where the principal appoints an agent to act on his/her behalf. B. Principal must have capacity (not a minor). D. Writing not generally required – unless to buy or sell land. D. Agent – capacity not required – minor can be an agent. E. Consideration not required to form an agency relationship. II. Duties of Agent to Principal A. Loyalty – agent must act solely in the principal's interest. B. Obedience – agent must obey principal's reasonable instructions. C. Reasonable care agent must not act negligently . D. If agent breaches the duties he owes the principal, then the principal can recover damages from the agent including tort damages, contract damages, secret profits and even withhold compensation. III. Duties of Principal to Agent A. Compensation – unless otherwise agreed. B. Reimbursement/indemnification for all expenses in carrying out the agency relationship. C. If the principal breaches her duties to the agent, then the agent can bring an action against the principal for damages. IV. Power to Terminate Relationship A. Both parties generally have the power, but not necessarily the right, to terminate the relationship at will. Can be held liable for damages if termination breaches contract. B. Agency coupled with an interest – exception – principal cannot terminate – only the agent can terminate. V. Agent's Power to Bind the Principal A. Principal is bound by agent's act if agent acted with authority. There are two kinds: Actual and Apparent . B. Actual authority. 1. Express Principal specifically grants the power. 2. Implied Authority necessary to run the business or carry out agency agreement.
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Becker CPA Review – Regulation 7 Class Notes 2 © 2009 DeVry/Becker Educational Development Corp. All rights reserved. C. Apparent authority. This is the second way an Agent has the power to bind the Principal. 1. Title – position 2. Failure to give notice of agent's termination. D. Ratification of previously unauthorized act can also bind principal in contract. Requirements: The agent must have indicated that he was acting on behalf of the principal; all material facts must be disclosed to the principal; and the principal must ratify the entire transaction. E. Disclosed Principal – the agent is not liable to third party under the contract.
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