When auditing City Wide's consolidated financial statements, what judgment and skepticism level should be maintained?
City_Wide Franchise · 2025 FDDAnswer from 2025 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 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 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 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 page 65)
What This Means (2025 FDD)
According to City Wide's 2025 Franchise Disclosure Document, the auditors are required to exercise professional judgment and maintain professional skepticism throughout the audit. This means the auditors must critically assess the information provided by City Wide and not blindly accept it as fact. They need to consider the reliability of the evidence and be alert to potential misstatements, whether due to fraud or error. This approach is aligned with generally accepted auditing standards (GAAS).
The auditors' responsibilities include identifying and assessing the risks of material misstatement in City Wide's financial statements. They design and perform audit procedures that are responsive to those risks, which involves examining evidence on a test basis regarding the amounts and disclosures in the financial statements. The auditors also obtain an understanding of City Wide's internal control system to design appropriate audit procedures, although they do not express an opinion on the effectiveness of the company's internal controls.
Furthermore, the auditors evaluate the appropriateness of the accounting policies used by City Wide and the reasonableness of significant accounting estimates made by management. They also consider whether there are conditions or events that raise substantial doubt about City Wide's ability to continue as a going concern. The auditors are required to communicate with those charged with governance regarding the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters identified during the audit.
For a prospective City Wide franchisee, this indicates that the company's financial statements are subject to a rigorous audit process designed to provide reasonable assurance that the statements are free from material misstatement. The auditor's skepticism and judgment provide an additional layer of scrutiny, which can increase confidence in the reliability of the financial information presented. However, it is important to remember that even a well-conducted audit is not a guarantee against all misstatements, particularly those resulting from fraud.