What aspects of Beggars Pizza's accounting policies and estimates must the auditor evaluate?
Beggars_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
In performing an audit in accordance with generally accepted auditing standards, 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 Beggars Pizza Franchise, LLC'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 Beggars Pizza Franchise, LLC's ability to continue as a going concern for a reasonable period of time.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 39)
What This Means (2025 FDD)
According to Beggars Pizza's 2025 Franchise Disclosure Document, the auditor must evaluate the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by the Beggars Pizza management team. The auditor also assesses the overall presentation of the financial statements. This evaluation is part of the auditor's responsibility to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes their opinion.
The accounting policies of Beggars Pizza cover several key areas. These include how the company recognizes revenue from franchise fees and royalties, how it handles cash and cash equivalents, and how it accounts for royalty receivables. For royalty receivables, Beggars Pizza states them at net collectible amounts and establishes an allowance for doubtful accounts based on specific assessments and historical loss experience. In 2023, Beggars Pizza changed its credit policy and now estimates the allowance based on an analysis of individual customers, adjusted for current conditions and reasonable forecasts.
The use of estimates is also a critical aspect of Beggars Pizza's financial reporting. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingent items, revenue, and expenses. These estimates are based on management's judgment and can impact the financial results. The auditor's role is to assess whether these estimates are reasonable and in line with generally accepted accounting principles. For example, the allowance for credit losses was $10,000 at the end of 2024 and 2023, which the auditor would need to evaluate for reasonableness given the company's credit policies and historical experience.
In summary, a prospective Beggars Pizza franchisee should understand that the financial statements are audited to ensure they present a fair view of the company's financial position. The auditor's evaluation of accounting policies and estimates provides an additional layer of scrutiny, helping to ensure that the financial information is reliable and in accordance with accounting standards. This process includes assessing policies around revenue recognition, cash management, and the handling of receivables, as well as the reasonableness of estimates used in preparing the financial statements.