Integrated Annual Report 2015

Independent auditor's report to members of Investec plc

Opinion on financial statements

In our opinion:


What we have audited

We have audited the financial statements of Investec plc for the year ended 31 March 2015, which comprise:

The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Accepted Accounting Practice).

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.


Respective responsibilities of directors and auditor

As explained more fully in the directors' responsibility statement set out here, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.


Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Investec plc combined consolidated and separate parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.


Our assessment of risks of material misstatement and response to that risk

The table below shows the risks we identified that have had the greatest effect on the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team together with our audit response to the risks:

Refer to the key management assumptions in the accounting policies section of the financial statements here, the audit committee report here in volume one and the disclosures of credit risk marked as audited within the Investec risk and Basel Pillar III disclosure.

Significant risk Response
Risk of inappropriate revenue recognition – Valuation of financial instruments, unlisted investments and embedded derivatives

The valuation of financial instruments, unlisted investments and embedded derivatives is determined through the application of valuation techniques which often involve the exercise of judgement by management and the use of assumptions and estimates.

Emphasis is particularly paid to the Level 3 instruments where significant valuation inputs are unobservable.

We tested the design and operating effectiveness of controls for the valuation of financial instruments, unlisted investments and embedded derivatives.

We performed a detailed examination of management's valuation methodologies and assessed the appropriateness and consistency of the model inputs and key assumptions.

Where such inputs and assumptions were not observable in the market we engaged our valuation specialists to critically assess whether they fell within an acceptable range based on relevant knowledge and experience of the market.

In addition we tested material valuations in detail and where appropriate sought additional external evidence from that provided by management. In doing so, we assessed the methodologies used, the data used and the judgments and assumptions made, where valuation inputs were unobservable.

Significant risk Response
The monitoring of credit quality and the appropriateness of the allowance for credit losses

The appropriateness of the allowance for credit losses is highly subjective due to the high degree of judgement applied by management in determining the impairment provisions.

We documented and tested the process and controls for assessing, calculating and booking loans and receivables impairment provisions, including the over-arching governance, classification, review and approval procedures. In addition, we tested loan exposures on a sample basis to ensure all loans which had suffered an incurred loss event had been included in the specific provisioning process.

Management assess the impairment provisioning on loan exposures in the Investec plc Specialist Bank on an individual basis. We audited an extensive sample of such exposures to understand the latest developments which influence performance and recoverability and critically assessed the basis of determining any impairment provisions held. In certain circumstances this also involved us utilising our own internal valuation specialists to challenge the collateral values that support the recovery of the loan exposures. This is an inherently judgemental process and particularly important where management are pursuing turnaround strategies in the legacy portfolio. We reviewed and challenged assumptions around future cash flow projections and the valuation of collateral held. Where turnaround strategies require additional funding to execute we have reviewed the approval of the strategies by the Global Credit Committee as well as obtained representations from management as to their intent and ability to make such funds available.

Certain leasing portfolios in the Specialist Bank are subject to collective provisioning approaches. In these portfolios, we critically assessed the appropriateness of the methodologies underlying the provisioning models and the assumptions and data input into such models. In examining the models and assumptions, we back tested the performance of the models to ensure all relevant risks and drivers were reflected in the calculations.

Significant risk Response

The quality of financial reporting – Inaccurate or improper accounting and financial reporting of large or complex transactions, including risk of inappropriate or late centralised adjustments

We focused on this area because the group has entered into a number of significant disposals during the year with the results of these transactions having a material impact on the results of the group.

We have examined a number of large or complex transactions including the sales of Investec Bank (Australia) Limited, Kensington Group plc and Start Mortgages and certain other Investec mortgage assets.

For each of the sales noted we have audited the accuracy of the profit or loss booked on completion of the transactions as well as assessing the disclosures made in the financial statements to check they complied with the relevant accounting standards and other pronouncements on disclosures.

We also focused on this area because there are certain transactions where the outcome is uncertain and the treatment will only be determined upon the resolution of negotiation or, in some cases, litigation with third parties. Consequently management makes judgments about the quantum of potential liabilities which are subject to change in future periods as more information becomes available.

As set out in the financial statements, since the settlement of the group's tax position is judgemental and subject to final resolution with the relevant tax authorities, the calculations of provisions are subject to inherent uncertainty.

We examined correspondence between the group and its external advisors and between the group and the relevant third parties. We examined the matters in dispute and assessed the available evidence and the provisions made by management and concluded they are reasonable.


Our application of materiality

We apply the concept of materiality in both planning and performing the audit, and in evaluating the effect of misstatements on our audit and on the financial statements. For the purposes of determining whether the financial statements are free from material misstatement, we define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable person, relying on the financial statements, would be changed or influenced.

When establishing our overall audit strategy we determined a magnitude of uncorrected misstatements that we judged would be material for the financial statements as a whole. We determined materiality for the group to be £22.7 million (2014: £22.0 million), which is approximately 5% (2014: 5%) of adjusted operating profit, and approximately 1% (2014: 1%) of equity. We used adjusted operating profits to exclude the non-recurring gains/losses on group disposals, gains/losses related to litigation, claims and assessments. The removal of these items in determining our materiality provided a stable basis which focused on the underlying profitability of the group. This provided a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further audit procedures.

Audit work at individual components is undertaken based on a percentage of our total performance materiality. The performance materiality set for each component is based on the relative size of the component and our view of the risk of misstatement at that component. In the current year the range of performance materiality allocated to components was £7.8 million to £1.9 million.

We agreed with the audit committee that we would report to the committee all audit differences in excess of £1.1 million (2014: £1.1 million), as well as differences below that threshold that, in our view warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality described above and in light of other relevant qualitative considerations.

Certain disclosures required by the financial reporting framework have been presented in the Investec risk and Basel Pillar III disclosure report in volume two of the Annual Report, rather than in the notes to the financial statements and have been identified as audited.


An overview of the scope of our audit

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the group's circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the directors and the overall presentation of the financial statements.

Following our assessment of the risk of material misstatement to the group financial statements, our audit scope focused on selecting 21 (2014: 24) components which represent the principal business units within the group and account for 96% (2014: 96%) of the group's total assets and 94% (2014: 94%) of the group's adjusted operating profit before goodwill, intangibles and tax. Of these, 17 (2014: 23) were subject to a full scope audit, while at the remaining 4 (2014: 1) specific scope audit procedures were performed including full audit of the accounts that were impacted by our assessed risks of material misstatement. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. For the remaining 10 (2014: 15) components which were neither full nor specific scope and which account for 4% (2014: 4%) of the group's total assets and 6% (2014: 6%) of the group's adjusted operating profit before goodwill, intangibles and tax, we primarily performed analytical procedures to confirm there were no significant risks of material misstatement in the group financial statements.

The group audit team follow a programme of planned visits to full scope components that has been designed to ensure that the Senior Statutory Auditor visits or participates in meetings at each of the key locations where the group audit scope was focused at least once every year. In addition to the location visit, the group audit team reviewed key working papers supporting conclusions on significant risk areas and participated in the component team's planning including the component team's discussion of fraud and error.


Opinion on other matter prescribed by the Companies Act 2006

In our opinion:


Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed.

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

Under the Listing Rules we are required to review:

Andy Bates (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor

London
10 June 2015

Notes

1. The maintenance and integrity of the Investec web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

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