How are misstatements considered material in the audit of Boulder Designs' financial statements?

According to Boulder Designs' 2025 Franchise Disclosure Document, misstatements are considered material if they could influence the judgment of a reasonable user of the 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, and to issue an auditor's report that includes their opinion. However, reasonable assurance is not absolute, and there is always a risk that a material misstatement may not be detected.

The FDD emphasizes that the risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error. This is because fraud may involve intentional actions such as collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. These actions are designed to conceal the misstatement, making it more difficult to detect through standard auditing procedures.

For a potential Boulder Designs franchisee, this means that the financial statements presented in the FDD are audited to a reasonable level of assurance, but there is no guarantee that they are completely free of errors or fraud. It is important for the franchisee to carefully review the financial statements and notes, and to consider seeking independent financial advice to fully understand the financial position of Boulder Designs. Understanding how materiality is assessed can help a franchisee appreciate the limitations of an audit and the importance of their own due diligence.