ASRS 4450

This Standard on Related Services (ASRS) addresses the auditor’s responsibilities when requested by the responsible party of the entity making an offering of securities to provide a comfort letter to certain requesting parties relating to particular financial information included in the entity’s offering document.  The auditor is ordinarily the appointed auditor of the entity for the period covered by the comfort letter and the entity ordinarily receives a copy of the comfort letter.  The requesting parties may be underwriters, buyers, sellers, brokers, selling agents, or other auditors appointed by the entity in connection with an offering being undertaken by the entity.  The entity may or may not be the issuer of the securities included in the offering document.  References in this ASRS to ‘entity’ are taken to mean the issuer unless otherwise stated.  The comfort letter is prepared based on the auditor having performed the requesting parties’ specified procedures and consequently no assurance is expressed in the comfort letter.  The auditor is not required by any AUASB Standard to accept the engagement, and ordinarily does so only if certain preconditions are met by both the responsible party of the entity and requesting parties. (Ref: Para. A1)

Any request by the entity to the auditor to perform an audit or review of the entity’s interim financial information included in the offering document is covered by a separate engagement to the comfort letter engagement and performed in accordance with applicable AUASB Standards. 

The subject matter that may be covered in a comfort letter includes: 

1. the independence of the auditor; 
2. unaudited financial statements, interim financial information, pro forma historical financial information and changes in selected financial statement items during a period subsequent to the date and period of the latest audited and /or reviewed financial statements of the entity; and
3. tables, statistics, and other financial information included in the offering document. 

The following types of offerings are included within the scope of this ASRS: (Ref: Para. A2)

1. initial public offerings;
2. overseas private placements of equity or debt securities;
3. offerings of debt securities that are issued or backed by public sector entities in overseas jurisdictions; and
4. acquisition of, or merger with, another entity domiciled in an overseas jurisdiction, where there is an exchange of equity shares between the two entities.

In certain jurisdictions, requesting parties who are underwriters may be held liable under applicable law or regulation for any material omissions or misstatements in an offering document.  Requesting the entity’s auditor to issue a comfort letter in respect of particular financial information included in the offering document is one of a number of procedures that may be used by the requesting parties to establish a due diligence defence against exposure to any liability. 

Relationship with applicable Standards of other jurisdictions

The auditor may undertake a comfort letter engagement in accordance with:

1. this ASRS, when issuing a comfort letter to requesting parties in a jurisdiction where there is no existing standard issued by a national auditing standards setting body; or
2. the requirements of another standard, when issuing a comfort letter to requesting parties in jurisdictions where the other standard has been issued by a national auditing standards setting body.^[1]

When conducting a comfort letter engagement, the auditor shall comply with relevant ethical requirements.^[3]

Nothing in this ASRS requires the auditor of an entity to accept a request to prepare a comfort letter, and the auditor shall evaluate all such requests in terms of individual engagement circumstances.

When a comfort letter is requested from more than one auditor, the requirements of this ASRS apply to each auditor.

Preconditions for Providing a Comfort Letter

The auditor shall, prior to agreeing the terms of providing the comfort letter:

1. discuss with the responsible party of the entity who the requesting parties are that the comfort letter will be provided to;
2. obtain an understanding of the applicable financial reporting framework used in the preparation of each type of financial information and the internal control environment for any change period financial information;
3. discuss with the requesting parties and the responsible party of the entity to: (Ref: Para. A3)
   1. understand the specific matters to be addressed in the comfort letter;
   2. understand whether a bring down comfort letter will be required covering change period financial information;
   3. understand the nature of the transaction giving rise to the preparation of the offering document, the jurisdiction(s) into which the offering document will be issued and applicable law or regulation that may affect the comfort letter;
   4. confirm that the financial information that is the subject of the comfort letter does not include a financial forecast; (Ref: Para. A4)
   5. understand the procedures that the requesting parties have specified to be performed for each type of financial information, and explain in any discussion of procedures that the auditor cannot and will not provide any assurance regarding the sufficiency of the procedures for the requesting parties' purposes;
4. confirm whether the responsible party of the entity^[4] acknowledges and accepts their responsibility for:
   1. the preparation of the offering document;
   2. the preparation and presentation of the financial information included in the offering document in accordance with the entity's selected applicable financial reporting framework;
   3. the inclusion of financial and other information in the offering document that is complete and does not include any information that is unacceptable or misleading for its intended purpose;
   4. the maintenance of proper financial records and systems which facilitate the preparation of the financial information;
   5. such internal control related to financial reporting as the entity determines is necessary to enable the preparation of financial information that is free from material misstatement and fraud;
   6. providing the auditor in a timely manner with:
      • access to all information (including a copy of the final offering document) and persons within the entity;
      • written representations covering all matters requested by the auditor; and
      • an update on any information the responsible party becomes aware of during the engagement that may impact the comfort letter;

If the preconditions for providing the comfort letter set out in paragraph 14 of this ASRS are not present, the auditor either:

1. does not agree to prepare the comfort letter in accordance with this ASRS; or
2. chooses not to accept the engagement.

