What aspects of accounting policies should be evaluated during the audit of Bath Tune Up's financial statements?
Bath_Tune_Up Franchise · 2025 FDDAnswer from 2025 FDD Document
In performing an audit in accordance with US GAAS, we:
- Exercise professional judgment and maintain professional skepticism throughout the audit.
- Identify and assess the risks of material misstatement of the 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 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 effectiveness of the Company's internal control. Accordingly, no such opinion is expressed.
- Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
- Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 51–52)
What This Means (2025 FDD)
According to Bath Tune Up's 2025 Franchise Disclosure Document, the auditors evaluate the appropriateness of accounting policies used by management and the reasonableness of significant accounting estimates. They also assess the overall presentation of the financial statements to ensure they are fairly presented. This evaluation is part of the audit process to provide reasonable assurance that the financial statements are free from material misstatement. The audit is conducted in accordance with auditing standards generally accepted in the United States of America (US GAAS).
Specifically, the significant accounting policies of Bath Tune Up that are scrutinized include the basis of presentation, which adheres to accounting principles generally accepted in the United States of America (GAAP). The auditors also consider the use of estimates made by management, especially those concerning the allowance for credit losses related to accounts, notes, and rebates receivable, as well as the allocation of the Parent's expenses to the Company. These estimates can significantly impact the reported amounts of assets, liabilities, revenues, and expenses.
Furthermore, the auditors review Bath Tune Up's fair value measurements, categorizing them into three levels based on the types of inputs used: Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs). This assessment ensures that fair value is determined in accordance with established guidelines. The auditors also take into account how the company handles cash, considering cash on hand and deposits in banks as cash, and they verify that the company complies with FDIC insurance limits on deposits.
For a potential Bath Tune Up franchisee, understanding these accounting policies and the estimates involved is crucial. It highlights areas where management's judgment can significantly affect the financial statements. Franchisees should be aware of these potential impacts and consider them when evaluating the financial health and performance of Bath Tune Up.