The North Face, Inc. – Individual Case Synopsis: The North Face, a company that has always found a way to sell their product to unique customer, didn’t get to where they are today easily. Presently owned by Vanity Fair, The North Face was started by Hap Sloop in the mid sass with the mission of providing a ready source of hiking and camping gear to customers. Today, they offer products ranging from outdoor chairs to backpacks. As the company began to grow, so did the goals set by management.
In the mid-ass a goal was set to hit revenues of $1 billion. This goal was deemed manageable based on their operating profit that they had shown over the years. As time passed, the goal became more difficult and the sense of urgency to claim revenue became a must. Several situations led to fines that would later be placed on the company’s executives including: Christopher Crawford [SCOFF, CPA]: Claimed revenue from a barter transaction that passed materiality by auditors.
This mistake however shouldn’t have passed and was a scheme operated by the SCOFF who knew the materiality of the testing. Todd Katz [UP of Sales]: Creates phones sales transactions that would soon be investigated by the SEC. Without these two fraudulent representations, The North Face would have reported a net loss for the first quarter of fiscal 1998. The cumulative overstatement found by auditors and the SEC was $1. 3 million in gross profit for the first quarter of fiscal 1998.
The SEC sanctioned both North Face executives and the auditors involved in the reporting of the financial statements. Epidermal, the auditor, was criticized for failing to exercise due professional care while reviewing North Face’s financial statements for the first quarter of 1998. Key Points: In 1970, NFG began designing and manufacturing its own line of products after peeing a small factory in nearby Berkeley. The North Face offered a lifetime guarantee on some of their products.
Chief Executive magazine included North Face among the nation’s five “worst managed” corporations Questions: snouts auditors Insist Tanat tenet clients accept all proposed auto adjustments* To a certain extent yes – to fulfill the role of completeness, auditors should make their clients accept these adjustments. However, in the case that the company doesn’t want to, they MUST be forced to disclose any information regarding this issue in the financial statements. Although the adjustment might not be material, future transactions could be taken advantage of by continuing to commit fraud. . Should auditors go too certain extent in limited what their clients know about materiality thresholds? Yes – this case is a prime example for why clients should not be able to know or predict exactly what materiality will be for their company. This will be difficult to do, as most Scoffs will know a basic area that will be material and will try to take as much advantage as possible. 3. Identify the basic rules behind when companies are entitled to record revenue. How was this violated in the $7. 8 million transaction in the case?
The revenue recognition principle clearly states that revenue is recognized when they are realized or realizable and when they are earned. In the transaction between North Face and the barter company, the revenue that was recognized by the company had not actually been earned. To recognize this revenue, the company would have to fulfill their contractual liabilities of all the inventory sold to the barter company not being returned. In doing so this transaction will be partly claimed as offered income and will be recognized as revenue when the services rendered by the barter company are comparable to cash. . What are the principal objectives regarding audit workspaces. How were these objectives undermined by Dolomite’s decision to alter the 1997 papers? The audit workspaces should: Provide support to the auditor’s report, including the representation regarding any observances of the fieldwork. Provide aid to the auditor in the conduct and supervision of the audit. Dolomite, when modifying the 1997 work papers did not document or disclose any evasions within those workspaces.
This would affect the 1998 audit, as the auditors working on that audit did not have the correct information to properly made a decision on. 5. Do auditors have a responsibility to assess the quality of the key decisions made by client executives? Yes – the quality of key decisions made by client executives can affect the inherent risk used in the audit. This would be extremely important in creating a proper audit Tort a company. Also Key cyclones mace Day executives can glee sling to Truculent activities as we saw in this case.