Agreeing on the Terms of Engagement

The auditor shall document the agreed terms of engagement in an engagement letter, addressed to the responsible party of the entity and requesting parties, which shall include, at a minimum:

1. an introduction that summarises the auditor's understanding of the nature of the transaction giving rise to the preparation of an offering document;
2. a statement identifying the addressees of the comfort letter; (Ref: Para. A8)
3. statements that the engagement will be conducted in accordance with this ASRS, in compliance with relevant ethical requirements, including independence, ^[5] and the applicable law and regulation of Australia; (Ref: Para. A9)
4. a statement that the agreed purpose of the engagement is to provide a comfort letter to the addressees solely for use by the responsible party of the entity and requesting parties in seeking to establish a due diligence defence, and accordingly the comfort letter is restricted in its distribution to only the addressees, or otherwise by prior written consent;
5. statements in respect of the work to be performed:
   1. that the auditor will perform the procedures specified by the requesting parties up to a certain date in respect of particular financial information related to, and/or included in the offering document and will report results or the auditor‟s statement in the comfort letter within the agreed timeframe; (Ref: Para. A9)
   2. if applicable, that the auditor will provide a draft copy of the comfort letter, containing the expected form and content of the comfort letter, together with a statement that there may be circumstances where the final comfort letter may differ from the draft; (Ref: Para. A10)
   3. that the sufficiency of the comfort letter procedures for the requesting parties' purposes is for the requesting parties to decide, and not the auditor; (Ref: Para. A11)
   4. if applicable, that the auditor will provide a draft copy of the bring down comfort letter in respect of certain change period financial information selected by the requesting parties;
6. the responsibilities of the responsible party of the entity, including those set out in paragraph 14(d) of this ASRS;
7. the responsibilities of the requesting parties, including those set out in paragraph 14(e) of this ASRS; and
8. other such terms or conditions that the auditor considers appropriate in the circumstances. (Ref: Para A12-A13)

The auditor shall endeavour to obtain a signed engagement letter from the responsible party of the entity and requesting parties.  If the requesting parties do not agree to sign the engagement letter, the auditor shall perform such procedures as in the auditor’s professional judgement are appropriate to ensure the auditor is satisfied the requesting parties understand the terms of the engagement.  If the responsible party of the entity does not agree to sign the engagement letter, the auditor shall not accept the engagement. (Ref: Para. A14)

Draft Comfort Letter

If agreed to in the terms of engagement as set out in paragraph 16 of this ASRS, the auditor shall provide a draft of the expected form and content of the comfort letter to the requesting parties in a timely manner. (Ref: Para. A15)

The draft comfort letter shall be clearly identified as a draft to avoid giving the impression that the procedures described in the draft have been performed.  To the extent possible, the draft comfort letter shall deal with all matters to be covered in the final comfort letter and use exactly the same terms as those to be used in the final comfort letter, subject to the understanding that the comments in the final comfort letter cannot be determined until the procedures underlying it have been performed.  It shall clearly describe that the procedures to be performed by the auditor are those specified by the requesting parties, and that the requesting parties above are responsible for the sufficiency of the procedures for their purposes. (Ref: Para. A16-A17)

If the auditor is unable to have a discussion with the requesting parties about the requesting parties' required procedures for the auditor to perform at the time of preparing the draft comfort letter, the auditor shall either:

1. describe in the draft comfort letter those procedures specified in the draft underwriting agreement that the auditor is willing to perform; or
2. if the draft underwriting agreement is not available at the time of being requested to prepare the draft, the auditor is unable to agree to provide a draft comfort letter. (Ref: Para. A18)

In competitive bidding situations in which legal counsel for the requesting parties acts as the requesting parties’ representative prior to opening and acceptance of the bid, the auditor shall carry out the discussions and other communications required by this ASRS with the legal counsel until the requesting parties are selected.  In such circumstances, the auditor shall not agree to provide a comfort letter addressed to the entity, legal counsel, or a non-specific addressee such as any or all underwriters to be selected.  If the auditor agrees to provide a draft comfort letter, the draft comfort letter shall include a legend describing the comfort letter’s purpose and limitations.
(Ref: Para. A19)

Changes in the Terms of Providing the Comfort Letter

The auditor shall not agree to a change in the scope of services agreed to in the engagement letter if there is no reasonable justification for doing so. (Ref: Para. A20)

If the terms of providing the comfort letter are agreed to be changed, the terms shall be documented in writing and co-signed by the auditor, the responsible party of the entity and the requesting parties. (Ref: Para. A21)

If the terms of providing the comfort letter are unable to be agreed by the auditor, the auditor shall withdraw from the engagement and not agree to issue the comfort letter.

(Ref: Para. A22)

The auditor shall perform the requesting parties’ specified procedures as agreed in the engagement letter.

General

If the auditor is required to comment in a comfort letter on financial information other than audited financial statements, the auditor shall: (Ref: Para. A23)

1. describe the procedures specified by the requesting parties to be performed by the auditor;
2. describe the applicable criteria specified by the requesting parties; and
3. state that the procedures performed with respect to interim financial reporting periods may not disclose matters of significance regarding the particular financial information about which the auditor's statement is requested.

The auditor shall not in the comfort letter:

1. make any statements that the auditor has applied procedures that the auditor determined to be necessary or sufficient for the requesting parties' purposes;
2. use terms of uncertain meaning (such as general review, limited review, reconcile, check, or test) in describing the work performed unless the procedures encompassed by these terms are described in the comfort letter; or
3. make a statement that nothing else has come to the auditor's attention that would be of interest to the requesting parties as a result of carrying out the specified procedures. (Ref: Para. A24-A25)

When an auditor’s report on audited financial statements or a review report on reviewed financial statements in the offering document includes a modified opinion or conclusion, the auditor shall consider the effect on the comfort letter regarding subsequent interim financial information included in the offering document or regarding an absence of specified subsequent changes. (Ref: Para. A26)

Knowledge of Internal Control (Ref: Para. A27)

The auditor shall obtain an understanding of the entity's internal control over financial reporting of both year-end and interim periods when commenting in a comfort letter on:

1. unaudited interim financial information; and/or
2. subsequent changes in selected financial statement items.

