What must the auditor do regarding the risks of material misstatement of B Bops' financial statements?
B_Bops 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 B-Bop's Franchising Corporation'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 B-Bop's Franchising Corporation's ability to continue as a going concern for a reasonable period of time.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 52–53)
What This Means (2025 FDD)
According to B Bops' 2025 Franchise Disclosure Document, the auditor has specific responsibilities related to the risk of material misstatement in the company's financial statements. The auditor must identify and assess the risks of material misstatement, whether due to fraud or error, and design and perform audit procedures responsive to those risks. These procedures include examining evidence regarding the amounts and disclosures in the financial statements on a test basis. The auditor's goal is to obtain reasonable assurance that the financial statements are free from material misstatement. However, this is not an absolute guarantee.
The auditor must also obtain an understanding of internal control relevant to the audit to design appropriate audit procedures, though not for the purpose of expressing an opinion on the effectiveness of B Bops' internal control. The auditor will evaluate the appropriateness of accounting policies used, the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements. Additionally, the auditor must conclude whether there are conditions or events that raise substantial doubt about B Bops' ability to continue as a going concern for a reasonable period of time.
Furthermore, the auditor is required to communicate with those charged with governance regarding the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters identified during the audit. It's important to note that 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 they would likely influence the judgment made by a reasonable user based on the financial statements.