About this guide

XX February 2020

We’re often asked to explain what the different elements of our audit reports mean. So, we’ve authored this guide to help readers of our audit reports understand the work we perform as auditors, and the terms we use when reporting to shareholders.

The audit report wording below is for XWV Group plc – a fictitious UK-listed mid-cap company that manufactures and distributes consumer health and beauty products. There are facts and circumstances relating to XWV that affect the way we’ve authored the example audit report – click the audit report heading below to find out what these are.

This reader’s guide to the audit report is one of the ways we’re helping investors to understand our role as auditors, and facilitate communication on how corporate reporting, stewardship and assurance can evolve to meet investors’ needs. To find out more, visit our Investor Insights web page.

 

Relevant facts and circumstances

In this example, XWV Group plc is a fictitious consolidated group of companies that:

Additionally:

  • going concern has not been included as a key audit matter because the audit team does not believe there is a material uncertainty with regard to going concern; and
  • we have not been requested to provide graduated findings in our audit report.

(NB: This section does not form part of the audit report and has been provided for information only.)

Pink light against blue background

Our opinion is unmodified

We have audited the financial statements of XWV Group plc (“the Company”) for the year ended 31 December 2019 which comprise the Group Income Statement, Group Statement of Comprehensive Income, Group Balance Sheet, Group Statement of Changes in Equity, Group Cash Flow Statement, and the related notes, including the accounting policies in Note 1, and the Parent Company Balance Sheet, Parent Company Statement of Changes in Equity, and the related notes, including the accounting policies in Note 1.

In our opinion:

  • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended;
  • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union;
  • the Parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; and
  • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Basis for our opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.

We were first appointed as auditor by the shareholders on 22 April 2016. The period of total uninterrupted engagement is for the four financial years ended 31 December 2019. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.

Key audit matters: including our assessment of risks of material misstatement

Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters (unchanged from 2018) in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.

Key Audit Matter 1

Refer to XXXX

The risk

XXXX

Our response

XXXX

Our results

XXXX

Key Audit Matter 2

Refer to XXXX

The risk

XXXX

Our response

XXXX

Our results

XXXX

Key Audit Matter 3

Refer to XXXX

The risk

XXXX

Our response

XXXX

Our results

XXXX

Key Audit Matter 4

Refer to XXXX

The risk

XXXX

Our response

XXXX

Our results

XXXX

Our application of materiality and an overview of the scope of our audit

Materiality

Materiality for the group financial statements as a whole was set at £12 million, determined with reference to a benchmark of group profit before tax, normalised to exclude this year’s impairment of property, plant and equipment due to flood damage at a key production site as disclosed in note 6, of £288 million, of which it represents 5.6% (2018: 5.7%).

Materiality for the parent company financial statements as a whole was set at £10 million (2018: £9 million), determined with reference to a benchmark of company total assets, of which it represents 0.5% (2018: 0.5%).

Chart showing materiality in the audit report

We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £600,000, in addition to other identified misstatements that warranted reporting on qualitative grounds.

Of the group’s 34 (2018: 32) reporting components, we subjected 21 (2018: 21) to full scope audits for group purposes and 8 (2018: 6) to specified risk-focused audit procedures. The latter were not individually financially significant enough to require a full scope audit for group purposes, but did present specific individual risks that needed to be addressed.

The components within the scope of our work accounted for the percentages illustrated below.

Chart showing component coverage in the audit report

The remaining 16% of total group revenue, 10% of group profit before tax and 9% of total group assets is represented by 5 reporting components, none of which individually represented more than 5% of any of total group revenue, group profit before tax or total group assets. For these residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.

The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group team approved the component materialities, which ranged from £2 to £9 million, having regard to the mix of size and risk profile of the Group across the components. The work on 15 of the 29 components (2018: 14 of the 27 components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the Group team. The Group team performed procedures on the items excluded from normalised group profit before tax.

We have nothing to report on going concern

The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”).

In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group’s and Company’s available financial resources over this period were:

  • the impact of a significant business continuity issue affecting the Group’s manufacturing facilities or those of its suppliers;
  • the impact of Brexit on the Group’s supply chain;
  • the enactment of regulation that significantly impairs the Group’s ability to communicate, differentiate, market or launch its products; and
  • product liability, regulatory or other significant cases may be lost or compromised resulting in a material loss or other consequence.

