Case Study Truth or Consequences case : Inventory Valuation 1.

Summary of the Case The case depicts the situation of Bill Donner, a Charted Accountant that is in c harge of an audit for a medium-sized client, Minter Metroplex. The controller o f Minter is Dawn Sunshine, a CMA that has had past relationship with Bill as a s taff accountant at Bill's firm a year ago. In addition it is revealed that she a nd Bill had dated for approximately five years before Dawn's marriage. Bill has al so tried to renew the relationship after Dawn's divorce. During the year-end audit phase, Bill discovered, through his analytical review, that the gross profit wa s understated by $300,000 due to the fact that last year's LCM's inventory was not p roperly recorded. As well, the inventory account was never revised downward. Whe n Bill presented this information to Dawn who refuses to inform management due t o the three layoff that occurred for her mistake. Bill was sympathetic towards D awn and proposed to disguise the $300,000 as a recent reinterpretation of some a ccounting rules. 2. Problem The main problem for this business is that the gross profit is understated by $3 00,000 . Another dilemma is Bill s past relationship with Dawn, this is leads to Bill s decision to cover the understatement of $300,000 up as a recent reinterp retation of some accounting rules due to his own personal desires. 3.Stakeholders Dawn Sunshine Bill Donner Management of Minter Shareholders or people who have invested in the company The employees laid off 4. Causes of the problem The root of this situation is caused by the understated gross profit of $300,000 is that the company had failed to record last year's inventory adjustments to the perpetual system. The cause for the other dilemma is Bill covering up this info rmation from management with conflict of interest since he is helping Dawn who h e had wanted to renew his relationship with. Bill is violating GAAPs due to not using sensible accounting. 5.What are the possible Alternatives 1st Alternative Bill Donner can correct these errors and inform the management t o reduce the chance of future errors 2nd Alternative Bill can fix the records of the previous years 3rd Alternative- Bill can leave the case in general and get someone else who has not had a past relationship to audit Dawn 6.Pros and Cons to Alternatives 1. Pros Cons Bill will not get in trouble since he is only doing his job and it is Dawns faul t Dawn can lose her job The finical statements will be fixed Other stakeholder can be effected Bill will be ethical The management of the business will know what s going on and get a better unders tanding of the business for the future 2. Pros Cons The finical statements will be fixed Taxes may increase due to the increase o f net income Bill will be somewhat ethical Dawn may not get caught and she will never be pu nished for her mistake Management may make the same mistake in the future

3. Pros Cons Bill will not have to deal with eh any ethical problems Dawn may get fir ed The other auditor, with no past relationship with Dawn, will approach management directly Bill may lose his creditability as an auditor

7.Recommendation and implementation If Bill Donner uses the first alternative he will show that he is ethical, a loy al auditor and that he won't let a past relationship interfere with his work. This will also benfit the compony by letting them know thier realgross profit. the o nly drawback is that dawn will get fired. The 2nd alternative will also help since by fixing up the previous year's financi al statement as well Bill will also be doing his job. Only if he were to change the current year's financial statement he would be violating the GAAP of the match ing principal since its expense items related to revenue would not be recorded i n the same period as the revenue it helped earn. The 3rd alternative will help Bill by releaving him of any ethical problems as w ell as help the management to further understand the position of the company. A drawback would be the termination of Dawn in the company and Bills creditability as an auditor because it may come up in the future he is not able to make ethic al decisions. 8.Justification The first solution would be the best soultion involves Bill being ethic al and informing the management about their business other than covering it up. Also even though Dawn might lose her job by informing the management, the compan y was ill not have to lay off people knowing it was an error. The companies shou ld always know how their business is going so it is only right if Bill tells the m about the understatement.