Unaudited Interim Financial Information

The auditor may only provide limited assurance on interim financial information included in the offering document if the auditor has, as agreed to under a separate engagement, conducted a review in accordance with the applicable Australian Standard on Review Engagements.  If included in the agreed terms of the comfort letter engagement, the auditor may attach a copy of the review report to the comfort letter unless it is already included in the offering document, or is otherwise publicly available. (Ref: Para. A28)

When unaudited interim financial information has been included in the offering document with respect to a period that has not been audited or reviewed, the auditor is not able to provide an auditor's statement on the interim financial information. The auditor may alternatively agree to perform procedures on the interim financial information, provided it:

1. has been prepared using an applicable financial reporting framework that is consistent with that used in the most recent audited or reviewed financial statements; and
2. is disclosed as being unaudited or unreviewed by the auditor; and report results in the comfort letter based on the procedures specified by the requesting parties.

Pro Forma Historical Financial Information

If the auditor is required to comment on pro forma historical financial information, the auditor shall not provide such a comment unless the auditor has an appropriate level of knowledge of the accounting and financial reporting practices of the entity. (Ref: Para. A29)

The auditor shall not provide an auditor's statement in a comfort letter with respect to: (Ref: Para. A30)

1. the application of pro forma adjustments to historical financial information amounts;
2. the compilation of any pro forma historical financial information; or
3. whether the pro forma historical financial information has been prepared in all material respects in accordance with the applicable financial reporting framework chosen by the responsible party of the entity;

unless the auditor has obtained the required knowledge described in paragraph 29 of this ASRS and has performed, in respect of the historical financial statements to which the pro forma adjustments are applied, either an audit in accordance with applicable Australian Auditing Standards, or a review in accordance with the applicable Standard on Review Engagements. If the auditor has not performed such an audit or review, the auditor shall only report results in the comfort letter based on the procedures specified by the requesting parties.

If the auditor is requested by the requesting parties to provide limited assurance on pro forma historical financial information included in the offering document, the auditor shall only agree to such a request if:

1. this is conducted as a separate engagement to the comfort letter engagement; and
2. it is performed in accordance with the applicable AUASB Standard.

Financial Forecasts (Ref: Para. A31)

The auditor shall not agree, as part of a comfort letter engagement, to perform procedures specified by the requesting parties in relation to a financial forecast.

Tables, Statistics, and Other Financial Information

The auditor may be requested to perform procedures specified by the requesting parties and report results on tables, statistics and other financial information. If the auditor is requested to comment in a comfort letter on tables, statistics and other financial information appearing in the offering document, the auditor shall comment only on information that: (Ref: Para. A32)

1. is expressed in dollars (or percentages or ratios derived from such dollar amounts) and that has been obtained from accounting records that are subject to internal control over financial reporting; or
2. has been derived directly from such accounting records by analysis or computation.

The auditor shall not comment in a comfort letter:

1. on quantitative information that has been obtained from accounting records unless the information is subject to the same controls over financial reporting as the dollar amounts; or
2. on tables, statistics, and other financial information relating to an unaudited period unless the auditor has:
   1. performed an audit of the entity's financial statements for a period including, or immediately prior to, the unaudited period, or completed an audit for a later period, or
   2. otherwise obtained knowledge of the entity's internal control over financial reporting for that period.

The auditor shall not use the terms “presents fairly” or “true and fair” in comments concerning tables, statistics, and other financial information and shall not comment on: (Ref: Para. A33)

1. information subject to legal interpretation, such as beneficial share ownership; or
2. matter(s) merely because the auditor is capable of reading, counting, measuring or performing other functions that might be applicable.

The auditor's reporting of results from the performance of the procedures in the comfort letter concerning tables, statistics, and other financial information included in the offering document shall include: (Ref: Para. A34)

1. a clear identification of the specific information commented on;
2. a description of the procedures performed; and
3. the results, expressed in terms of agreement between items compared.

With respect to the acceptability of methods of allocation used in deriving the figures commented on, the auditor shall comment only to the extent to which such allocation is made in, or can be derived directly by, analysis or computation from the entity's accounting records. Such comments, if made, shall make clear that:

1. such allocations may be, to a substantial extent, arbitrary;
2. the method of allocation used is not the only acceptable method; and
3. other acceptable methods of allocation might produce significantly different results.

The comfort letter shall state that the auditor makes no representations regarding:

1. any matter of legal interpretation;
2. the completeness or adequacy of disclosure; and
3. the adequacy of the procedures followed, and that such procedures would not necessarily identify material misstatements or omissions in the financial information to which the comments relate.

Change Period Financial Information

If agreed to under the terms of the engagement, the auditor shall perform the procedures specified by the requesting parties on financial information during the change period, in order to provide an auditor’s statement on such financial information in the comfort letter. (Ref: Para. A35)

The auditor shall base the auditor’s statement regarding any subsequent changes in the change period financial information solely on the procedures performed with respect to the change period. (Ref: Para. A36)

The auditor shall provide an auditor’s statement in the comfort letter regarding subsequent changes in the change period financial information only as of a date less than the date specified in paragraph 10(f) of this ASRS. (Ref: Para. A37)

When the requesting parties request an auditor’s statement regarding subsequent changes in specified financial information as of a date after the date specified in paragraph 10(f) of this ASRS, the auditor is not permitted to include an auditor’s statement in the comfort letter and is restricted to reporting on the results based on the procedures specified by the requesting parties.