As these were risks that could potentially cast significant doubt on the Group’s and the Company's ability to continue as a going concern, we considered sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the Directors consider they would take to improve the position should the risks materialise. We also considered less predictable but realistic second order impacts such as the erosion of customer or supplier confidence, which could result in a rapid reduction of available financial resources.

Based on this work, we are required to report to you if:

  • we have anything material to add or draw attention to in relation to the directors’ statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
  • the related statement under the Listing Rules set out on page 2 is materially inconsistent with our audit knowledge.

We have nothing to report in these respects, and we did not identify going concern as a key audit matter.

We have nothing to report on the other information in the Annual Report

The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Strategic report and directors’ report

Based solely on our work on the other information:

  • we have not identified material misstatements in the strategic report and the directors’ report;
  • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
  • in our opinion those reports have been prepared in accordance with the Companies Act 2006.

Directors’ remuneration report

In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

Disclosures of emerging and principal risks and longer-term viability

Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:

  • the directors’ confirmation within the Viability Statement, pages 45-47 that they have carried out a robust assessment of the emerging and principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
  • the risk management framework disclosures describing these risks and explaining how they are being managed and mitigated; and
  • the directors’ explanation in the Viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

      • Under the Listing Rules we are required to review the Viability Statement. We have nothing to report in this respect.

      Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and Company’s longer-term viability.

Corporate governance disclosures

We are required to report to you if:

  • we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
  • the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.

We have nothing to report in these respects.

We have nothing to report on the other matters on which we are required to report by exception

Under the Companies Act 2006, we are required to report to you if, in our opinion:

  • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
  • the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
  • certain disclosures of directors’ remuneration specified by law are not made; or
  • we have not received all the information and explanations we require for our audit.

We have nothing to report in these respects.

Respective responsibilities

Directors' responsibilities

As explained more fully in their statement set out on page 80, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

Irregularities – ability to detect

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence, and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the group to component audit teams of relevant laws and regulations identified at group level.

The potential effect of these laws and regulations on the financial statements varies considerably.

Firstly, the group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.

Secondly, the group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the group’s licence to operate. We identified the following areas as those most likely to have such an effect: health and safety, anti-bribery, employment law and certain aspects of company legislation recognising the nature of the group’s activities and its legal form. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on the related financial statement items. The identified actual or suspected non-compliance was not sufficiently significant to our audit to result in our response being identified as a key audit matter.

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Our opinion: level of assurance

You may encounter references to different levels of assurance when reading audit reports or other reviews performed by KPMG. Here’s the definition of each of these levels.

Reasonable assurance

When KPMG performs a statutory audit, we give ‘reasonable assurance’ over the information that has been audited. This means that we give a statement assuring the reader that the information that we have audited can be relied upon up to a defined threshold. (This is also sometimes called ‘positive’ assurance.)

As we state in our audit reports, reasonable assurance is a high level of assurance, but does not guarantee that an audit will always detect a material misstatement when it exists.

Example

“In our opinion the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended.”

Limited assurance

When KPMG performs reviews that are not audits, we give limited assurance over the information that has been reviewed. (This is also sometimes called ‘negative’ assurance.) A limited assurance opinion states that nothing has come to our attention to indicate that the reviewed information cannot be relied upon up to a defined threshold.

Example

“Nothing has come to our attention to indicate that the financial information has not been properly prepared, in all material respects, in accordance with [applicable framework].”

What does 'true and fair' mean?

The ‘true and fair’ view is a fundamental concept in auditing – our audit opinion rests on whether ‘the financial statements give a true and fair view’ of the state of the Group’s affairs’ at the reporting date and its profit or loss for the period. However, there is no statutory definition of what ‘true and fair’ means.

Several legal opinions on the definition of ‘true and fair’ have been obtained over time, most recently in Martin Moore QC’s Opinion requested by the Financial Reporting Council (FRC) in 2013.

The FRC’s summary of the True and Fair Concept states that:

“Directors must consider whether, taken in the round, the financial statements that they approve are appropriate. Similarly, auditors are required to exercise professional judgement before expressing an audit opinion.”

As a result, Martin Moore QC’s Opinion confirms that it is not sufficient for either directors or auditors to conclude that a set of financial statements give a true and fair view solely because the financial statements were prepared in accordance with applicable accounting standards.

In exercising our professional judgement as to whether the financial statements give a true and fair view, we consider all of the following questions.

