Premium Essay

The North Face Case

In: Business and Management

Submitted By xiaowanzi
Words 627
Pages 3
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. Clients have rights to reject some proposed audit adjustments if they disagree with these adjustments. According to the part of the fifth and final phase in the audit opinion formulation process in our textbook, some additional evidence would be gathered if the evidence does not support a fair presentation. It also mentioned that “The account balance is misstated, but the client disagrees. The auditor will issue an audit report indicating that the financial statements, in his or her opinion, are not fairly presented.”

Should auditors take explicit measures to prevent their clients from discovering or becoming aware of the materiality thresholds used on individual audit engagement? Would it be feasible for auditors to conceal this information from their audit clients. ?

It would be feasible for auditors to conceal this information from their audit clients. In the North Face case, Crawford, The North Face’s CFO, knew the materiality threshold that Deloitte had established for them, and also knew that the gross profit of approximately $800,000 on the $1.64million fell slightly below Deloitte’s materiality threshold for North Face’s collective gross profit. He believed that company would pass on that proposed adjustment. If CFO of North Face didn’t know the threshold, it would be another story. Anyway, general acceptable accounting principle and other accounting standards have set up rules for companies to follow how to record its transactions, such as revenues recognition, match principle, and full-disclosure principle. The financial statements provided by companies should be free of material errors. Financial reporting information should have qualitative characteristics,

Similar Documents

Premium Essay

The North Face Case

...Unit: 2 The North Face Case AC503: Advanced Auditing 1. Should auditors insist that their clients accept all proposed audit adjustments, even those that have an “immaterial” effect on the given financial statements? No, if we consider overall accounting. Companies shouldn’t have to adopt an auditor’s proposal. Yes, if we consider this case with North Face. You see Crawford new Deloitte’s materiality threshold and expected them to propose adjustments but ultimately pass due to the fact there was no assumed “Immaterial” impact. However, it was later realized that Crawford did not inform the Deloitte auditors of the $2.65 million portion of the barter transaction. It safer to purpose and report then purpose and pass. 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? I think so. It would avoid companies like North Face and individuals like Crawford to take advantage of these thresholds. I don’t know how feasible it would be since auditor’s live by certain standards and transparency. The goal of an auditor is to be objective and honest, by concealing materiality threshold they would doing the very thing they are trying impose. 3. Identify the general principles or guidelines that dictate when companies are entitled to record revenue. How were these principles or guidelines...

Words: 615 - Pages: 3

Premium Essay

North Face Case Study

...North Face Case 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. No, clients are not required to accept all proposed audit adjustments that need to be made to the financial statements. However, the auditor is required to challenge management to justify not recording these adjustments. Regardless of the justification, the auditor needs to be aware that even if theses misstatements don’t effect the financial statements they can lead to material misstatements that can be in other parts of the financial statements. The possibility of prior financial statements containing material misstatements is of concern as well as material misstatements showing up in future audits. The auditor is required to document the nature and effect of the misstatements as well as the conclusion as to whether the misstatements can cause the financial statements to be misrepresented (PCAOB. 2002). 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? The materiality threshold is going to vary from organization to organization but auditors have long used the materiality threshold in the preparation and audit of the financial statements of 5%. If the auditor...

Words: 1307 - Pages: 6

Premium Essay

North Face Case Study

...Cindy Bachan Kaplan University AC503 Advanced Auditing Unit 3 Just For FEET, Inc. Case Study Professor Louis Beaubien December 14, 2011 1. Prepare common-sized balance sheets and income statements for Just for Feet for the period 1996 – 1998. Also compute key liquidity, solvency, activity, and profitability ratios for 1997 and 1998. Given these data, comment on what you believe were the high-risk financial statement items for the 1998 Should auditors insist that their clients accept all proposed audit adjustment, even those that have an “immaterial” effect on the given financial statements? According to section 312.10 of the PCAOB standards, “the auditor’s consideration of materiality is a matter of professional judgment and is influenced by his or her perception of the needs of a reasonable person who will rely on the financial statements” (Public Company Accounting Oversight Board, 2011). This statement suggests that there are no hard and fast rules with regards to the determination of whether an adjustment is material or immaterial. In my opinion, much of the decisions are left to the auditor’s interpretation of the rule. Given all the rules and standards that both auditors and corporations must abide by, it would be wise to accept the proposed audit adjustments. Whether they are “material” or “immaterial” should not matter, because the fact that the auditor finds it necessary to propose the adjustment must be based on a rule or interpretation...

Words: 1200 - Pages: 5

Premium Essay

Case 5.3 the North Face Inc.

