Independent auditor’s report continued to the members of NCC Group plc
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 detailed procedures described. Our procedures included: • Test of detail: We compared the carrying value of investments and intercompany receivables with the relevant subsidiaries’ draft balance sheet as at 31 May 2022 to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying value and assessing whether those subsidiaries have historically been profit-marking. Our results We found the Group’s assessment of the recoverability of the parent company’s investments in subsidiaries and intercompany receivables to be acceptable. (2021 result: acceptable).
Recoverability of parent company’s investments in subsidiaries and intercompany receivables Investments – £276.9m (2021: £151.8m). Intercompany receivables - £32.9m (2021: £162.6m).
Low risk, high value The carrying amount of the Parent Company’s investments in subsidiaries and intercompany receivables represents 84% (2021: 48%) and 10% (2021: 52%) respectively of the Company’s total assets. Their recoverability is not a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the Parent Company financial statements, this is the area that had the greatest effect on our overall Parent Company audit.
Refer to page 155 (accounting policy) and pages 197–199 (financial disclosures).
Changes to Key Audit Matters
Fox IT long term fixed price contract accounting Following the continued performance of the Fox IT long term fixed price contracts in the past 12 months, the estimation uncertainty has significantly reduced. Cloud-based software arrangement costs The accounting treatment of cloud-based arrangements was a significant risk and key audit matter in the prior year. However, due to the profit and loss charge recognised by the Group in respect of this in the prior year, in addition to the fact there are no significant new cloud arrangements in the year, the level of judgement has significantly reduced we have not assessed this as one of our most significant risks in the current year audit. US R&D tax credits The estimation uncertainty has reduced on the uncertain tax position following a provision recognised by the Group in the prior year. The provisioning methodology has been consistently applied in the current year, reducing the estimation uncertainty. We continue to perform work over the above areas. However, as a result of the above reasons, we have not assessed these as the most significant risks in our current year audit and therefore, they are not separately identified in our report this year.
3 Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £1.4 million (2021: £1.2 million), determined with reference to a benchmark of Group profit before tax £31.0m (2021: £14.8m), normalised to exclude this year’s costs directly attributable to the acquisition of the IPM Software Resilience business, as disclosed in note 5 of £0.9m (2021: profit before tax normalised to exclude costs directly attributable to the acquisition of the IPM Software Resilience business and cloud configuration and customisation costs of £12.7 million) of which it represents 4.5% (2021: 4.5%). Materiality for the Parent Company financial statements as a whole was set at £0.5 million (2021: £0.3 million), determined with reference to a benchmark of Company total assets, of which it represents 0.3% (2021: 0.1%). In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole. Performance materiality was set at 65% (2021: 65%) of materiality for the financial statements as a whole, which equates to £0.93 million (2021: £0.78 million) for the Group and £0.35 million (2021: £0.20 million) for the parent company. We applied this percentage in our determination of performance materiality based on the level of identified misstatements and control deficiencies during the prior period.
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NCC Group plc — Annual report and accounts for the year ended 31 May 2022
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