What is the criteria for misstatements to be considered material in Bath Tune Up's financial statements?

According to the 2025 Bath Tune Up Franchise Disclosure Document, 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. This definition is used by the independent auditor when assessing the fairness and accuracy of Bath Tune Up's financial statements. The auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes their opinion.

Reasonable assurance, while a high level of assurance, is not absolute. Therefore, an audit conducted following US GAAS (Generally Accepted Auditing Standards) does not guarantee that all material misstatements will be detected. The risk of not detecting a material misstatement is higher when it results from fraud, as fraud may involve intentional concealment or misrepresentation. Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

For a potential Bath Tune Up franchisee, this means that the financial statements presented in Item 21 of the FDD are audited to provide a reasonable level of confidence in their accuracy. However, it's important to recognize that even with an audit, there is always a risk of undetected misstatements, especially those resulting from fraudulent activities. Franchisees should carefully review the financial statements and consider consulting with a financial advisor to fully understand the financial health of Bath Tune Up.

In summary, the materiality of misstatements in Bath Tune Up's financial statements is judged by whether they could influence the decisions of a reasonable user of those statements. While audits aim to detect such misstatements, they do not provide an absolute guarantee, and the risk of undetected fraud remains a consideration for prospective franchisees.