Tesco 2015 Annual Report Download - page 78

Area of focus How our audit addressed the area of focus
Recognition of commercial income
Refer to page 37 (Audit Committee Report), page 88 (Accounting
Policies).
Tesco has agreements with suppliers whereby discounts and rebates
are received retrospectively according to the quantity of goods
bought and promotional and marketing activity performed in stores
and online.
We focused on this area as this income contributes a significant
amount to the Group results and also due to the fact that these
agreements can include a number of characteristics that require
judgement to be applied in determining the appropriate
accounting based on the terms of the agreement. There may
also be incentives for buyers to manipulate the timing of when
commercial income is recognised to meet internal targets.
Our audit procedures focused, in particular, on the following
judgements:
• the period which the agreements cover and hence the correct
period for recognition;
• the determination of volume achieved and the applicable
rebate income earned; and
• the appropriate recognition of income related to one off
agreements and marketing and promotional activity.
This risk was heightened during the period following the
Group’s announcement on 22 September 2014 relating to
the misstatement of commercial income. As a result of this
announcement our audit in 2014/15 also considered the impact
on prior period financial statements of the issues identified
during the current period.
As with any significant audit risk, we understood and evaluated
the controls that the Group has in place around commercial
income. Given the announcement in September 2014 we did not
seek to place any significant reliance on the operating effectiveness
of the controls and our work in 2014/15 in the UK and around the
world principally comprised substantive testing.
Our response to this risk included an understanding of the work
carried out by Tesco Internal Audit and also the scope and results
of the work carried out by Deloitte, who were appointed by the
directors to perform an independent review of the commercial
income misstatement.
In the UK we also used our specialist forensic knowledge to help
corroborate the misstatement of commercial income announced
by the Group, provide information relating to prior periods and
assess the reliability of support provided by management.
Our audit approach and results of our work on Commercial Income
were discussed on a number of occasions with the Audit Committee.
As part of our review of component teams’ audit work, the Group
engagement team was specifically involved in determining the audit
approach in this area in order to be satisfied that sufficient focus
was placed on the more judgemental areas. As a result of this
involvement we were satisfied that, whilst complex, this area was
well understood and there was sufficient focus on this area of risk.
Our audit procedures across individual countries included a
combination of the following substantive testing, on a sample basis:
• detailed testing of commercial income recognised in the
period, with particular attention to whether the income was
recognised in the correct period and the appropriateness of
accrued commercial income at the period end. This involved
selecting a sample of amounts invoiced and accrued in the
period and agreeing them to supporting documentation and
third party evidence. Where available we inspected underlying
contractual terms and/or related third party correspondence
for a selection of arrangements. We also held a number of
discussions with members of Tesco’s commercial buying team
to understand the nature of individual agreements;
• confirming the quantum and nature of a sample of individual
commercial income agreements directly with suppliers. Where
confirmations were not received from suppliers we examined
alternative supporting documentation;
• testing that amounts have been recognised in the correct
period through examining active promotional deals in-store
and online either side of the period end and ensuring that the
related income was recognised in the correct period;
• testing credit notes issued during the period and post period
end to determine whether the income to which they related has
been appropriately reversed;
• testing supplier statement reconciliations prepared by
management for a sample of suppliers; and
• inspecting the ‘Groceries Supplier Code of Practice’ (GSCOP)
reporting and any complaints from suppliers.
The above audit procedures did not identify any matters that
resulted in a significant audit adjustment.
76 Tesco PLC Annual Report and Financial Statements 2015
Independent auditors’ report to the members of Tesco PLC
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