During the audit of Hardees' consolidated financial statements, what must the auditor do regarding the risks of material misstatement?
Hardees Franchise · 2025 FDDAnswer from 2025 FDD Document
the combined consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' 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 combined 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 combined consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
Source: Item 21 — Financial Statements (FDD pages 84–85)
What This Means (2025 FDD)
According to Hardees' 2025 Franchise Disclosure Document, the auditor has specific responsibilities related to the risk of material misstatement during the audit of the consolidated financial statements. The auditor must identify and assess the risks of material misstatement in the consolidated financial statements, whether due to fraud or error. They must also design and perform audit procedures that are responsive to these identified risks. These procedures include examining evidence regarding the amounts and disclosures in the consolidated financial statements, which is done on a test basis.
Furthermore, the auditor is required to obtain an understanding of internal control relevant to the audit. This understanding is used to design audit procedures that are appropriate for the circumstances, but it is not for the purpose of expressing an opinion on the effectiveness of Hardees' internal control. Consequently, the auditor's report will not include an opinion on the company's internal control effectiveness.
In addition to assessing the risk of material misstatement and understanding internal controls, the auditor must exercise professional judgment and maintain professional skepticism throughout the audit. They must also evaluate the appropriateness of the accounting policies used, the reasonableness of significant accounting estimates made by management, and the overall presentation of the consolidated financial statements. Finally, the auditor must conclude whether there are conditions or events that raise substantial doubt about Hardees' ability to continue as a going concern for a reasonable period of time.
These steps are in line with generally accepted auditing standards (GAAS) and are intended to provide reasonable assurance that the consolidated financial statements are free from material misstatement. However, it's important to note that reasonable assurance is not absolute, and there is always a risk that a material misstatement may not be detected, especially if it results from fraud involving collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.