AU 634: Letters for Underwriters and Certain Other Requesting Parties1

AU-C 920: Letters for Underwriters and Certain Other Requesting Parties

AU EFFECTIVE DATE AND APPLICABILITY

AU-C EFFECTIVE DATE AND SUMMARY OF CHANGES

SAS No. 122, Codification of Auditing Standards and Procedures, is effective for comfort letters issued after December 15, 2012.

AU-C 920 does not change extant requirements in any significant way.

APPLICABILITY

In addition to issuing a comfort letter to an underwriter, accountants may also issue a comfort letter to a broker-dealer or other financial intermediary, acting as principal or agent in an offering or a placement of securities in connection with the following types of securities offerings:

In those offerings, the accountant may issue a comfort letter only if the party provides a representation letter that represents that the party’s review process is substantially consistent with the review process under the 1933 Act.

An accountant is also permitted to issue a comfort letter in connection with acquisition transactions in which there is an exchange of stock and comfort letters that are requested by the buyer or seller, or both, as long as a representation letter is provided that represents that the party’s review process is substantially consistent with the review process under the 1933 Act.

A comfort letter may also be addressed to parties with a statutory due diligence defense under Section 11 of the Act, other than a named underwriter, when a law firm or attorney for the requesting party issues a written opinion to the accountants that states that the party has a due diligence defense under Section 11 of the Act. If the requesting party cannot provide a law firm’s or attorney’s written opinion to the accountant, the requesting party should provide a representation letter.

When one of the parties identified in the preceding paragraphs (other than an underwriter or other party with due diligence responsibilities) requests a comfort letter, but does not provide a representation letter, a special type of letter is permissible. (See Illustration 17.)

AU DEFINITIONS OF TERMS

Capsule financial information. Unaudited summarized interim information for periods subsequent to the periods covered by audited financial statements or unaudited condensed interim financial information. Capsule financial information (either in narrative or tabular form) often is provided for the most recent interim period and for the corresponding period of the prior year. It usually includes income statement items, often limited to sales and total and per share amounts for extraordinary items and net income.

Change period. The period that ends on the cutoff date (specified in the underwriting agreement) and which usually begins for balance sheet items immediately after the date of the latest balance sheet in the registration statement. For income statement items, the period usually begins immediately after the latest period for which those items are presented in the registration statement.

Closing date. The date on which the issuer or selling security holder delivers the securities to the underwriter in exchange for the proceeds of the offering.

Comfort letter. A letter issued by accountants to underwriters, or to other parties with a statutory due diligence defense under Section 11 of the Act, in connection with financial statements and financial statement schedules included (incorporated by reference) in registration statements filed with the SEC under the Act. Comfort letters are not required under the Act, and copies are not filed with the SEC. It is, however, a common condition of an underwriting agreement in connection with the offering for sale of securities registered with the SEC under the Act that the accountants are to furnish a comfort letter. Subjects covered in a comfort letter usually are limited to those specified in the underwriting agreement. Subjects that may be addressed in a comfort letter include:

Cutoff date. A date specified in the underwriting agreement to which certain procedures described in the comfort letter are to relate (for example, a date five days before the date of the letter).

Effective date. The date on which the registration statement becomes effective. It is the date when the issuer’s or selling security holder’s securities may first be sold to the public.

Filing date. The date on which the registration statement is first filed with the SEC.

Negative assurance. A statement by accountants that, as a result of performing specified procedures, nothing came to their attention that caused them to believe that specified matters do not meet a specified standard (for example, that nothing came to their attention that caused them to believe that any material modifications should be made to the unaudited financial statements or unaudited condensed financial statements for them to be in conformity with generally accepted accounting principles [GAAP]).

Shelf registration statement. A registration statement in which the issuer registers a designated amount of securities for continuous or delayed offerings during an extended period. Ordinarily, the issuer does not have to prepare and file a new prospectus and registration statement for each sale.

Underwriter. Any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking or participates or has a participation in the direct or indirect underwriting of any such undertaking. An underwriter does not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission (Section 2 of the Act).

Underwriting agreement. An agreement between issuers of securities or selling stockholders and the underwriter specifying terms and conditions of the offering and sale of securities. It usually contains provisions that affect the accountant including the provision that the accountant is to furnish a comfort letter.

AU-C DEFINITIONS OF TERMS

Source: AU-C 920.07

For purposes of this section, the following terms have the meanings attributed as follows:

Capsule financial information. Unaudited summarized interim financial information for periods subsequent to the periods covered by the audited financial statements or unaudited interim financial information included in the securities offering. Capsule financial information may be presented in narrative or tabular form and is often provided for the most recent interim period and for the corresponding period of the prior year.

Change period. The period ending on the cut-off date and ordinarily beginning, for balance sheet items, immediately after the date of the latest balance sheet in the securities offering and, for income statement items, immediately after the latest period for which such items are presented in the securities offering.

Closing date. The date on which the issuer of the securities or selling security holder delivers the securities to the underwriter in exchange for the proceeds of the offering.

Comfort letter. A letter issued by an auditor in accordance with this section to requesting parties in connection with an entity’s financial statements included in a securities offering.

Comparison date and comparison period. The date as of which, and period for which, data at the cut-off date and data for the change period are to be compared.

Cut-off date. The date through which certain procedures described in the comfort letter are to relate.

Effective date. The date on which the securities offering becomes effective.

Entity. The party whose financial statements are the subject of the engagement.