...John Mullin Audit Case 5.3 North face Inc. 10/10/12 North Face Inc. 1. As an auditor, your job is to examine companies’ financial statements and make sure the information correctly reflects the economic events that occurred during the accounting period. When a mistake is found the auditor determines if the misstatement is material or immaterial. Misstatements are material when they affect a person’s decision using the financial statements and are immaterial if there is no effect on a person’s decision. When an auditor comes across a misstatement of the financial statements that is considered immaterial, they should recognize it and suggest that management fix it. Since it is immaterial, the auditor shouldn’t insist if management decides not to take the auditors suggestion because after all it is immaterial and will not affect anyone’s decision based on the financial statements. 2. With unethical people out there in the world, like in this case Crawford, auditors should try not to let their clients be aware of the materiality thresholds that are set and used for the audit. If management or other employees find out this information, they can use it to manipulate the records, accounts, or the system since they have an idea of what is being looked for. Now, is it feasible for an auditor to conceal this information? I believe it is almost impossible for this information to be held from the client. During an audit, often times the auditors will get assistances...

Words: 609 - Pages: 3

Premium Essay

North Face

...http://www.academia.edu/9339215/CASE_STUDY_OF_THE_NORTH_FACE_INC._AUDITING_ Summary Founded in the mid-1960's by Hap Klopp, The North Face, Inc., was a premier supplier of high-quality hiking, camping, and outdoor gear. In July 1996, North Face's went public. Initially, it sold at $14 per share, then peaked at $30 per share. In March 1999, NASDAQ halted public trading of North Face stock following the company's announcement it would be restating financial statements due to "bad bookkeeping".Christopher Crawford (CFO) boosted company sales by negotiating a barter transaction structured to avoid triggering materiality levels. Result: In May 2000, VF Corporation bought North Face for $2 per share. (Knapp, 2013) Question1 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. AnswerforQuestion1: • Auditors should not insist that clients accept all proposed audit adjustments. • Auditors are not perfect and clients should therefore have the right to reject proposed audit adjustments. • If a client does not accept a proposed audit adjustment, the auditor should generally be more suspicious as to the possibility of fraud and misstatement. Question2 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...

Words: 4874 - Pages: 20

Premium Essay

North Face Discussion

...North Face Case Discussion The North Face, Inc. tried to position its outdoor apparel and sporting equipment products at the “high-end” segment of the retail market. In order to maintain the quality of its merchandise, North Face manufacturing all of its products in-house rather than out-sourcing some of its manufacturing operations to third parties. As a result of North Face’s limited production capacity, the company faced quality control issues over the next several years making it difficult to maintain its image as the leading producer of high-quality outdoor apparel. The company went public in 1996 and was accused of violating the revenue recognition principle when preparing its financial statements. Management had inflated revenue in order to meet expectations. Basically, North Face was incorrectly recognizing revenue barter transactions. North Face’s CFO, Crawford, was a CPA and knew that if he kept these transactions under the materiality threshold, then the auditors would not look into the matter. Additionally, North Face arranged two large sales to inflate the company’s revenue; however, the two transactions were actually consignments rather than sales. North Face’s auditors, Deloitte & Touche, knew that they should reverse the barter transaction, but then changed their minds because it was immaterial. As a result, the advisory partner for the North Face audit engagement, Richard Fiedelman...

Words: 263 - Pages: 2

Premium Essay

Defect In North Korea

...The Democratic People’s Republic of North Korea is a country on the Korean peninsula in Asia. More colloquially known as North Korea, it is infamous for its numerous human rights violations and oppressive government. Harsh conditions, severe famine, a communist dictatorship and many other factors contribute to the reasons why many North Korean citizens would want to defect. Defection is a long, arduous event with many obstacles, which can make or break someone’s life, and is a taboo topic in North Korea. Not only is defection risking your life, but it is risking the lives of your family as well.     North Korea feeds constant communist propaganda to their citizens, and controls all aspects of international media. This is common knowledge,...

Words: 644 - Pages: 3

Premium Essay

Business Ethics

...care. The public expects that healthcare organizations always make the “right” choices in reference to challenging decisions. However there are times where patient’s families make ethical decision making by the healthcare team virtually impossible. Hospital ethical committees and even the legal system in certain situations must oversee such cases. There have been many cases where patients’ lives have been sustained by artificial measures and the issue of right to die has been debated. These individuals are in hospitals and long term facilities where everyone from family to the healthcare providers have an opinion. One particular instance would be the Terri Schiavo case where a young woman’s life had been sustained by artificial means for 15 years. A public battle was waged between her family and her husband and the decision to end her life. The case lingered on and ultimately the US congress had to intervene. As Terri Quill (2005) stated in relation to the case, “how can it be that medicine, ethics, law, and family could work so poorly together in meeting the needs of this woman who was left in a persistent vegetative state?” Cases like Terry Schiavo are not encountered everyday in a healthcare organization but to a lesser extent there are ethical situations that are. Healthcare organizations must also address ethical issues in terms of the financial aspect of healthcare. There has been a significant increase in awareness of healthcare fraud. Some examples would be...

