(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)