The North Face

Case 5.3: The North Face, Inc.

1. I believe auditors should not insist that their clients accepted all proposed audit adjustments when it is immaterial because as per ! section 31" #$5%, the auditor is not responsible to obtain reasonable assurance i& the misstatement is not material to the &inancial statements. 'ith that bein( said, the auditor could propose the audit adjustments to their clients but cannot insist because the inclusion or the e)clusion o& the misstatement would not have a material e&&ect on the &inancial statements.

". uditor should ta*e e)plicit measures to prevent preven t their clients &rom *nowin( the materialit+ threshold used in the audit.  per&ect e)ample was provided in The North Face- case, Craw&ord was aware o& o & the materialit+ level &or his audit en(a(ement so he *nows that his plan would not be uestioned b+ the /eloitte audit team because it was under the materialit+ level set &or his audit en(a(ement. I& Craw&ord was unaware o& the materialit+ threshold, he mi(ht not have plan the &raudulent scheme because he would not have been able to provide an appropriate answer &or the (ross pro&it o& 0$$,$$$.

uditor and clients do have to have open communication and it is hard &or auditors to conceal this in&ormation because &irst, i& the client &eels that the auditor is not bein( open about the en(a(ement, the+ the + mi(ht act in the same matter. This would result in a more di&&icult audit en(a(ement. 2econd, based b ased on in&ormation reuested b+ auditors, the compan+ would have a (eneral idea on where the materialit+ threshold is because the+ would be reuestin( &or, let sa+ &or e)ample, e) ample, invoices above a certain dollar amount, this would have revealed the materialit+ threshold &or the audit en(a(ement.

3. The (uidance &or revenue reco(nition is (overned b+ F2 ccountin( 2tandards Codi&ication topic 4$5, where 4$5, where it states that revenue should be reco(nied when realied or realiable. 6ealied means that the compan+ has delivered the (oods, per&ormed the services or title has chan(e hands and cash or cash euivalent has alread+ been received. For revenue to be realiable, the compan+ would have per&ormed all the necessar+ reuirements to receive the pa+ment in the &uture.

The principle stated above was violated b+ the 07. million barter transaction because the compan+ is receivin( trade credits. It is unclear as to the value and the use&ulness o& these trade credits thus it is hard to measure the monetar+ value this have to the compan+. I& the+ are unable to value what was received, it would be harder &or the compan+ to sa+ the amount that can be realied. The two consi(nment case violated 2C 4$5 because title did not chan(e hands. Inventor+ on consi(nment means that North Face still owns the inventor+, title did not chan(e hands and the compan+ cannot reco(nied an+ revenue &rom this consi(nment until the (oods have been sold to 3rd parties.

8. udit wor* papers are a ver+ important part o& the audit en(a(ement because it  provides documentation and anal+sis o& all audit &indin(s. !9C 2ec. "3$ states that the  principal objective o& audit wor* papers is to provide supportin( evidence o& the auditors opinion on the &inancial statements based on audit &indin(s and documentation durin( the audit en(a(ement. The above objective was undermined b+ /eloitte when the+ decided to alter North Faces wor* papers &or 1;;7 because the+ are alterin( and destro+in( the evidence that supported their 1;;7 opinion on the audit &inancial statements. This in turn would brin( the uestion as to the reliabilit+ o& the opinion (iven b+ /eloitte &or the 1;;7 &inancial statement.

5. uditors do not have the responsibilit+ to assess the ualit+ o& *e+ decisions made b+ client e)ecutive because as per !9C 2ec. "8$.$8, The primar+ responsibilit+ &or the  prevention and detection o& &raud rests with both those char(ed with (overnance o& the entit+ and mana(ement.- s per the (uidance, the compan+ is the one responsible &or  preventin( &raud and the+ are the ones that would ta*e &ull responsibilit+ o& their *e+ decisions. n independent auditor, re(ardless o& how &amiliaried the+ are with their clients industr+, would not be able to have a complete understandin( o& the decisions made b+ the compan+s mana(ement because ever+ compan+, even in the same industr+, operates di&&erentl+. 2ince auditors are unable to understand the strate(ic blunders &ull+, the+ will be unable to access the ualit+ o& the *e+ decisions o& *e+ e)ecutives.