What is considered a material misstatement in the combined consolidated financial statements for Carls?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Our objectives are to obtain reasonable assurance about whether the combined consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' 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 GAAS 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 judgment made by a reasonable user based on the combined consolidated financial statements.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, a material misstatement in the combined consolidated financial statements is defined as a misstatement where there is a substantial likelihood that, individually or in the aggregate, it would influence the judgment made by a reasonable user based on these financial statements. This definition is used by the independent auditor, KPMG LLP, in their audit of Carls's financial statements.
For a prospective Carls franchisee, this means that the financial statements presented in Item 21 of the FDD are prepared and audited with the goal of ensuring they are free from errors or omissions that could significantly mislead someone relying on them to make business decisions. The auditors are responsible for obtaining reasonable assurance that the financial statements are fairly presented in all material respects.
It's important to understand that while auditors aim to detect material misstatements, there is always a risk that some may go undetected, especially those resulting from fraud. Fraudulent misstatements are more difficult to detect because they may involve collusion, forgery, intentional omissions, or the override of internal controls. Therefore, while the audit provides a level of confidence in the accuracy of the financial statements, it is not a guarantee.
As a potential franchisee, you should carefully review the financial statements and consider consulting with a financial advisor to fully understand the financial health of Carls. Pay attention to the notes and disclosures within the financial statements, as these can provide additional context and explanations of the figures presented. Understanding what constitutes a material misstatement can help you assess the reliability of the financial information provided and make informed decisions about investing in a Carls franchise.