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 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& 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& 01$$,$$$. 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+ mi(ht act in the same matter. This would result in a more di&&icult audit en(a(ement. 2econd, based 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, 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 23 ccountin( 2tandards Codi&ication topic 4$5, where it states that revenue should be reco(ni5ed when reali5ed or reali5able. 6eali5ed 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 reali5able, 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 07.1 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 reali5ed. The two consi(nment case violated 2C 4$5 because title did not chan(e hands. Inventor+ on consi(nment means that North Face still owns the inventor+, title did not chan(e hands and the compan+ cannot reco(ni5ed an+ revenue &rom this consi(nment until the (oods have been sold to 3rd parties. 8. udit wor* papers are a ver+ important part o& the audit en(a(ement because it provides documentation and anal+sis o& all audit &indin(s. !9C 2ec. "3$ 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 &amiliari5ed 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.