What is the auditor's responsibility in judging Carls' ability to continue as a going concern?
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 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' 2024 Franchise Disclosure Document, the auditor's responsibility is to 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. This assessment is made based on the auditor's judgment, considering all relevant conditions and events in the aggregate. The auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes their opinion.
However, the FDD clarifies that reasonable assurance is not absolute and does not 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. This is because fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
To fulfill their responsibility, the auditors perform specific actions including exercising professional judgment and maintaining professional skepticism, identifying and assessing risks of material misstatement, obtaining an understanding of internal control, and evaluating the appropriateness of accounting policies and the reasonableness of significant accounting estimates. These procedures are conducted in accordance with auditing standards generally accepted in the United States of America (GAAS).