i) Ethical Issue in Inventory Adjustment:
The inventory adjustment made by the Finance Director raises a significant ethical concern because it appears to violate accounting principles and ethical standards. Here’s why:

1. Violation of Revenue Recognition Principles:
   Under IAS 18, revenue is recognized when the significant risks and rewards of ownership are transferred to the buyer, which in this case, happens when the goods are delivered. The Finance Manager reviewed the contract and found that the customer had no right of return on unsold goods. This implies that the goods had been sold, and any inventory adjustment is inappropriate since it would inflate the closing inventory figure and reduce the cost of sales. This misrepresentation results in an artificially increased profit.
2. Breach of Bank Covenant:
   The inventory adjustment seems to have been made deliberately to meet the net asset requirement of the bank covenant. Inflating inventory to avoid breaching the covenant is a form of financial manipulation and misrepresentation, which is unethical and could lead to legal consequences if discovered.
3. Professional Integrity and Objectivity:
   As both the Finance Director and Finance Manager are Chartered Accountants, they are bound by the Code of Ethics for Professional Accountants (issued by IFAC), which requires accountants to act with integrity and objectivity. Manipulating inventory values to meet external covenants compromises the integrity of financial reporting and misleads stakeholders, including the bank, shareholders, and regulators.
4. Potential Personal Gain:
   The Finance Director may be attempting to manipulate the financial statements to present a healthier financial position for personal or corporate gain, such as avoiding penalties from the bank or preserving the company’s credit facilities. This type of action is in direct conflict with ethical standards and fiduciary responsibilities.

(6 marks for explaining the ethical issues)

ii) Courses of Action for the Finance Manager:
As a qualified Chartered Accountant, the Finance Manager is obligated to act ethically and professionally. Here are four courses of action he should take:

1. Gather All Relevant Facts:
   The Finance Manager should first ensure that he has all the facts regarding the inventory adjustment. This may involve reviewing contracts, invoices, and the original stock count to confirm that the adjustment is indeed improper. It is essential to have a clear understanding before taking further steps.
2. Discuss the Issue with the Finance Director:
   The Finance Manager should have a direct conversation with the Finance Director to express his concerns about the ethical and financial reporting implications of the inventory adjustment. This discussion should emphasize the professional and legal consequences of manipulating financial statements, including potential breaches of accounting standards and bank covenants.
3. Escalate the Issue to a Higher Authority:
   If the Finance Director does not respond appropriately, the Finance Manager should escalate the issue to a higher authority within the company, such as the Board of Directors or the Audit Committee. These parties have oversight responsibilities and can intervene to ensure that the financial statements are prepared in accordance with ethical standards and accounting principles.
4. Consult External Auditors or Regulatory Bodies:
   If internal escalation fails to resolve the issue, the Finance Manager should consider informing the company’s external auditors or relevant regulatory bodies. External auditors have a duty to ensure that financial statements are fairly presented and may take corrective action if they discover financial manipulation. In extreme cases, regulatory bodies may need to be informed of the unethical practices.