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 actions?

A. Sarah failed to evaluate a potential ethical issue.

B. Sarah failed to refer the matter to the AICPA ethics hotline.

C. Sarah failed to ensure that her staff was competent to make the entries.

D. Sarah failed to consider the rules of other regulators.

Answer: Sarah failed to evaluate a potential ethical issue.

Explanation:

From the question, we are informed that Sarah who is the controller of a large beverage supplier, supervises two employees and that her boss, Vladimir, told 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.

We are further told that Sarah does not know the reason behind this but told one of her staff to make them because she has been instructed to do so.

We can see that Sarah failed to evaluate a potential ethical issue. She didn't evaluate the effect of what she is doing. In this case, what her boss told her to do could be a case of fraud and she just obliged without asking questions which will put her conscience at ease in case anything happens but the fact that she just did it without asking questions or thinking if what she has done is morally right or wrong, it shows that Sarah failed to evaluate a potential ethical issue.