What factors might increase the risk of not detecting a material misstatement in Kidokinetics' financial statements?
Kidokinetics 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 user based on the financial statements.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2024 FDD)
According to Kidokinetics' 2024 Franchise Disclosure Document, the auditor's responsibilities include obtaining reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes their opinion. However, the FDD clarifies that reasonable assurance is not absolute, so an audit is not a guarantee that all material misstatements will be detected.
The document states that the risk of not detecting a material misstatement resulting from fraud is higher than that of one resulting from error. This is because fraud may involve actions such as collusion, forgery, intentional omissions, misrepresentations, or the override of internal control, which are designed to conceal the misstatement.
Furthermore, the FDD explains that misstatements, including omissions, are considered material if there is a substantial likelihood that they would influence the judgment of a reasonable user of the financial statements, either individually or in the aggregate. This definition of materiality is consistent with standard accounting practices, where the focus is on whether the misstatement would affect the decisions of investors or other stakeholders.