What is the risk of not detecting a material misstatement resulting from the override of internal control 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. Misstateme
Source: Item 23 — RECEIPTS (FDD pages 63–253)
What This Means (2025 FDD)
According to Crave's 2025 Franchise Disclosure Document, the auditor's responsibilities include obtaining reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and issuing an auditor's report that includes their opinion. While reasonable assurance is a high level of assurance, it is not absolute, and there is no guarantee that an audit conducted according to Generally Accepted Auditing Standards (GAAS) will always detect a material misstatement.
The FDD indicates that 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 override of internal control. These actions are designed to conceal the misstatement, making it more difficult to detect through standard auditing procedures.
For a prospective Crave franchisee, this highlights the importance of understanding the financial health and internal controls of the franchisor. While an audit provides a level of assurance, it is not a foolproof guarantee against financial misstatements, especially those resulting from fraudulent activities. Franchisees should consider this inherent risk when evaluating the financial stability of Crave.