North Face Knapp Case Questions

1285 WordsOct 23, 20086 Pages
1. Materiality is one of the most controversial topics in accounting due to its subjective nature. Auditors must gather data and decide whether the adjustments in question would have a material affect on a financial statement. A large number of inaccurate transactions that are determined immaterial could easily add up and over time, create significant misstatements, so the aggregate effect must be taken into consideration. Audits should be completed as early as possible, so management cannot use time constraint as an excuse to forego making the adjustments. In regards to the North Face case, Deloitte used a dollar amount threshold of $800,000 as a guideline to assess materiality. The level of materiality should be compared to the size of…show more content…
There must be "Completion of the earnings process, under this test, the seller must have no significant remaining obligation to the customer" and "Assurance of Payment." "In order to book revenue, the selling company must be able to reasonably estimate the probability that it will be paid for the order (Kennon 1)." As for barter and consignment transactions in which trade credits are received, merchandise should be recorded at fair value of the products exchanged. The realization of the trade credit is not certain and the value may change drastically, so the profit received from the transaction should be deferred. The terms of the agreement made by Crawford allowed the wholesaler to return any unsold product for a full refund, so the entire value should not have been booked as realized profit. Once the wholesaler is able to sell the whole lot of clothing, the trade credit can be considered realized, but the true monetary value cannot be accurately determined. The auditors for Deloitte would have forced an adjustment if they had known the true details of the transaction. The auditors were defrauded by both the CFO and the wholesaler, who worked together to generate and sign purchase contracts with falsified terms. 4. There are two categories of principal objectives auditors accomplish by preparing audit workpapers. Permanent objectives mainly deal with the

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