When auditing Carls' consolidated financial statements, are the auditors required to express an opinion on the effectiveness of the company's internal control?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
In performing an audit in accordance with GAAS, we:
- Exercise professional judgment and maintain professional skepticism throughout the audit.
- Identify and assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated 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 79–80)
What This Means (2024 FDD)
According to Carls' 2024 Franchise Disclosure Document, the auditors are not required to express an opinion on the effectiveness of the company's internal control. While the auditors do obtain an understanding of internal control relevant to the audit, this is specifically for the purpose of designing audit procedures that are appropriate for the circumstances.
The document explicitly states that the audit procedures are "not for the purpose of expressing an opinion on the effectiveness of the Company's internal control." The auditors' report will not include any opinion on the effectiveness of Carls' internal controls.
This means that while the auditors assess internal controls to plan their audit, they do not provide an independent assessment of how well those controls are working. A prospective Carls franchisee should be aware that the financial statements' audit focuses on the accuracy of the financial reporting, not on the strength of the company's internal control systems.