What is the auditor's responsibility regarding forgery in Deka Lash's financial statements?
Deka_Lash 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 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 judgement made by a reasonable user based on the financial statements.
Source: Item 23 — RECEIPT (FDD pages 63–234)
What This Means (2024 FDD)
According to the 2024 Deka Lash 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, and to issue an auditor's report that includes their opinion. However, this reasonable assurance is not absolute, and there is no guarantee that an audit will always detect a material misstatement. The risk of not detecting a material misstatement resulting from fraud, including forgery, is higher than for one resulting from error because fraud may involve collusion, intentional omissions, misrepresentations, or the override of internal control.
In practical terms, this means that while the auditor is responsible for assessing the risk of material misstatement due to fraud, including forgery, they are not expected to uncover every instance of fraud. The auditor's procedures include exercising professional judgement, maintaining professional skepticism, identifying and assessing risks, examining evidence on a test basis, understanding internal control (without expressing an opinion on its effectiveness), evaluating accounting policies and estimates, and concluding on Deka Lash's ability to continue as a going concern.
For a prospective Deka Lash franchisee, this highlights the importance of understanding that the audited financial statements provide a reasonable level of assurance, but do not eliminate the possibility of fraud. It also underscores the importance of a franchisee conducting their own due diligence and seeking professional advice to assess the financial health and stability of Deka Lash.