North Face case solution

8 August 2016

Should auditors insist that their clients accept all proposed audit adjustments, even those that have an “immaterial” effect on the given financial statements? Defend your answer. The auditors should not insist that their clients accept all proposed audit adjustments. The auditor’s main duty is to provide reasonable assurance to verify the accuracy and compliance of client’s financial statements, to ensure that it conveys data and information of events occurred within the accounting period. When a misstatement is found, the auditor should decide whether the misstatement is material, considering both amount and quality perspectives.

If it is a material misstatement, the auditor should mainly insist in making proper adjustments, because the misstatement will have a direct effect on financial statements and thus affect decisions of people who rely on it. However, if it is an immaterial misstatement, auditors should provide client with reasons of making adjustments. Since the immaterial misstatement will not have a direct effect on financial statements and thus will not affect people’s decision related to the financial statements, the auditor can appreciate management’s reasons and respect client’s decision.

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Should auditors take explicit measures to prevent their clients from discovering or becoming aware of the materiality thresholds used on individual audit engagements? Would it be feasible for auditors to conceal this information from their audit clients? Auditors should take explicit measures to prevent client from discovering the materiality thresholds used on individual audit engagements. If unethical management or employee of client finds out the materiality thresholds, they will understand auditors’ intention and get chances to manipulate accounts and records.

It may results in concealed material misstatements and difficulties in auditing. It is difficult for auditors to conceal the materiality thresholds from clients, because auditors usually need help of client’s employees. To minimize the probability of releasing the materiality information, auditors should pay attention to their words and behaviors and reduce communicating too much with clients. If there is a leak of materiality thresholds information, auditors can make changes of measurement index or adjust measurement basement.

Identify and briefly explain each of the principal objectives that auditors hope to accomplish by preparing audit workpapers. How were these objectives undermined by Deloitte’s decision to alter North Face’s 1997 workpapers? ISA 230 indicates that principal objectives of audit workpapers are providing basis for conclusions about achievements of overall purposes of auditors and providing evidence that audit was planned and performed in accordance with regulatory requirements.

Additional objectives include assisting engagement team with planning, performing and supervising services, retaining records of continuing significance to future audits, etc. In this case, Fiedelman was aware of the $2. 65 million portion of barter transaction but did not challenge client’s decision to record its normal profit margin on the January 1998 “sale” and overstate gross profit by more than $1. 3 million. Besides, Borden neither addressed the issue by simply contacting Vanstraten nor referred to authoritative literature to determine the entitlement of transaction.

He did not advise an adjusting entry. Furthermore, the Deloitte personnel substitute a new summary memo and adjustment schedule to the original 1997 workpapers without documenting the revisions in those workpapers. 5. 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. Auditors do not have the responsibility to assess the quality of the key decisions made by client executives. Auditors’ responsibility is to provide with an overall opinion whether financial statements are fairly presented and in compliance with GAAP. Auditors will also evaluate the client’s internal control if the company goes public. Assessing the quality of executives’ decisions is a part of consulting service instead of assurance service.

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