What must the auditors do regarding the risks of material misstatement of Beauty Bungalows' financial statements?
Beauty_Bungalows Franchise · 2025 FDDAnswer from 2025 FDD Document
In performing an audit in accordance with GAAS, we:
Exercise professional judgment and maintain professional skepticism throughout the audits.
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 audits in order to design audit procedures that are appropriate in the circumstance, 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.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits, significant audit findings, and certain internal control-related matters that we identified during the audits.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Beauty Bungalows' 2025 Franchise Disclosure Document, the auditors have specific responsibilities related to the risk of material misstatement in the financial statements. The auditors must identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. They are also required to design and perform audit procedures that are responsive to these identified risks. These procedures include examining evidence regarding the amounts and disclosures in the financial statements on a test basis.
Furthermore, the auditors must obtain an understanding of internal control relevant to the audits to design appropriate audit procedures. However, this understanding is not for the purpose of expressing an opinion on the effectiveness of Beauty Bungalows' internal control, and the auditors will not express such an opinion. The auditors also evaluate the appropriateness of the accounting policies used, the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements.
In addition to these responsibilities, the auditors must exercise professional judgment and maintain professional skepticism throughout the audit. They must also conclude whether there are conditions or events that raise substantial doubt about Beauty Bungalows' ability to continue as a going concern for a reasonable period of time. Finally, the auditors are required to communicate with those charged with governance regarding the planned scope and timing of the audits, significant audit findings, and certain internal control-related matters identified during the audits.
These measures ensure that the financial statements of Beauty Bungalows are reasonably assured to be free from material misstatements, whether due to fraud or error, providing a level of confidence to potential franchisees and investors. However, it is important to note that reasonable assurance is not absolute, and there is always a risk that a material misstatement may not be detected.