What must auditors do in order to design audit procedures that are appropriate for Carls?
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 the 2024 FDD, when performing an audit in accordance with GAAS (auditing standards generally accepted in the United States of America), auditors must obtain an understanding of internal control relevant to the audit. This understanding is specifically for the purpose of designing audit procedures that are appropriate in the circumstances. However, the auditors are not expressing an opinion on the effectiveness of the company's internal control.
This means that the auditors for Carls need to assess the company's internal controls to tailor their audit approach. Internal controls are the policies and procedures implemented by Carls to ensure the accuracy and reliability of financial reporting, compliance with laws and regulations, and effectiveness and efficiency of operations. By understanding these controls, the auditors can identify areas of higher risk and design their audit tests accordingly.
For a prospective Carls franchisee, this indicates that the company undergoes a thorough audit process where the auditors consider the internal controls in place. While the audit doesn't provide a direct opinion on the strength of these controls, the fact that auditors must understand them to design appropriate procedures suggests a level of scrutiny over Carls's financial practices. This can provide some reassurance regarding the financial stability and reporting of the franchise system.