  • Do the accounting principles used, and the accounting policies adopted, comply with the relevant financial reporting framework and legislation?
  • Are the accounting policies adopted appropriate to the circumstances of the company?
  • Are any departures from relevant legislation, regulations or the identified financial reporting framework justified and adequately explained in the financial statements?
  • Is there is adequate disclosure of all information relevant to the proper understanding of the financial statements?
  • Moreover, are the financial statements prepared in a way that is not misleading in any material respect, and is the view that they present consistent with our knowledge of the company’s business?

What do we report to the audit committee?

Two-way communication with those charged with governance is key to audit quality. We stress the importance of keeping those charged with governance informed of issues arising throughout the audit and of understanding their views. We achieve this through a combination of reports and presentations, attendance at audit committee or board meetings and ongoing discussions with members of the audit committee.

We deliver insights such as the appropriateness of accounting policies, the design and operation of financial reporting systems and controls, key accounting judgements and matters where we may disagree with management’s view and any uncorrected audit misstatements. We ensure the content of these reports meets the requirements of auditing standards and we share our industry experience to encourage discussion and debate with those charged with governance.

What does 'independent' mean?

We take our independence very seriously and rigorous firm-wide controls, policies and processes are in place. These include (and are not limited to) the following measures.

Personal independence

All KPMG partners and all professional staff are required to use KICS – our independence tracking system – before making any personal investments. This is to:

  • identify whether our independence restrictions permit them to make the investment; and
  • maintain a record of all of their investments in KICS which automatically notifies them if their investments subsequently become restricted.

All of our partners and externally-facing directors (partner equivalents) are required to obtain specific clearance from our Partner Independence Team for any investment they or their immediate family propose to make.

Independence training and confirmations

We provide all relevant personnel with independence training appropriate to their seniority and function twice per year, and provide all new personnel with relevant training when they join the firm.

All personnel are required to sign an independence confirmation upon joining the firm. Thereafter, all personnel confirm annually they have remained in compliance with applicable ethics and independence policies throughout the period. In addition, partners and partner equivalents make an additional confirmation at the mid-year regarding their personal investment compliance.

Audit engagement leader rotation

All audit engagement leaders are subject to periodic rotation of their responsibilities for companies we audit under applicable laws and regulations and independence rules which limit the number of years that engagement leaders may provide audit services to a company we audit. KPMG rotation policies are consistent with the IESBA Code and also require our firm to comply with the requirements of the FRC’s Ethical Standard (and, where applicable for certain engagements, the rules of the PCAOB – the United States audit regulator).

We monitor the rotation of audit engagement leaders and any other key roles where there is a rotation requirement – including the Engagement Quality Control reviewer – and have transition plans to enable us to allocate partners with the necessary competence and capability to deliver a consistent quality of service to the companies we audit. The rotation monitoring is subject to compliance testing.

Firm rotation

EU public interest entities (EU PIEs), as defined in the FRC’s Ethical Standard, are required to rotate their firm of auditors. Mandatory Firm Rotation rules in the UK require that all EU PIEs must tender their audit contract at least every 10 years and change (i.e. rotate) their auditor at least every 20 years. We have processes in place to track and manage these requirements.

Engagement acceptance and continuance

We consider a range of factors when deciding to take on a company’s audit for the first time, or to continue to audit a company – we call this our engagement acceptance and continuance process.

As part of this process, we analyse potential independence and conflict of interest issues, as well as factors specific to the type of engagement. We have built controls into our engagement management system to ensure we complete the engagement acceptance process appropriately. We re-evaluate all of our audit engagements annually.

When taking on a statutory audit for the first time, the prospective engagement team performs additional independence evaluation procedures. These include a review of any non-audit services provided to the company and of other relevant relationships and matters that may have a bearing on our independence. We perform similar independence evaluations after a change in the company’s circumstances. Additional safeguards may be introduced to help mitigate any identified risks, and potential independence or conflict of interest issues are documented and resolved prior to acceptance. We will decline a prospective audit engagement if a potential independence or conflict issue cannot be resolved satisfactorily.

Non-audit services

We have policies regarding the scope of services that can be provided to the companies we audit. Our policies are consistent with the FRC’s Ethical Standard and the IESBA Code of Ethics. Where applicable, our policies also comply with the rules of United States regulators such as the SEC and PCAOB. KPMG policies require the audit engagement leader to evaluate the threats arising from the provision of non-audit services and the safeguards available to address those threats.

