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    Purpose of an audit and the role of ethics in the accounting

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    Jim's Music Company uses LIFO for inventory, and the company's profits are quite high this year. The cost of inventory has been steadily rising all year, and Jim is worried about his taxes. You are Jim's accountant and you suggested that the company make a large purchase of inventory to be received during the last week in December. You explained to Jim that this would reduce his income significantly.

    Jim still doesn't understand the logic of your suggestion. Explain how the purchase would affect taxable income. (1 Paragraph)

    Is this ethical? Jim is uncertain about the appropriateness of this from a legal and ethical perspective. Give your opinion and explain the ethical implications of making the purchase. (1 to 2 Paragraphs)

    List any References used.

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    Solution Preview

    Accounting issue: This is merely a window dressing of the accounts. It will artificially increase the purchases and the cost of goods sold will increase as the accounting basis is LIFO that is Last in first out. Thus ...

    Solution Summary

    This explains the purpose of an audit and the role of ethics in the accounting profession.