How does the auditor define 'material' misstatements in the context of C12 Group's financial statements?
C12_Group 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 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 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 22 — CONTRACTS (FDD page 46)
What This Means (2025 FDD)
According to C12 Group's 2025 Franchise Disclosure Document, the auditor's report clarifies what constitutes a 'material misstatement' in their financial statements. The auditor's objective is to gain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. However, this reasonable assurance isn't absolute, so there's no guarantee that every material misstatement will be detected.
The document specifies 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, whether looked at individually or in the aggregate. This definition is crucial because it sets the threshold for what the auditor focuses on during the audit.
For a prospective C12 Group franchisee, this means that the financial statements are audited to a standard where significant errors or omissions that could sway someone's decision-making based on those statements should be identified. It's also noted that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error because fraud may involve more sophisticated methods such as collusion or forgery. This highlights the inherent limitations of an audit, even when conducted according to generally accepted auditing standards.