What is the auditor's responsibility regarding the detection of material misstatements in Belocal's financial statements that result from the override of internal control?
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 including their opinion. While reasonable assurance is a high level of assurance, it is not absolute, and there is no guarantee that an audit conducted according to Generally Accepted Auditing Standards (GAAS) will always detect a material misstatement.
The document indicates that the risk of not detecting a material misstatement resulting from fraud is higher than that of one resulting from error. This is because fraud may involve actions such as collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. These actions are designed to conceal the fraud, making it more difficult to detect through standard auditing procedures.
For a prospective Belocal franchisee, this means that while the financial statements are audited, there is still a risk of material misstatements, especially those resulting from fraudulent activities. Franchisees should understand the limitations of an audit and consider this when making financial decisions based on the provided statements. Misstatements are considered material if they could reasonably be expected to influence the economic decisions of users of the financial statements.