During the Beauty Bungalows audits, what level of professional judgment and skepticism is expected?
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Beauty Bungalows' 2025 Franchise Disclosure Document, the auditors are expected to exercise professional judgment and maintain professional skepticism throughout the audits. This means the auditors must use their expertise and experience to critically assess the information provided by Beauty Bungalows and not simply accept it at face value. They must remain objective and question assumptions, looking for any indications of potential misstatements, whether due to fraud or error.
The auditors' responsibilities include identifying and assessing the risks of material misstatement in the financial statements, whether due to fraud or error. They design and perform audit procedures responsive to those risks, which include examining evidence regarding the amounts and disclosures in the financial statements on a test basis. However, the audit is not designed to express an opinion on the effectiveness of Beauty Bungalows' internal control.
The goal is to obtain reasonable assurance that the financial statements are free from material misstatement. While this is a high level of assurance, it is not absolute, and there is always a risk that a material misstatement may not be detected, especially if it results from fraud involving collusion, forgery, or intentional omissions. The auditors also evaluate the appropriateness of accounting policies, the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements, as well as conclude on Beauty Bungalows' ability to continue as a going concern.