Negative assurance. A statement that, based on the procedures performed, nothing has come to the auditor’s attention that caused the auditor to believe that specified matters do not meet specified criteria (for example, that nothing came to the auditor’s attention that caused the auditor to believe that any material modifications should be made to the unaudited interim financial information for it to be in accordance with GAAP).

Requesting party. One of the following specified parties requesting a comfort letter, which has negotiated an agreement with the entity:

• An underwriter
• Other parties that are conducting a review process that is, or will be, substantially consistent with the due diligence process performed when the securities offering is, or if the securities offering was, being registered pursuant to the 1933 Act, as follows:
  • A selling shareholder, sales agent, or other party with a statutory due diligence defense under Section 11 of the 1933 Act
  • A broker-dealer or other financial intermediary acting as principal or agent in a securities offering in connection with the following types of securities offerings:
    • Foreign offerings, including Regulation S, Eurodollar, and other offshore offerings
    • Transactions that are exempt from the registration requirements of Section 5 of the 1933 Act, including those pursuant to Regulation A, Regulation D, and Rule 144A
    • Offerings of securities issued or backed by governmental, municipal, banking, tax-exempt, or other entities that are exempt from registration under the 1933 Act
  • The buyer or seller in connection with acquisition transactions in which there is an exchange of stock

Securities offerings. One of the following types of securities offerings:

• Registration of securities with the SEC under the 1933 Act
• Foreign offerings, including Regulation S, Eurodollar, and other offshore offerings
• Transactions that are exempt from the registration requirements of Section 5 of the 1933 Act, including those pursuant to Regulation A, Regulation D, and Rule 144A
• Offerings of securities issued or backed by governmental, municipal, banking, tax-exempt, or other entities that are exempt from registration under the 1933 Act
• Acquisition transactions in which there is an exchange of stock

Underwriter. As defined in the 1933 Act:

. . . any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission. As used in this paragraph, the term “issuer” shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

Except when the context otherwise requires, the word underwriter, as used in this section, refers to the managing, or lead, underwriter, who typically negotiates the underwriting agreement or purchase agreement (hereafter referred to as the underwriting agreement) for a group of underwriters whose exact composition is not determined until shortly before a securities offering becomes effective.

OBJECTIVES OF AU SECTION 634

SAS 72 provides guidance to accountants for performing and reporting on the results of engagements to issue comfort letters for underwriters and certain other requesting parties. Those engagements are in connection with financial statements and financial statement schedules contained in registration statements filed with the SEC under the Act and certain other securities offerings.

SAS 72 addresses various matters, such as the following:

Providing comfort letters to underwriters is a service of accountants that developed after enactment of the Securities Act of 1933. Section 11 of the Act provides that underwriters, among others, could be liable if any part of a registration statement contained material omissions or misstatements. The Act also provides for an affirmative defense for underwriters if they can demonstrate that, after a reasonable investigation (called “due diligence”), the underwriter has reasonable grounds to believe that there were no material omissions or misstatements. In requesting a comfort letter, an underwriter is generally seeking assistance in performing a reasonable investigation of financial and accounting data in the registration statement that is not “expertized” (i.e., covered by a report of independent accountants, who consent to be named as experts, based on an audit in accordance with the standards of the Public Company Accounting Oversight Board [PCAOB]) as a defense against possible claims under Section 11 of the Act.

Ordinarily, underwriting agreements require comfort letters from the issuer’s accountant to the underwriter. Comfort letters pertain primarily to financial data and information that have not been audited (“expertized”). What constitutes a reasonable investigation of unaudited data and information sufficient to satisfy the underwriter is not authoritatively established. Consequently, only the underwriter can determine what is sufficient for his or her purposes concerning procedures to be applied by the accountant.

The assistance the accountant can provide to the underwriter by way of the comfort letter is subject to limitations. Procedures short of an audit, such as those contemplated in a comfort letter, provide an accountant with a basis for expressing, at the most, negative assurance. Also, an accountant can properly comment only on matters to which the accountant’s professional expertise is substantially relevant.

OBJECTIVES OF AU-C SECTION 920

AU-C 920.06 states that:

. . . the objectives of the auditor, when engaged to issue a letter to a requesting party in connection with an entity’s financial statements included in a securities offering, are to

FUNDAMENTAL REQUIREMENTS: GENERAL

Representation Letter

According to AU 634.06, if the party requesting the comfort letter is a party other than a named underwriter with a due diligence defense under Section 11 of the Act, but is one of the types of parties described in the “Applicability” section, the accountant should obtain a representation letter that includes the following elements:

When the accountants receive the representation letter, they should refer in the comfort letter to the requesting party’s representations (see Illustration 16 and Illustration 17 when requesting party has not provided the required representation letter).

Reports to Other Parties

When a party other than those described in the “Applicability” section requests a report, the accountant should not provide a comfort letter or the letter in Illustration 17. Instead, the accountant should provide a report on agreed-upon procedures. (See Section 201.)

Communications with Underwriter

The accountant should suggest to the underwriter that they meet with the client to discuss the procedures to be followed related to the issuance of the comfort letter (procedures followed are described in the comfort letter; see Illustration 1). The underwriter should also provide the accountant with a draft of the underwriting agreement so that the accountant can indicate whether he or she will be able to furnish a letter in acceptable form.

Draft Comfort Letter

It is desirable for accountants to prepare a draft of the form of the comfort letter they expect to furnish as soon as they receive the draft of the underwriting agreement. The draft comfort letter should:

The following (from AU 634.16) is a suggested form of the legend that may be placed on the draft comfort letter for identification and explanation of its purposes and limitations:

This draft is furnished solely for the purpose of indicating the form of letter that we would expect to be able to furnish [name of underwriter] in response to their request, the matters 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 underwriter], it is our understanding that the procedures outlined in this draft letter are those they wish us to follow.* Unless [name of underwriter] 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 cutoff date indicated therein.

