What is the risk the auditors face when auditing the consolidated financial statements of Even Hotels?
Even_Hotels Franchise · 2025 FDDAnswer from 2025 FDD Document
Our objectives are to obtain reasonable assurance about whether the 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 US 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
Source: Item 23 — RECEIPTS (FDD pages 99–438)
What This Means (2025 FDD)
According to Even Hotels' 2025 Franchise Disclosure Document, the auditors face the risk of failing to detect a material misstatement in the consolidated financial statements. While the auditors aim to obtain reasonable assurance that the financial statements are free from material misstatement, this assurance is not absolute. Therefore, there is no guarantee that an audit conducted according to US GAAS (auditing standards generally accepted in the United States of America) will always uncover a material misstatement.
The FDD clarifies 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 sophisticated methods such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls, which are designed to prevent errors but may be circumvented in cases of fraud. The auditors' responsibilities include exercising professional judgment and maintaining professional skepticism throughout the audit, identifying and assessing the risks of material misstatement, obtaining an understanding of internal control, evaluating the appropriateness of accounting policies, and concluding on the company's ability to continue as a going concern.
For a prospective Even Hotels franchisee, this information highlights the importance of understanding the financial health and reporting practices of the parent company, Six Continents Hotels, Inc. While the audit aims to provide a fair representation of the company's financial position, inherent limitations exist, especially concerning the detection of fraud. Franchisees should consider this when evaluating the financial stability and transparency of Even Hotels and its parent company.