What is the purpose of understanding internal control during the City Wide audit, and is an opinion expressed on the effectiveness of the company's internal control?
City_Wide Franchise · 2025 FDDAnswer from 2025 FDD Document
Our objectives are to obtain reasonable assurance about whether the consolidated 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 consolidated financial statements.
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.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 65)
What This Means (2025 FDD)
According to City Wide's 2025 Franchise Disclosure Document, the auditors obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. However, the audit is not performed for the purpose of expressing an opinion on the effectiveness of City Wide's internal control, and therefore, no such opinion is expressed. This means the auditors assess City Wide's internal controls to plan their audit effectively, but they do not provide a separate, formal opinion on how well those controls are working.
For a prospective City Wide franchisee, this is a standard practice in financial audits. The audit focuses on whether the financial statements are fairly presented, not on whether the company's internal controls are perfect. However, the auditors are required to communicate any significant internal control-related matters that they identify during the audit to those charged with governance.
Therefore, while the audit report provides assurance on the accuracy of City Wide's financial statements, it does not offer any guarantee about the strength of its internal controls. A potential franchisee may want to inquire further about City Wide's internal controls and risk management practices to gain a more complete understanding of the company's operational and financial health.