* If the accountant has not met with the underwriter, this sentence should be as follows:

In the absence of any discussions with [name of underwriter], 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.

Principal Accountant

If more than one accountant is involved in the audit of the financial statements and the reports of those accountants appear in the registration statement, the principal accountant (the accountant reporting on the consolidated financial statements) should read the comfort letters of the other accountants who are reporting on significant components of the consolidated group. According to AU 634.18, the principal accountant should state in his or her comfort letter that (see Illustration 10):

Shelf Registration

If the registrant has not chosen an underwriter by the effective date of a shelf registration statement, the accountant should not agree to furnish a comfort letter addressed to the client, legal counsel designated to represent the underwriting group, or a nonspecific addressee. The accountant may, however, agree to provide the client or legal counsel for the underwriting group with a draft comfort letter that describes the procedures performed by the accountant and the comments the accountant is willing to express based on those procedures. The following (from AU 634.19) is a suggested form of the legend that should be placed on the draft comfort letter to describe the letter’s purpose and limitations:

This draft describes the procedures that we have performed and represents a letter we would be prepared to sign as of the effective date of the registration statement if the managing underwriter had been chosen at that date and requested such a letter. Based on our discussions with [name of client or legal counsel], the procedures set forth are similar to those that experience indicates underwriters often request in such circumstances. The text of the final letter will depend, of course, on whether the managing underwriter who is selected requests that other procedures be performed to meet his or her needs and whether the managing underwriter requests that any of the procedures be updated to the date of issuance of the signed letter.

A signed comfort letter may be issued to the underwriter selected for the portion of the issue then being offered when the underwriting agreement for an offering is signed and on each closing date.

Issuance of Letters or Reports under Other Standards

When issuing a comfort letter, the accountant may not issue any additional letters or reports under any other statements (SASs, Statements on Standards for Attestation Engagements [SSAEs], or Statements on Standards for Accounting and Review Services [SSARSs]) to the underwriter or other requesting parties in connection with the offering or placement of securities in which the accountant comments on items for which commenting is otherwise precluded by this section.

FUNDAMENTAL REQUIREMENTS: FORMAT AND CONTENTS OF COMFORT LETTERS

Dating of Comfort Letter

The following apply to the date of the comfort letter:

Addressee

The following apply to determining the addressee of the comfort letter:

Introductory Paragraph

The following apply to the introductory paragraph of the comfort letter:

If the above reports are not included (incorporated by reference) in the registration statement, they may be attached to the comfort letter. The accountant should not repeat the report in the comfort letter or otherwise imply that he or she is reporting as of the comfort letter date or that he or she is responsible for the sufficiency of the procedures for the underwriter’s purposes.

Independence

The following apply to statements on independence:

Compliance as to Form with SEC Requirements

The following apply to compliance with SEC requirements:

FUNDAMENTAL REQUIREMENTS: COMMENTING IN A COMFORT LETTER ON INFORMATION OTHER THAN AUDITED FINANCIAL STATEMENTS

General

The following apply to (1) unaudited condensed interim financial information, (2) capsule financial information, (3) pro forma financial information, (4) financial forecasts, and (5) changes in capital stock, increases in long-term debt, and decreases in other specified financial statement items.

Knowledge of Internal Control

If the accountant has not obtained knowledge of a client’s internal control over financial reporting as it relates to the preparation of both annual and interim financial information, he or she should not comment in the comfort letter on (1) unaudited condensed interim financial information, (2) capsule financial information, (3) a financial forecast when historical financial statements provide a basis for one or more significant assumptions for the forecast, or (4) changes in capital stock, increases in long-term debt, and decreases in selected financial statement items.

Unaudited Condensed Interim Financial Information

The following apply to unaudited condensed interim financial information:

Capsule Financial Information

The following apply to capsule financial information:

Pro Forma Financial Information

The following apply to pro forma financial information:

Financial Forecasts

The following apply to financial forecasts:

Subsequent Changes

Comments on subsequent changes usually address:

Accountants generally will be asked to read minutes and make inquiries of company officials concerning the change period. The accountants should, therefore, base their comments solely on those limited procedures, and clearly state this in the comfort letter. (see AU Illustration 1, paragraph 6).

The following apply to other aspects of subsequent changes:

Tables, Statistics, and Other Financial Information

The following apply to tables, statistics, and other financial information:

FUNDAMENTAL REQUIREMENTS: OTHER MATTERS

Concluding Paragraph

It is desirable that the comfort letter conclude with a paragraph such as the following wording from AU 634.31:

This letter is solely for the information of the addressees and to assist the underwriters in conducting and documenting their investigation of the affairs of the company in connection with the offering of the securities covered by the registration statement, and it is not to be used, circulated, quoted, or otherwise referred to within or without the underwriting group for any other purpose, including, but not limited to, the registration, purchase, or sale of securities, nor is it to be filed with or referred to in whole or in part in the registration statement or any other document, except that reference may be made to it in the underwriting agreement or in any list of closing documents pertaining to the offering of the securities covered by the registration statement.

Disclosure of Subsequently Discovered Matters

Accountants may discover matters that should be included in the final comfort letter but that were not mentioned in the draft comfort letter. If these matters are not to be disclosed in the registration statement, the accountant should let the client know that they will be mentioned in the final comfort letter. Also, the accountant should suggest that the underwriter be informed immediately. It is advisable for the accountant to be present when these matters are discussed between the client and the underwriter.

