What is the auditor's responsibility regarding the detection of material misstatements in City Publications' financial statements?
City_Publications Franchise · 2025 FDDAnswer from 2025 FDD Document
ncial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about CITY PUBLICATIONS FRANCHISE GROUP, INC.'s ability to continue as a going concern for one year after the date that the financial statements are issued.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's 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 financial statements.
In performing an audit in accordance with GAAS, we:
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- 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 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 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 CITY PUBLICATIONS FRANCHISE GROUP, INC.'s internal control. Accordingly, no such opinion is expressed.
Source: Item 23 — RECEIPT (FDD pages 39–129)
What This Means (2025 FDD)
According to City Publications' 2025 Franchise Disclosure Document, the auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. This assurance allows them to issue an auditor's report including their opinion on the financial statements. While reasonable assurance is a high level of confidence, it is not absolute, so an audit conducted according to Generally Accepted Auditing Standards (GAAS) does not guarantee that all material misstatements will be detected.
The FDD emphasizes that the risk of not detecting a material misstatement resulting from fraud is higher than that of one resulting from error. This is because fraud may involve sophisticated methods such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls. The document defines misstatements as material if they are likely to influence the judgment of a reasonable user of the financial statements, either individually or in the aggregate.
To perform the audit in accordance with GAAS, the auditor must exercise professional judgment and maintain professional skepticism throughout the audit. They identify and assess the risks of material misstatement, whether due to fraud or error, and design and perform audit procedures responsive to those risks, including examining evidence regarding the amounts and disclosures in the financial statements on a test basis. The auditor obtains an understanding of internal control relevant to the audit in order to design appropriate audit procedures, but does not express an opinion on the effectiveness of City Publications' internal control. The auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as the overall presentation of the financial statements. Finally, the auditor concludes whether there are conditions or events that raise substantial doubt about City Publications' ability to continue as a going concern for a reasonable period of time.