How does the auditor define 'material' misstatements in the context of Beard Papas' financial statements?
Beard_Papas 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 auditor's 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 U.S. 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 58–275)
What This Means (2025 FDD)
According to Beard Papas's 2025 Franchise Disclosure Document, the auditor's responsibilities include obtaining reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditor issues a report that includes their opinion on these statements. However, reasonable assurance is not absolute, so there is no guarantee that all material misstatements will be detected. The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error because fraud may involve more complex concealment.
For a prospective Beard Papas franchisee, this means that the financial statements have been audited to a reasonable degree of certainty. However, it is important to understand that the audit is not a guarantee of complete accuracy. The definition of 'material misstatement' is crucial because it sets the threshold for what the auditor is responsible for detecting.
Specifically, 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 important for a potential franchisee because it clarifies that the focus is on misstatements that could impact decision-making. A prospective franchisee should consider this when reviewing the financial statements and performing their own due diligence.