What is the auditor's responsibility regarding fraud involving collusion when auditing C12 Group?
C12_Group Franchise · 2025 FDDAnswer from 2025 FDD Document
onsidered in the aggregate, that raise substantial doubt about the Company'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 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.
In performing an audit in accordance with generally accepted auditing standards, 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\nerror, and design and perform audit procedures responsive to those risks. Such procedures include\nexamining, on a test basis, evidence regarding the amounts and disclosures in the combined 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\nestimates made by management, as well as evaluate the overall presentation of the combined 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.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
ADKF, P.C.
Source: Item 22 — CONTRACTS (FDD page 46)
What This Means (2025 FDD)
According to C12 Group's 2025 Franchise Disclosure Document, the auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's report including their opinion. However, this reasonable assurance isn't absolute, and there's no guarantee that an audit will always detect material misstatements. The risk of not detecting material misstatement resulting from fraud is higher than for error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
In practical terms, this means that while the auditor is responsible for assessing the risk of material misstatement, including those resulting from fraud, the very nature of collusion makes it more difficult to detect. Collusion involves secret agreements or cooperation among individuals within the company to conceal fraudulent activities, which can effectively bypass or override internal controls that would otherwise prevent or detect errors. Therefore, a prospective C12 Group franchisee should understand that the audit provides a reasonable level of assurance, but it is not a foolproof guarantee against fraud, especially when collusion is involved.
The auditor's responsibilities include exercising professional judgment and maintaining professional skepticism, identifying and assessing risks of material misstatement, understanding internal controls, evaluating accounting policies and estimates, and concluding on the company's ability to continue as a going concern. These procedures are designed to provide a sound basis for the auditor's opinion, but they are not specifically designed to uncover sophisticated schemes involving collusion. 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.
For a potential C12 Group franchisee, this highlights the importance of strong internal controls and ethical behavior within the organization. While the audit provides an independent assessment of the financial statements, the ultimate responsibility for preventing and detecting fraud rests with the company's management and those charged with governance. Franchisees may want to inquire about the specific measures C12 Group has in place to prevent and detect fraud, including the company's code of ethics, internal control policies, and whistle-blower mechanisms.