What is the auditor's responsibility in evaluating the reasonableness of significant accounting estimates made by management for Aunt Millies Bakeries?
Aunt_Millies_Bakeries Franchise · 2025 FDDAnswer from 2025 FDD Document
material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS, we:
- Exercise professional judgment and maintain professional skepticism throughout the audit.
- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the\neffectiveness of Perfection Bakeries, Inc.'s internal control. Accordingly, no such opinion is expressed.
Source: Item 23 — RECEIPT (FDD pages 44–196)
What This Means (2025 FDD)
According to Aunt Millies Bakeries' 2025 Franchise Disclosure Document, the auditor has specific responsibilities when auditing the financial statements of Perfection Bakeries, Inc., which is the parent company of Aunt Millies Bakeries. As part of their audit, the auditor must evaluate the reasonableness of significant accounting estimates made by the management of Perfection Bakeries, Inc. This involves assessing whether the estimates used by management are appropriate and justifiable based on the available evidence and accounting principles.
The auditor's role is to obtain reasonable assurance that the consolidated financial statements are free from material misstatement, whether due to fraud or error. This includes exercising professional judgment and maintaining professional skepticism throughout the audit process. The auditor identifies and assesses the risks of material misstatement, designs and performs audit procedures responsive to those risks, and examines evidence regarding the amounts and disclosures in the financial statements on a test basis.
Furthermore, the auditor obtains an understanding of internal control relevant to the audit to design appropriate audit procedures, though they do not express an opinion on the effectiveness of Perfection Bakeries, Inc.'s internal control. The auditor also needs to conclude whether there are conditions or events that raise substantial doubt about Perfection Bakeries, Inc.'s ability to continue as a going concern for a reasonable period of time. These responsibilities ensure that the financial statements provide a fair and accurate representation of the company's financial position and performance.