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North Face Essay

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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 ...

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