In commenting on subsequent changes, the auditor shall not characterise subsequent changes using ambiguous terms, such as referring to a change as adverse. (Ref: Para. A38)

The auditor shall comment only on the occurrence of subsequent changes in the change period financial information that are not disclosed in the offering document.  Accordingly, the auditor shall include the statement “except for changes, increases, or decreases that the offering document discloses have occurred or may occur” in the comfort letter when it has come to the auditor’s attention that a change, increase, or decrease has occurred during the change period, and the amount of such change, increase, or decrease is disclosed in the offering document.  This statement need not be included in the comfort letter when there are no changes, increases, or decreases in the change period financial information or if they are already disclosed in the offering document. (Ref: Para. A38)

The auditor shall comment in the comfort letter if as a result of the procedures performed, the auditor identifies there has been a change in the application of the applicable financial reporting framework to the change period financial information such that the financial information is not prepared on a basis consistent with the latest audited or reviewed financial statements. (Ref: Para. A39)

The auditor shall identify in the comfort letter the dates as of which, and periods for which, data at the cut-off date and data for the change period are to be compared. (Ref: Para. A40-A42)

If the requesting parties request the use of an earlier change period or change periods other than that defined in paragraph 10(f) of this ASRS, the auditor shall explain to the requesting parties the implications of using an earlier date.  If the requesting parties, nonetheless, request the use of a change period or periods other than that defined in paragraph 10(f) of this ASRS, the auditor is permitted to use the change period or periods requested. (Ref: Para. A43)

If the auditor is unable to perform the exact nature, timing or extent of the requesting parties’ specified procedures, the auditor shall discuss this as soon as possible with the requesting parties.  If alternative procedures are requested by the requesting parties, then these new procedures shall be agreed between the auditor and the requesting parties, and documented in writing and co-signed by the auditor and the requesting parties.

If the terms of engagement include the auditor preparing a bring down comfort letter, to be dated at or shortly before the closing date of the offering, the auditor shall carry out the specified procedures set out in the engagement letter and make enquiries of the entity as of the cut-off date for the bring down comfort letter.  The subsequent bring down comfort letter shall relate only to financial information in the offering document as most recently amended.

(Ref: Para. A44-A45)

The auditor shall request a written representation letter from the entity‟s Chief Executive Officer and Chief Financial Officer^[6] that includes the following representations, at a minimum:

1. a reaffirmation of the representations previously provided in the most recent audit or review of the entity's financial statements;
2. that all information requested by the auditor has been provided, including the final version of the offering document;
3. that all matters relevant to the comfort letter have been advised to the auditor;
4. an acceptance of responsibility for the offering document, including that it complies with the applicable legal requirements of all jurisdiction(s) in which it will be, or is, issued;
5. that all financial information that is the subject of the comfort letter has:
   1. been derived from the same accounting records and subject to the same internal control as the most recent audited or reviewed financial statements;
   2. a reasonable basis of preparation, and is prepared in accordance with the applicable financial reporting framework chosen by the responsible party of the entity; and
   3. been prepared on a basis consistent with that of the most recent audited or reviewed financial statements; or if not, that appropriate disclosure of any changes has been made to the financial information in the offering document; and
6. such other representations that the auditor determines are appropriate in the engagement circumstances.

The date of the representation letter shall be either the cut-off date of the offering document, or as near as practicable to, but not after, the date of the comfort letter.

If the required representations set out in paragraph 53 of this ASRS are not received, the auditor shall not issue the comfort letter.

The auditor shall determine if all the requesting parties’ specified procedures have been completed in order to prepare the comfort letter.

The auditor shall request a copy of the signed underwriting agreement from the requesting parties.

The auditor shall agree to provide a comfort letter to the requesting parties only if the auditor has received a signed copy of the underwriting agreement.

(Ref: Para. A46)

The auditor shall inform the requesting parties as soon as possible when the auditor has discovered matters, as a result of the procedures performed by the auditor, not included in the offering document, that require inclusion in the final comfort letter and that were not previously included in the draft comfort letter provided to the requesting parties.  If the responsible party of the entity decides not to amend the offering document, the auditor shall inform the responsible party of the entity that the matters will be included in the final comfort letter.

The auditor‟s comfort letter shall include, at a minimum, each of the following elements: (Ref: Para. A50)

1. addressees, being only the responsible party of the entity and the requesting parties;
2. the date of issue, being the date the auditor signs the comfort letter; (Ref: Para. A47-A49)
3. identification of the offering document to which the comfort letter relates;
4. the purpose of the comfort letter and that it has been prepared in accordance with this ASRS and the engagement letter;
5. the specified procedures requested by the requesting parties which have been performed by the auditor on each type of financial information in order to report factual findings, and that no assurance is expressed on that financial information;
6. a statement that the auditor is not responsible for the sufficiency of the procedures performed;
7. the results of the procedures;
8. if applicable, for the change period financial information:
   1. the change period financial information;
   2. the applicable cut-off period, as well as the dates and periods of comparison for the cut-off period financial information; (Ref: Para. A47)
   3. the procedures performed and that they did not cover the period from the cut-off date to the date of the comfort letter; (Ref: Para. A47)
   4. the auditor's statement as to whether, based on the procedures described, nothing has come to the auditor's attention that there are any changes, increases or decreases in the change period financial information, as compared to the corresponding period:
      • if there are such changes, increases or decreases, that are actual or contemplated, disclosed in the offering document, the auditor's statement states that “except for changes, increases or decreases disclosed in the offering document as having occurred or which may occur”; or
      • if the changes are not disclosed in the offering document, the auditor's statement shall include the amount of the changes, increases or decreases in the selected financial information during the change period;
   5. the auditor's statement that no audit or review was performed on the change period financial information, and accordingly no assurance is expressed on that financial information; and
   6. a statement that the auditor is not responsible for updating the comfort letter for events and circumstances occurring after the cut-off date.
9. confirmation that the use of the comfort letter is restricted to its addressees and is prepared for the sole purpose of assisting the requesting parties in their due diligence defence of the offering document, and consequently is to be used only in connection with the stated purpose of the comfort letter. Consequently the auditor is not responsible for any reliance that may be placed on the comfort letter for any other purpose;
10. the auditor's firm name; and
11. the auditor's address.

