What is the auditor's responsibility regarding accounting policies used in the preparation of Carls' financial statements?
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's 2024 Franchise Disclosure Document, the auditor, in accordance with generally accepted auditing standards (GAAS), is responsible for evaluating the appropriateness of the accounting policies used by management in the preparation of the financial statements. This evaluation also extends to assessing the reasonableness of significant accounting estimates made by the management of Carls. The auditor's responsibility is to also evaluate the overall presentation of the financial statements.
This means the auditor must exercise professional judgment and maintain professional skepticism throughout the audit process. They must assess whether the chosen accounting policies are suitable for Carls's business and industry, and whether management's estimates are realistic and well-supported. This involves examining evidence related to the amounts and disclosures in the financial statements on a test basis.
For a prospective Carls franchisee, this indicates that an independent and qualified auditor has reviewed the accounting practices of the company. This review provides a level of assurance that the financial statements are presented fairly and in accordance with accounting standards. However, it's important to remember that an audit provides reasonable, but not absolute, assurance. Therefore, while the auditor evaluates accounting policies, the ultimate responsibility for the accuracy and fairness of the financial statements rests with Carls's management.