The following quote was taken from The Wall Street Journal (December 14, 1992): How an audit can misfire is illustrated by the way Deloitte & Touche, the auditors ofLaribee Manufacturing Co., failed to realize that the New York copper wire maker was buoying a sink¬ ing ship by creating fictitious inventories. Laribee was plagued by huge debt—almost seven times its equity—generated by a major acquisition in 1988. Meanwhile, its sales to the troubled construction industry, its major cus¬ tomerfor copper wire, were declining. In 1990, Laribee borrowed $130 millionfrom six banks. The banks say that they relied on the clean opinion that Deloitte & Touche gave Laribee’s financial statementfor 1989, when the company reported $3 million in net income. A major portion ofthe loan collateral consisted ofLaribee’s inventories ofthe copper rod used to draw wire at its six U.S. factories. But after Laribee filed for bankruptcy court protection in early 1991, a court-ordered investigation by other accountants, attorneys and bank specialists showed that much of Laribee’s inventory didn’t exist. Some was on the books at bloated values. Certain wire prod¬ uct stocks carried at $2.20 a pound were selling at only $1.70 to $1.75 a pound. REQUIRED:

a. Identify factors that could have been used in advance by Deloitte & Touche to indicate that Laribee might be a risky audit.

b. What two methods did Laribee use to increase its inventory valuation, and what short-run advantage did the company gain by doing so?

c. What principles of inventory valuation were violated by Laribee?

d. What did the auditors fail to do, and to what parties are they responsible?