The external auditors of HHP (Heart Health Procedures) are currently performing Obsolescence their annual audit of the company with the help of assistant controller Linda Joyner.

Several years ago Heart Health Procedures developed a unique balloon technique for opening obstructed arteries in the heart. The technique utilizes an expensive component that HHP purchases from a sole supplier. Until last year, HHP maintained a monopoly in this field.

During the past year, however, a majoi competitor developed a technically superior product that uses an innovative, less costly component. The competitor was granted FDA approval, and it is expected that HHP will lose market share as a result.

HHP currently has several years' worth of expensive components essential for the manufacturing of its balloon product. Linda Joyner knows that these components will decrease in price due to the introduction of the competitor's product. She also knows that her boss, the controller, is aware of the situation. The controller, however, has informed the chief financial officer that there is no obsolete inventory, nor any need for reductions of inventories to net realizable values. Linda is aware that the chief financial officer's bonus plan is tied directly to corporate profits.

In signing the auditor's representation letter, the chief financial officer acknowledges that all relevant information has been disclosed to the auditors and that all

^ accounting procedures have been followed according to generally accepted accounting principles. Linda knows that the external auditors are unaware of the inventory problem, and is unsure what to do.

Required:

a. Has the controller behaved unethically?

b. How should Linda Joyner resolve this problem? Should she report this inventory overvaluafion to the external auditors?