What is the auditor's responsibility regarding the detection of fraud in Burros Fries' financial statements?
Burros_Fries 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 GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than 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 statements.
In performing an audit in accordance with GAAS, 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 Burros & Fries Franchise, Inc.'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.
- Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Burros & Fries Franchise, Inc.'s ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 53)
What This Means (2024 FDD)
According to Burros Fries' 2024 Franchise Disclosure Document, the auditor's responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditor's report will include their opinion on the financial statements. However, this reasonable assurance is not absolute, and an audit conducted following Generally Accepted Auditing Standards (GAAS) does not guarantee the detection of every material misstatement. The FDD states 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 actions such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls.
In conducting an audit under GAAS, the auditor must exercise professional judgment and maintain professional skepticism. They are required to identify and assess the risks of material misstatement in the financial statements, whether due to fraud or error, and to design and perform audit procedures that address these risks. These procedures include examining evidence related to the amounts and disclosures in the financial statements on a test basis. The auditor also needs to understand the company's internal control relevant to the audit to design appropriate audit procedures, although the audit does not aim to express an opinion on the effectiveness of the company's internal control.
The auditor also evaluates the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as the overall presentation of the financial statements. They must conclude whether there are conditions or events that raise substantial doubt about Burros Fries' ability to continue as a going concern. Finally, the auditor is required to communicate with those in charge of governance regarding the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters identified during the audit.