What level of assurance does an audit provide regarding the detection of material misstatements in the financial statements of Premium Service Brands, LLC, the parent company of 360 Painting?
360_Painting 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 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 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 56)
What This Means (2025 FDD)
According to 360 Painting's 2025 Franchise Disclosure Document, the audit of Premium Service Brands, LLC's financial statements aims to provide reasonable assurance that the statements are free from material misstatement, whether due to fraud or error. The goal of the auditors is to issue a report that includes their opinion on the financial statements.
However, the FDD clarifies that reasonable assurance is a high level of assurance, but it is not absolute. Therefore, an audit is not a guarantee that all material misstatements will be detected. The risk of not detecting a misstatement resulting from fraud is higher than one resulting from error because fraud may involve intentional concealment or misrepresentation.
The document defines material misstatements as those that could influence the judgment of a reasonable user of the financial statements. The auditors' responsibilities include exercising professional judgment, assessing risks of material misstatement, examining evidence on a test basis, understanding internal controls (though not expressing an opinion on their effectiveness), and evaluating accounting policies and estimates. Ultimately, the auditors must conclude whether there are conditions that raise substantial doubt about Premium Service Brands, LLC's ability to continue as a going concern.
For a prospective 360 Painting franchisee, this means that while the financial statements of the parent company, Premium Service Brands, LLC, are audited, there is still a risk that material misstatements may exist that were not detected during the audit. This is a standard disclaimer in audited financial statements and reflects the inherent limitations of the auditing process.