What is the risk of not detecting a material misstatement resulting from collusion 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, the independent auditor's report addresses the risk of not detecting material misstatements in the company's consolidated financial statements. The auditor's objectives include obtaining reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and issuing an auditor's report that includes their opinion.
The FDD states that reasonable assurance is a high level of assurance, but it is not absolute. Therefore, an audit conducted in accordance with generally accepted auditing standards does not guarantee the detection of every material misstatement. 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 collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
For a prospective Carbones Pizzeria franchisee, this means that while the financial statements are audited, there is always a risk that fraud, especially if it involves collusion, could lead to material misstatements that go undetected. This is a standard disclaimer in audit reports and reflects the inherent limitations of the auditing process. It is important for franchisees to understand that audited financial statements provide a reasonable level of assurance, but not a guarantee of complete accuracy.