What happens if fraud involves collusion when auditing Fly Fitness?
Fly_Fitness 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 judgment made by a reasonable use based on the financial statements.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 44)
What This Means (2024 FDD)
According to Fly Fitness's 2024 Franchise Disclosure Document, the risk of not detecting a material misstatement is higher when fraud involves collusion. The document states that while the auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, this is not a guarantee.
The FDD explains that fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. This makes detecting fraud more difficult than detecting errors. 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 audit procedures responsive to those risks.
For a prospective Fly Fitness franchisee, this means that even with an audit, there is a risk that fraud, especially if it involves collusion, may not be detected. This highlights the importance of carefully reviewing Fly Fitness's financial statements and understanding the risks involved. It also emphasizes the need for strong internal controls and ethical behavior within the Fly Fitness organization to minimize the potential for fraud.