We were the first firm to voluntarily discontinue the provision of non-audit services (other than those required by law or regulation or closely related to the audit) to the FTSE 350 companies we audit. This goes beyond the requirements of the FRC’s Ethical Standard and is a step we have taken to remove even the perception of a possible conflict.

To maintain auditor independence, no individual with the ability to influence the conduct and outcome of an audit can be rewarded for selling non-audit services to the companies we audit.

Auditor reporting on going concern

The use of the going concern basis of accounting is one of the key principles in preparing financial statements. A very high hurdle must be overcome before company directors can decide that it is inappropriate to prepare the financial statements under the going concern basis.

It is only appropriate to prepare financial statements on a non-going concern basis if:

  • the company has ceased trading; or
  • the directors intend to cease trading or have no realistic alternative but to do so.

Note that this is not simply a consideration of liquidity or cash flows; a company will be classified as a non-going concern if it has ceased trading (or intends to do so), even if it has sufficient funds to meet all its liabilities as they fall due.

What is the 'going concern basis of accounting'?

Under the going concern basis of accounting (ISA 570), financial statements are prepared on the assumption that the company is a going concern and will continue its operations for the foreseeable future. Assets and liabilities are recorded on the basis that the company will be able to realise its assets and discharge its liabilities in the normal course of business.

In general, the going concern basis of accounting is used unless management either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so.

What if there are material uncertainties over going concern?

XXXX

XXXX

The auditor does not provide a guarantee

Our statement is not intended to, and does not, provide a guarantee that the company will be able to continue as a going concern for the foreseeable future. It is the default position when none of the situations outlined above have been identified during the audit.

In that sense it can be regarded as an indication only that we have not identified any undisclosed material uncertainties, nor any evidence that indicates that there are no realistic alternatives to ceasing to trade in the 12-month period from the date of approval of the financial statements. Further, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in our auditor's report is not a guarantee that the Group and the Company will continue in operation.

When the company does not apply the UK Corporate Governance Code, the wording of this section of the audit report is slightly different but the substance of the statement is the same.

"We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects."

Premium listed companies: Additional requirements

For Premium listed UK companies, we are also required by the Listing Rules to review the going concern statement made by the directors under those rules, which may be separate from the basis of preparation disclosures in the financial statements themselves. Again, unless any of the above scenarios apply, we are required only to state that we have nothing to report.

What do we do in relation to going concern?

The auditing standard defining the auditor’s responsibilities in relation to going concern (ISA 570) is 37 pages long, and their obligations are complex, detailed, and extensive.

Fundamentally though, in the UK it is management’s responsibility to assess the company’s ability to continue as a going concern. The auditor's responsibility is to corroborate management’s assessment – that is, to consider whether a material uncertainty related to going concern exists; and – if there is no material uncertainty – to consider whether management's use of the going concern basis of accounting is appropriate.

In doing this, auditors will use their professional judgement and will rely on findings throughout the audit process, from planning and risk assessment, to controls and substantive testing. They will consider the company’s operational structure, the geographies and the industries that the business operates in, and the customers and suppliers it relies on.

The going concern assessment covers 12 months from the date the financial statements are approved, and therefore remains a live consideration until the final release of the annual report.

Level of assurance over 'other information' and the nature of the procedures we perform

‘Other information’ encompasses everything that is include in the annual report document other than the financial statements and the audit report.

Under auditing standards, we audit only the financial statements. In the main, our responsibility in relation to the other information is limited.

We are required to read all of the other information and consider whether it is materially misstated or inconsistent with our audit knowledge or the audited financial statements. However, that assessment is made only in the light of our existing financial statements audit knowledge. We are not required to perform specific additional procedures over most of the disclosures within the other information, so we do not give an assurance opinion on it.

For all audits, we are required to report any uncorrected material misstatements in the other information that we identify, or state that we have not identified any. In the case of material inconsistencies, we would require the directors to rectify these prior to finalising the financial statements and annual report. Failing that, we would need to consider whether to refer to the inconsistencies in our audit report.

Read each section below to find out more about the extent of the work we do.

Strategic report and directors’ report

The Companies Act 2006 requires us to report on the existence of material misstatements or inconsistencies in the Strategic Report and the Directors Report, and on the compliance of those reports with the Companies Act. This is based solely on our work performed in relation to other information and so does not provide positive assurance over the specific disclosures in those reports.

