5 pages accounting case study attached.

The Valu-Aid internal audit management team consisted of Phillip, the director of internal audit, and Karen, a CPA, the audit manager. Just a few days earlier they had put me on probationary status. This meant that I was not to be assigned any audits that the management felt were not right for me, plus I had to provide a detailed account of all my time. I interpreted this to mean that I was not to be assigned any audits that would uncover findings that would embarrass the company. This would allow the internal audit department to continue to be management's ally without uncovering controversial accounting activities, as I had done. At the same time, since I had to record all my activities, the internal audit department was assured that I would not pursue anything beyond the limited scope I was given.

Just a week earlier, Phillip, the director, had told me that I would have to sign the misleading report on the inventory... or else. It was clear that termination loomed if I stood up for the ethics of the CPA profession. I knew Phillip had wanted me to quit rather than follow my ethics and expose the inventory overstatement in the internal audit report to the external auditors and to senior management.

When I started at Valu-Aid, as the newest internal auditor, I was assigned the mundane task of completing the external auditor's ten-store inventory observations. The external auditors wrote the respective audit program to be executed, which afforded the internal audit personnel the flexibility to select which store inventories to observe as well as which items to recount to ensure the counters' accuracy.

The home office was located in the East. I was to select surrounding states to perform the observations to get adequate coverage to satisfy the external auditors. Given the training I had received in my previous job with a large international accounting firm, I was well versed on the procedures necessary to complete the audit program prepared by the external auditors.

Based on the schedule provided by the store inventory department, numerous stores' inventory counts were being performed during the following week in New Jersey, so I jumped on this opportunity to get the counts completed timely. One store was in Northern New Jersey, so I stayed overnight at a nearby hotel in order to get to the store before it opened. Since the other inventory observation was in Southern New Jersey, this gave me the evening of the first inventory to travel to that store's location.

All the inventory observations were broken into two segments, one for the store merchandise and the other for a separate pharmaceutical area. The initial store counts were contracted out to a retail inventory company whose responsibility was to perform inventory counts for all items at a store's location, which were then sent back to the home office for processing.

I zealously started on the store inventory area. The store merchandise took up the most space, but the pharmaceutical area inventory represented the higher dollar amount. The counting crew that was consistently assigned to the pharmaceutical area was familiar with the merchandise and proper counting procedures, so I gave them adequate time to complete several areas before I rechecked their counts. It was my responsibility to randomly select merchandise to count and check against the counters' totals, getting a full explanation for any discrepancies, which I could record as a potential finding subject to review by internal audit department management. Alternatively, I had the authority to ask the counters to correct their counts.

Counting was the most tedious part of the job, while preparation and understanding procedures was the most taxing. Counting what others had already counted had never been a problem in my prior experience with the accounting firm, as there is usually a logical explanation for any discrepancies. My counting proceeded without incident, with typical minor questions about a number of store merchandise counts that were off by one or two items. Then I started my recounts behind the pharmaceutical counter.

I selected an open vial to check against the number of pills listed by the counters. I anticipated no problems, as the store's inventory was proceeding smoothly.

Rattling a vial, it was obvious that it contained only one pill. However, on the counters' lists, it was represented as being half full. That would translate to 250 pills. I knew that this overstatement of inventory must be recorded as a finding in my audit report. I felt a sense of accomplishment for finding this item, but later events would dampen my excitement. Upon further review of the inventory list for the pharmacy area, I noted that no items were listed as less than half full. "What are your guidelines for counting items in open vials?" I asked one of the counting crew.

"We do not record any item as less than 50% full," she told me, looking somewhat concerned. "We record items to the nearest 10% for amounts we deem to be greater than 50% full." It was obvious I had a finding for my report. If the counters took the trouble to record items to the nearest 10% when they were more than half full, they could make the same effort for items that were less than half full. The counters' figures were fed to the home office for use in producing financials at the end of the day. With such a massive amount of pharmacy inventory at Valu-Aid stores, I estimated that the numbers could be off in the millions in New Jersey because of this deceptive counting technique.

To make matters worse, I found that Valu-Aid was selling expired children's cold and flu medications to the public. I determined, with help from the district manager, that the company was shipping expired cold and flu medications to stores up and down the Eastern seaboard for resale. "Sue," Jim, the district manager, told me when he called, "I found the same lines of expired merchandise in two other store locations this week. They had just arrived from the distribution center in Maryland!" Jim and I concluded that the distribution center was where the expired merchandise had originated. After questioning the manufacturers about expired medications, I was relieved to find that although there were no harmful effects from taking them, the medicine would be useless for treating fevers in children.

I felt a great sense of responsibility, even beyond my professional duties, as I have young children of my own and would want them to have the best medicine when they need it. I was appalled that a company could sell expired products that parents would rely on.

Unfortunately, doing the right thing got me into a great deal of trouble. After returning to the home office and writing up my audit reports, I received a written review from Karen, the internal audit manager, asking me to remove my findings about the overestimation of the physical inventories and the sale of expired children's medications to consumers.

I compliantly removed the findings but went to Phillip, the director, to discuss my reservations. "I truly feel that this audit finding should remain in the report," I told him. "Not only is there a potential liability to Valu-Aid, but millions of dollars of obsolete inventory will be inappropriately reflected in the financials." "Karen is right," Phillip replied curtly. "Just remove the findings." His hardened look signaled an end to the conversation.

I retorted, "I believe the findings are valid and should remain in the audit report. I refuse to sign an audit report that does not enumerate these extraordinary findings. Ethically, it is my responsibility to report misstatements and potential liability to the company."

"Just drop it!" Phillip told me.