Unilever 2013 Annual Report Download - page 91

AREA OF FOUS HOW THE SOPE OF OUR AUDIT ADDRESSED
THE AREA OF FOUS
Provisions and contingences – indirect tax provisions
Due to the complexity of certain local tax regimes, particularly in
emerging markets, the Group has potential exposures relating to
indirect taxes.
We focused on this area because certain exposures and the related
provisions recorded within the financial statements are material,
involve a high level of judgement and are subject to uncertainty.
(Refer to note 19 to the financial statements.)
We obtained a detailed understanding of the significant potential
exposures and challenged the appropriateness of management’s
assumptions and resulting provisions. We assessed the levels of
provisions having regard to correspondence between Unilever and
local tax authorities and, where relevant, third party legal opinions.
Provisions and contingences – direct tax provisions
The Directors are required to exercise significant judgement when
determining the appropriate amount to provide in respect of
potential direct tax exposures relating to challenges by the tax
authorities on inter-company transfer pricing arrangements and
global supply chains, particularly in emerging markets. (Refer to
note 19 to the financial statements.)
We focused on this area because changes in assumptions can materially
affect the levels of provisions recorded in the financial statements.
We obtained a detailed understanding of the Group’s tax strategy
and assessed key technical tax risks related to business and
legislative developments including reading the Group’s transfer
pricing arrangements. We recalculated direct tax provisions and
determined whether the calculations were in line with the Group’s
methodology and principles had been applied consistently. We
challenged the key underlying assumptions, particularly in
territories where new tax structures are in place, having due regard
to correspondence between Unilever and local tax authorities.
Pensions – obligations and assumptions
In many countries the Group operates defined benefit pension plans,
giving rise to pension plan liabilities.
We focused on this area because of the magnitude of the pension plan
liability in the context of the overall balance sheet. Measurement of
the balance requires a significant level of judgement and technical
expertise in choosing appropriate assumptions. Changes in key
assumptions can have a material impact on the liability recorded.
(Refer to note 4B to the financial statements.)
For the four largest defined benefit pension plans, we considered and
challenged the reasonableness of key actuarial assumptions (including
pension increase, salary increases, inflation, discount rates and
mortality), using benchmark ranges based on market conditions and
expectations at the balance sheet date and comparison across the wider
pensions industry. We also confirmed whether the methods used by
management to determine key assumptions had been consistently
applied year-on-year and evaluated the rationale for any changes in
approach. We tested the reconciliation of the opening to closing liability
for accuracy taking into account the movements in key assumptions over
the year and any changes made to benefits provided within the schemes.
Goodwill and intangible assets – impairment testing
The Directors’ assess the carrying value of goodwill and indefinite
lived intangible assets and conduct an annual impairment review.
(Refer to note 9 to the financial statements.)
We focused on this area because of the materiality of these assets,
particularly in the three cash generating units relating to Foods, and
because it involves complex and subjective judgements by the
Directors about near term and long term sales growth rates,
commodity prices and the projected operating margins.
We evaluated the Directors’ cash flow forecasts; including
comparing them to the latest Board approved budgets. We
challenged the Directors’ key assumptions, including the long term
growth rate and the discount rate. We performed sensitivity analysis
around these assumptions to ascertain the extent of change that
either individually or collectively would be required for the relevant
asset to be impaired. We then considered the likelihood of such
movement in those key assumptions arising.
Fraud in revenue recognition
ISAs (UK & Ireland) presume there is a risk of fraud in revenue
recognition because of the pressure management may feel to
achieve the planned results.
Unilever’s focus on revenue targets as a key performance measure
creates incentive for revenue to be recorded in the incorrect period.
Therefore, we focused on whether transactions have been recorded
in the period in which the Group becomes entitled to record revenue.
We challenged the appropriateness of management’s revenue
recognition policies, particularly regarding the recording of sales
around the year end date. We performed a combination of testing the
financial controls and substantive testing of revenue recorded during
the year, using sampling and data auditing techniques, and testing of
sales transactions and credit notes around the year end date to
determine whether the criteria for recording revenue had been met.
We performed trend analysis on weekly sales and returns reports to
identify unusual patterns of sales transactions before the year end date
and returns after the year end date. We tested manual adjustments
impacting revenue to determine whether these had occurred in the
period and met the Group’s revenue recognition policies.
Risk of management override of internal controls
ISAs (UK & Ireland) require that we consider this.
We tested key reconciliations and manual journal entries. We
examined the significant accounting estimates and judgements for
evidence of bias by the Directors that may represent a risk of material
misstatement due to fraud. We assessed the overall control
environment of the Group, including the arrangements for staff to
“whistle-blow” inappropriate actions, and interviewed senior
management and the Group’s internal audit function. We incorporated
a number of unpredictable audit procedures into our work, including
the audit of certain operations or balances at short notice.
88 Unlever Annual Report and Accounts 2013Fnancal statements
INDEPENDENT AUDITOR’S REPORT
UNITED KINGDOM CONTINUED