What must the auditor evaluate regarding Devon Creek's accounting policies and estimates?
Devon_Creek Franchise · 2024 FDDAnswer from 2024 FDD Document
In performing an audit in accordance with generally accepted auditing standards, we:
- 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 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 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 45)
What This Means (2024 FDD)
According to Devon Creek's 2024 Franchise Disclosure Document, the auditor must evaluate the appropriateness of the accounting policies used by management and the reasonableness of significant accounting estimates made by management. The auditor must also evaluate the overall presentation of the financial statements. This evaluation is part of the auditor's responsibility to obtain reasonable assurance about whether 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.
This means the auditor must scrutinize the choices Devon Creek's management has made in how they record and report their financial activities. Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. Accounting estimates are approximations of financial statement elements, accounts, or items. Examples of accounting estimates include allowances for uncollectible accounts receivable, depreciation expense, and revenue recognition.
The auditor's evaluation provides an independent assessment of whether Devon Creek's financial statements are presented fairly and in accordance with generally accepted accounting principles. This is important for prospective franchisees because it gives them confidence that the financial information they are reviewing is reliable and accurate. It also helps to ensure that Devon Creek is following consistent accounting practices, which makes it easier to compare their financial performance over time and to other similar companies.
Furthermore, the auditor must determine whether there are conditions or events that raise substantial doubt about Devon Creek's ability to continue as a going concern for a reasonable period of time. This assessment is crucial for potential franchisees as it sheds light on the financial stability and long-term viability of Devon Creek. If the auditor identifies such concerns, it could indicate significant risks for franchisees who are considering investing in the Devon Creek brand.