During an audit, what level of judgment and skepticism is required when assessing Beard Papas' financial statements?
Beard_Papas Franchise · 2025 FDDAnswer from 2025 FDD Document
any's ability to continue as a going concern for one year after the date that the financial statements are available to be issued.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with U.S. GAAS will always detect a 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 financial statements.
In performing an audit in accordance with U.S. 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\nin 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\nis 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 23 — RECEIPTS (FDD pages 58–275)
What This Means (2025 FDD)
According to Beard Papas's 2025 Franchise Disclosure Document, auditors must exercise professional judgment and maintain professional skepticism throughout the audit of the company's financial statements. This involves a critical assessment of the financial data to ensure it is free from material misstatements, whether due to fraud or error. The auditors' objective is to obtain reasonable assurance that the financial statements present a true and fair view. However, the FDD clarifies that reasonable assurance is not absolute and doesn't guarantee the detection of all material misstatements. 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 financial statements.
To achieve this level of assurance, the audit includes several key steps. Auditors identify and assess the risks of material misstatement, designing audit procedures that respond to these risks. These procedures involve examining evidence related to the amounts and disclosures in the financial statements on a test basis. Auditors also obtain an understanding of Beard Papas's internal control mechanisms to design appropriate audit procedures, although they do not express an opinion on the effectiveness of these controls.
Furthermore, the audit requires evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by the management of Beard Papas. The auditors must also determine whether there are conditions or events that raise substantial doubt about the company's ability to continue as a going concern. Finally, the auditors are required to communicate with those charged with governance regarding the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters identified during the audit.