What is the level of assurance that an audit provides regarding the detection of material misstatements in Bevaris Alliance's financial statements?
Bevaris_Alliance Franchise · 2024 FDDAnswer from 2024 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 generally accepted auditing standards 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, including omissions, 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 statements.
In performing an audit in accordance with generally accepted auditing standards, we:
- Exercise professional judgment and maintain professional skepticism throughout the audit.
- 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 audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Bevaris Alliance Franchise System, LLC'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.
Source: Item 23 — RECEIPT (FDD pages 22–88)
What This Means (2024 FDD)
According to Bevaris Alliance's 2024 Franchise Disclosure Document, an audit aims to provide reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditor issues a report including their opinion on the financial statements. Reasonable assurance is considered a high level of assurance, but it is not absolute. Therefore, an audit is not a guarantee that all material misstatements will be detected.
The document clarifies 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 activities like collusion, forgery, intentional omissions, misrepresentations, or overriding internal controls, which are designed to conceal the fraud. Misstatements, including omissions, are considered material if they could influence the judgment of a reasonable user of the financial statements.
During the audit, the auditor exercises professional judgment and maintains professional skepticism. They identify and assess the risks of material misstatement, whether due to fraud or error, and design 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 auditor also obtains an understanding of internal control relevant to the audit to design appropriate procedures, but they do not express an opinion on the effectiveness of Bevaris Alliance's internal control. The auditor evaluates the appropriateness of accounting policies used, the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements.
For a prospective Bevaris Alliance franchisee, this means that while the financial statements have been audited, there is still a risk that material misstatements, particularly those resulting from fraud, may not be detected. Therefore, it is important for the franchisee to carefully review the financial statements and consider seeking independent financial advice to fully understand the financial position of Bevaris Alliance.