What is the auditor's responsibility regarding the reasonableness of significant accounting estimates made by management of City Publications?
City_Publications Franchise · 2025 FDDAnswer from 2025 FDD Document
tect 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 has a responsibility to evaluate the reasonableness of significant accounting estimates made by the management of City Publications. This evaluation is part of performing an audit in accordance with Generally Accepted Auditing Standards (GAAS).
In practical terms, this means the auditor must assess whether the estimates made by City Publications' management are justifiable and appropriate. These estimates can significantly impact the financial statements, affecting reported amounts of assets, liabilities, revenues, and expenses. The auditor's assessment provides a level of assurance to potential franchisees that the financial information presented by City Publications is based on reasonable assumptions.
The auditor's responsibilities extend to exercising professional judgment and maintaining professional skepticism throughout the audit. They must identify and assess the risks of material misstatement in the financial statements, whether due to fraud or error, and design audit procedures to address those risks. This includes examining evidence related to the amounts and disclosures in the financial statements on a test basis.
Furthermore, the auditor must obtain an understanding of internal controls relevant to the audit to design appropriate procedures, though they do not express an opinion on the effectiveness of City Publications' internal control. The auditor also evaluates the appropriateness of the accounting policies used and 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.