1. The auditor should mainly insist their clients to make the proper adjustments towards material misstatements that have a direct effect on financail statements.
In regards to immaterial items, the auditor should give the client suggestions on why they recommend for the client to make adjustments. And if the client disagrees with the adjustments they probably have a logical reason for why they don't want to make the adjustments. And the auditor should respect the clients decision since the items have no material effect on the financial statements.2.
Auditors should try as much as possible to not provide the client information on what procedures will take place to find material misstatements. Because it leaves the oppurtunity for unethical clients to manipulate the specific records your looking for to conceal the material misstatements. But often the auditor ask their clients to pull certain records to reduce the amount of time that would be wasted on just trying to find the files to audit. Which still gives the client an idea on how the task the auditor will perform to find material misstatements.3.
SFAC No.5 which is “Recognition and Measurement Financial Statements of Business Enterprises,” was violated in regards to the barter trascation. Even though the exchange element of the revenue recognition was excuted correctly but the fair value on the excess merchandise that was sold to the barter company was clearly questionable. And they should of used a more conservative approach in accounting for that transaction.
Also SFAS No. 48 “Revenue Recognition When Right of Return Exist was violated in regards to the consignment sales recorded by North Face. There was not a real exchange since the two custumers did not pay for there merchandise and and the transactions we not finanlized until the customers resells the merchandise. Which means a large portion of the 9.3 millions dollars that was recorded for the consignment sales was improperly recorded.
Because the realized requirement for the revenue recognition principle was not satisified.4. The auditors workpapers should show, (1) the clients accounting records agree or reconcile with the financial statements, (2) the work was aduately planned and supervised, (3) a sufficient understanding of the clients internal control was obtained, (4) sufficient appropriate audit evidence was obtained as a reasonable basis for an audit opinion. One objective that was undermined by the auditors decision after for altering North Faces documents was not documenting the revisions in those workpapers. Which terminanted the evidence the previous audit team investigated that gave helpful notes on their audit. That decision also led the improper treatment for accounting in regards to the barter transaction the subsequent year.
5. Since theres always the inherent risk for top management offcials to commit fruadlent acts that can cause material misstatements in finanacial statements. The auditor should always show professional skepticisim and be skeptical of any key decisions that top level excutives make for their company that could be material implications.
