What level of assurance does an audit provide regarding the detection of material misstatements in Spray Net's financial statements?
Spray_Net Franchise · 2025 FDDAnswer from 2025 FDD Document
the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Spray-Net, Inc.'s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditor's Responsibilities for the Audit of the Financial Statements
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, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users made on the basis of these 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 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 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 Spray-Net, Inc.'s internal control. Accordingly, no such opinion is expressed.
Source: Item 23 — RECEIPTS (FDD pages 75–219)
What This Means (2025 FDD)
According to Spray Net's 2025 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's report includes their opinion on the financial statements. Reasonable assurance is defined as a high level of assurance, but it is not absolute, meaning there is no guarantee that an audit will always detect a material misstatement. The auditor's responsibility includes exercising professional judgment and maintaining professional skepticism throughout the audit. They also identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
The document clarifies 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 sophisticated methods such as collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. The auditor obtains 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 Spray-Net, Inc.'s internal control. Accordingly, no such opinion is expressed.
For a prospective Spray Net franchisee, this means that while the financial statements have been audited, there is still a risk that material misstatements, especially those resulting from fraud, may not be detected. This is a standard limitation in the auditing process. Franchisees should understand that the audit provides a reasonable level of confidence in the financial statements but does not eliminate all risk of error or fraud. The auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluates the overall presentation of the financial statements.
The auditor is required to communicate with those charged with governance regarding the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters identified during the audit. This communication helps ensure that those responsible for overseeing Spray Net's financial reporting are aware of any significant issues identified during the audit. Muhammad Zubairy, CPA PC, located in Westbury, NY, performed the audit, with the report dated April 4, 2025.