How are misstatements considered material in the context of Remax's consolidated financial statements?
Remax 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 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 consolidated financial statements.
Source: Item 22 — Contracts (FDD pages 108–334)
What This Means (2025 FDD)
According to Remax's 2025 Franchise Disclosure Document, misstatements in the consolidated financial statements are considered material if they could influence the judgment of a reasonable user of those statements. Specifically, if there is a substantial likelihood that the misstatements, either individually or in the aggregate, would impact the decisions made by someone relying on the financial statements, they are deemed material. This definition applies whether the misstatements are due to fraud or error.
This means that Remax franchisees and potential investors should be aware that the accuracy of the financial statements is crucial. Even seemingly small errors can be considered material if they have the potential to sway financial decisions. The auditors' responsibility is to provide reasonable assurance that the financial statements are free from such material misstatements, although this is not an absolute guarantee.
For a prospective franchisee, this highlights the importance of carefully reviewing Remax's financial statements and understanding the assumptions and accounting policies used in their preparation. It also underscores the need to rely on qualified financial advisors to interpret these statements and assess the financial health of the company. Furthermore, it is important to understand that the risk of undetected material misstatement is higher when it results from fraud, as fraud may involve intentional concealment.