What is the auditor's responsibility regarding the detection of material misstatements in Brueggers Bagels' financial statements due to fraud versus error?
Brueggers_Bagels Franchise · 2025 FDDAnswer from 2025 FDD Document
Our objectives are to obtain reasonable assurance about whether the consolidated 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 US 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 consolidated financial statements.
In performing an audit in accordance with US GAAS, we:
- x Exercise professional judgment and maintain professional skepticism throughout the audit.
- x Identify and assess the risks of material misstatement of the consolidated 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 consolidated financial statements.
- x 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 the Company's internal control. Accordingly, no such opinion is expressed.
- x 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 consolidated financial statements.
- x Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 61)
What This Means (2025 FDD)
According to Brueggers Bagels' 2025 Franchise Disclosure Document, the auditor's objective is to obtain reasonable assurance that the consolidated financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report including their opinion. The auditor's assurance is considered a high level, but it is not absolute, and there is no guarantee that an audit conducted following US GAAS (Generally Accepted Auditing Standards in the United States of America) will always detect a material misstatement.
The FDD states that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error. This is because fraud may involve actions such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls, which are designed to conceal the fraud. The document defines misstatements as material if they would likely influence the judgment of a reasonable user of the consolidated financial statements.
To perform the audit in accordance with US GAAS, the auditor must exercise professional judgment and maintain professional skepticism throughout the audit. They must identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. The auditor must also obtain an understanding of internal control relevant to the audit in order to design appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control. Finally, the auditor must 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 consolidated financial statements and conclude whether there are conditions or events that raise substantial doubt about the Company's ability to continue as a going concern.