INTERPRETATIONS

Letters to Directors Relating to Annual Reports on Form 10-K (Issued April 1981; Modified May 1981; Revised June 1993; Revised January 2001)

Since annual reports to the SEC on Form 10-K must be signed by at least a majority of the board of directors, the directors might ask for assistance from the registrant’s independent accountants. The accountant can report to the directors in accordance with the following guidelines:

• The auditor can express an opinion on whether the financial statements and schedules comply as to form with the accounting requirements of the 1934 Act.
• The auditor may affirm that the PCAOB standards require the auditor to read the information in addition to financial statements in the Form 10-K (see Section 550).
• The auditor may apply procedures requested by directors to tables, statistics, and other financial information. The guidance in Section 634 on comfort letters provides appropriate guidance in this area.
• The auditor may comment on whether information in Form 10-K is in conformity with disclosure requirements of Regulation S-K. The guidance in Section 634 provides appropriate general guidance in this area.
• The auditor may reaffirm independence in a manner similar to the guidance in Section 634.
• The auditor should clearly indicate to the directors that the auditor cannot make any representations as to whether any procedures performed at the request of the directors are sufficient for the directors’ purposes.

Commenting in a Comfort Letter on Quantitative Disclosures about Market Risk Made in Accordance with Item 305 of Regulation S-K (August 1998; Revised June 2009)

Regulation S-K, Item 305, Quantitative and Qualitative Disclosures about Market Risk, requires certain qualitative (descriptive) and quantitative disclosures with respect to the following, which are collectively referred to as “market-risk-sensitive instruments”:

• Derivative and other financial instruments, generally as defined in the Master Glossary of the FASC Accounting Standards Codification (ASC).
• Derivative commodity instruments, such as commodity futures, forwards, and swaps that are permitted by contract or custom to be settled in cash.

These required disclosures:

• Generally include a combination of historical and fair value data and the hypothetical effects on such data of assumed changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates
• Should be disclosed outside the financial statements and related notes thereto

Assurance

An accountant may not provide either positive or negative assurance on conformity with Item 305 of Regulation S-K. Positive assurance is prohibited since Section 634 states that accountants may not give positive assurance on conformity of information with the disclosure requirements of Regulation S-K since this information is not in the form of financial statements and generally has not been audited by the accountants. Negative assurance is also not allowed, since much of the information provided by the registrant is not derived from accounting records subject to the entity’s controls over financial reporting.

Comments on Qualitative Disclosures

Accountants may not comment in a comfort letter on the registrant’s Item 305 qualitative disclosures since such information is not:

• Expressed in dollars or percentages obtained from dollar amounts
• Obtained from accounting records subject to the entity’s controls over financial reporting.
• Derived from such accounting records by analysis or computation

Comments on Quantitative Disclosures

Item 305 requires quantitative disclosures that may be presented in the form of tabular presentation, sensitivity analysis, or value-at-risk disclosures. An accountant’s ability to comment on such quantitative disclosures is largely dependent upon the degree to which the forward-looking information used to prepare these disclosures is linked to accounting records that are subject to the entity’s controls over financial reporting. This link to the accounting records will vary with the three forms of presentation.

Tabular presentation. The tabular presentation includes the fair values of market-risk-sensitive instruments and contract terms to determine the future cash flows from these instruments that are categorized by expected maturity dates. This approach may require the use of yield curves and implied forward rates to determine expected maturity dates, as well as assumptions regarding prepayments and weighted-average interest rates.

The tabular presentation contains fewer assumptions and less complex mathematical calculations than the sensitivity analysis or value-at-risk disclosures. In addition, certain information, such as contractual terms in a tabular presentation, are derived from the accounting records. Therefore, the accountant may perform limited procedures related to tabular presentations to the extent that such information is derived from the accounting records.

When performing procedures related to tabular presentation disclosures, the accountant should:

• Consider whether the entity’s documentation of its contractual positions in derivatives, commodities, and other financial instruments is subject to the controls over financial reporting
• Consider whether such documentation provides a complete record of the entity’s market-risk-sensitive instruments

The accountant also should disclaim as to the reasonableness of the assumptions underlying the disclosures.

Sensitivity analysis. This term describes a general class of models that are designed to assess the risk of loss in market-risk-sensitive instruments, based on hypothetical changes in market rates or prices. Sensitivity analysis does not refer to one specific model and may include duration analysis or other “sensitivity” measures. The disclosures are dependent upon assumptions about theoretical future market conditions, and therefore, are not derived from the accounting records. Therefore, accountants should not agree to make any comments or perform any procedures related to these disclosures.

Value at risk. This term describes a general class of models that provide a probabilistic assessment of the risk of loss in market-risk-sensitive instruments over a selected period of time, with a selected likelihood of occurrences based upon selected confidence intervals. Value at risk disclosures are extremely aggregated and, in addition to the assumptions made for sensitivity analyses, may include additional assumptions regarding correlation between asset classes and future market volatilities.

As a result, these disclosures are not derived from the accounting records. Therefore, the accountant should not agree to make any comments or perform any procedures related to these disclosures.

Market Risk Category Disclosures

Registrants are required under Item 305 to stratify financial instruments according to market risk category (i.e., interest rate risk, foreign exchange risk, and equity price risk). If the instrument is at risk in more than one category, the instrument should be included in the disclosures for each applicable category. When reporting findings from agreed-upon procedures relating to market risk categories, the accountant should not provide any findings that the company’s stratifications are complete or comply as to form with Item 305 requirements. The auditor should also issue a disclaimer regarding the company’s determination of market risk categories.

