How are misstatements considered material in the context of Better Blend's financial statements?
Better_Blend Franchise · 2024 FDDAnswer from 2024 FDD Document
Our objectives are to obtain reasonable assurance about whether the financial statement as a whole is 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 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 statement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 43)
What This Means (2024 FDD)
According to Better Blend's 2024 Franchise Disclosure Document, 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 statement. This definition is used by the independent auditor when assessing the fairness and accuracy of Better Blend's 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.
Reasonable assurance, while a high level of assurance, is not absolute. Therefore, an audit conducted according to Generally Accepted Auditing Standards (GAAS) does not guarantee that all material misstatements will be detected. The risk of not detecting a material misstatement resulting from fraud is higher than that of one resulting from error because fraud may involve intentional concealment, such as collusion or forgery.
For a prospective Better Blend franchisee, this means that the financial statements presented in the FDD have been audited to provide a reasonable level of confidence in their accuracy. However, it is important to understand the limitations of an audit and the potential for undetected misstatements, especially those resulting from fraudulent activities. Franchisees should carefully review the financial statements and consult with their own financial advisors to make informed decisions.