Question #1 10 marks Donut Inc. just completed an initial public offering and is listed on the Toronto Stock Exchange. You are the auditor of Donut and have been reviewing the franchise agreements...

Question #1 10 marks

Donut Inc. just completed an initial public offering and is listed on the Toronto Stock Exchange. You are the auditor of Donut and have been reviewing the franchise agreements Donut has with its franchisees.

The franchise agreements include:

- Franchisees pay an upfront fee for a 10 year period to operate the franchise plus pay Donut 2% of sales revenue.

- Franchisees may choose the operating location and hours.

- To maintain quality, key raw ingredient suppliers approved by Donut must be used.

- Key products must be priced using Donut’s master price list for the geographic region.

- Franchisees may hire their own employees but must use Donut’s training manuals.

Required:

Does Donut control its franchisees and therefore required to consolidate them? Discuss arguments for and against. Provide your thoughts in your own words only for this situation (ie. no direct Handbook references). Point form may be used if complete thoughts.

ANSWER: