Is an audit a guarantee that all material misstatements will be detected in Sonesta Simply Suites' financial statements?
Sonesta_Simply_Suites Franchise · 2025 FDDAnswer from 2025 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 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 financial statements.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to the 2025 FDD, an audit of Sonesta Simply Suites' financial statements, conducted under Generally Accepted Auditing Standards (GAAS), aims to provide reasonable assurance that the financial statements are free from material misstatement. However, this is not an absolute guarantee. The auditor's objective is to obtain reasonable, but not absolute, assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error.
The FDD clarifies that while a high level of assurance is sought, there remains a risk that a material misstatement may not be detected, even when the audit is properly executed according to GAAS. 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.
For a prospective Sonesta Simply Suites franchisee, this means that while audited financial statements offer a degree of confidence in the accuracy and reliability of the financial information, they should not be seen as a complete guarantee. Franchisees should understand the inherent limitations of an audit and consider this when making investment decisions. It is common practice for audits to provide reasonable, but not absolute, assurance due to the limitations in the scope and nature of audit procedures.