Medical Products Inc (MPI) was created in 2011 and entered the optical equipment industry. Its made-to-order optical equipment requires large investments in research and development. To fund these needs, MPI made a public stock offering, which was completed in 2012. Although the offering was moderately successful, MPI's ambitious management is convinced that it must report a good profit this year (2013) to maintain the current marke price of the stock. MPI's president recently stressed this point when he told his controller, Pam Adams "If we don't make $1.25 million pretax this year, our stock wiil tank"

Adam was pleased that even after adjustments for accrued vacation pay, 2013 pretax profit was $1.35 million. However, MPI's auditors, HB proposed an additional adjustment for inventory valuation that would reduce this profit by $900,000. HB's proposed adjusment had been discussed during the 2012 audit.

An additional issue discussed in 2012 was MPI's failure o accrue executive vacation pay. At that time HB dud not insist on the adjustment because the amount($20,000) was not material to the 2012 results and because MPI agreed to being accruing vacation pay in future years. The cummulative accrued executive vacation pay aounts to $300,000 and has been accrued at the end of 2013.

The inventory issue arose in 2011 when MPI purchased $450,000 of specialized computer components to be used with its optical scanners for a special order. The order was subsequently canceled and HB proposed to write down this inventory in 2012. MPI explained, however, that the components could easily be sold without a loss during 2013, and no adjustment was made. However, the equipment was not sold by the end of 2013 and prospects for future sales were nonexistent. HB proposed to write off the entire $450,000 in 2013.

The audit parter Johanna insisted that Adams make an inventory adjustment. Adams insisted that if the inventory is adjusted the vacatuon accrual be pushed to the next year. Adams then informed Johanna to continue the working relationship they would need to agree to push the accrual to the next year.

Requried

A. Should the inventory adjustment be made to the 2013 financial statements?

B. Irrespective of your decision regarding the inventory adjustment what is your reaction to Adams suggestion to release the vacation accrual? Should the auditor insist on keeping the accrual of the executives vacarion pay?

C. Consider the conflict between Adams and Johanna. Assuming that Johanna believes the inventory adjustment and vacation accural must be made and that she does not want to lost the audit fee from MPI audit what should she do?