What is the risk of not detecting a material misstatement resulting from the override of internal control 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 a material misstatement in the company's financial statements. The auditor's objective is to obtain reasonable assurance that the consolidated financial statements are free from material misstatement, whether due to fraud or error, and to issue a report including their opinion. However, reasonable assurance is not absolute, and there is no guarantee that an audit will always detect a material misstatement.
The FDD indicates 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 collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Any of these actions are meant to actively hide the misstatement, making it harder to detect through standard auditing procedures.
For a prospective Carbones Pizzeria franchisee, this highlights the importance of understanding the financial health and internal controls of the company. While an audit aims to provide reasonable assurance, it is not a foolproof guarantee against financial misstatements, especially those resulting from fraudulent activities. This information emphasizes the need for careful review and due diligence when considering investing in a Carbones Pizzeria franchise.