Aviva 2013 Annual Report Download - page 109

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
107
Independent auditors report to the members of Aviva plc continued
to other components to ensure we obtained appropriate coverage across all account balances and performed audit work to cover
the areas of focus we identified and which are set out below.
The work performed on the components, together with additional procedures performed at the Group level gave us the evidence
we needed for our opinion on the Consolidated financial statements as a whole.
Areas of particular audit focus
In preparing the financial statements, the directors made a number of subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily
focused our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements,
and evaluating the disclosures in the financial statements.
In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered
necessary to provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness
of controls, substantive procedures or a combination of both.
We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all
risks or areas of focus identified by our audit. For the Consolidated financial statements we discussed these areas of focus with the
Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements
is set out on pages 75 and 76.
Area of focus How the scope of our audit addressed the area of focus
Valuation of insurance contract liabilities
We focused on this area because the directors’ valuation of the
provisions for the settlement of future claims involves complex and
subjective judgements about future events, both internal and external
to the business, for which small changes in assumptions can result in
material impacts to the valuation of these liabilities. (Refer to note 41
to the Consolidated financial statements.)
We tested the key methodologies and challenged the assumptions used
by the directors in the valuation of the insurance contract liabilities
consisting of the long-term and general insurance businesses.
For the long-term business liabilities, those assumptions to which the
liability is most sensitive are as follows:
 the United Kingdom business has substantial holdings in asset classes
with significant credit risk, particularly corporate bonds and
commercial mortgages which are used to back annuitant liabilities.
We therefore focused on the allowance for credit default in setting
the applicable liability discount rate; and
 the United Kingdom business annuitant mortality assumptions as
these require a high degree of judgement due to the number of
factors that result in uncertainty over future life expectancy.
We assessed the directors’ calculation of these liabilities by testing the
underlying company data, the approach and assumptions used against
recognised actuarial practices and by applying our industry knowledge
and experience.
For the general insurance liabilities we performed re-projections on
selected classes of general insurance business in the United Kingdom
and Canada.
We also assessed the directors’ calculation of the general insurance
liabilities by testing the underlying company data, the approach and
assumptions used against recognised actuarial practices and by applying
our industry knowledge and experience.
Valuation of goodwill
Our audit of the directors’ goodwill impairment assessment focused in
particular on Aviva Spain. This is because the continued volatility in the
Spanish economy means that there is an increased potential for
impairment in the goodwill relating to Aviva Spain. (Refer to note 17 to
the Consolidated financial statements.)
We evaluated the results of the directors’ impairment assessment,
including an analysis of the methodology and the assumptions adopted.
We performed testing of the appropriateness of the key assumptions
used by the directors including performing a sensitivity analysis on the key
assumptions used and by considering publicly available data, such as
interest rate and economic growth projections.
Valuation of certain investments in the Consolidated and the
Company financial statements
We focussed on financial investments based on models at United
Kingdom Life and General Insurance, France and Italy in the Consolidated
financial statements because of the subjective nature of their valuation
and we focussed on investments in subsidiaries in the Company financial
statements because of the judgments involved in applying the applicable
valuation models. (Refer to note 23 to the Consolidated financial
statements and note A to the Company financial statements.)
For a sample of financial investments valued based on models, such as
unquoted equity or debt securities, commercial mortgages and over the
counter derivatives, we compared the assumptions used by the directors
to external industry data, and in certain instances independently modelled
certain valuations, to assess and challenge the appropriateness of the
directors’ models and key assumptions used.
For investments in subsidiaries, we assessed the directors’ process for
identifying indicators of impairment. We also tested the directors’
determination of the value of these investments, including the
methodology and assumptions adopted.
Valuation of the provision for client compensation arising
from breaches in the dealing policy relating to the
improper allocation of trades in fixed income securities
in Aviva Investors
We focused on this area given the subjective nature of the valuation of
the provision in the context of the Consolidated financial statements.
(Refer also to note 41 and 53 to the Consolidated financial statements.)
We assessed the reasonableness of the methodology used by the
directors and challenged the assumptions applied in valuing the provision.
We tested input data in the calculation of the provision to underlying
books and records and/or third party evidence.