Registrants are encouraged by Item 305 to provide quantitative and qualitative information about market risk in terms of, among other things, the magnitude of actual past market movements and estimates of possible near-term market movements. Accountants should not agree to perform any procedures related to such market data.

Understanding with the Underwriter/Need for Specialist

The accountant should establish a clear understanding with the underwriter regarding the limitations of the procedures to be performed related to market risk disclosures. Accountants should also consider whether to use a specialist in performing procedures related to these disclosures.

TECHNIQUES FOR APPLICATION

Accountants, in comfort letters, describe procedures applied and findings obtained by applying those procedures. Negative assurances may be provided in certain circumstances. The procedures applied are described in the comfort letters. Examples of comfort letters are presented in the following section.

AU ILLUSTRATIONS

The following illustrations of comfort letters are reprinted from SAS 72, SAS 86, and SSAE 8.

Shelf registration statements may have several closing dates and different underwriters. Descriptions of procedures and findings regarding interim financial statements, tables, statistics, or other financial information that is incorporated by reference from previous 1934 Act filings may have to be repeated in several comfort letters. To avoid restating these descriptions in each comfort letter, accountants may initially issue the comments in a format (such as an appendix) that can be referred to in, and attached to, subsequently issued comfort letters.

Illustration 8. Comments on Tables, Statistics, and Other Financial Information: Descriptions of Procedures and Findings Regarding Tables, Statistics, and Other Financial Information—Attached Registration Statement (or Selected Pages) Identifies with Designated Symbols Items to Which Procedures Were Applied

This illustration illustrates an alternate format which could facilitate reporting when the accountant is requested to perform procedures on numerous statistics included in a registration statement. Each of the comments is in response to a specific request. The paragraph in Illustration 8 is intended to follow paragraph 6 in Illustration 1.

7. For purposes of this letter, we have also read the items identified by you on the attached copy of the registration statement (prospectus) and have performed the following procedures, which were applied as indicated with respect to the symbols explained below.

Compared the amount with the XYZ (Predecessor Company) financial statements for the period indicated and found them to be in agreement.

Compared the amount with the XYZ (Predecessor Company) financial statements for the period indicated contained in the registration statement and found them to be in agreement.

Compared the amount with Basic Company’s financial statements for the period indicated contained in the registration statement and found them to be in agreement.

Compared with a schedule or report prepared by the Company and found them to be in agreement.

The letter would also contain paragraphs 8, 10, and 11 of the letter in Illustration 6. [The following is an extract from a registration statement that illustrates how an accountant can document procedures performed on numerous statistics included in the registration statement.]

The following summary is qualified in its entirety by the financial statements and detailed information appearing elsewhere in this Prospectus.

The Company

Basic Company (the Company) designs, constructs, sells, and finances single-family homes for the entry-level and move-up homebuyer. The Company and its predecessor have built and delivered more single-family homes in the metropolitan area than any other homebuilder for each of the last five years. The Company delivered 1,000 homes in the year ending December 31, 20X5, and at December 31, 20X5, had 500 homes12 under contract with an aggregate sales price of approximately $45,000,000. The Company’s wholly owned mortgage banking subsidiary, which commenced operations in March 20X5, currently originates a substantial portion of the mortgages for homes sold by the Company.

The Company typically does not engage in land development without related home-building operations and limits speculative building. The Company purchases only that land which it is prepared to begin developing immediately for home production. A substantial portion of the Company’s homes are under contract for sale before construction commences.

The DEF area has been among the top five markets in the country in housing starts for each of the last five years, with more than 90,000 single-family starts during that period. During the same period, the DEF metropolitan area has experienced increases in population, personal income, and employment at rates above the national average. The Company is a major competitive factor in three of the seven market areas, and is expanding significantly in a fourth area.

The Offering

Common Stock Offered by the Company	750,000 shares of Common Stock—$.01 par value (the Common Stock)*
Common Stock to Be Outstanding	3,250,000 shares*
Use of Proceeds	To repay indebtedness incurred for the acquisition of the Company.
Proposed NASDAQ Symbol	BAS

* Assumes no exercise of the Underwriters’ overallotment option. See “Underwriting.”

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Illustration 13. Alternate Wording When Accountants Are Aware of a Decrease in a Specified Financial Statement Item

Illustration 13 covers a situation in which accountants are aware of a decrease in a financial statement item on which they are requested to comment. The same facts exist as in Illustration 1, except for the decrease covered in the following change in paragraph 5b.

5. b. (1) At May 31, 20X6, there was any change in the capital stock, increase in long-term debt or any decrease in consolidated stockholders’ equity of the consolidated companies as compared with amounts shown in the March 31, 20X6 unaudited condensed consolidated balance sheet included in the registration statement, or

(2) For the period from April 1, 20X6, to May 31, 20X6, there were any decreases, as compared with the corresponding period in the preceding year, in consolidated net sales or the total or per share amounts of income before extraordinary items or of net income, except in all instances for changes, increases, or decreases that the registration statement discloses have occurred or may occur and except that the unaudited consolidated balance sheet as of May 31, 20X6, which we were furnished by the company, showed a decrease from March 31, 20X6, in consolidated net current assets as follows (in thousands of dollars):

