What are some examples of fraudulent activities that could lead to material misstatement in Jersey Mikes' financial statements, according to the auditor?
Jersey_Mikes Franchise · 2025 FDDAnswer from 2025 FDD Document
year after the date that the financial statements are available to be issued.
Auditor's Responsibilities for the Audit of the Financial Statements
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 an auditor's 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 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.
Source: Item 22 — CONTRACTS (FDD page 77)
What This Means (2025 FDD)
According to Jersey Mike's 2025 Franchise Disclosure Document, the auditor indicates that fraud poses a higher risk of material misstatement in financial statements compared to error. This is because fraud may involve activities such as collusion, forgery, intentional omissions, misrepresentations, or the overriding of internal controls. These actions can lead to inaccuracies in the financial statements that are significant enough to influence the judgment of a reasonable user.
For a prospective Jersey Mike's franchisee, this highlights the importance of the integrity of the financial reporting within the franchise system. While the auditor aims to provide reasonable assurance that the financial statements are free from material misstatement, the risk of fraud remains a concern. Franchisees rely on the accuracy of the franchisor's financial statements to make informed decisions about their investment and the overall health of the franchise system.
The auditor's responsibilities include identifying and assessing the risks of material misstatement, whether due to fraud or error, and designing audit procedures to address those risks. They also obtain an understanding of internal control relevant to the audit. However, the auditor does not express an opinion on the effectiveness of the company's internal control. This means that while the auditor evaluates the internal controls to plan the audit, they do not provide a guarantee that these controls are effective in preventing or detecting fraud.
Therefore, it is crucial for potential Jersey Mike's franchisees to carefully review the financial statements and consider the risk factors associated with fraud. They may also want to inquire about the franchisor's internal controls and risk management practices to gain a better understanding of how the company mitigates the risk of fraudulent activities. Understanding these aspects can help franchisees make a more informed investment decision.