Tesco 2014 Annual Report Download - page 70

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Area of focus How the scope of our audit addressed the area of focus
Valuation of assets held for sale
We focused on this area due to the significant and complex
judgements required over determining the fair value of the
Group’s operations in China, which are disclosed in the financial
statements within assets held for sale.
We assessed and challenged the valuation techniques and
assumptions in the third party valuation report commissioned
by management. This included assessing and challenging:
• the independence, scope of work and findings of management’s
third party valuation expert; and
• the cashflow forecasts and key assumptions over growth and
discount rates.
We also assessed the valuation against available entity specific and
similar transaction market data.
Provisions and reserves in Tesco Bank
We focused on this area because of the significant judgement
required by the Directors in determining the level of provision for
the following areas:
• Loan, credit card and mortgage impairments
• Provisions of customer redress
• Insurance reserving
We assessed the overall control environment at Tesco Bank
and performed a combination of internal controls testing and
substantive testing. We tested the year end product reconciliations,
the impairment provisions recognised and the level of
suspended interest.
We have assessed and challenged the assumptions made by
management in calculating the provisions for redress. We have
reviewed historical data to assess whether trends in customer
claims have been accurately reflected in the provisions.
We evaluated the work performed by independent actuaries
and challenged the key assumptions the Directors have made for
insurance reserving by using our market knowledge of the UK Motor
and Household insurance products to perform corroborative analytics.
Risk of management override of internal controls
ISAs (UK & Ireland) require that we consider this. We assessed the overall control environment of the Group, including
the arrangements for staff to “whistleblow” inappropriate actions,
and interviewed senior management and the Group’s internal audit
function. We examined the significant accounting estimates and
judgements relevant to the financial statements for evidence of bias
by the Directors that may represent a risk of material misstatement
due to fraud. We also tested manual journal entries and incorporated
an element of unpredictability in the timing of our work into our
testing plans.
Risk of 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. Therefore we focused on the
occurrence of transactions and whether they were recorded in
the period in which the Group became entitled to record revenue.
We tested controls over the recording of revenue in the relevant
IT systems and performed substantive testing of revenue recorded
during the year. We tested that retail sales transactions are supported
by cash receipts and also tested journal entries posted to revenue
accounts to identify unusual or irregular items.
Other information
Governance Financial statementsStrategic report
Tesco PLC Annual Report and Financial Statements 2014 67