What is the auditor's responsibility regarding the detection of material misstatements in Degree Wellness's financial statements due to fraud versus error?
Degree_Wellness 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 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 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 Degree Wellness Franchise, LLC'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 Degree Wellness Franchise, LLC's ability to continue as a going concern for a reasonable period of time.
Source: Item 23 — Receipts (FDD pages 66–257)
What This Means (2025 FDD)
According to Degree Wellness's 2025 Franchise Disclosure Document, the auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes their opinion. The auditor's assurance is not absolute, so 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 for one resulting from error. This is because fraud may involve actions like collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls, which are designed to prevent errors but may be circumvented in cases of fraud. The document defines material misstatements as those that could individually or collectively influence the judgment of a reasonable user of the financial statements.
To perform the audit in accordance with 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 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 audit procedures that are appropriate in the circumstances. The auditor will 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. Finally, the auditor must conclude whether there are conditions or events that raise substantial doubt about Degree Wellness's ability to continue as a going concern for a reasonable period of time.