How are misstatements considered material in the audit of Carbones Pizzeria?
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, 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 consolidated financial statements. This definition is used by the independent auditor when assessing the accuracy and reliability of the company's financial statements. The auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error.
Reasonable assurance, as defined in the FDD, is a high level of assurance but not an absolute guarantee that all material misstatements will be detected. The risk of not detecting a material misstatement resulting from fraud is higher than that of one resulting from error because fraud may involve intentional concealment, such as collusion or forgery. The auditor's responsibilities include exercising professional judgment, identifying risks of material misstatement, and evaluating the appropriateness of accounting policies and estimates made by management.
For a prospective Carbones Pizzeria franchisee, this means that the financial statements presented in the FDD are audited with the goal of ensuring they are free from material misstatements that could influence a reasonable person's judgment. However, it is important to recognize that an audit provides reasonable, but not absolute, assurance. Franchisees should carefully review the financial statements and consider seeking professional advice to fully understand the financial health and performance of Carbones Pizzeria.