What factors can make detecting material misstatements in Crave Franchising, LLC's financial statements more difficult?
Crave Franchise · 2025 FDDAnswer from 2025 FDD Document
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue and auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore 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 financial statements.
Source: Item 23 — RECEIPTS (FDD pages 63–253)
What This Means (2025 FDD)
According to Crave's 2025 Franchise Disclosure Document, several factors can increase the difficulty of detecting material misstatements in the company's financial statements. The independent auditor's report explains that achieving reasonable assurance that the financial statements are free from material misstatement is an objective, but it is not an absolute guarantee. This is because an audit conducted following generally accepted auditing standards (GAAS) will not always detect every material misstatement.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error. This is because fraud may involve actions such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls. These actions are designed to conceal the misstatement, making it more difficult for auditors to detect through standard audit procedures.
Furthermore, the determination of whether misstatements are material involves judgment. 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 financial statements. This materiality assessment requires auditors to exercise professional judgment and maintain professional skepticism throughout the audit, adding a layer of complexity to the detection process.