Nature and Extent of the Audit Engagement
Item 21.1 of Annexure 1
The directors’ statement required by Item 21.1 of Annexure 1 includes the directors’ opinion on “solvency” as at the end of the last financial year as to whether there are reasonable grounds to believe that the franchisor will be able to pay its debts as and when they fall due.
The auditor’s responsibility is to form and express an opinion on the directors’ statement made pursuant to Item 21.1 of Annexure 1. The substance of this responsibility is similar to that assumed by a company auditor in relation to the “solvency” statement by directors which forms part of the directors’ declaration under Section 295(4) of the Corporations Act 2001 (the “Act”), and on which the auditor forms an opinion and reports, as a component of the financial report, under the Act. For audits under the Act, the auditor’s opinion on the directors’ solvency statement is derived from, and is integral to, the audit process related to forming an opinion on the financial report and the appropriateness of the going concern basis in accordance with ASA 570 Going Concern.
In the case of an audit under the Act, the auditor’s responsibility is to consider the appropriateness of the going concern basis (defined for financial reporting purposes) in the context of the audit of a financial report. The auditor therefore considers the going concern assumption under ASA 570 (including solvency) for the “relevant period”, being the period from the date of the auditor’s current report to the expected date of the next auditor’s report on the financial report for the next period.
Item 21.2 and 21.3 of Annexure 1
If requested by the franchisee and they are available the franchisor should provide to the franchisee or prospective franchisees as part of the Disclosure documents under Item 21.2 or 21.3 of Annexure 1, the financial reports of the franchisor for each of the last two completed financial years or as part of the consolidated entity (or foreign equivalent) which are accompanied by an independent audit report addressed to the directors of the franchisor.
Item 21.4 and 21.5 of Annexure 1
In the event that clause 21.4 or 21.5 of Annexure 1 applies and the auditor (either a registered company auditor or for foreign franchisors, a foreign equivalent) is engaged to provide an independent audit report on the directors’ statement under Item 21.1 of Annexure 1, the audit report is required to be provided within four months of the end of the financial year to which the directors’ statement relates. The implication for the auditor will be on managing workflow, client expectations and meeting all reporting requirements in a shorter time frame.
While recognising that for entities subject to audit under the Act, there is an interrelationship between the opinion under the Act and that required under Item 21.4 or 21.5 of Annexure 1, the audit report issued under Item 21.4 or 21.5 of Annexure 1, is undertaken as a separate engagement. It is acknowledged, however, that in situations where the audit reports are to be provided by the same auditor, much of the evidence to support the opinion under Item 21.4 and 21.5 of Annexure 1 will be derived from the financial report audit under the Act.
For engagements under Item 21.4 and 21.5 of Annexure 1, the auditor considers the risks inherent in issuing an audit report without the support of an accompanying financial report. For example, unlike the auditor’s opinion on solvency under the Act, which is one element of the information reported on by the auditor, the Item 21.4 and 21.5 of Annexure 1 opinion is a specific audit report on the directors’ statement and stands in its own right.
In situations where no audit has been conducted as at the end of the last financial year, the nature and extent of the audit procedures to be undertaken by an auditor on an entity’s financial information, may be similar to those required to express an audit opinion under the Act, before being able to report under Item 21.4 or 21.5 of Annexure 1. Whilst the audit process need not be directed to supporting an opinion on a complete financial report, but rather on the directors’ assertion in their statement, the auditor may, for example need to have obtained sufficient appropriate audit evidence under ASA 500 Audit Evidence about the assets, liabilities, revenues, expenses, cash flows, budgets and projections of the entity in order to assess the basis for the directors’ statement.
The audit procedures performed to be able to report under Item 21.4 or 21.5 of Annexure 1, are likely to include an analysis and assessment of prospective information in relation to cash flows, revenue and payment streams and reflect assumptions that are dependent upon future events which may be subject to risks inherent in the business and future economic conditions. The auditor applies professional judgement in auditing any assumptions to determine their reasonableness as such evidence is future oriented and speculative in nature. The auditor may refer to ASAE 3450 Assurance Engagements involving Corporate Fundraisings and/or Prospective Financial Information for further guidance on this area.
Item 21.6 of Annexure 1
In situations where the franchisor or the entity were insolvent in either or both of the last two completed financial years, and are required to report under Item 21.6 of Annexure 1, the auditor considers the guidance contained in paragraphs 10-14 of this guidance statement. The auditor considers the date on which the statutory declaration of the franchisor’s solvency is provided and the date at which they sign the independent audit report in order to consider whether any subsequent events under ASA 560 Subsequent Events have been reported appropriately by the franchisor.
Other Considerations under the Franchising Code
The franchisor is also required to disclose to the franchisee or prospective franchisee under section 17 of the Franchising Code any materially relevant facts that may affect a statement, declaration or a document referred to in Item 21 of Annexure 1, as soon as reasonably practicable prior to the parties entering into the franchise agreement.
In the circumstances where a materially relevant fact becomes known after the disclosure document is completed, the matter should be brought to the attention of the franchisee or prospective franchisee in writing within a reasonable time but not more than 14 days after the franchisor becomes aware of the matter.
The auditor needs to enquire of the franchisor as to whether there are any materially relevant facts that should be brought to their attention and apply professional judgement to determine any impact on the engagement specific audit approach of such facts.
In the case where a materially relevant fact becomes known to the auditor after completion and distribution of the disclosure document (including the audit report) to the franchisee or prospective franchisee that may have caused the auditor to amend the audit report, the auditor needs to follow the requirements in ASA 560 to resolve the matter.