What level of assurance does an audit provide regarding the detection of material misstatements in Coffee News' financial statements?
Coffee_News 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 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 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.
In performing an audit in accordance with generally accepted auditing standards, 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 Coffee News USA, 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 Coffee News USA, 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.
February 27, 2025
Source: Item 23 — Receipts (FDD pages 36–118)
What This Means (2025 FDD)
According to Coffee News' 2025 Franchise Disclosure Document, an audit aims to provide reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditor's report includes their opinion on the financial statements. Reasonable assurance is defined as a high level of assurance, but it is not absolute, meaning there is no guarantee that an audit will always detect a material misstatement.
The document clarifies 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 intentional actions like collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls, which are designed to prevent errors. Misstatements, including omissions, are considered material if they could individually or collectively influence the judgment of a reasonable user of the financial statements.
During the audit, the auditor exercises professional judgment and maintains professional skepticism. They identify and assess the risks of material misstatement, whether due to fraud or error, and design audit procedures to respond to those risks. These procedures include examining evidence regarding the amounts and disclosures in the financial statements on a test basis. The auditor also obtains an understanding of internal control relevant to the audit to design appropriate procedures, but they do not express an opinion on the effectiveness of Coffee News' internal control.
Furthermore, the auditor 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 also conclude whether there are conditions or events that raise substantial doubt about Coffee News' ability to continue as a going concern. The auditor is required to communicate with those charged with governance regarding the scope and timing of the audit, significant audit findings, and certain internal control-related matters identified during the audit.