During the audits, what level of judgment and skepticism should be exercised when assessing Chesters' financial statements?
Chesters Franchise · 2025 FDDAnswer from 2025 FDD Document
In performing an audit in accordance with generally accepted auditing standards, we:
- Exercise professional judgment and maintain professional skepticism throughout the audits.
- 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. 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 audits 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 Chester's International, LLC'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 financial statements.
- Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Chester's International, LLC's ability to continue as a going concern for a reasonable period of time.
Source: Item 21 — **FINANCIAL STATEMENTS (FDD page 48)
What This Means (2025 FDD)
According to Chesters's 2025 Franchise Disclosure Document, auditors are expected to exercise professional judgment and maintain professional skepticism throughout the audits of the company's financial statements. This means the auditors should have a questioning mind and critically assess the evidence presented to them. They should not automatically assume that the information is correct but should instead seek to verify it and look for any indications of potential misstatement, whether due to fraud or error.
The auditors' responsibilities include identifying and assessing the risks of material misstatement in the financial statements, whether due to fraud or error. They design and perform audit procedures that are responsive to those risks, including examining evidence regarding the amounts and disclosures in the financial statements on a test basis. The auditors also obtain an understanding of internal control relevant to the audits in order to design appropriate audit procedures, though they do not express an opinion on the effectiveness of Chesters' internal control.
Furthermore, the auditors evaluate the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as the overall presentation of the financial statements. They also conclude whether there are conditions or events that raise substantial doubt about Chesters' ability to continue as a going concern for a reasonable period of time. These procedures are designed to provide reasonable assurance that the financial statements are free from material misstatement.
For a prospective franchisee, this indicates that Chesters' financial statements are subject to a rigorous audit process. While the audit provides a high level of assurance, it is not an absolute guarantee against misstatements. Franchisees should still carefully review the financial statements and consult with their own financial advisors to make informed decisions.