You are in your second year as an auditor with Dantly and Regis, a regional CPA firm. One of the firms 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 years audit you discover that Mayberry Cleaver has changed its method of determining inventory from LIFO to FIFO. Your clients 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.

Required:

Facts (respond to the questions using complete sentences):

What impact will FIFO have on reported net income?

How will use of FIFO affect taxes paid?

Do company managers stand to benefit from the change? If so how?

Why does the auditor risks negative consequences if the change is challenged?

Ethical Dilemma Remember this is about the auditor:

Answer:

Who is affected? The author noted 6 constituencies. List at list 4 to earn full credit.