How does the auditor define 'material misstatements' in the context of Dq Treat's financial statements?

According to Dq Treat's 2025 Franchise Disclosure Document, misstatements are considered material if they could influence the judgment of a reasonable user of the financial statements. This definition is provided within the context of the auditor's responsibilities during the audit of Dq Treat's financial statements. The auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. However, reasonable assurance is not absolute, so there is no guarantee that all material misstatements will be detected.

The FDD emphasizes that the risk of not detecting a material misstatement resulting from fraud is higher than from error. This is because fraud may involve intentional actions like collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls. These actions are designed to conceal the misstatement, making it more difficult to detect through standard auditing procedures.

For a prospective Dq Treat franchisee, this definition of material misstatement is important because it sets the standard for the accuracy and reliability of the financial information provided by the company. If the financial statements contain material misstatements, it could affect a franchisee's assessment of the company's financial health and future prospects. Therefore, understanding how the auditor defines and addresses material misstatements can help a franchisee make a more informed investment decision.