How are misstatements considered material in the audit of Beauty Bungalows' financial statements?
Beauty_Bungalows 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 and auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore not a guarantee that an audit conducted in accordance with 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 aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
Exercise professional judgment and maintain professional skepticism throughout the audits.
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 audits in order to design audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company'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 the Company's ability to continue as a going concern for a reasonable period of time.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Beauty Bungalows' 2025 Franchise Disclosure Document, misstatements are considered material if they could influence the judgment of a reasonable user of the 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. However, this is not an absolute guarantee that all material misstatements will be detected.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error because fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. During the audit, the auditors exercise professional judgment and maintain professional skepticism, assess the risks of material misstatement, and perform 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 auditors also obtain an understanding of internal control relevant to the audit to design appropriate procedures, but they do not express an opinion on the effectiveness of Beauty Bungalows' internal control. They evaluate 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. The auditors also conclude whether there are conditions or events that raise substantial doubt about Beauty Bungalows' ability to continue as a going concern.
This means that prospective Beauty Bungalows franchisees should be aware that the financial statements are audited to provide reasonable assurance of accuracy, but there is always a risk of undetected misstatements, especially those resulting from fraud. Franchisees should carefully review the financial statements and consider seeking professional advice to fully understand the financial health of Beauty Bungalows.