The auditor is concerned with obtaining sufficient appropriate audit evidence that the position and declaration given in the directors’ statement pursuant to Item 21.1 of Annexure 1 is fairly presented, based on the foreseeable commercial circumstances facing the entity and which the auditor can reasonably perceive to exist.
If, as a result of applying the appropriate level of audit procedures, the auditor forms the opinion that there is sufficient and appropriate audit evidence obtained to support the representations made by the directors in their statement, the auditor issues an unmodified auditor’s report under ASA 700. An example report is provided in Appendix 2 to this Guidance Statement.
If the auditor is of the opinion that the audit evidence is inconsistent with the representation made by the directors, under ASA 570 the auditor needs to communicate with those charged with governance e.g. directors and/or audit committee of the franchisor, events or conditions arising from the audit that in the auditor’s professional judgement may cast significant doubt on the entity’s ability to continue as a going concern under ASA 570 and issue a modified report under ASA 705 Modifications to the Opinion in the Independent Auditor’s Report. In this scenario, the auditor may need to consider the basis for the modification and whether this may potentially result in a breach of the Franchising Code and may deem it appropriate to obtain legal advice to determine the appropriate course of action in the circumstances.
If the auditor is of the opinion that there is sufficient and appropriate audit evidence to support the representation made by the directors that events exist that put into doubt the ability of the entity to pay its debts as and when they fall due, the auditor expresses an unqualified opinion but adds an emphasis of matter section. ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report may provide the auditor with some further guidance in this area.
Item 21.4(b) of Annexure 1, requires the copy of the independent audit [report] to be provided with the directors’ statement before distribution of that report by the franchisor to any franchisee or prospective franchisee.
Conformity with International Pronouncements
There is no equivalent International Auditing Practice Statement (IAPS) or Auditing Standard to this Guidance Statement.
This example independent audit report on a Directors’ Solvency Statement can be adapted accordingly for similar audit engagements across different subject matter e.g. Competition and Consumer (Industry Codes – Oil code) Regulation 2006.