If the auditor is required by law or regulation to use a specific layout and/or wording in the comfort letter, the auditor shall refer to compliance with this ASRS only if the comfort letter includes, at a minimum, each of the elements identified in paragraph 60 of this ASRS.

When issuing a comfort letter in accordance with this ASRS, the auditor shall not circumvent the intent of this ASRS by issuing any additional letters or reports to requesting parties in connection with the offering document in which the auditor comments on items for which commenting is otherwise precluded by this ASRS.

The auditor shall not refer to in, or attach to, the comfort letter any restricted use reports.

If the auditor does not receive the requested signed representation letter containing a confirmation that the requesting parties have a due diligence defence as required in paragraph 14(e)(v) of this ASRS, the auditor shall not agree to issue the comfort letter to the requesting parties.

If the agreed terms of engagement require the auditor to issue a letter subsequent to the comfort letter in order to report procedures performed on financial information for a new change period, the auditor shall perform the new change period procedures specified by the requesting parties. (Ref: Para. A51)

The auditor shall request an updated written representation letter from the entity’s Chief Executive Officer and Chief Financial Officer, containing such representations that the auditor determines are appropriate in the engagement circumstances.

The date of the updated representation letter shall be either the cut-off date of the offering document or as near as practical to, but not after, the date of the bring down comfort letter.

If the required representations set out in paragraph 66 of this ASRS are not received, the auditor shall not issue the comfort letter.

The auditor shall provide a written bring down comfort letter to the requesting parties including a clear expression of the results of the auditor’s procedures on the change period financial information. (Ref: Para A51)

Basic Elements of the Bring Down Comfort Letter (Ref: Para. A52)

The bring down comfort letter shall include, at a minimum, each of the following elements:

1. date issued;
2. addressees;
3. a reference to the previously issued comfort letter and the purpose of the bring down comfort letter;
4. a statement as to whether the auditor reaffirms the statements previously included in the comfort letter;
5. details of the updated procedures specified by the requesting parties and performed by the auditor, including when the procedures were performed, and the change period subsequent to the date of the comfort letter to which the procedures relate; and
6. a statement that the bring down comfort letter is restricted to the addressees and is to be used only in connection with the stated purpose of the letter.

The auditor shall document on a timely basis:

1. the nature, timing and extent of the procedures performed by the auditor as specified by the requesting parties and the results obtained, as identified in the comfort letter; and
2. evidence that the procedures were carried out in accordance with this ASRS and the agreed terms of engagement.

(Ref: Para. 3)

The requesting parties ordinarily request the auditor of the entity to perform certain procedures as a part of their due diligence investigation on selected financial information disclosed in the entity’s offering document and report results by way of issuing a comfort letter.  The request is ordinarily made through the responsible party of the entity, and the auditor’s agreement to undertake the engagement is both with the requesting parties and the responsible party of the entity.  Comfort letters are not included in the offering document.  It is ordinarily a condition of the underwriting agreement between the entity and its underwriters (as requesting parties) that an auditor’s comfort letter is provided in respect of the financial information.  The issuance of the comfort letter is restricted to those parties that have agreed to the procedures to be performed by the auditor since others, unaware of the reasons for the procedures, may misinterpret the results.  The comfort letter is ordinarily issued upon pricing of the offering or when a debt program is established provided the engagement letter has been signed.  The comfort letter is ordinarily updated on closing, settlement date or when the requesting parties request multiple updates through the issue of a bring down comfort letter. 

(Ref: Para. 6)

While the types of offerings covered by this ASRS are specifically aimed at international offerings, this ASRS also applies if the auditor is requested to issue a comfort letter in relation to domestic debt or equity offerings, notwithstanding that in Australia, auditors ordinarily are not requested to issue comfort letters for such domestic offerings.

Preconditions for Providing a Comfort Letter

If the requesting parties refuse to meet the auditor, the auditor considers whether to accept the engagement. (Ref: Para. 14(c))

In Australia, auditors do not ordinarily provide review conclusions or audit opinions on non-historical financial information such as a financial forecast and consequently do not agree to perform any other procedures on such financial information.  If the auditor is requested to provide a comfort letter on financial information that includes a financial forecast, the auditor shall not agree to such a request and shall consider the implications for the engagement. (Ref: Para 14(c)(iv))

The signed representations may be provided by way of a specific letter or agreed to be included by the auditor in the engagement letter terms which are then co-signed by the requesting parties with the responsible party of the entity. (Ref: Para. 14(e)(v))

A legal counsel’s letter indicating that a requesting party may be deemed to be an underwriter or has a liability substantially equivalent to that of an underwriter under the applicable law would ordinarily not meet this requirement. (Ref: Para.14(e)(v))

What is substantially consistent may vary from situation to situation and may not be the same as that done in a registered offering of the same securities for the same issuer.  Whether the procedures being, or to be, followed will be substantially consistent is determined by the requesting parties on a case-by-case basis. (Ref: Para.14(e)(v))

Agreeing on the Terms of Engagement

The responsible party of the entity who signs the engagement letter ordinarily is the ultimate responsible party of the entity, or an authorised representative/officer thereof, recognising that, in certain circumstances, the directors of the entity (being those charged with governance) may not be appointed by the time of agreeing the terms of the engagement or the entity may not be in existence when the engagement commences (for example, a new company structure).  If there is a change of responsible party of the entity, the auditor considers whether to update and re-issue the engagement letter for their signature as approval of the terms.  (Ref: Para. 16(b))

