North Face, Inc.
1. Should auditors insist that their clients accept all proposed audit adjustments, even those that have an "immaterial" effect on the given financial statements? Define your answer. I think auditors should strongly insist that their proposed adjustments should be made. If the company makes the proposed adjustments, it would seem to allow for a lesser probability for misstatements to occur. Even though an adjustment may seem immaterial for one year's statements, a combination of these immaterialities over a 2-3 years timeframe could easily add up to be important, if not detrimental to the company's existence. In this case, luckily, North Face was able to recover from the fraudulent activity.
2. Should auditors take explicit measures to prevent their clients from discovering or becoming aware of the materiality thresholds used on individual engagements? Would if be feasible for auditors to conceal this information from their audit clients? I do not think that withholding the materiality thresholds is necessary nor is it feasible. In most cases, I think the thresholds are based on the client's industry standards and a percentage of a base number for the client, i.e. gross profit, revenues, net income, etc. Trying to conceal that information would be waste of time that could be better spent investigating the sources of the immateriality. I think that any item that comes within 25% of the threshold should warrant further analysis.
4. Identify and briefly explain each principal objectives that the auditors hope to accomplish by preparing audit workpapers. How were these objectives undermined by Deloitte's decision to alter North Face's 1997 workpapers? The objectives of the workpapers are:
1. To provide principal support for the representation in the auditor’s report that the audit was conducted in accordance with GAAS (AU 339.03). This written record shows the auditors reasoning process and the basis for the conclusions made....
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