BT 2014 Annual Report Download - page 122

Financial statements
119
Financial statements
Area of focus How the scope of our audit addressed the area of focus
Major contracts in BT Global Services and BT Wholesale
We focused on this area because it involves signicant judgements
regarding the
• determination and timing of recognition of contract prots
• lifetime probability forecasts for the contracts
• completeness and adequacy of provisions against loss making
contracts and
• recoverability of contract specic assets.
We evaluated the design and operating eectiveness of controls in
respect of major contracts. We tested a sample of major contracts
through the year, assessing whether the terms of the contracts,
including change notes and contractual amendments,
had been accounted for in line with the group’s accounting policies.
We assessed the reasonableness of the assumptions and
judgements underpinning the forecast performance of the
contracts, the adequacy of contract loss provisions and the
recoverability of contract specic assets.
Revenue recognition
ISAs (UK & Ireland) presume there is a risk of fraud in revenue
recognition because of the pressure management may be under to
achieve the planned results. Our risk assessment focused on manual
adjustments to revenue.
The accuracy of revenue amounts recorded is an inherent industry risk
because of the complexity of the operation of telecom billing systems
and the combination of products sold and price changes in the year.
We evaluated the relevant IT systems and the design and operating
eectiveness of controls over the capture and recording of revenue
transactions. We tested the supporting evidence for manual journal
entries posted to revenue accounts to identify unusual items.
This included the audit of the reconciliation of amounts billed
to customers to the amount of revenue recorded in the nancial
statements.
Our audit work focused on the internal controls in place over the
authorisation of rate changes and the input of this information to
the billing systems. We tested the internal controls in place over the
calculation of amounts billed to customers. We also tested a sample
of customer bills for accuracy. Our testing included customer bills for
consumers, corporate and wholesale customers.
Risk of management override of internal controls
ISAs (UK & Ireland) require that we consider the risk that management
could override the system of internal controls within the business and
intentionally misstate the nancial results and position of the group.
We assessed the overall control environment of the group, including
the arrangements for sta to whistleblow’ inappropriate actions,
and interviewed senior management and the group’s internal audit
function. We examined the signicant accounting estimates and
judgements relevant to the nancial statements for evidence of bias
by the directors that may represent a risk of material misstatement
due to fraud. We also tested the supporting documentation for
manual journal entries posted to the nancial results. This included
the testing of journals posted to the consolidation.
Valuation of the pension scheme obligations and unquoted
investments
We focused on this area because the valuation of the pension
scheme obligations and unquoted investments require estimates
and signicant judgement by the directors.
We assessed the reasonableness of actuarial assumptions used in
valuing the pension scheme obligations. In assessing the unquoted
pension asset investments we tested the valuations, including
assessing the key assumptions used.
Regulatory and other provisions
Provisions are based on judgements and estimates by the directors.
The current telecom regulatory environment has seen an increased
frequency and magnitude of matters brought to Ofcom and the
Competition Appeal Tribunal in the UK.
We assessed the key assumptions applied by the directors to calculate
new and existing provisions. We tested the calculation of the
provisions, validating assumptions by reference to third party
data and assessing the judgements for reasonableness against
historical trends.
Capitalisation practices and asset lives for property, plant and
equipment and software intangible assets
Capitalisation of costs and the useful lives assigned to assets are areas
ofsignicant judgement by the directors.
We evaluated the design and operating eectiveness of controls
in respect of capitalisation and asset lives. We assessed the
appropriateness of the nature of costs being capitalised through
testing of amounts recorded and assessing the appropriateness of
the accounting treatment. Weassessed the appropriateness of the
asset lives assigned.
Assessment of the carrying value of goodwill in the BT Global
Services line of business
We focused on this area because it involves complex and subjective
judgements by the directors, including about the future results of
thebusiness.
We evaluated the key assumptions used in the impairment review,
in particular the cash ows, long term growth rates and the discount
rate. We also performed sensitivity analysis around the key drivers
of the cash ow forecasts, including revenue and EBITDA growth.
We tested the integrity of theunderlyingcalculations.
Recognition and measurement of potential tax exposures and
tax{assets
We focused on this area because the directors have made signicant
judgements in determining the group’s eective tax rate specically
inrelation to the recognition of tax exposures and tax assets.
We assessed the appropriateness of the directors’ assumptions and
key judgements around actual and potential tax exposures and
assets. Weutilised our experience of similar situations elsewhere
toexamine tax planning arrangements.