What is the auditor's responsibility regarding the detection of material misstatements in Embassy Suites' financial statements due to fraud versus error?
Embassy_Suites Franchise · 2025 FDDAnswer from 2025 FDD Document
gate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are available to be issued.
Auditor's Responsibilities for the Audit of the Financial Statements
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 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 generally accepted auditing standards, 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 the Company'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 the Company's ability to continue as a going concern for a reasonable period of time.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 97)
What This Means (2025 FDD)
According to Embassy Suites'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 including their opinion. While reasonable assurance is a high level of assurance, it is not absolute, and there is no guarantee that an audit conducted according to generally accepted auditing standards will always detect a material misstatement. The auditor's responsibilities include identifying and assessing the risks of material misstatement of the financial statements, whether due to fraud or error, and designing and performing audit procedures responsive to those risks. These procedures include examining evidence regarding the amounts and disclosures in the financial statements on a test basis. The auditor must exercise professional judgment and maintain professional skepticism throughout the audit. They must also obtain an understanding of internal control relevant to the audit in order to design appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control. The auditor is required to communicate with those charged with governance regarding the planned scope and timing of the audit, significant audit findings, and certain internal control related matters identified during the audits.
For a prospective Embassy Suites franchisee, this means that the financial statements have been audited to provide a reasonable level of confidence in their accuracy. However, it's important to recognize that the audit is not a guarantee against all misstatements. The FDD points out 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 collusion, forgery, intentional omissions, misrepresentations, or the override of internal control, making it more difficult to detect.
Material misstatements are those that could influence the judgment of a reasonable user of the financial statements. The auditor's report indicates whether the financial statements present fairly the financial position, results of operations, and cash flows of Embassy Suites in accordance with accounting principles generally accepted in the United States of America. The auditor's opinion is based on the audit evidence obtained, which they believe is sufficient and appropriate to provide a basis for their opinion. The auditor's responsibilities include evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. The auditor must also conclude whether there are conditions or events that raise substantial doubt about the company's ability to continue as a going concern for a reasonable period of time.