What are the auditors' objectives in auditing the combined consolidated financial statements of Carls?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Our objectives are to obtain reasonable assurance about whether the combined consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the combined consolidated financial statements.
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 combined 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 combined 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 combined 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, the auditors' primary objectives are to gain reasonable assurance that the combined consolidated financial statements are free from material misstatement, whether due to fraud or error. Their goal is to issue an auditors' report that includes their professional opinion on the financial statements. The auditors' report provides an independent assessment of the fairness and reliability of the financial information presented by Carls.
It is important to note that while the auditors aim to provide a high level of assurance, it is not an absolute guarantee. 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' responsibilities include exercising professional judgment, maintaining skepticism throughout the audit, identifying and assessing risks of material misstatement, and obtaining an understanding of internal controls relevant to the audit.
The auditors' work involves examining evidence on a test basis, evaluating the appropriateness of accounting policies, and assessing the reasonableness of significant accounting estimates made by Carls's management. They also evaluate the overall presentation of the financial statements to ensure they comply with U.S. generally accepted accounting principles (GAAP). Additionally, the auditors must determine whether there are conditions or events that raise substantial doubt about Carls's ability to continue as a going concern.
For a prospective Carls franchisee, understanding the auditors' objectives provides insight into the level of scrutiny applied to the financial statements. While the audit aims to provide reasonable assurance, franchisees should recognize the inherent limitations and potential risks involved. Reviewing the auditors' report and understanding the scope of their work can help franchisees make informed decisions about the financial health and stability of the Carls franchise system.