Question 1

Auditors should not insist that their clients accept all the proposed audit adjustments. Ideally, an auditor ought to request a client to correct all the misstatements; both material and immaterial. However, it is up to the management to decide whether to correct immaterial misstatements or not. If the auditor believes that a given misstatement is not material to the overall financial statement, the auditor can still go ahead and issue a clean opinion. However, it is vital to document uncorrected misstatements regardless of whether they are immaterial or material and the basis used by the auditor to reach that conclusion.

Question 2

Auditors should take explicit measures to prevent their clients from discovering the materiality thresholds used on audit engagements. In case unethical employee or management of the client became aware of the materiality thresholds, they will have an understanding of the auditor’s intention, and this gives them an opportunity to manipulate accounting records. However, it is quite difficult for auditors to conceal such information because savvy managers can estimate the materiality levels likely to be used by an auditor. The contact that the auditor has with employees also makes it difficult to conceal this information since the auditors need the employees’ help. To minimize the issue, auditors should pay close attention to the way they relate to the employees to ensure that they do not give out such information. In case there is a leak of materiality threshold, adjustments of measurement basement and changes of measurement index should be done.

Question 3

Companies are entitled to record revenue when the revenue involved has been realized and earned. According to SEC, revenue is realized and earned when there is the existence of evidence of an arrangement, services have been rendered or delivery has occurred, the seller’s price to the buyer is determinable or fixed, and there is reasonable assurance of collectability. For the transactions mentioned here, the guidelines were violated. North Face did not collect the revenues since they were not earned. The recorded revenues were more of guarantees for future sales that never occurred, and therefore the Merchandise was returned to the company.

Question 4

By preparing work papers, auditors aim to get assistance with performance, planning, and supervision of an engagement, and they are also used as the basis for reviewing the quality of work since they provide reviewers with written documentation of evidence to support the auditor’s conclusions. Other auditors use the work papers to review the quality of work that was performed as this helps in planning the preceding year’s audit. Deloitte undermined these objectives by altering the 1997 audit work papers. This is because the work papers would affect the 1998’s audit decision making. The misrepresented transactions in 1997, would work to affect 1998.

Question 5

Auditors do not have the responsibility of assessing the quality of key decisions that are usually made by client executives. However, there is a need for assessing the competence of these executives. A less competent management team presents a greater inherent risk since it means the management’s probability of detecting financial misstatements is low. When the management is not competent, there is always a need for greater audit procedures.

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