Under what condition are misstatements considered material in Carbones Pizzeria's consolidated 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, 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. This definition is provided within the context of the Independent Auditor's Report. The auditor's responsibility is to obtain reasonable assurance that the consolidated financial statements are free from material misstatement, whether due to fraud or error.
For a potential Carbones Pizzeria franchisee, this means that the financial statements should be reliable and free from significant errors that could mislead someone using them to make financial decisions. The auditor's report aims to provide assurance that the financial statements present a fair view of the company's financial position and performance. This is a standard practice in financial auditing, ensuring transparency and reliability in financial reporting.
The FDD also states that reasonable assurance is a high level of assurance but is not absolute, and there is always a risk that a material misstatement may not be detected. 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. This highlights the importance of due diligence and critical evaluation of the financial information provided.