Directors’ remuneration report

For quoted companies (and for others, when engaged to do so) we are required to audit certain disclosures within the Directors’ Remuneration Report. Unlike most ‘other information’, we provide reasonable assurance over these disclosures having performed such audit procedures necessary to provide us with sufficient appropriate audit evidence over them. A lower level of materiality is applied to our audit work in this area compared with that applied to the financial statements as a whole.

Disclosures of emerging and principal risks and longer-term viability

Companies that apply the UK Corporate Governance Code provide disclosures about the principal risks facing the company, and its long-term viability. For such companies, we are required to state whether we have anything material to add or draw attention to in relation to those disclosures. We are not required to perform specific procedures over these disclosures. Our statement is made based on our existing financial statements audit knowledge; particularly, in respect of the viability statement, our work in relation to going concern.

For Premium listed UK companies, we are also required by the Listing Rules to review the viability statement but do not provide any assurance over the ability of the company to be able to continue as a going concern over the period covered by the viability statement.

We assess these matters strictly within the context of the knowledge acquired during our audit. As we cannot predict all future events – and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made – the absence of anything to report on these statements is not a guarantee as to the Group’s and Company’s longer-term viability.

Corporate governance disclosures

For companies that apply the UK Corporate Governance Code (the Code), auditing standards require us to specifically report if:

  • we have identified any material inconsistencies between the directors’ “fair, balanced and understandable” statement and our financial statements audit knowledge; or
  • the audit committee’s disclosures do not adequately address the matters communicated to them by us – in this respect, we consider the level of consistency between the matters disclosed in the Audit Committee’s disclosures in the annual report, the key audit matters included in our audit report, and our separate communication with the Audit Committee.

In addition, for premium-listed UK companies, the Listing Rules require us to report if the corporate governance statement does not appropriately detail any non-compliance with certain specified provisions of the Code.

We do not give any opinion on the adequacy of the company’s corporate governance procedures – the Code is a ‘comply or explain’ regime and we are required only to report on whether any non-compliance in the specified areas has been appropriately disclosed. We are not required to consider the company’s reporting in respect of other aspects of the Code, although as we do on all ‘other information’, we read the entire corporate governance statement for material misstatements or inconsistencies.

For companies that are within the scope of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR), we are required under the Companies Act 2006 to give additional reporting when the corporate governance statement is presented separately from the directors’ report (inclusion of a corporate governance statement by cross-reference in the directors’ report does not consistent separate presentation for this purpose). This reporting is similar to that required on the strategic report and directors’ report, and includes a statement on the compliance of the corporate governance statement with the applicable legal requirements. Again, this reporting is given based solely on our existing financial statements audit knowledge.

Level of assurance provided

Under applicable laws and regulations we may be required to report on certain matters only if we have identified an issue during the course of our financial statements audit work, without being required to perform specific procedures in respect of these matters. For a UK company, under the Companies Act 2006 this includes, among other matters, the adequacy of accounting records of the company (or the parent company if reporting on a group).

Under UK auditing standards we are required to state that we have nothing to report in these respects when this is the case. We do not provide an assurance opinion in respect of these matters, and our reporting in respect of accounting records should not be interpreted as any kind of assessment of the company’s accounting systems and internal controls.

The 'Bannerman' paragraph

Under the Companies Act 2006, our statutory audit report is addressed to, and may only be relied upon by, the shareholders as a body.

Following a Scottish Judgment in the Royal Bank of Scotland v Bannerman Johnstone Maclay and others (‘Bannerman’), we clarify our responsibilities by including a duty of care paragraph in all audit reports.

In this way, we notify third parties that we do not have a duty of care, and hence a liability, to them. Third parties in this context might include banks and prospective investors – such parties will not have engaged us and are not within our duties or responsibilities under company law.

We also clarify that our liability is to the shareholders collectively, rather than individually. Our duties to a company’s shareholder body are not to them as investors but as collective owners of the company – i.e. for their governance purposes (holding the directors to account for their stewardship of the company).

When we are engaged to report on matters that are not mandated by law or regulation – e.g. when we are engaged to report graduated findings – the wording of the ‘Bannerman’ paragraph is expanded to refer to the company’s engagement of us to report on further matters.

For non-UK companies, we use similar wording in the duty of care paragraph, reflecting the specific legal circumstances and/or the circumstances specific to the audit engagement.

The inclusion of this paragraph does not change our responsibility and liability in respect of our audit as set out in law and in any additional engagement terms. However, the absence of such a paragraph might infer that we have assumed an (uninsurable) liability to a third party.

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