What level of assurance does an audit provide regarding the detection of material misstatements 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.
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 consolidated 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 consolidated 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 estimates made by management, as well as evaluate the overall presentation of the consolidated 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.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to the 2025 FDD, an audit of Carbones Pizzeria's financial statements aims to provide reasonable assurance that the statements are free from material misstatement, whether due to fraud or error. The auditor issues a report containing their opinion on the financial statements. Reasonable assurance is defined as a high level of assurance, but it is not absolute. Therefore, an audit does not guarantee that all material misstatements will be detected.
The FDD specifies 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 activities like collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls, which are designed to prevent errors but may be circumvented in cases of fraud. Misstatements are considered material if they are likely to influence the judgment of a reasonable user of the financial statements.
In conducting an audit, the auditor exercises professional judgment and maintains professional skepticism. They identify and assess the risks of material misstatement, design and perform audit procedures responsive to those risks, and examine evidence on a test basis. The auditor also obtains an understanding of internal control relevant to the audit but does not express an opinion on the effectiveness of the company's internal control. Finally, the auditor evaluates the appropriateness of accounting policies, the reasonableness of significant accounting estimates, and the overall presentation of the financial statements, as well as assessing the company's ability to continue as a going concern.