Under which circumstance is an agent permitted to use their draft authority to issue a check or draft on behalf of the principal?

• A. Only after receiving written approval from a financial institution
• B. Only when acting within the scope of authority granted by the principal
• C. Whenever the agent deems it necessary, regardless of principal's instructions
• D. Whenever the agent is acting in their own personal interest

Answer: (B)

Verified step by step guidance

1. Understand the concept of 'draft authority': Draft authority refers to the permission granted to an agent to issue checks or drafts on behalf of the principal. This authority is typically limited to specific circumstances outlined by the principal.
2. Identify the scope of authority: The agent can only act within the scope of authority explicitly granted by the principal. This means the principal must provide clear instructions or guidelines regarding when and how the agent can use draft authority.
3. Eliminate incorrect options: Review the options provided. For example, 'Whenever the agent deems it necessary' and 'Whenever the agent is acting in their own personal interest' are incorrect because they disregard the principal's instructions and authority.
4. Focus on the correct condition: The correct condition is 'Only when acting within the scope of authority granted by the principal.' This ensures the agent is acting in alignment with the principal's intentions and legal boundaries.
5. Apply this understanding to similar scenarios: In financial accounting, agents must always act within the authority granted by the principal to avoid legal or ethical violations. This principle is crucial for maintaining trust and accountability in financial transactions.