Peachtree 2015 Annual Report Download - page 102

The Sage Group plc | Annual Report & Accounts 2015
100
Independent auditor’s report to the members of The Sage Group plc continued
Risk Our response to the risk
What we concluded to the
Audit and Risk Commiee
Revenue recognition
(continued)
We identified 3 specific risks of fraud
and error in respect of improper
revenue recognition given the nature
of the Group’s products and services
as follows:
– Inappropriate cut-off and deferral
of revenue;
– Inappropriate accounting for
complex one-off arrangements
and new products/services; and
– Inappropriate allocation of revenue
between the components of
bundled products.
Audit procedures on revenue at full
and specific scope locations covered
90% of reported revenue.
– Our procedures in relation to inappropriate accounting for complex one-off
arrangements and new products or services were addressed at Group and
component level through our procedures on the revised revenue
recognition accounting policies outlined above;
– For bundled products, we tested on a sample basis, that (1) the calculation
of the fair value aributed to each element of the bundle was reasonable,
and (2) that the allocation of any discount was consistent with the relative
fair value of each element of the bundle;
– We performed other substantive, transactional testing and analytical
procedures to validate the recognition of revenue throughout the year.
At certain components, we performed data analysis over full populations
of transactions; and
– For revenue recorded through journal entries outside of normal business
processes, we performed testing to establish whether a service had
been provided or a sale had occurred in the financial year to support
the revenue recognised.
We also considered the adequacy of the Group’s disclosures in respect of
the restatement of revenue in the current year and the accounting policies
for revenue recognition in notes 1 and 3.1 respectively.
Carrying value of goodwill
Refer to the Audit Commiee Report
(page 70); and Notes 3.6 and 6.1 of the
Group financial statements.
We focussed on this area due the size
of the goodwill balance £1,446m (2014:
£1,433m) and because the directors’
assessment of ‘value in use’ of the
Group’s Cash Generating Units (“CGUs”)
involves judgement about the future
performance of the business and the
discount rates applied to future cash
flow forecasts.
In particular, we focused our audit effort
on the Brazil CGU due to the impairment
charge of £62.3m recognised in the
current year (2014: impairment charge
of £44.3m). The remaining goodwill
balance in relation to Brazil is £nil at
30 September 2015.
Goodwill was subject to full scope audit
procedures by the Primary audit team.
We challenged management’s assumptions used in its impairment models for
assessing the recoverability of the carrying value of goodwill. We focused on
the appropriateness of CGU identification, methodology applied to estimate
recoverable values, discount rates, and forecast cash flows. Specifically:
– We tested the methodology applied in the VIU calculation as compared
to the requirements of IAS 36, Impairment of Assets, and the mathematical
accuracy of management’s model;
– We obtained an understanding of and assessed the basis for key
underlying assumptions for the 2016 budget. We challenged management
on cash flow forecasting and the implied growth rates beyond 2016 by
considering evidence available to support these assumptions and their
consistency with findings from other areas of our audit and by performing
sensitivity analysis;
– The discount rates and long term growth rates applied within the model
were assessed by an EY business valuation specialist, including comparison
to economic and industry forecasts where appropriate; and
– For Brazil, we performed sensitivity analyses on key assumptions in
the model to recalculate a range of potential outcomes in relation
to the impairment charge to be recognised in the year.
We considered the appropriateness of the related disclosures provided
in notes 3.6 and 6.1 in the Group financial statements.
We concluded that the goodwill
balance at 30 September 2015
is materially correct.
Accounting for taxation
Refer to the Audit Commiee Report
(page 70); and Notes 4 and 11 of the
Group Financial Statements.
We focussed on this area as the Group
has international operations and in the
normal course of business the Directors
make judgments and estimates in
relation to tax issues and exposures,
the final outcome of which could be
significantly different to these estimates.
The most significant of these relate
to the Unites States, UK and Brazil.
We challenged and applied professional scepticism to the judgments and
estimates made by management in relation to tax maers through the
following audit procedures:
– We utilised relevant country tax specialists in testing the assumptions and
estimates in relation to the level of provisions recognised for significant tax
risks and the judgements made in determining the Group’s deferred tax assets;
– We confirmed that the Group’s stated tax position in relation to both tax
exposures or deferred tax assets were consistent with the underlying
transactions and fact paerns; and
– We inspected the Group’s correspondence with relevant tax authorities,
to consider the completeness of tax provisions for all relevant risks.
We also considered the adequacy of the Group’s disclosures (in Notes 1, 4,
and 11) in respect of tax and uncertain tax positions.
We concluded that management’s
judgements in relation to tax
provisions for uncertain maers
and deferred tax asset recognition
were appropriate.
The risks of material misstatement as set out in the table above are consistent with those reported by The Sage Group plc’s previous external auditor
with the exception of Archer litigation following the dismissal of the compensation claim against the Group in August 2015 as explained on page 122.