What level of assurance do the auditors provide regarding the detection of material misstatements in Buona's financial statements?
Buona 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 auditors' 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.
Source: Item 22 — CONTRACTS (FDD page 78)
What This Means (2025 FDD)
According to Buona's 2025 Franchise Disclosure Document, the auditors aim to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. Their goal is to issue an auditor's report that includes their opinion on the financial statements. The FDD clarifies that reasonable assurance is a high level of assurance, but it is not absolute.
The auditors' report explicitly states that reasonable assurance does not guarantee the detection of every material misstatement. There's an inherent risk that some misstatements, especially those resulting from fraud involving collusion, forgery, or intentional omissions, may not be detected during the audit. The auditors emphasize that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error.
In practical terms, this means that while the audit provides a level of confidence in the accuracy of Buona's financial statements, prospective franchisees should understand that it is not a foolproof guarantee. The auditors' procedures include exercising professional judgment, assessing risks of material misstatement, examining evidence on a test basis, understanding internal controls (though not expressing an opinion on their effectiveness), and evaluating accounting policies and estimates. These procedures are designed to provide a reasonable basis for their opinion, but they are not exhaustive, and some level of risk remains.