Carphone Warehouse 2015 Annual Report Download - page 80

Dixons Carphone plc Annual Report and Accounts 2014/15
Financial statements
Independent Auditor’s report
78
Ris
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How the scope of our audit responded to the risk
Revenue recognition – network commissions
Commission receivable on sales, being commission
which is contractually committed, and for which there
are no ongoing performance obligations, is dependent
on customer behaviour beyond the point of sale.
Management is therefore required to exercise
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udgement in respect of the level of customer default
within the contract period, expected levels of customer
spend and customer behaviour beyond the initial
contract period. The key judgements and estimates
involved are described in more detail in notes 1d) and
1u) to the Group financial statements.
We evaluated the design and implementation of both the manual and
automated controls over the revenue recognition process in respect
of commissions receivable, utilising IT specialists to assist with testing
of automated controls. In addition we tested that these controls were
operating effectively throughout the period.
We have tested the valuation of revenue recognised through review
of the Group’s contractual arrangements, substantive testing of
management assumptions including tenure, line rental, and churn to
third party network data and testing of subsequent cash receipts.
We have also assessed any changes in estimate in comparison to the
prior year and reviewed year on year movement in key assumptions.
Supplier funding
The Group holds a number of significant funding
arrangements with suppliers. Agreements in relation to
supplier funding are based predominantly on volume-
related targets, for both purchases and sales, and are
most commonly agreed as a fixed percentage of targets
upfront. These targets are generally a mix of quarterly
and annual targets and are mostly coterminous with the
Group’s year end. The timing of recognition of this
income is sometimes judgemental, in particular where
the target period for measuring achievements spans the
year end and it is necessary to ensure there is sufficient
formal documentation justifying recognition. As a result,
and given the increased focus on this area by
management and investors, we have elevated the
treatment of supplier funding to be a significant risk
area this year. The key judgements and estimates
involved are described in more detail in note 1u) to the
Group financial statements.
We obtained an understanding of the key supplier funding
arrangements across the Group. As part of this, we met with the key
commercial and finance process owners, we tested the design and
implementation of the Group’s key controls in operation, principally
focused on those that determine the appropriate timing of recognition
for supplier funding balances, and we performed an analytical
assessment of movements in supplier funding throughout the
current year to historical trends.
To ensure there is sufficient evidence to support the recognition
of supplier funding, we substantively tested and recalculated a
sample of amounts with reference to third party contracts. We
also obtained confirmations received following circularisation of
a sample of suppliers.
Inventory provisioning
Inventory is a significant balance for the Group
(£920 million at 2 May 2015) 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 1q) and 1u)
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 31 stores and distribution centres across the UK
and Nordics, including visiting the Group’s main distribution centre in
Newark on five 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 ageing and provisioning for reasonableness, including
challenging the appropriateness of provisioning with reference to 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 over-
stock on the required provision calculation.
Taxation
The Group operates in a number of different tax
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urisdictions. The nature of the Group’s operations and
related transactions can give rise to uncertain tax
treatments, including with respect to transfer pricing,
thereby requiring the use of estimates and assumptions
which may be subsequently challenged by the relevant
tax authorities.
Further information in relation to this area is discussed
in notes 1k) and 1u) to the Group financial statements.
We used our internal tax specialists to evaluate and test
management’s assumptions in respect of tax related provisions,
including assessment against local tax legislation and review of
supporting documentation.