North Face

Topics: Audit, Auditor's report, Auditing Pages: 6 (2050 words) Published: November 25, 2012
Assignment 2: North Face
Auditors are faced with the very difficult task of insuring the public, that in their opinion, the financial statements of their clients are accurate and free of any material misstatements. The problem is that materiality is a subjective figure. In the North Face case an immaterial revenue recognition entry ended up being material when compounded with additional misstatements. North Face was the perpetrator of the intentional misstatements but they were concealed by the Deloitte audit advisor, Richard Fiedelman. Fiedelman allowed additional non-recognizable revenue to be posted and altered/replaced the original working papers that reported the original material misstatement. (Knapp, Rittenberg, Johnstone, & Gramling, 2012) Several generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) were violated (In the Matter of Richard Fiedelman, 2003) resulting in declining stock prices and Security and Exchange Commission (SEC) sanctions. SEC Sanctioned Richard Fiedelman

The SEC requires the all registrant working papers be reviewed by a partner that is not assigned to the engagement. When the Deloitte concurring partner found the discrepancies and misstated revenue they investigated further leading to the review and the ultimate discovery of the altered working papers. North Face’s audit committee then retained a second accounting firm to investigate the accounting records which led to the SEC sanctioning Fiedelman. (Knapp, Rittenberg, Johnstone, & Gramling, 2012) 1. The SEC sanctioned Richard Fiedelman for failing to document the changes that his subordinates had made in 1997 North Face work papers and for failing to exercise due professional care. Explain the SEC’s rational in making each of these allegations. The SEC found that Fiedelman violated GAAP by allowing recognition of profit margin on the second barter transition and violated GAAS 150, 230, 326, and 338. (In the Matter of Richard Fiedelman, 2003) Failing to Document Work Paper Changes

Per the several GAAS violations the SEC was right to sanction Fiedelman for failing to document the changes made to North Face working papers. AU 338 (339A) directs auditors on the importance of working papers. Working papers are the “principal record of the work that the auditor has done and the conclusions that are reached concerning significant matters.” (Public Company Accounitng Oversight Board, 1982) The working papers help insure that the audit engagement has been properly planned and adequately supervised. It is also the record of the audit evidence and procedures applied to the audit. Fiedelman also violated Auditing Standard No. 3 which is very clear that any changes must be documented. “Circumstances may require additions to audit documentation after the report release date. Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it.” (Public Accounting Oversight Board, 2004-06) When Fiedelman revised the 1997 work papers without the proper documentation he violated Standard No. 3 justifying the SEC sanction. Failing to Exercise Due Professional Care

Fiedelman violated AU 150 and AU 326, failing to execute due professional care. AU 150 states that “due professional care is to be exercised in the performance of the audit and the preparation of the report.” (Public Accounitng Oversight Board, 2001) AU 230 explains that due professional care is “employments where peculiar skill is requisite, if one offers his services, he is understood as holding himself out to the public as possessing the degree of skill commonly possessed by others in the same employment, and if his pretentions are unfounded, he commits a species of fraud upon every man who employs him in...

References: In the Matter of Richard Fiedelman. (2003, October 1). Retrieved November 4, 2012, from U.S. Securities and Exchange Commission:
Accounitng Standards Oversight Board. (1980, August). AU Section 326. Retrieved November 4, 2012, from PCAOB:
Knapp, Rittenberg, Johnstone, & Gramling. (2012). Contemporary Auditing. Mason : Cengage Learning.
Public Accouniting Oversighe Board. (1972, November). AU Section 230A. Retrieved November 4, 2012, from PCAOB:
Public Accounitng Oversight Board. (2001, December 15). AU Section 150. Retrieved November 4, 2012, from PCAOB:
Public Accounting Oversight Board. (2004-06). Auditing Standard No. 3. Retrieved October 28, 2012, from PCOAB:
Public Compaany Accouning Oversight Board. (2010, December 15). Auditing Standard No. 14. Retrieved November 4, 2012, from PCAPB:
Public Company Accounitng Oversight Board. (1982, April 1). AU Section 339A. Retrieved November 4, 2012, from PCOAB:
Public Coumpany Accounting Oversight Board. (2010, December 15). Aditing Standard No. 11. Retrieved Novembe 4, 2012, from PCAOB:
Vorhies, J. B. (2005, May). The New Importance of Materiality . Retrieved November 4, 2012, from Journal of Accountancey:
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