2 Key audit matters: our assessment of risks of material misstatement continued
The risk
Our response
We performed the tests below rather than seeking to rely on any of the Group’s controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the
Recoverability of goodwill in respect of the EU Assurance and IPM CGUs Goodwill EU Assurance £65.2m (2021: £64.7m), IPM £76.9m (2021: n/a). Refer to page 96 (Audit Committee Report), pages 155–156 (accounting policy) and pages 175–178 (financial disclosures).
Subjective estimate Management assess impairment of the EU Assurance and IPM CGUs through their recoverable amounts, which are determined as the higher of their value in use (‘VIU’) and their fair value less costs to sell (‘FVLCTS’), of which the FVLCTS is higher. There is judgement applied in the earnings multiples and sustainable earnings assumptions used to calculate the FVLCTS estimate in the impairment model. The risk is specific to the EU Assurance and IPM CGUs. The effect of these matters is that, as part of our risk assessment for audit planning purposes, we determined that the value in use of the EU Assurance and IPM CGUs had a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. In conducting our final audit work, we reassessed the degree of estimation uncertainty to be less than that of materiality. 2022 sales cut-off Incentives and pressures to meet market expectations increase the risk of fraudulent revenue recognition. There is a specific risk around the cut-off period at the year end, which is the last month of the year. The risk is with regards to ensuring revenue, including accrued is being recognised in the correct accounting period. This is a particular risk for the assurance business, where projects are ongoing at the year end and there are judgements taken in determining completion and progress to date.
detailed procedures described. Our procedures included:
• Historical comparison: We assessed the reasonableness of the sustainable earnings assumption, with reference to the Group’s forecasting accuracy in historical results, by comparing actual results in the year to the Group’s previous forecast for the year; • Benchmarking assumptions: We further challenged the sustainable earnings figures with reference to future forecast growth and whether that appeared reasonable, including challenging any one-off adjustments to the sustainable earnings assumption made by management, by agreeing them to supporting documentation; • Our valuation expertise: With the support of our own valuation specialists, we challenged the earnings multiple key assumption, by comparison to external market data and comparable companies; • Sensitivity analysis: We performed sensitivity analysis for the key assumptions, including the earnings multiples and sustainable earnings; • Assessing transparency: We evaluated the adequacy of the disclosures related to the judgements taken by management. Our results We found the Group’s assessment of the recoverability of goodwill in respect of the EU Assurance and IPM CGUs to be acceptable (2021 EU Assurance CGU result: acceptable). We performed the detailed tests below rather than seeking to rely on any of the Group’s controls because our knowledge of related IT controls indicated that we would not be able to obtain the required evidence to support reliance on controls. Our procedures included: • Test of detail: We agreed a sample of revenue transactions within the cut off period pre-year end to supporting documentation, including timesheets and contracts to assess whether these have been recorded in the correct accounting period. We sampled on a contract basis which included testing the revenue recognised in the year, and the contract asset balances at the year end; • Analytic sampling: We used data and analytics tools to identify journals with unusual account combinations involving revenue, specifically in the cut off period and performed testing over the identified items. This included procedures to understand the nature and substance of the transaction and obtaining supporting documentation. Our results We found the recognition of Assurance revenue in the cut-off period to be acceptable. (2021 result: acceptable).
Assurance revenue recognition in the cut off period Contract assets – accrued income £20.3m; (2021: £21.3m). Refer to pages 157–161 (accounting policy) and pages 170, 181 and 185–186 (financial disclosures).
NCC Group plc — Annual report and accounts for the year ended 31 May 2022
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