What is the risk of not detecting a material misstatement resulting from misrepresentations 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 auditor's objective is to gain reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. The auditor's report includes their opinion on the financial statements. However, the FDD clarifies that reasonable assurance is not absolute, so an audit conducted according to Generally Accepted Auditing Standards (GAAS) does not guarantee that all material misstatements will be detected.
The risk of not detecting a material misstatement resulting from fraud is higher than that of error because fraud may involve actions like collusion, forgery, intentional omissions, misrepresentations, or overriding internal controls. The document defines misstatements as material if they are likely to influence the judgment of a reasonable user of the financial statements, either individually or in the aggregate.
In practical terms, this means that while Crave's financial statements are audited, there is still a risk that some misstatements, especially those resulting from fraudulent activities, may not be detected during the audit process. As a prospective franchisee, it is important to understand the inherent limitations of an audit and to consider other factors, such as the company's internal controls and overall financial health, when making investment decisions.