A factor in considering whether to accept the engagement is whether the period between the cut-off date and the date of the comfort letter provides sufficient time to allow the auditor to perform the procedures and prepare the comfort letter. (Ref: Para.16(e)(i))

The underwriting agreement ordinarily outlines either the expected form or content of the comfort letter (including the specific matters to be addressed in the comfort letter), or that such form and content are to be determined by the requesting parties separately.  At the time of engagement acceptance, the agreement may be in draft form, as it is not ordinarily finalised and signed by the entity and the requesting parties until closer to the offering document’s date of issue.  The auditor ordinarily receives a copy of the underwriting agreement.  As the auditor is not a party to the underwriting agreement, the procedures the auditor will perform need to be agreed between the responsible party of the entity, requesting parties and auditor, and documented in the engagement letter. (Ref: Para 16(e)(ii))

When financial information in an offering document has not been audited in accordance with Australian Auditing Standards and, accordingly, is not covered by an auditor’s opinion, the nature of the comments that the auditor can make in the comfort letter with respect to that financial information is limited.  What constitutes a reasonable investigation of unaudited financial information sufficient to satisfy the requesting parties’ purposes for the comfort letter can vary from jurisdiction to jurisdiction.  Consequently, only the requesting party can determine what is sufficient for the requesting party’s purposes. (Ref: Para.16(e)(iii))

The assistance that the auditor can provide by way of a comfort letter is subject to limitations.  One limitation is that auditors can properly comment in their professional capacity only on matters to which their professional expertise is relevant.  Another limitation is that procedures contemplated in a comfort letter, which do not constitute an audit of financial statements, do not provide the auditor with a basis for expressing an opinion.  Such procedures may bring to the auditor’s attention significant matters affecting the financial information, but they do not provide any assurance that the auditor will become aware of any or all significant matters that would be disclosed in an audit.  Accordingly, a risk exists that the auditor may have provided assurance on the absence of conditions or matters that may prove to have existed. (Ref: Para. 16(h))

Appendix 1 contains an illustrative auditor’s engagement letter. (Ref: Para. 16(h))

Acknowledgement by the responsible party of the entity and the requesting parties in writing of their acceptance of the engagement letter provides evidence that the entity and the requesting parties accept their engagement responsibilities and establishes a basis of common understanding of the responsibility of each party. It also avoids misunderstandings of the agreed terms. If the requesting parties do not agree to sign, or do not sign the engagement letter, the auditor may: (Ref. Para: 17)

1. be satisfied that the requesting parties' responsibilities in the engagement are already contained in applicable law or regulation thereby not requiring the requesting parties' written acknowledgement as a signatory to the engagement letter;
2. if the requesting parties' responsibilities are not already contained in applicable law or regulation, not agree to issue the comfort letter; or
3. agree to report only factual findings on the financial information in accordance with ASRS 4400 Agreed-Upon Procedures Engagements to Report Factual Findings.

Draft Comfort Letter

By providing a draft comfort letter early in the process, the auditor has the opportunity to clearly show the requesting parties what they may expect to receive from the auditor.  The requesting parties therefore also have the opportunity to discuss further with the auditor the procedures and to request any additional procedures.  If the additional procedures relate to matters within the auditor’s professional competence, and the auditor agrees to perform them, a revised draft may be prepared. (Ref: Para. 18)

Acceptance by the requesting parties of the draft comfort letter (and subsequently by acceptance of the comfort letter in final form) is an indication to the auditor that the requesting parties consider the procedures described to be sufficient for the requesting parties’ purposes.  Clearly describing the procedures to be followed by the auditor in the comfort letter avoids misunderstanding about the basis on which the auditor’s comments have been made and assists the requesting parties in deciding whether the procedures performed are sufficient for the requesting parties’ purposes. (Ref: Para.19)

The following is an example of a paragraph that may be placed in the draft letter for identification and explanation of its purposes and limitations: (Ref: Para. 19)

“This draft is provided solely for the purpose of indicating the form of letter that we would expect to be able to furnish [names of the requesting party] in response to their request, the matters expected to be covered in the letter, and the nature of the procedures that we would expect to carry out with respect to such matters.  Based on our discussions with [name of requesting party], it is our understanding that the procedures outlined in this draft letter are those they wish us to follow.  Unless [names of the requesting party] informs us otherwise, we shall assume that there are no additional procedures they wish us to follow.  The text of the letter itself will depend, of course, on the results of the procedures, which we would not expect to complete until shortly before the letter is given and in no event before the cut-off date indicated therein.”

If the auditor has not had any discussions with the requesting parties about the procedures required to be performed by the requesting parties, the second sentence in this paragraph would be revised as follows: “In the absence of any discussions with [names of the requesting party], we have set out in this draft letter those procedures referred to in the draft underwriting agreement (of which we have been furnished a copy) that we are willing to follow.” (Ref: Para. 20)

Situations may exist in which more than one auditor is involved in the audit of the financial statements of an entity and in which the reports of more than one auditor appear in the offering document.  This is ordinarily the case when the entity is involved in a business combination.  Other examples may include the audit of significant divisions, branches, or subsidiaries by component auditors.  Comfort letters are requested occasionally from more than one auditor, for example, in connection with an offering document to be used in the subsequent sale of shares issued in recently effected mergers, and from predecessor auditors.  In such circumstances, it is the responsible party of the entity’s responsibility, at the earliest practicable date, to inform any other auditors who may be involved about any comfort letter that may be requested of them and arrange for those other auditors to receive a draft of the underwriting agreement so that those other auditors may make arrangements at an early date for the preparation of a draft comfort letter and for the performance of specified procedures.  The responsible party of the entity or requesting parties are also responsible for arranging for a copy of the comfort letters of component auditors in draft and final form to be provided to the auditor of the group financial statements provided that the group auditor has signed the component auditor’s engagement letter as one of the requesting parties. (Ref: Para. 21)

