What is the auditor's responsibility in assessing the risk of material misstatement in Carls' financial statements?
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 auditor's responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditor's report will include their opinion on the financial statements. While reasonable assurance is a high level of assurance, it is not absolute, so there is no guarantee that all material misstatements will be detected. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error because fraud may involve activities such as collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
In assessing the risk of material misstatement, the auditor will exercise professional judgment and maintain professional skepticism throughout the audit. They will 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. These procedures include examining evidence regarding the amounts and disclosures in the financial statements on a test basis.
The auditor will also obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate for the circumstances. However, the purpose of this is not to express an opinion on the effectiveness of the company's internal control, and accordingly, no such opinion is expressed. The auditor will 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. Finally, the auditor will conclude whether there are conditions or events that raise substantial doubt about the company's ability to continue as a going concern for a reasonable period of time.