What is the auditor's responsibility regarding the detection of material misstatements in Belocal's financial statements that result from error?
Belocal 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 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, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these financial statements.
Source: Item 23 — RECEIPTS (FDD pages 71–242)
What This Means (2025 FDD)
According to Belocal's 2025 Franchise Disclosure Document, 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. The auditor's assurance is considered a high level of assurance, but it is not absolute. Therefore, an audit conducted following Generally Accepted Auditing Standards (GAAS) does not guarantee the detection of every material misstatement.
The FDD clarifies that the risk of not detecting a material misstatement resulting from fraud is higher than from error. This is because fraud may involve intentional concealment, such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls. These actions are designed to deceive the auditor, making them harder to detect than unintentional errors.
The document defines material misstatements as those that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users relying on the financial statements. This means the auditor focuses on detecting misstatements significant enough to impact the judgment of someone using the statements to make financial decisions about Belocal.