.Danville is a privately owned corporation with significant
financing provided by a local bank. The bank requires annual audited financial
statements as a condition of the loan. By July 17, the auditors had completed
their review of the financial statementswhich are scheduled to be issued on
July 25. They did not discover the inventory error.
John’s first reaction was to communicate his findings to the
auditors and to revise the financial statements before they are issued.
However, he knows that his and his fellow workers’ profit-sharing plans are
based on annual pretax earnings and that if he revises the statements, everyone’s
profit-sharing bonus will be significantly reduced.
Required:
1. Why will bonuses be negatively affected? What is the
effect on pretax earnings?
2. If the error is not corrected in the current year and is
discovered by the auditors during the following year’s audit, how will it be
reported in the company’s financial statements?
3. Discuss the ethical dilemma John Howard faces
