What is considered a high level of assurance, but not absolute assurance, in the context of Carbones Pizzeria's audit?
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, reasonable assurance in the context of an audit is considered a high level of assurance, but it is not absolute assurance. The auditor's objective is to obtain reasonable assurance that the consolidated financial statements are free from material misstatement, whether due to fraud or error. However, because it is not absolute assurance, it does not guarantee that an audit conducted according to generally accepted auditing standards will always detect a material misstatement.
According to the FDD, the risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error. This is because 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 they would influence the judgment made by a reasonable user of the consolidated financial statements.
For a prospective Carbones Pizzeria franchisee, this means that while the financial statements have been audited to a high standard, there is still a risk that some misstatements, especially those resulting from fraud, may not be detected. Therefore, franchisees should not rely solely on the audited financial statements but should also conduct their own due diligence and seek professional advice when evaluating the franchise opportunity.