North Face Inc Essays

North Face Inc Essays North Face Inc Essay North Face Inc Essay Discuss the risks to an audit should the client become aware of the materiality thresholds used on audit engagements by the auditing firm. Auditors cannot insist that their clients accept all proposed audit adjustments even those that have an â€Å"immaterial† effect on the given set of financial statements, because most clients would refuse to propose audit adjustments. 1. Discuss the general principles or guidelines that dictate when companies are entitled to record revenue and how the $7. 8 million barter transaction and the two consignment sales discussed in the case may have violated these principles. Revenues and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Generally, barter transactions in which a company receives trade credits in exchange for merchandise should be recorded at the fair value of the merchandises given up since the ultimate reliability or economic value of the trade credits is typically not determinable at the time of the exchange. So, even though the exchange element of the revenue recognition principle is satisfied by such a transaction, the realized element is not necessarily satisfied, meaning that any profit on the transaction should be deferred. In the case at hand, there was clearly some question as to the fair value of the excess merchandise that was being sold to the barter company. A conservative treatment of the transaction might have dictated that a loss or write-down of the merchandise was actually the most appropriate accounting treatment for the transaction. . Explain the principle objectives of auditor’s work papers and how these objectives were undermined by Deloitte’s decision to alter North Face’s 1997 work papers. Audit documentation serves mainly to: a. Provide the principal support for the basis of opinion of audit paper work , including the representation regarding observance of the standards of fieldwork, which is implicit in the reference to generally accepted audit ing standards. b. Aid the auditor in the conduct and supervision of the audit. Both of these objectives were undercut by the decision of the Deloitte auditors to alter North Face’s 1997 audit workpapers. First, by modifying the 1997 workpapers and not documenting the given revisions in those workpapers, the Deloitte auditors destroyed audit evidence, evidence that demonstrated that the 1997 audit team had properly investigated the authoritative literature relevant to barter transactions and proposed an audit adjustment consistent with the requirements of that literature. Second, the alteration of the 1997 workpapers affected the decisions made on the 1998 audit. That is, the auditors during the 1998 audit relied on the apparent decisions made during the 1997 audit and thus reached an improper decision on the accounting treatment that would be appropriate for the barter transaction recorded by North Face in January 1998. North Face’s management teams were criticized for strategic blunders that they made over the course of the company’s history. Do auditors have a responsibility to assess the quality of the key decisions made by client executives? Defend your answer. Clearly, major strategic blunders by client management can create an environment in which client executives and their key subordinates have a strong incentive to distort their entity’s accounting records and financial statements. More generally, the overall quality of top management’s decisions affects the â€Å"inherent risk† present during a given audit References: termpapersmonthly. com