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

a) Sarah failed to evaluate a potential ethical issue

Explanation:

A financial fraud refers to misrepresentation of financial data by inflating or reducing a figure amount with the motive to deceive the users of the financial statements and thereby depict better financial position and state of affairs.

The above concept is also referred to as window dressing of accounts.

In the given case, the purpose behind increasing the value of inventory and creation of miscellaneous expense account is to depict fake financial picture. With an increase in the inventory balance, the profits would be inflated. Crediting miscellaneous expenses again would reduce expenses balances and further inflate the profits.

Thus, Sarah failed to evaluate a potential ethical issue when she blindly directed her staff to incorporate such changes.

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