6. As mentioned in 4b, company officials have advised us that no consolidated financial statements as of any date or for any period subsequent to May 31, 20X6, are available; accordingly, the procedures carried out by us with respect to changes in financial statement items after May 31, 20X6, have been, of necessity, even more limited than those with respect to the periods referred to in 4. We have inquired of certain officials of the company who have responsibility for financial and accounting matters regarding whether (1) there was any change at June 23, 20X6, in the capital stock, increases in long-term debt, or any decreases in consolidated net current assets or stockholders’ equity of the consolidated companies as compared with amounts shown on the March 31, 20X6 unaudited condensed consolidated balance sheet included in the registration statement; or (2) for the period from April 1, 20X6, to June 23, 20X6, there were any decreases, as compared with the corresponding period in the preceding year, in consolidated net sales or in the total or per share amounts of income before extraordinary items of net income. On the basis of these inquiries and our reading of the minutes as described in 4, nothing came to our attention that caused us to believe that there was any such change, increase, or decrease, except in all instances of changes, increases, or decreases that the registration statement discloses have occurred or may occur and except as described in the following sentence. We have been informed by officials of the company that there continues to be a decrease in net current assets that is estimated to be approximately the same amount as set forth in 5b [or whatever other disclosure fits the circumstances].

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AU-C 920 ILLUSTRATIONS

The following illustrations of comfort letters are reprinted from AU-C 920.

Illustration 8. Comments on Tables, Statistics, and Other Financial Information: Descriptions of Procedures and Findings Regarding Tables, Statistics, and Other Financial Information—Attached Securities Offering (or Selected Pages) Identifies Items to Which Procedures Were Applied Through the Use of Designated Symbols

Illustration 8 illustrates an alternate format that could facilitate reporting when the auditor is requested to perform procedures on numerous statistics included in a securities offering. Each of the comments is in response to a specific request. The paragraph in Illustration 9 is intended to follow paragraph 6 in Illustration 1-A or paragraph 5 in Illustration 1-B.

7. For purposes of this letter, we have also read the items identified by you on the attached copy of the registration statement and have performed the following procedures, which were applied as indicated with respect to the symbols explained below:

Compared the amount with ABC Company’s financial statements for the period indicated included in the securities offering and found them to be in agreement.

8. Our audit of the consolidated financial statements for the periods referred to in the introductory paragraph of this letter comprised audit tests and procedures deemed necessary for the purpose of expressing an opinion on such financial statements as a whole. For none of the periods referred to therein, nor any other period, did we perform audit tests for the purpose of expressing an opinion on individual balances of accounts or summaries of selected transactions, such as those enumerated above, and, accordingly, we express no opinion thereon.

9. It should be understood that we make no representations regarding questions of legal interpretation or regarding the sufficiency for your purposes of the procedures enumerated in the preceding paragraph; also, such procedures would not necessarily reveal any material misstatement of the amounts or percentages listed above. Further, we have addressed ourselves solely to the foregoing data as set forth in the registration statement and make no representations regarding the adequacy of disclosure or regarding whether any material facts have been omitted.

[The following is an extract from a securities offering that illustrates how an auditor can document procedures performed on numerous statistics included in the securities offering.]

Summary Financial Information of ABC Company (in Thousands)

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Illustration 13. Alternate Wording When Auditors Are Aware of a Decrease in a Specified Financial Statement Item

Illustration 13 covers a situation in which auditors are aware of a decrease in a financial statement item on which they are requested to comment (see paragraphs .58–.64). The same facts exist as in Illustration 1-A, except for the decrease covered in the following change in paragraph 5b.

5. b. (1) At May 31, 20X6, there was any change in the capital stock, increase in long-term debt, or any decrease in consolidated stockholders’ equity of the consolidated companies as compared with amounts shown in the March 31, 20X6 unaudited condensed consolidated balance sheet included in the registration statement, or

(2) For the period from April 1, 20X6 to May 31, 20X6, there were any decreases, as compared with the corresponding period in the preceding year, in consolidated net sales, or income before extraordinary items or of net income, except in all instances for changes, increases, or decreases that the registration statement discloses have occurred or may occur and except that the unaudited consolidated balance sheet as of May 31, 20X6, which we were furnished by the company, showed a decrease from March 31, 20X6 in consolidated net current assets as follows (in thousands of dollars):

6. As mentioned in 4b, company officials have advised us that no consolidated financial statements as of any date or for any period subsequent to May 31, 20X6, are available; accordingly, the procedures carried out by us with respect to changes in financial statement items after May 31, 20X6, have, of necessity, been even more limited than those with respect to the periods referred to in item 4. We have inquired of certain officials of the company who have responsibility for financial and accounting matters whether (a) at June 23, 20X6, there was any change in the capital stock, increase in long-term debt, or any decreases in consolidated net current assets or stockholders’ equity of the consolidated companies as compared with amounts shown on the March 31, 20X6, unaudited condensed consolidated balance sheet included in the registration statement; or (b) for the period from April 1, 20X6 to June 23, 20X6, there were any decreases, as compared with the corresponding period in the preceding year, in consolidated net sales or in income before extraordinary items or of net income. On the basis of these inquiries and our reading of the minutes as described in item 4, nothing came to our attention that caused us to believe that there was any such change, increase, or decrease, except in all instances for changes, increases, or decreases that the registration statement discloses have occurred or may occur and except as described in the following sentence: We have been informed by officials of the company that there continues to be a decrease in net current assets that is estimated to be approximately the same amount as set forth in 5b [or whatever other disclosure fits the circumstances].

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Illustration 16. Letter to a Requesting Party That Has Not provided The Legal Opinion or the Representation Letter Required by Paragraph 11

Illustration 16 illustrates the letter to be provided in accordance with paragraph .11, in which the auditor does not provide negative assurance. This illustration assumes that these procedures are being performed at the request of the placement agent on information included in an offering circular in connection with a private placement of unsecured notes. The letter is dated June 30, 20X6; procedures were performed through June 25, 20X6, the cut-off date. The statements in paragraphs 4–8 of the example are illustrative of the statements required to be included by paragraph .12.

