What level of assurance does an audit provide regarding the accuracy of Fly Fitness's financial statements?
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, an audit aims to provide reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditor issues a report including their opinion on the financial statements. This "reasonable assurance" signifies a high level of confidence, but it isn't absolute, so an audit doesn't guarantee the detection of every material misstatement.
The FDD emphasizes that the risk of not detecting a material misstatement resulting from fraud is higher than that of error. This is because fraud may involve intentional concealment through collusion, forgery, or the override of internal controls. The auditor's responsibilities include exercising professional judgment, maintaining skepticism, assessing risks of material misstatement, and examining evidence on a test basis. They also evaluate the appropriateness of accounting policies and the reasonableness of management's estimates.
For a prospective Fly Fitness franchisee, this means that while audited financial statements offer a good degree of reliability, they are not infallible. There remains a risk that some misstatements, particularly those resulting from fraud, may go undetected. Therefore, it's crucial for franchisees to not only review the audited financial statements but also to conduct their own due diligence, potentially involving consultation with financial professionals, to gain a comprehensive understanding of Fly Fitness's financial health.