During the audit, what level of judgment should be exercised by the auditor for Closet Storage Concepts?
Closet_Storage_Concepts Franchise · 2025 FDDAnswer from 2025 FDD Document
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 generally accepted auditing standards 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 generally accepted auditing standards, we:
- Exercise professional judgment and maintain professional skepticism throughout the audit.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2025 FDD)
According to Closet Storage Concepts' 2025 Franchise Disclosure Document, the auditor is expected to exercise professional judgment and maintain professional skepticism throughout the audit. The auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes their opinion.
Reasonable assurance, as defined in the FDD, is considered a high level of assurance, but it is not absolute. Therefore, it does not guarantee that an audit conducted according to generally accepted auditing standards will always detect a material misstatement. The risk of not detecting a material misstatement resulting from fraud is higher than that of error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
In practical terms, this means that while the audit aims to provide a high degree of confidence in the accuracy of the financial statements, there is always a risk that some misstatements, especially those resulting from fraud, may not be detected. For a prospective Closet Storage Concepts franchisee, this highlights the importance of understanding the financial statements and seeking professional advice to interpret them, rather than relying solely on the auditor's report.