Carphone Warehouse 2016 Annual Report Download - page 86

Independent Auditor’s report
84
Our assessment of risks and material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy,
the allocation of resources in the audit and directing the efforts of the engagement team. The key risks we identified are:
•Impairment of goodwill and other intangible assets
•Revenue recognition – UK network commissions
•UK supplier funding
•Inventory provisioning (Dixons)
•Property rationalisation provisioning
Risk How the scope of our audit responded to the risk
Impairment of goodwill and other intangible assets
The Group has significant acquisition related
intangible assets, including goodwill, (£3,402 million
at 30 April 2016 including £3,054 million of goodwill
and £348 million of acquisition intangibles) primarily
related to the CPW Europe and Dixons Retail plc
acquisitions in previous years. The Group’s
assessment of impairment of acquisition related
intangible assets is a judgemental process which
requires estimates concerning the future cash flows
and associated discount rates and growth rates
based on management’s projections of future
business performance and prospects. The key
j
udgements and estimates involved are described
in more detail in notes 1j), 1k) and 1s) to the Group
financial statements.
We assessed the assumptions used by management in the
impairment models for goodwill and acquisition related intangible
assets, including specifically the cash flow projections, discount rates
(utilising the assistance of our valuation specialists), and long-term
growth rates used against historical performance, our understanding
of the future prospects of the business and comparison against
market rates and the prevailing Group cost of capital at the year end.
We have audited the mechanics of the impairment models prepared
by management.
Revenue recognition – UK network commissions
The monetary value of commission receivable on
sales, being commission for which there is a
contractual entitlement based on mobile phone
connections already made, 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
j
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), 1s) and 26h) to the Group
financial statements.
We evaluated the design and implementation of both the relevant
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 data received from networks and testing of 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.
UK 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 up front. These targets are
generally a mix of quarterly and annual targets. The
timing of recognition of this income is sometimes
j
udgemental, in particular where the target period for
measuring achievements spans the year end and it is
necessary to ensure there is sufficient evidence
j
ustifying recognition. The key judgements and
estimates involved are described in more detail in
note 1s) to the Group financial statements.
We updated our 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 signed supplier contracts. We also obtained
confirmations following circularisation of a sample of suppliers.
00_DC 2016 Annual Report.pdf 84 11/07/2016 18:34