What is the risk of not detecting a material misstatement resulting from misrepresentations 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 auditor's report states that the objective of an audit is to provide reasonable assurance that the consolidated financial statements are free from material misstatement, whether due to fraud or error. While reasonable assurance is a high level of assurance, it is not absolute, and there is no guarantee that an audit conducted according to generally accepted auditing standards will always detect a material misstatement. Therefore, there is a risk that a material misstatement may not be detected.
The FDD indicates that 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. Any of these actions are designed to conceal the misstatement, making it more difficult to detect through standard auditing procedures.
The document defines misstatements as 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 means that if a misstatement is large enough to affect the decisions of someone relying on the financial statements, it is considered material. As a prospective franchisee, it is important to understand that while Carbones Pizzeria's financial statements are audited, there is always a risk that some misstatements, especially those resulting from fraud, may go undetected.