This illustration may also be used in connection with a filing under the 1933 Act when a party other than a named underwriter (for example, a selling shareholder) has not provided the auditor with the representation letter described in paragraph .11. In such a situation, this example may be modified to include the auditor’s comments on independence and compliance as to form of the audited financial statements and financial statements schedules with the applicable accounting requirements of the 1933 Act and the related rules and regulations adopted by the SEC. Paragraph 1a(ii) may include an inquiry, and the response of company officials, on compliance as to form of the unaudited condensed interim financial statements.

June 30, 20X6

[Addressee]

Dear Ladies and Gentlemen:

We have audited the consolidated financial statements of The Nonissuer Company, Inc. (the company) and subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X5 and 20X4, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 20X5, and the related notes to the consolidated financial statements, all included in the offering circular for $30,000,000 of notes due June 30, 20Z6. Our report with respect thereto is included in the offering circular. The offering circular dated June 30, 20X6, is herein referred to as the offering circular.

We are independent certified public accountants with respect to the company under Rule 101 of the AICPA’s Code of Professional Conduct and its interpretations and rulings.

We have not audited any financial statements of the company as of any date or for any period subsequent to December 31, 20X5; although, we have conducted an audit for the year ended December 31, 20X5, the purpose (and, therefore, the scope) of the audit was to enable us to express our opinion on the consolidated financial statements as of December 31, 20X5, and for the year then ended, but not on the financial statements for any interim period within that year. Therefore, we are unable to, and do not express any opinion on, the unaudited condensed consolidated balance sheet as of March 31, 20X6, and the unaudited condensed consolidated statements of income, stockholders’ equity, and cash flows for the three-month periods ended March 31, 20X6 and 20X5, included in the offering circular, or on the financial position, results of operations, or cash flows as of any date or for any period subsequent to December 31, 20X5.

1. At your request, we have read the 20X6 minutes of meetings of the stockholders, the board of directors, and [include other appropriate committees, if any] of the company as set forth in the minute books at June 25, 20X6, officials of the company having advised us that the minutes of all such meetings through that date were set forth therein and having discussed with us the unapproved minutes of meetings held on [dates]; we have carried out other procedures to June 25, 20X6, as follows (our work did not extend to the period from June 26, 20X6 to June 30, 20X6, inclusive):

a. With respect to the three-month periods ended March 31, 20X6 and 20X5, we have:

(1) Read the unaudited condensed consolidated balance sheet as of March 31, 20X6, and the unaudited condensed consolidated statements of income, stockholders’ equity, and cash flows of the company for the three-month periods ended March 31, 20X6 and 20X5, included in the offering circular, and agreed the amounts included therein with the company’s accounting records as of March 31, 20X6 and 20X5, and for the three-month periods then ended.

(2) Inquired of certain officials of the company who have responsibility for financial and accounting matters whether the unaudited condensed consolidated financial statements referred to in 1a(1) are in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included in the offering circular. Those officials stated that the unaudited condensed consolidated financial statements are in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements.

b. With respect to the period from April 1, 20X6 to May 31, 20X6, we have:

(1) Read the unaudited condensed consolidated financial statements of the company for April and May of both 20X5 and 20X6, furnished us by the company, and agreed the amounts included therein with the company’s accounting records. Officials of the company have advised us that no financial statements as of any date or for any period subsequent to May 31, 20X6 were available. [if applicable: The financial information for April and May of both 20X5 and 20X6 is incomplete in that it omits the statements of cash flows and other disclosures.]

(2) Inquired of certain officials of the company who have responsibility for financial and accounting matters whether (a) the unaudited condensed consolidated financial statements referred to in 1b(1) are stated on a basis substantially consistent with that of the audited consolidated financial statements included in the offering circular, (b) at May 31, 20X6, there was any change in the capital stock, increase in long-term debt, or any decrease in consolidated net current assets or stockholders’ equity of the consolidated companies as compared with amounts shown in the March 31, 20X6, unaudited condensed consolidated balance sheet included in the offering circular, and (c) for the period from April 1, 20X6 to May 31, 20X6, there were any decreases, as compared with the corresponding period in the preceding year, in consolidated net sales, or in income before extraordinary items or of net income.

Those officials stated that (a) the unaudited condensed consolidated financial statements referred to in 1b(2) are stated on a basis substantially consistent with that of the audited consolidated financial statements included in the offering circular, (b) at May 31, 20X6, there was no change in the capital stock, no increase in long-term debt, and no decrease in consolidated net current assets or stockholders’ equity of the consolidated companies as compared with amounts shown in the March 31, 20X6, unaudited condensed consolidated balance sheet included in the offering circular, and (c) there were no decreases for the period from April 1, 20X6 to May 31, 20X6, as compared with the corresponding period in the preceding year, in consolidated net sales, or in income before extraordinary items or of net income.

c. As mentioned in 1b, company officials have advised us that no financial statements as of any date or for any period subsequent to May 31, 20X6, are available; accordingly, the procedures carried out by us with respect to changes in financial statement items after May 31, 20X6, have, of necessity, been even more limited than those with respect to the periods referred to in 1a and 1b. We have inquired of certain officials of the company who have responsibility for financial and accounting matters whether (1) at June 25, 20X6, there was any change in the capital stock, increase in long-term debt, or any decreases in consolidated net current assets or stockholders’ equity of the consolidated companies as compared with amounts shown on the March 31, 20X6, unaudited condensed consolidated balance sheet included in the offering circular or (2) for the period from April 1, 20X6 to June 25, 20X6, there were any decreases, as compared with the corresponding period in the preceding year, in consolidated net sales or in income before extraordinary items or of net income.

