North Face Inc. Case Study Essay Example

revenue recognition when right of return exists meaning that it prohibits a seller from recognizing revenue when the given customer can return he product and the ultimate payment to be received by the seller hinges on the customer reselling the product. Another area of the revenue recognition principle would be with bartering. When a company receives credits for an exchange, it is not determinable at the time of exchange.

Although the exchange is satisfied by the transaction of the revenue recognition principle, the revenue is not yet “realized”, therefore any profit should be deferred. North Face Inc. violated both features of the revenue recognition rule because there was not a true exchange since the two customers did not pay for the merchandise and the transactions were not finalized, therefore the “realized” requirement was not satisfied within the revenue recognition principle.

4. Identify and briefly explain each of the principal objectives that auditors have to accomplish by preparing audit workpapers. How were these objectives undermined by Deloitte’s decision to alter North Face’s 1997 workpapers? Audit documentations are used for two purposes: 1) to provide the principal support for the auditor’s report and 2) aid the auditor in the conduct and supervision of the audit. Deloitte’s decision to alter the workpapers that the 1997 audit team did affected the 1998 audit because of the information that were used from the audit done in 1997.

Deloitte’s auditors destroyed audit evidence when they modified and did not document the given revision in the workpapers in 1997, which the audit team had properly investigated the relevance of the barter transactions and proposed audit adjustment that was consistent with

the requirements. In the end, the 1998 audit team did not make the right decision on the accounting treatment for the barter transaction that was recorded by North Face that year.

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. There would be a higher standard when it comes to a high management and low management team. Fraud can still occur and documents can still be manipulated, but the overall quality of management’s decisions will affect the inherent risk of an audit test. As an auditor, you would be aware of all the risks that occur, but you must also have the competence to all areas of an audit.