Melena - Abstract Financial accountants and independent...

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Abstract Financial accountants and independent auditors commonly face challenging technical and ethical dilemmas while carrying out their professional responsibilities. This case profiles an accounting and financial reporting fraud orchestrated by the chief financial officer (CFO) of a major public company and his subordinates. The CFO, who was a CPA, took extreme measures to conceal the fraud from his company’s audit committee and independent auditors. Despite those measures, the independent auditors identified suspicious entries in the company’s accounting records that were a result of the CFO’s fraudulent scheme but did not properly investigate those items. Shortly before the fraud was publicly revealed, a partner of the company’s audit firm instructed his subordinates to alter prior year audit work-papers for the client to conceal improper decisions made by himself and his firm. AUDITOR’S DILEMMA: The auditor’s dilemma in the case presented is to either alter the prior-year work-papers to conceal questionable decisions made by an audit partner, decisions that involved several large barter transactions that inflated the audit client’s reported operating results or incorporate in the succeeding audit that the audit partners failed to investigate thoroughly the barter transaction thus making its previous audit opinion inappropriate. Company Profile North Face Inc. is a retail and manufacturing corporation of outdoor apparel and equipment. It serves the specialty market of extreme athletes characterized by the young, high-income earners that are willing to pay high prices for quality outdoor apparel. The company does not only market its products in the United States but also to other areas of the globe. International sales accounted for approximately 26% of the company’s net sales in 1997.
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Questions 1 If the auditor concludes, based on the accumulation of sufficient evidential matter, that the effects of likely misstatements, individually or in the aggregate, cause the financial statements to be materially misstated, the auditor should request management to eliminate the misstatement. If the auditor concludes that the effects of likely misstatements, individually or in the aggregate, do not cause the financial statements to be misstated, he or she should recognize that they could still be materially misstated because of further misstatements remaining undetected. Given the guidance provided by the professional auditing standards, I would suggest that the
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Melena - Abstract Financial accountants and independent...

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