Carphone Warehouse 2016 Annual Report Download - page 87

85
Ris
k
How the scope of our audit responded to the risk
Inventory provisioning (Dixons
)
Inventory is a significant balance for the Group
(£958 million at 30 April 2016) and there are a number
of judgemental areas including obsolescence and
shrinkage provisioning. This risk has a significant
effect on our audit strategy, the allocation of
resources in the audit and directing the efforts of the
engagement team in the legacy Dixons side of the
business only, given the nature and relative
significance of the inventory balances within each
part of the Group. Further information in relation to
this area is discussed in notes 1o) and 1s) to the
Group financial statements.
We have performed testing of the operating effectiveness of controls
around the inventory business cycle and attended a sample of
inventory counts at 34 stores and the distribution centres across the
Dixons UK and Nordics businesses, including visiting the Group’s
main distribution centre in Newark on four separate occasions, which
enables us to assess management’s processes for monitoring
inventory. We performed audit tests to assess whether inventory is
valued at the lower of cost and net realisable value. We reviewed,
recalculated and assessed the inventory provisioning for
reasonableness, including challenging the appropriateness of
provisioning with reference to inventory ageing, both historical and
post year end performance and a review of the provision as a
percentage of gross stock year on year. We have also considered the
impact of range changes and other specific known areas of overstock
on the required provision calculation.
Property rationalisation provisioning
The Group has recorded a charge of £70 million in
relation to restructuring of the property portfolio in the
UK business. The magnitude of the associated
restructuring provision involves the use of estimates
and judgement, particularly with regard to property
exit and onerous lease costs. Further information is
included in notes 1r), 1s) and 4iii) to the Group
financial statements.
We have obtained an understanding of the process undertaken by
management to quantify the expected costs arising from the
rationalisation of the property portfolio and have evaluated the design
and implementation of the associated controls. We have assessed the
appropriateness of the provisions to ensure they meet the relevant
criteria for recognition in accordance with the accounting standard.
We have reviewed a sample of contractual lease agreements and
assessed management’s judgements in relation to sublet income,
rent free periods and dilapidations against past evidence available
for similar properties. We have substantively tested a sample of the
costs incurred during the period to supporting documentation.
Last year our report included three other risks which are not included in our report this year: acquisition accounting (there have
been no significant acquisitions during the year following the acquisition of Dixons Retail plc last year), assets held for sale,
discontinued operations and disposal accounting (as the accounting for the disposals was largely completed last year), and
taxation (there have been no significant changes noted in the current year and it is no longer an area which has a significant
effect on our audit strategy and the efforts of the engagement team). In the current period, we have included an additional risk
in relation to property rationalisation provisioning, reflecting the announcement of the restructuring of the property portfolio
made by the Group during the year.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee
discussed on pages 52 to 53.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope
of our audit work and in evaluating the results of our work.
We determined materiality for the group to be £17.5 million (2014/15: £14.0 million), which is below 5% (2014/15: 5%) of
adjusted Headline profit before tax, and below 1% (2014/15: 1%) of equity. In using adjusted Headline profit before tax, we have
followed the Group’s definition of Headline results in note 1a) and adjusted this to include the impact of the amortisation of
acquisition intangibles and pension finance costs due to their recurring nature. This is the same basis on which we calculated
materiality in the prior year and the increase in materiality in the current year is due to the increase in the Group’s Headline profit
before tax. We have assessed the use of a Headline measure to be appropriate as this continues to be a key driver of business
value, is a critical component of the financial statements and the main measure which management uses to monitor the
performance of the business and communicate this to shareholders.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £600,000
(2014/15: £500,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the
financial statements.
00_DC 2016 Annual Report.pdf 85 11/07/2016 18:34