What level of assurance does an audit provide regarding the detection of material misstatements for Desi District?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free of 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 52)
What This Means (2024 FDD)
According to Desi District's 2024 Franchise Disclosure Document, an audit aims to provide reasonable assurance that the financial statements are free of material misstatement, whether due to fraud or error. The auditor's report includes an opinion on whether the financial statements present fairly the financial position of Desi District. This assurance is conducted in accordance with auditing standards generally accepted in the United States of America (GAAS).
However, the FDD clarifies that reasonable assurance is not absolute. There is no guarantee that an audit conducted following GAAS will always detect a 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 concealment.
For a prospective Desi District franchisee, this means that while the audit provides a high level of confidence in the accuracy of the financial statements, it is not a perfect guarantee. The franchisee should understand the inherent limitations of an audit and consider other factors, such as their own due diligence and financial expertise, when evaluating the financial health of the franchise.