The North Face Inc. | | A Case Study | | | | | |

Table of Contents CASE BRIEF 3 CASE ABSTRACT: 3 AUDITOR’S DILEMMA: 3 AUDITOR’S QUESTION: 3 Research Questions: 3 CASE CONTEXT 4 Understanding of the North Face Entity 4 Understanding of the Entity’s Environment 6 INDUSTRY CONDITIONS 6 INDUSTRY LIFE CYCLE: 8 The Apparel Commodity Chain: 9 Demand and Competition 9 Regulatory Environment: 10 Revenue Recognition 11 Other External Factors: 12 Answer to Questions 13

Figure 1- The Apparel Creation-to-Sales Cycle 7 Figure 2 - The Fraud Triangle 19 Table 1 - Rules for Revenue Recognition in Manufacturing Industry 11

CASE BRIEF

CASE ABSTRACT:
Financial accountants and independent auditors commonly face challenging technical and ethical dilemmas while carrying out their professional responsibilities. This case profiles an accounting and financial reporting fraud orchestrated by the chief financial officer (CFO) of a major public company and his subordinates. The CFO, who was a CPA, took extreme measures to conceal the fraud from his company’s audit committee and independent auditors. Despite those measures, the independent auditors identified suspicious entries in the company’s accounting records that were a result of the CFO’s fraudulent scheme but did not properly investigate those items. Shortly before the fraud was publicly revealed, a partner of the company’s audit firm instructed his subordinates to alter prior year audit workpapers for the client to conceal improper decisions made by himself and his firm. AUDITOR’S DILEMMA:
The auditor’s dilemma in the case presented is to either alter the prior-year workpapers to conceal questionable decisions made by an audit partner, decisions that involved several large barter transactions that inflated the audit client’s reported