Words: 1762 - Pages: 8

Premium Essay

Supply Chain

...between various stages of the supply chain.These examples shows that the customer is an integral part of the supply chain. The main purpose of any supply chain is to satisfy customer needs, in the process generating profits for itself. Supply chain activities begin with a customer order and end when a satisfied customer has paid for his or her purchase. It is important to know that information, funds, and product flows along both directions of this chain. In the real world, manufacturer may receive material from several suppliers and then supply several distributors. Thus, most supply chains are actually networks. Each supply chain will depend on both the customer's needs and the roles of the stages involved having an appropriate design. In the case of Acer, the manufacturer may fill customer orders directly. As Acer is base of builds-to-order and so do not have a retailer, wholesaler, or...

Words: 394 - Pages: 2

Premium Essay

Lkooko

...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...

Words: 9182 - Pages: 37

Premium Essay

Security Competition Between the Us and North Korea

...Conclusion This concluding chapter evaluates the implications of this research project through five sections. First, a postscript briefly recalls the process of US-North Korean interaction from the transition to the Administration of George W. Bush in 2001 to Pyongyang’s June 2008 demolition of the cooling tower at the Yongbyon nuclear facility. Secondly, and based on the findings of my empirical case study in Chapters Four and Five, I comparatively examine the strength of offensive realism, defensive realism and constructivism in explaining the extent to which US-North Korean security competition was mitigated from 1993 to 2000. The third section considers the implications of this research project’s findings for the ability of policymakers to exercise security dilemma sensibility. The fourth section concludes this PhD thesis by laying out a proposed research agenda that builds on the findings of this research project. 1. Postscript: Transition to George W. Bush George W. Bush succeeded to the US presidency in early 2001 on a political platform that pointed to elements of ideological fundamentalism and assumptions of inherent bad faith in Pyongyang. Robert Woodward argued that the Bush Administration’s outlook was based on moral absolutism that cast the US as a crusader against the ‘evil’ North Korean leadership. Similarly, Charles L. Pritchard, who served as National Security Council Director for Asian Affairs under the Clinton Administration, and the US Representative...

Words: 9664 - Pages: 39

Premium Essay

Essay

...their clients accepting the proposed audit adjustments. If the auditor comes to the conclusion after gathering his or her evidence, that the errors cause a material misstatement to the clients financial statements then of course an adjustment is required. However, in the case in which the effects of such misstatements are immaterial to the financial statements, then no adjustment must be required- often relieving the auditors from conducting such work that is nuisant and having to debate with the clients as to why such insignificant adjustments need be made. Then again the auditors need to very aware that a material misstatement may well still be possible and therefore need to critically evaluate their results. 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? Absolutely, auditors should do their utmost in concealing such critical audit aspects as that of materiality thresholds because they can very well jeopardize the genuinity and conclusion of the audit engagement as was evident in the case. Of course, it is nearly impossible to eliminate such doubt because of the fact there is so much interaction between the client and the auditors, whether it be handle inquiries or prepare documents. Clients can very use such interaction to their advantage and develop a...

Words: 555 - Pages: 3

Premium Essay

'Slavery In The Film Amistad'

...America from Cuba, and this results in a court case. This court case touches apon the ideas and opinions on slaves, and the practice of slavery in general. John Quincy Adams becomes and ally with the slaves during the court case and utters these words, "If it means Civil War then let it come. And when it does, may it be, finally, the final battle of the American Revolution." (John Quincy Adams, Amistad). When Adams said this he meant three things, slaves are equal to everyone else, a civil war is imminent, and this war would be the end of the American Revolution....

Words: 486 - Pages: 2

Free Essay

Sundail

...from shadow-lengths at an even earlier date, but this is hard to verify. In roughly 700 BC, the Old Testament describes a sundial — the "dial of Ahaz" mentioned in Isaiah 38:8 and II Kings 20:9. The Roman writer Vitruvius lists dials and shadow clocks known at that time. Italian astronomer Giovanni Padovani published a treatise on the sundial in 1570, in which he included instructions for the manufacture and laying out of mural (vertical) and horizontal sundials. Giuseppe Biancani ' s  Constructio instrumenti ad horologia solaria  (ca. 1620) discusses how to make a perfect sundial. how it works In general, sundials indicate the time by casting a shadow or throwing light onto a surface known as a dial face or dial plate. Although usually a flat plane, the dial face may also be the inner or...

Words: 2084 - Pages: 9

Premium Essay

Check Fraud Case Summary

...While searching for a case that dealt with check fraud, one case regarding a North Carolina man who used fake checks to acquire over 650,000 dollars in post office stamps and other merchandise came up. According to the United States Department of Justice website, Jimmy Lee Williams was charged with twenty-nine felonies due to check fraud. The web article, “Man Charge In Post Office Scheme” explained how Williams along with other accomplices were able to acquire the large sum of merchandise by using fraud checks and false identification. There were two moments in the time frame from November 2010 till 2015 where Williams and the other conspirators went to the post office and small businesses and purchased a variety of stamps, gift cards, and other merchandise. Williams would give his sixteen accomplices the checks and they all targeted stores in North and South Carolina along with neighboring states. In Williams’ indictment, or formal charge, the face value of the items totaled 650,000 dollars and the first offense that occurred, Williams used checks that were made by Ronald Carr (Justice, 2015)....

Words: 502 - Pages: 3