Is an audit a guarantee that all material misstatements will be detected in B Bops' financial statements?
B_Bops 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, including omissions, 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 pages 52–53)
What This Means (2025 FDD)
According to B Bops' 2025 Franchise Disclosure Document, an audit does not guarantee the detection of all material misstatements in the financial statements. While the auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, this assurance is not absolute. Therefore, an audit conducted according to generally accepted auditing standards does not guarantee the detection of every material misstatement.
The risk of not detecting a material misstatement is higher when it results from fraud compared to error. This is because fraud may involve intentional actions such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls, which are designed to prevent errors but may not be effective against deliberate deception. Misstatements, including omissions, are considered material if they are likely to influence the judgment of a reasonable user of the financial statements.
During the audit, the auditor exercises professional judgment and maintains professional skepticism, assesses the risks of material misstatement, and performs audit procedures to respond to those risks. These procedures include examining evidence regarding the amounts and disclosures in the financial statements on a test basis. The auditor also obtains an understanding of internal control relevant to the audit to design appropriate procedures but does not express an opinion on the effectiveness of B Bops' internal control. Additionally, the auditor evaluates 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. These steps are taken to provide a reasonable basis for the auditor's opinion, but they do not eliminate the possibility of material misstatements going undetected.