Attachment 2: Example key audit matter wording

Transcription

1 Attachment 2: Example key audit matter wording Note that the following example does not represent "pro-forma" wording and that in this example scenario we illustrate a risk over the pension scheme membership data (i.e. assumed that this, as well as the valuation assumptions, contributed to the "key audit matter"). All disclosures are tailored to the specific client and audit Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Goodwill ([currency and amount disclosed in the financial statements]) There is a risk of irrecoverability of the group's significant goodwill balance due to weak demand in certain markets and to the nature of the cost base in this industry. Due to the inherent uncertainty involved in forecasting and discounting future cash flows, which are the basis of the assessment of recoverability, this is one of the key judgmental areas that our audit is concentrated on. testing of the group's budgeting procedures upon which the forecasts are based and the principles and integrity of the group's discounted cash flow model. We used our own valuation specialist to assist us in evaluating the assumptions and methodologies used by the group, in particular those relating to the forecast revenue growth and profit margins in countries X and Y. We compared the group's assumptions to externally derived data as well as our own assessments in relation to key inputs such as projected economic growth, competition, cost inflation and discount rates, as well as performing breakeven analysis on the assumptions. We compared the sum of the discounted cash flows to the group's market capitalization to assess the reasonableness of those cash flows. We also assessed whether the group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of goodwill KPMG IFRG Limited, a UK company limited by guarantee. For internal use only. All rights reserved. Page 1

2 Carrying amount of trade receivables ([currency and amount disclosed in the financial statements]) The group has significant trade receivables with customers in X industry. A number of companies in this industry are under financial stress and, therefore, there is a risk over the recoverability of these balances. Our audit procedures included testing the group's controls over the receivables collection processes; testing the receipt of cash after the year end; and testing the adequacy of the group's provisions against trade receivables by assessing the directors' assumptions, taking account of externally available data on trade credit exposures and our own knowledge of recent bad debt experience in this industry. We also considered the adequacy of the group's disclosures about the degree of estimation involved in arriving at the provision. Litigation and contingent liabilities ([currency and amount disclosed in the financial statements]) In the normal course of business, potential exposures may arise from [describe e.g., general legal proceedings, product liability, guarantees, government investigations, environmental issues]. Whether there is a liability is inherently uncertain, the amounts involved are potentially significant and the application of accounting standards to determine the amount, if any, to be provided as a liability, is inherently subjective. Our audit procedures included, on all significant legal cases, assessment of correspondence with the group's external counsel accompanied by discussion and formal confirmations from that counsel. In addition, we used our own forensic and compliance specialists to identify actual and potential noncompliance with law and regulations relevant to the group's business, analyzed correspondence with regulators, and monitored external sources of information. We also assessed whether the group's disclosures detailing significant legal proceedings adequately disclose the potential liabilities of the group KPMG IFRG Limited, a UK company limited by guarantee. For internal use only. All rights reserved. Page 2

3 Tax provisioning ([currency and amount disclosed in the financial statements]) Accruals for tax contingencies require the directors to make judgments and estimates in relation to tax issues and exposures given that the group operates in a number of tax jurisdictions, the complexities of transfer pricing and other international tax legislation and the time taken for tax matters to be agreed with the tax authorities. the use of our own international and local tax specialists to assess the group's tax positions, its correspondence with the relevant tax authorities and to analyze and challenge the assumptions used to determine tax provisions based on our knowledge and experiences of the application of the international and local legislation by the relevant authorities and courts. We also considered the adequacy of the group's disclosures in respect of tax and uncertain tax positions. Recognition of deferred tax assets ([currency and amount disclosed in the financial statements]) The group has significant [unrecognized] deferred tax assets in respect of tax losses. There is inherent uncertainty involved in forecasting future taxable profits, which determines the extent to which deferred tax assets are or are not recognized. using our work on the group s forecasts described in our response to the goodwill key audit matter above. We then used our own tax specialists to assist us in assessing the recoverability of the tax losses against the forecast future taxable profits, taking into account the group s tax position, [the timing of forecast taxable profits], and our knowledge and experience of the application of relevant tax legislation. We also assessed whether the group s disclosures about the sensitivity of the recognition of deferred tax assets to changes in key assumptions reflected the associated inherent risks KPMG IFRG Limited, a UK company limited by guarantee. For internal use only. All rights reserved. Page 3

4 Post-retirement benefits ([currency and amount disclosed in the financial statements]) Significant estimates are made in valuing the group's post-retirement defined benefit schemes and small changes in assumptions and estimates used to value the group's net pension deficit would have a significant effect on the results and financial position of the group. challenging the key assumptions applied in determining the group's net deficit, being the discount rate, inflation rate and mortality/life expectancy, with the support of our own actuarial specialists. This included a comparison of these key assumptions against externally derived data. We also considered the adequacy of the group's disclosures in respect of the sensitivity of the deficits to these assumptions KPMG IFRG Limited, a UK company limited by guarantee. For internal use only. All rights reserved. Page 4

5 The following examples are provided to illustrate descriptions of key audit matters that would NOT BE APPROPRIATE in light of the guidance in Attachment 1: Goodwill ([currency and amount disclosed in the financial statements]) The assessment of the carrying value of goodwill and intangible assets was identified as a significant risk and required us to involve specialists in the audit of the balances. There is a risk of irrecoverability of the group's significant goodwill balance due to weak demand in certain markets and to the nature of the cost base in this industry. Due to the inherent uncertainty involved in forecasting and discounting future cash flows, which are the basis of the assessment of recoverability, this is one of the key judgmental areas that our audit is concentrated on. To address this area of significant risk we audited management s assumptions used in the impairment model for goodwill and intangible assets including specifically the cash flow projections, discount rates and sensitivities used. testing of the group's budgeting procedures upon which the forecasts are based and the principles and integrity of the group's discounted cash flow model. We used our own valuation specialist to assist us in evaluating the assumptions and methodologies used by the group, in particular those relating to the forecast revenue growth and profit margins in countries X and Y. We compared the group's assumptions to externally derived data as well as our own assessments in relation to key inputs such as projected economic growth, competition, cost inflation and discount rates, as well as performing breakeven analysis on the assumptions. We compared the sum of the discounted cash flows to the group's market capitalization to assess the reasonableness of those cash flows. We also assessed whether the group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of goodwill KPMG IFRG Limited, a UK company limited by guarantee. For internal use only. All rights reserved. Page 5

6 Pension scheme ([currency and amount disclosed in the financial statements]) The entity has a large pension scheme that is in a deficit position. Calculating the pension amount involves using actuarial assumptions and significant judgements. Significant estimates are made in valuing the group's post-retirement defined benefit schemes and small changes in assumptions and estimates used to value the group's net pension deficit would have a significant effect on the results and financial position of the group. We used our own actuarial specialists to audit the appropriateness of the key assumptions and estimates used by management in its accounting for pensions. We also considered the appropriateness and compliance with relevant disclosures requirements of the disclosures included in the financial statements, including checking the mathematical accuracy of the tables included in the disclosures. challenging the key assumptions applied in determining the group's net deficit, being the discount rate, inflation rate and mortality/life expectancy, with the support of our own actuarial specialists. This included a comparison of these key assumptions against externally derived data. We also considered the adequacy of the group's disclosures in respect of the sensitivity of the deficits to these assumptions KPMG IFRG Limited, a UK company limited by guarantee. For internal use only. All rights reserved. Page 6