You are in your second year as an auditor with Dantly and Regis, a regional CPA

Question

You are in your second year as an auditor with Dantly and Regis, a regional CPA firm. One of the firm's long-time clients is Mayberry-Cleaver Industries, a national company involved in the manufacturing, marketing, and sales of hydraulic devices used in specialized manufacturing applications. Early in this year's audit you discover that Mayberry-Cleaver has changed its method of determining inventory from LIFO to FIFO. Your client's explanation is that FIFO is consistent with the method used by some other companies in the industry. Upon further investigation, you discover an executive stock option plan whose terms call for a significant increase in the shares available to executives if net income this year exceeds $44 million. Some quick calculations convince you that without the change in inventory methods, the target will not be reached; with the change, it will.

a. Do you perceive an ethical dilemma? Justify your response.

b. What would be the likely impact of following the controller's suggestions?

c. Who is affected?

Explanation / Answer

Liz,
You outlined a change in accounting methods, which is common and acceptable, but you did not specify the "Controller's suggestions."

You need to research the reporting requirements for changes in accounting policy, especially for changes in inventory valuation...that will give you a hint to the homework. Remember, even if the client states outright the change was simply to ensure the bonuses, auditors only care if the methodology is permitted in the SAS

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