THIS USER ASKED 👇
Sarah, the controller of a large beverage supplier, supervises two employees. Her boss, Vladimir, instructs her to increase the company’s inventory balance for an amount that is material to the financial statements by crediting several small “miscellaneous” expense accounts. She does not understand why he wants her to make these entries but immediately directs one of her staff to make them because she has been instructed to do so. Which of the following statements best describes Sarah’s actionsa)Sarah failed to evaluate a potenTal ethical issueb)Sarah failed to refer the ma²er to the AICPA ethics hotlinec)Sarah failed to ensure that her stu± was competent to make the entriesd)Sarah failed to consider the rules of the regulators
THIS IS THE BEST ANSWER 👇
a) Sarah failed to consider a potential ethical issue
Financial fraud refers to the misrepresentation of financial data by increasing or decreasing the size of the figure and the reason for attracting the users of the financial statements and thus showing a better financial and state of affairs.
Window dressing is also outlined in the above concept.
In some cases, the purpose behind increasing the value of inventory and creating a miscellaneous cost account is to present a false financial picture. With an increase in inventory balance, the profits would inflate. Crediting miscellaneous expenses again would reduce expenditure balances and further increase profits.
So Sarah failed to consider a potential ethical issue when she blindly instructed her staff to incorporate such changes.