Those officials referred to above stated that (1) at June 25, 20X6, there was no change in the capital stock, no increase in long-term debt, and no decreases in consolidated net current assets or stockholders’ equity of the consolidated companies as compared with amounts shown on the March 31, 20X6, unaudited condensed consolidated balance sheet, and (2) there were no decreases for the period from April 1, 20X6 to June 25, 20X6, as compared with the corresponding period in the preceding year, in consolidated net sales or in income before extraordinary items or of net income.

2. For purposes of this letter, we have also read the items identified by you on the attached copy of the offering circular and have performed the following procedures, which were applied as indicated with respect to the symbols explained below:

Compared the amount with the company’s financial statements for the period indicated and found them to be in agreement.

Compared the amount with the company’s financial statements for the period indicated included in the offering circular and found them to be in agreement.

Compared with a schedule or report prepared by the company and found them to be in agreement.

3. Our audit of the consolidated financial statements for the periods referred to in the introductory paragraph of this letter comprised audit tests and procedures deemed necessary for the purpose of expressing an opinion on such financial statements as a whole. For none of the periods referred to therein, nor for any other period, did we perform audit tests for the purpose of expressing an opinion on individual balances of accounts or summaries of selected transactions, such as those enumerated above, and, accordingly, we express no opinion thereon.

4. It should be understood that we have no responsibility for establishing (and did not establish) the scope and nature of the procedures enumerated in paragraphs 1–3 above; rather, the procedures enumerated therein are those the requesting party asked us to perform. Accordingly, we make no representations regarding questions of legal interpretation or regarding the sufficiency for your purposes of the procedures enumerated in the preceding paragraphs; also, such procedures would not necessarily reveal any material misstatement of the amounts or percentages listed above as set forth in the offering circular. Further, we have addressed ourselves solely to the foregoing data and make no representations regarding the adequacy of disclosures or whether any material facts have been omitted. This letter relates only to the financial statement items specified above and does not extend to any financial statement of the company as a whole.

5. The foregoing procedures do not constitute an audit conducted in accordance with generally accepted auditing standards. Had we performed additional procedures or had we conducted an audit or a review of the company’s March 31, April 30, or May 31, 20X6 and 20X5 condensed consolidated financial statements in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you.

6. These procedures should not be taken to supplant any additional inquiries or procedures that you would undertake in your consideration of the proposed offering.

7. This letter is solely for your information and to assist you in your inquiries in connection with the offering of the securities covered by the offering circular, and it is not to be used, circulated, quoted, or otherwise referred to for any other purpose, including but not limited to the registration, purchase, or sale of securities, nor is it to be filed with or referred to, in whole or in part, in the offering circular or any other document, except that reference may be made to it in any list of closing documents pertaining to the offering of the securities covered by the offering document.

8. We have no responsibility to update this letter for events and circumstances occurring after June 25, 20X6.

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1 The illustrations in this section have been conformed to refer to standards of the PCAOB.

2 The example includes financial statements required by SEC regulations to be included in the filing. If additional financial information is covered by the comfort letter, appropriate modifications should be made.

3 The example assumes that the accountants have not previously reported on the interim financial information. If the accountants have previously reported on the interim financial information, they may refer to that fact in the introductory paragraph of the comfort letter as follows:

Also, we have reviewed the unaudited condensed consolidated financial statements as of March 31, 20X6 and 20X5, and for the three-month periods then ended, as indicated in our report dated May 15, 20X6, which is included (incorporated by reference) in the registration statement.

The report may be attached to the comfort letter. The accountants may agree to comment in the comfort letter on whether the interim financial information complies as to form in all material respects with the applicable accounting requirements of the published rules and regulations of the SEC.

4 The accountants should discuss with the secretary those meetings for which minutes have not been approved. The letter should be modified to identify specifically the unapproved minutes of meetings that the accountants have discussed with the secretary.

5 If the interim financial information is incomplete, a sentence similar to the following should be added:

“The financial information for April and May is incomplete in that it omits the statements of cash flows and other disclosures.”

6 If there has been a change in accounting principle during the interim period, a reference to that change should be included herein.

7 Section 722 does not require the accountants to modify the report on a review of interim financial information for a lack of consistency in the application of accounting principles, provided that the interim financial information appropriately discloses such matters.

8 See footnote 4.

9 In some cases it may be considered desirable to combine in one paragraph the substance of paragraphs 7 and 9. This may be done by expanding the identification of items in paragraph 9 to provide the identification information contained in paragraph 7. In such cases, the introductory sentences in paragraphs 7 and 9 and the text of paragraph 8 might be combined as follows: “For purposes of this letter, we have also read the following information and have performed the additional procedures stated below with respect to such information. Our audit of the consolidated financial statements. . . .”

10 In some cases the company or the underwriter may request that the independent accountants report on “selected financial data” as described in Section 552, Reporting on Condensed Financial Statements and Selected Financial Data. When the accountants report on this data and the report is included in the registration statement, separate comments should not be included in the comfort letter.

10 Other methods of summarizing the descriptions may also be appropriately used. For example, the letter may present a matrix listing the financial information and common procedures employed and indicating the procedures applied to specific items.

12 See paragraph .55 of SAS 72.

13 See footnote 4.

14 See footnote 4.