Case 5.3 North Face

July 12, 2013

Tax Research

5.3 The North Face, Inc

1. In my opinion, the auditors should not insist that their clients make the proper adjustments unless these adjustments could have a direct and material effect on the given set of financial statements. If the adjustments have an immaterial effect, then auditors should make suggestions on why they recommend on making these adjustments. In case the client does not accept to follow the suggestions, then there must be a logical reasoning on why client choses to do so. In this situation, the auditors cannot do anything but respect the decision, especially because the adjustments would not have any material effect on the given financial statements.

2. I think auditors should use any precautions possible to prevent their clients from discovering the materiality threshold used on individual audit engagements. By doing so, it eliminates the possibility for clients to manipulate certain records that auditors will use in the engagement, and will decrease the possibility for clients to conceal the material misstatements. If a client becomes aware of the materiality thresholds, it can be used to impair on individual audit engagements by some unethical clients. It would not be feasible for auditors to conceal this information from their clients, because it creates the difficulty for auditors to detect the material errors in the financial statements. The auditor would not be able to count on the client’s documents and information, which would be very impractical, especially if dealing with material information.

3. According to SFAC No.5, revenues are realized when products, merchandise, or other assets are ex-changed for cash or claims to cash. Revenues are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Even though the exchange part of the revenue recognition was executed correctly, however, the fair value on the excess merchandise sold to...