Changes in the Terms of Providing the Comfort Letter

Any change in agreed terms proposed by the responsible party of the entity during the engagement needs to be appropriately justified to the auditor’s satisfaction before the auditor agrees to such a change.  Examples of when requests from the entity may be received include a change to reflect a change in circumstances or a misunderstanding of the nature of the services to be provided.  The auditor considers the implications of the proposed change on the conduct and reporting of the engagement, as well as any evidence that was obtained prior to the change.  A change in circumstances that affects the entity’s requirements, or a misunderstanding concerning the nature of the auditor’s Comfort letter originally agreed, may be considered a reasonable basis for requesting a change in the engagement terms. (Ref: Para. 22)

It is important that all changes agreed to by the entity, the requesting parties and the auditor be documented and approved in writing to ensure there is no misunderstanding of what has been agreed. (Ref: Para. 23)

Comfort letter engagements ordinarily require the following procedures be performed by the auditor: (Ref: Para. 25)

1. procedures specified by the requesting parties on unaudited interim financial information; and
2. procedures specified by the requesting parties in respect of selected financial information during the change period.

General

Comments included in the letter will often be related to: (Ref: Para. 26)

1. Unaudited interim financial information.
2. Pro forma financial information.
3. Tables, statistics and other financial information.
4. Subsequent changes in other specified financial statement items.

The procedures performed with respect to interim periods may not disclose subsequent changes in the specified financial statement items, inconsistencies in the application of the applicable financial reporting framework, instances of non-compliance as to form with applicable legal or regulatory requirements, or other matters about which an auditor’s statement is requested.

The auditor is not allowed to make a general statement in the comfort letter to the effect that “nothing else has come to the auditor’s attention that would be of interest to the requesting parties” because there is no way for the auditor to anticipate other matters that would be of interest to the requesting parties. (Ref: Para. 27(c))

The effect of any modification needs to be assessed by the auditor based on the nature of the modification and whether and how it relates to any of the financial information that is the subject of the comfort letter.  The auditor uses professional judgement in making such an assessment. (Ref: Para. 28)

Knowledge of Internal Control (Ref: Para. 29)

The auditor should have obtained a sufficient understanding of an entity’s internal control over financial reporting for both year-end and interim periods through performing an audit of the entity’s financial statements for one or more financial reporting periods.

Unaudited Interim Financial Information (Ref: Para. 30)

The applicable financial reporting framework used for the review of interim financial information is ordinarily represented by Australian Accounting Standard AASB 134 Interim Financial Reporting, issued by the Australian Accounting Standards Board.

Pro Forma Financial Information

An appropriate level of knowledge of the accounting and financial reporting practices of the entity may be obtained by the auditor auditing, or reviewing, in accordance with Australian Auditing Standards, historical financial statements of the entity (or, in the case of a business combination, a significant constituent part of the combined entity) for the most recent year end or interim period for which the pro forma financial information is presented. (Ref: Para. 32)

Pro forma financial information is ordinarily included in the offering document when the entity is involved in a business combination.
(Ref: Para. 33)

Financial Forecast (Ref: Para. 35)

A financial forecast prepared by the entity may or may not be included in the offering document.

Tables, Statistics, and Other Financial Information

Other financial information appearing in the offering document does not include financial information that is covered by the auditor’s report on the financial statements. (Ref: Para. 36)

As the audit terms “presents fairly” or “true and fair” ordinarily relates to presentations of financial statements, the use of the terms by auditors in commenting on other types of information may be misleading and should not be used in the comfort letter. (Ref: Para. 38)

Options for describing the procedures performed and the findings obtained include: (Ref: Para. 39)

1. describing them individually for each item of specific information on which comment is made;
2. grouping or summarising some or all of the descriptions, provided:
   1. the procedures and factual findings are adequately described;
   2. the applicability of the descriptions to items in the offering document is clear; and
   3. the descriptions do not imply that the auditor assumes responsibility for the adequacy of the procedures;
3. presenting a matrix listing the financial information and common procedures employed and indicating the procedures applied to the specific items; and
4. identifying procedures performed with specified symbols and identifying items to which those procedures have been applied directly on a copy of the offering document, which is attached to the comfort letter.

Change Period Financial Information

Comments regarding subsequent changes typically relate to whether, during the change period, there have been any: (Ref: Para. 42)

1. changes in share capital;
2. increases in long-term debt;
3. decreases in other specified financial statement items;
4. decreases in net current assets or equity and equity attributable to the company;
5. decreases in net sales or the total per-share amounts of income from continuing operations and of net income or net income attributable to the company; or
6. changes in the basis of preparation of the financial information (e.g. different accounting policies adopted).

Procedures may include: (Ref: Para. 43)

1. reading minutes during the change period and discussing with those charged with governance those meetings for which minutes have not been approved;
2. reading the unaudited or unreviewed financial information for the change period; or
3. making enquiries of entity relating to the whole of the change period and obtaining appropriate written representations from the entity to support the answers to the enquiries;

to enable the auditor to state whether anything has come to the auditor's attention that a change, increase, or decrease has occurred during the change period.

