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Case 5.3 The North Face, Inc. audit workpapers, proposed AJE

Case 5.3 The North Face, Inc. (by Michael C. Knaap 8e.)
Questions
1. 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.
2. 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?
3. Identify the general principles or guidelines that dictate when companies are entitled to record revenue. How were these principles or guidelines violated by the $7.8 million barter transaction and the two consignment sales discussed in this case?
4. 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?
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.

Solution Preview

1. 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.

No. Auditors consider the individual and cumulative effect of proposed but not book adjustments. If they are not individually or cumulatively material, it is not misleading to the users if they are not booked because the "uncorrected misstatements" are not material errors. However, the uncorrected misstatements must be documented fully in the workpapers. (AU 312)

In practice, auditors try to get clients to book the proposed entries and often the client does. That way the impact on this year and the next (often cut off issues) does not have to be tracked (which is costly use of expensive talent).

2. 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 do not as a routine tell client what the materiality limit is for the overall audit and for specific accounts. ...

Solution Summary

Your tutorial is 518 words and explains the auditor workpapers, whether clients have to book proposed adjustments, guides for risk of return and consignment sales, and the important of audit workpapers. Also mentioned is whether poor performance is an audit problem.

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