What level of assurance does an audit provide regarding the detection of material misstatements in Basecamp Fitness's financial statements?
Basecamp_Fitness 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 US 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 financial statements.
Source: Item 23 — RECEIPTS (FDD pages 62–248)
What This Means (2025 FDD)
According to Basecamp Fitness's 2025 Franchise Disclosure Document, an audit aims to provide reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditors issue a report that includes their opinion on the financial statements. Reasonable assurance is considered a high level of assurance, but it is not absolute.
The FDD clarifies that a reasonable assurance is not a guarantee that an audit conducted following US GAAS (Generally Accepted Auditing Standards in the United States of America) will always detect every material misstatement. There's a higher risk of not detecting a material misstatement resulting from fraud compared to error. This is because fraud may involve activities like collusion, forgery, intentional omissions, misrepresentations, or overriding internal controls, which are designed to prevent errors but may be circumvented in cases of fraud.
For a prospective Basecamp Fitness franchisee, this means that while the financial statements have been audited, there is still a risk that material misstatements, especially those resulting from fraud, may not be detected. Misstatements are considered material if they would likely influence the judgment of a reasonable user of the financial statements. Therefore, while an audit provides a level of confidence in the accuracy of the financial statements, it is not a complete guarantee of accuracy.