When auditing Carls' financial statements, what must the auditors evaluate regarding the accounting policies used by management?
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's 2024 Franchise Disclosure Document, when performing an audit in accordance with generally accepted auditing standards (GAAS), the auditors must evaluate the appropriateness of the accounting policies used by management. They must also assess the reasonableness of significant accounting estimates made by management and evaluate the overall presentation of the consolidated financial statements. This evaluation is part of the auditors' responsibility to provide an opinion on whether the financial statements present fairly the company's financial position, results of operations, and cash flows in accordance with U.S. generally accepted accounting principles.
This means that the auditors will scrutinize the specific accounting methods Carls' management has chosen to record and report its financial transactions. For example, they will look at how revenue is recognized, how expenses are matched to revenue, and how assets and liabilities are valued. The auditors will assess whether these policies are in line with standard accounting practices and whether they accurately reflect the economic reality of Carls' business operations.
For a prospective franchisee, this audit process provides a level of assurance that the financial information presented by Carls is reliable and fairly stated. It reduces the risk that the financial statements are misleading or contain material misstatements. However, it is important to note that even a GAAS audit provides reasonable, but not absolute, assurance. There is always a risk that some misstatements, especially those resulting from fraud, may not be detected. Franchisees should still conduct their own due diligence and seek professional advice when evaluating the financial health of Carls.