What is the auditor's responsibility regarding omissions 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 Deka Lash's 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, and to issue an auditor's report that includes their opinion. This assurance, while high, isn't absolute, so an audit doesn't guarantee the detection of every material misstatement. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error because fraud may involve intentional omissions.
For a prospective Deka Lash franchisee, this means that the financial statements presented in the FDD have been audited to provide a reasonable level of confidence in their accuracy. However, it's important to recognize that the audit isn't a guarantee against all misstatements, especially those resulting from intentional fraud. Omissions are considered material if they would likely influence the judgment of a reasonable user of the financial statements.
The auditor's responsibilities include exercising professional judgment and maintaining professional skepticism, identifying and assessing risks of material misstatement, obtaining an understanding of internal control, evaluating accounting policies and estimates, and concluding on Deka Lash's ability to continue as a going concern. These procedures are designed to provide a sound basis for the auditor's opinion on the fairness of the financial statements.
This is a standard practice in franchise auditing, where auditors play a crucial role in providing credibility to financial statements. Franchisees should still carefully review the financial statements and consider seeking independent financial advice to fully understand the financial health of Deka Lash.