What is the risk of not detecting a material misstatement resulting from fraud compared to one resulting from error in the Crave Franchising, LLC audit?
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, 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 actions such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls.
This statement is part of the auditor's responsibilities outlined in the audit report. It indicates that while audits are designed to provide reasonable assurance that financial statements are free from material misstatement, they are not a guarantee. The very nature of fraudulent activities makes them more difficult to detect than simple errors.
For a prospective Crave franchisee, this highlights the importance of understanding that even audited financial statements are not infallible. While the audit aims to provide a reliable view of Crave's financial position, the possibility of undetected fraud always exists. This underscores the need for franchisees to conduct their own due diligence and seek professional advice when evaluating the franchise opportunity.