What does the FDD state about the auditor's responsibility to consider collusion when auditing Belocal's financial statements?
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 responsibilities include obtaining reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and issuing an auditor's report that includes their opinion. The FDD clarifies that reasonable assurance is a high level of assurance but not absolute, so an audit does not guarantee the detection of all material misstatements.
The document emphasizes that the risk of not detecting a material misstatement resulting from fraud is higher than that of error. This is because fraud may involve tactics like collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls. These actions are deliberately deceptive and designed to evade detection, making them more difficult to uncover during an audit.
For a prospective Belocal franchisee, this information highlights the importance of understanding the financial statements and internal controls of the company. While the auditor is responsible for providing reasonable assurance, the inherent risk of fraud, especially involving collusion, means that franchisees should also exercise due diligence in reviewing financial information and seeking clarification on any discrepancies or concerns.