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The North Face Case

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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,…...

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