What is the risk of not detecting a material misstatement resulting from intentional omissions 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 material misstatements in the company's consolidated 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, and to issue a report including their opinion.
However, the FDD clarifies that reasonable assurance is not absolute, and an audit conducted according to generally accepted auditing standards does not guarantee the detection of every material misstatement. The risk of not detecting a material misstatement resulting from fraud, including intentional omissions, is higher than the risk of not detecting one resulting from error. This is because fraud may involve collusion, forgery, misrepresentations, or the overriding of internal controls.
The document defines misstatements as material if they could individually or collectively influence the judgment of a reasonable user of the consolidated financial statements. This highlights the importance of transparency and accuracy in financial reporting for Carbones Pizzeria.
In performing an audit, the auditor exercises professional judgment, maintains skepticism, identifies and assesses risks of material misstatement, obtains understanding of internal control, evaluates accounting policies and estimates, and concludes on the company's ability to continue as a going concern.