Is an audit a guarantee that all material misstatements will be detected in Carbones Pizzeria's financial statements?
Carbones_Pizzeria 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 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 judgement made by a reasonable user based on the consolidated financial statements.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, an audit does not guarantee the detection of all material misstatements. The Independent Auditor's Report clarifies that while the objective of an audit is to obtain reasonable assurance that the financial statements are free from material misstatement, this assurance is not absolute. Therefore, an audit is not a guarantee that all misstatements will be detected.
The report explains that the risk of not detecting a material misstatement resulting from fraud is higher than that of detecting one resulting from error. This is because fraud may involve intentional concealment, such as collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. These deceptive practices can make it more difficult for auditors to uncover material misstatements.
For a prospective Carbones Pizzeria franchisee, this means understanding that the audited financial statements, while providing a high level of assurance, are not infallible. While the auditors exercise professional judgment and maintain professional skepticism, there remains a risk that some material misstatements, especially those resulting from fraud, may not be detected. This highlights the importance of a franchisee conducting their own due diligence and seeking independent financial advice when evaluating the franchise opportunity.