When auditing Embassy Suites' financial statements, are the auditors expressing an opinion on the effectiveness of the company's internal control?
Embassy_Suites Franchise · 2025 FDDAnswer from 2025 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 97)
What This Means (2025 FDD)
According to the 2025 FDD, the auditors of Embassy Suites' financial statements do not express an opinion on the effectiveness of the company's internal control. While the auditors obtain an understanding of internal control relevant to the audit to design appropriate procedures, the audit's purpose is not to provide assurance on the internal control's effectiveness. The auditors' primary objective is to obtain reasonable assurance that the financial statements are free from material misstatement and to issue a report including their opinion on the financial statements themselves.
Specifically, the FDD states that the audit procedures are designed to identify and assess the risks of material misstatement in the financial statements, whether due to fraud or error. These procedures include examining evidence regarding the amounts and disclosures in the financial statements on a test basis. The auditors evaluate the appropriateness of accounting policies and the reasonableness of significant accounting estimates made by management, as well as the overall presentation of the financial statements.
This means that while the auditors consider internal controls to design their audit approach, prospective Embassy Suites franchisees should not rely on the audit report as an endorsement of the company's internal control systems. If a franchisee wants to assess the effectiveness of Embassy Suites' internal controls, they would need to conduct a separate assessment or engage a specialist to do so.
It is important for potential franchisees to understand the scope and limitations of the audit report when evaluating the financial health and stability of Embassy Suites. The audit report provides an opinion on the fairness of the financial statements but does not provide assurance about the effectiveness of internal controls.