What happens if fraud involves collusion when auditing Canine Dimensions?
Canine_Dimensions Franchise · 2025 FDDAnswer from 2025 FDD Document
My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to error or fraud, and to issue an auditor's report that includes my opinion. Reasonable assurance
is a high level of assurance but 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 controls. Misstatements are considered material if there is 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 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2025 FDD)
According to Canine Dimensions's 2025 Franchise Disclosure Document, the auditor's responsibilities include obtaining reasonable assurance that the financial statements are free from material misstatement, whether due to error or fraud. However, this assurance is not absolute, and there's no guarantee that an audit will always detect a material misstatement. The FDD states that the risk of not detecting a material misstatement is higher when fraud involves collusion.
Collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls can make fraud more difficult to detect. The auditor's procedures include exercising professional judgment, maintaining skepticism, assessing risks of material misstatement, examining evidence, understanding internal controls (though not expressing an opinion on their effectiveness), evaluating accounting policies, and assessing the company's ability to continue as a going concern.
The auditor is required to communicate with those charged with governance regarding the audit's scope, timing, significant findings, and internal control matters identified during the audit. This communication is crucial for transparency and accountability. For a prospective franchisee, this highlights the importance of carefully reviewing Canine Dimensions's audited financial statements and understanding the limitations of an audit in detecting fraud, especially when collusion is involved.