What is the auditor's responsibility regarding the detection of material misstatements in Monicals Pizza's consolidated financial statements?
Monicals_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' 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 GAAS 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 consolidated financial statements.
In performing an audit in accordance with GAAS, we:
- Exercise professional judgment and maintain professional skepticism throughout the audit.
- Identify and assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated 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 23 — RECEIPTS (FDD pages 46–257)
What This Means (2025 FDD)
According to Monicals Pizza's 2025 Franchise Disclosure Document, the auditor's responsibility is to obtain reasonable assurance that the consolidated financial statements are free from material misstatement, whether due to fraud or error. The auditor's report will include their opinion on the financial statements. While reasonable assurance is a high level of assurance, it is not absolute, and there is no guarantee that an audit conducted according to GAAS (auditing standards generally accepted in the United States of America) will always detect a material misstatement.
The FDD clarifies 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 activities like collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls. The document defines misstatements as material if they would likely influence the judgment of a reasonable user of the consolidated financial statements, whether individually or in the aggregate.
In conducting an audit according to GAAS, the auditor will exercise professional judgment and maintain professional skepticism throughout the audit. They will identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. These procedures include examining evidence regarding the amounts and disclosures in the consolidated financial statements on a test basis.
The auditor will also obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate for the circumstances. However, this understanding is not for the purpose of expressing an opinion on the effectiveness of Monicals Pizza's internal control, and no such opinion is expressed. The auditor will 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 consolidated financial statements. Finally, the auditor will conclude whether there are conditions or events that raise substantial doubt about Monicals Pizza's ability to continue as a going concern for a reasonable period of time.