In determining whether to accept the comfort letter engagement, the auditor ordinarily considers whether the length of the cut-off period proposed by the requesting parties for the change period financial information is appropriate, having regard to factors such as: (Ref: Para. 44)

1. the timeframe proposed to be covered;
2. the time that has elapsed since the issue date of the latest audit or review report on the entity's financial statements;
3. when the next audit or review report is expected to be issued; and
4. whether the basis of preparation is consistent with that of the most recent audited or reviewed financial statements.

Publicly listed entities ordinarily have a change period up to six months from the date of the latest audited or reviewed financial statements whilst privately incorporated entities ordinarily have a change period up to twelve months. If the auditor is not comfortable with the proposed change period, it should be discussed with the requesting parties. If the auditor does not accept the proposed change period, the auditor does not agree to provide an auditor's statement in respect of the change period financial information and consequently only reports the results of the procedures performed as specified by the requesting parties in the comfort letter.

In commenting on subsequent changes, the auditor may use terms such as ‘change’, ‘increase’, or ‘decrease’.  Terms such as ‘adverse’ are not clearly understood and may cause the comments on subsequent changes to be ambiguous and hence are not used. (Ref: Para. 46-47)

An example of a change in the financial reporting framework may be as a result of the entity changing the selection or application of accounting policies applied to the change period financial information. (Ref: Para. 48)

The comparison for the change period relates to the entire period and not to portions of that period.  A decrease during one part of the period may be offset by an equal or larger increase in another part of the period; however, because no decrease for the period as a whole existed, the comfort letter would not report the decrease occurring during one part of the period. (Ref: Para. 49)

Dates as of which, and periods for which, data at the cut-off date and data for the change period are to be compared are to be agreed in the engagement letter. For balance sheet items, the comparison date is normally that of the latest balance sheet included in the offering document (that is, immediately prior to the beginning of the change period). For income statement items, the comparison period or periods might be one or more of the following: (Ref: Para. 49)

1. the corresponding period of the preceding year;
2. a period of corresponding length immediately preceding the change period;
3. a proportionate part of the preceding fiscal year; or
4. any other period of corresponding length chosen by the requesting parties.

The purpose of identifying the date and period used for comparison is to avoid misunderstandings about the matters being compared, and so that the requesting parties can determine whether the comparison period is suitable for the requesting parties’ purposes. (Ref: Para. 49)

Requesting parties occasionally request that the change period begins immediately after the date of the latest audited balance sheet (which is, ordinarily also the closing date of the latest audited statement of comprehensive income) in the offering document, even though the offering document includes a more recent unaudited balance sheet and statement of income.  The use of the earlier date may defeat the requesting parties’ purpose because it is possible that an increase in one of the items referred to in paragraph A35 occurring between the dates of the latest audited and unaudited balance sheets included in the offering document might more than offset a decrease occurring after the later date.  A similar situation might arise in the comparison of income statement items.  In these circumstances, the decrease occurring after the date of the latest unaudited interim financial statements included in the offering document would not be reported in the comfort letter. (Ref: Para. 50)

(Ref: Para. 53-55)

The auditor ordinarily requests to receive a written representation letter from the responsible party of the entity at the completion of the engagement.^[7]  The auditor ordinarily provides the responsible party of the entity with a specific list of matters requiring the entity’s representations.  Such matters may already be contained in documentation reviewed by the auditor, including minutes of meetings, and written acceptance of the engagement letter, and therefore the auditor only needs to request the inclusion of such matters in the written representation letter if the auditor considers it appropriate in the engagement circumstances.  If the responsible party of the entity does not provide a written representation letter, or refuses to provide it, the auditor informs them that the auditor is unable to provide a comfort letter.

Appendix 2 contains an illustrative representation letter.

(Ref: Para. 59)

The auditor ordinarily requests a copy of the final offering document (and any document incorporated by reference in it) for the sole purpose of reading it to identify any possible matters that may impact providing the comfort letter, or its final form and content to the entity.  Subsequently discovered matters may include matters identified from reading the final offering document and changes in specified items that are the subject of the comfort letter and have been identified as a result of the procedures performed, but which are not already disclosed in the offering document.  If the matters are already disclosed in the offering document, there is ordinarily no need to include such matters in the comfort letter, except by way of reference to where they are disclosed in the offering document.  If matters are not already disclosed in the offering document, the auditor ordinarily discusses them with the entity and advises that the auditor will include details of the matters in the final comfort letter.  The auditor may also advise the requesting parties of the matters and/or suggest to the entity that the requesting parties be advised.

Date of the Comfort Letter (Ref: Para. 60(b))

The comfort letter is dated when issued which is ordinarily on, or shortly after:

1. the entity‟s representation letter is received;
2. when the underwriting agreement(s) is/are signed;
3. when the signed engagement letter is received; and
4. before finalisation of the offering document.

The engagement letter ordinarily specifies the date, often referred to as the cut-off date, to which the procedures specified by the requesting parties in the letter are to relate, ordinarily between three and five working days before the date of the comfort letter.  A factor in considering whether to accept the engagement is whether the period between the cut-off date and the date of the letter provides sufficient time to allow the auditor to perform the procedures and prepare the comfort letter.

Comments included in an earlier comfort letter that relate to information in the offering document may be incorporated by reference in a subsequent bring down comfort letter. 

Appendix 3 contains an illustrative comfort letter. (Ref: Para. 60)

The requesting parties may request the auditor to issue an updated comfort letter, ordinarily referred to as a bring down comfort letter, at the offering pricing, closing of the offering document and/or subsequent dates depending on the offering circumstances. (Ref: Para. 65-66)

Appendix 4 contains an illustrative bring down comfort letter. (Ref: Para. 70)