When conducting an audit for Casiola, what level of judgment and skepticism is required?
Casiola Franchise · 2024 FDDAnswer from 2024 FDD Document
d material if there is a substantial likelihood that, individually or in aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with generally accepted auditing standards, we:
- Exercise professional judgment and maintain professional skepticism throughout the audit.
- Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or\nerror, 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 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 Casiola Franchise, LLC's internal control. Accordingly, no such opinion is expressed.
- Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting\nestimates made by management, as well as evaluate the overall presentation of the financial statements.
Source: Item 23 — RECEIPTS (FDD pages 47–209)
What This Means (2024 FDD)
According to Casiola's 2024 Franchise Disclosure Document, auditors are expected to exercise professional judgment and maintain professional skepticism throughout the audit. This means the auditor must have a questioning mind and critically assess the audit evidence. The auditor's objectives are 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.
The FDD clarifies that reasonable assurance is a high level of assurance, but it is not absolute. Therefore, an audit is not a guarantee that all material misstatements will be detected. The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error because fraud may involve intentional concealment.
In practical terms, this means a Casiola franchisee relying on the audited financial statements should understand that the audit provides a high degree of confidence, but not a certainty, that the financials are accurate. The franchisee should also be aware that the risk of undetected fraud is inherent in any audit, and the auditor's responsibility is to provide reasonable, not absolute, assurance.