The North Face, Inc Case
Case 5.3 The North Face, Inc
1
Auditors should not insist that their clients accept all proposed audit adjustments even those that have an “immaterial” effect on the given set of financial statements. Because “immaterial” effect on the financial statements will not affect the users’ decisions. Therefore, auditors have to confirm if the effects on the financial statements are really “immaterial”. If there are really “immaterial”, sometimes the auditor would be forced by the clients to ignore it. So the auditor should give the client suggestions on why they recommend for the client to make adjustments. If the client disagrees with the adjustments, they maybe have a logical reason for why they don't want to make the adjustments. The auditor should respect the client’s decision since the items have no material effect on the financial statements.
2
Auditors should take explicit measures to prevent their clients from discovering the materiality threshold used on individual audit engagements. Because it leaves the opportunity for unethical clients to manipulate the specific records that auditors looking for to conceal the material misstatements. The clients can use these information to impair an audit engagement or an individual’s audit procedures. It is not feasible for auditors to conceal this information from their clients, especially when they are dealing with material information. It will increase the difficulty of auditors to detect the material errors in the client’s financial statements, because audit would not be able to rely on the client’s documents and information.
3
Revenue should be recognized based on accrual accounting in accordance with GAAP. It should be recognized when earned, regardless of the timing of cash receipts. Deposits, early payments and progress payments should not be recognized as revenue until the revenue has occurred. Barter transaction is the transaction that a company receives trade credits in exchange for merchandises, it should
1
Auditors should not insist that their clients accept all proposed audit adjustments even those that have an “immaterial” effect on the given set of financial statements. Because “immaterial” effect on the financial statements will not affect the users’ decisions. Therefore, auditors have to confirm if the effects on the financial statements are really “immaterial”. If there are really “immaterial”, sometimes the auditor would be forced by the clients to ignore it. So the auditor should give the client suggestions on why they recommend for the client to make adjustments. If the client disagrees with the adjustments, they maybe have a logical reason for why they don't want to make the adjustments. The auditor should respect the client’s decision since the items have no material effect on the financial statements.
2
Auditors should take explicit measures to prevent their clients from discovering the materiality threshold used on individual audit engagements. Because it leaves the opportunity for unethical clients to manipulate the specific records that auditors looking for to conceal the material misstatements. The clients can use these information to impair an audit engagement or an individual’s audit procedures. It is not feasible for auditors to conceal this information from their clients, especially when they are dealing with material information. It will increase the difficulty of auditors to detect the material errors in the client’s financial statements, because audit would not be able to rely on the client’s documents and information.
3
Revenue should be recognized based on accrual accounting in accordance with GAAP. It should be recognized when earned, regardless of the timing of cash receipts. Deposits, early payments and progress payments should not be recognized as revenue until the revenue has occurred. Barter transaction is the transaction that a company receives trade credits in exchange for merchandises, it should