An Analysis of Instructional Case Focusing on Ethical Issues Involving Financial Accountants and Independent Auditors
THE NORTH FACE, INC.: An analysis of Instructional Case Focusing on Ethical Issues Involving Financial Accountants and Independent Auditors
Questions
1. Should auditors insist that their clients accept all proposed audit adjustments, even those that have an “immaterial” effect on the given set of financial statements? Defend your answer.
To confirm that materiality is a pervasive concept in auditing, simply refer to the index of the professional auditing standards and identify the large number of “materiality” entries—approximately fifty, if you are curious. In addition to being an important topic, materiality is easily among the most controversial auditing topics. And, no more topic is as controversial as the issue of how to assess the materiality of proposed audit adjustments near the conclusion of an audit engagement. The most explicit guidance on this matter in the professional standards is contained in AU 312.34-41. Following is an excerpt from AU 312.38-39. If the auditor concludes, based on the accumulation of sufficient evidential matter, that the effects of likely misstatements, individually or in the aggregate, cause the financial statements to be materially misstated, the auditor should request management to eliminate the misstatement. . . . If the auditor concludes that the effects of likely misstatements, individually or in the aggregate, do not cause the financial statements to be misstated, he or she should recognize that they could still be materially misstated because of further misstatements remaining undetected. Given the guidance provided by the professional auditing standards, I would suggest that the most reasonable answer to this case question is, “No, not necessarily.” Clearly, auditors’ lives would be less complicated if clients would prepare an adjusting entry for each
Questions
1. Should auditors insist that their clients accept all proposed audit adjustments, even those that have an “immaterial” effect on the given set of financial statements? Defend your answer.
To confirm that materiality is a pervasive concept in auditing, simply refer to the index of the professional auditing standards and identify the large number of “materiality” entries—approximately fifty, if you are curious. In addition to being an important topic, materiality is easily among the most controversial auditing topics. And, no more topic is as controversial as the issue of how to assess the materiality of proposed audit adjustments near the conclusion of an audit engagement. The most explicit guidance on this matter in the professional standards is contained in AU 312.34-41. Following is an excerpt from AU 312.38-39. If the auditor concludes, based on the accumulation of sufficient evidential matter, that the effects of likely misstatements, individually or in the aggregate, cause the financial statements to be materially misstated, the auditor should request management to eliminate the misstatement. . . . If the auditor concludes that the effects of likely misstatements, individually or in the aggregate, do not cause the financial statements to be misstated, he or she should recognize that they could still be materially misstated because of further misstatements remaining undetected. Given the guidance provided by the professional auditing standards, I would suggest that the most reasonable answer to this case question is, “No, not necessarily.” Clearly, auditors’ lives would be less complicated if clients would prepare an adjusting entry for each