North Face Inc

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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 “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.

1. 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...
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