Governance Report Independent auditors’ report to the members 4 of S Capital plc continued Key Audit Matter How our audit addressed the Key Audit Matter Revenue and cost of sales recognition over time on The significant risk related to the timing of revenue and cost of sales Content contracts (Group) recognition on open contracts is restricted to six of the 16 Content Refer to page 62 (Report of the Audit and Risk Committee), components where judgment is required and complexity arises in Note 2D (Judgment in relation to revenue and Note 3C identifying the performance obligations, whether the income should (Revenue recognition). be recognised over time or at a point in time and assessing the stage of delivery of performance obligations on open contracts at Assessing the timing of revenue and cost of sales recognised year end. on open contracts at the year-end is an area of complexity For these six Content components (including two audited by the and judgment is required in identifying the performance Group team) our audit procedures included the following: obligations, whether the income should be recognised over time or at a point in time and assessing the stage of delivery • we assessed the systems and controls in operation in the year; of performance obligations on open contracts where revenue • we analysed the total open contracts as at the year-end is recognised over time. by total contract value and against prior periods to identify Accounting for open contracts was based on the underlying unusual trends; systems and processes in each component. Due to the • on a sampling basis, we assessed contractual terms and typical term of contracts being between 3 to 6 months, a full assessed each of these terms (e.g acceptance criteria, delivery analysis by management of the key judgments including the and payment terms) to ensure that the application of these terms identification of performance obligations, agency vs principal were applied correctly within each project; relationships and in which period revenue and cost of sales should be recognised is typically not performed until after the • on the sample selected, we recalculated revenue recognised year end. This analysis is important in ensuring accuracy of based on the proportion of the service performed in respect percentage of completion. of each performance obligation by obtaining schedules of estimated effort to complete from project managers and Given the complexity in estimation and judgment involved, challenging the key supporting evidence to test its completeness the timing of revenue recognition and the accuracy of project and accuracy. The supporting evidence included signed revenue and related costs recorded within the financial statements of works, evidence of the delivery of content to statements is subject to both risk of error and fraud as there customers, project trackers, internal guidelines, sales invoices, is an incentive for management to manipulate the results by post-year end credit notes and subsequent bank receipts; moving 2022 revenue into 2021 in order to achieve targets. • we considered whether there was any evidence which As a result this was considered to be a significant audit risk. contradicted management’s assumptions regarding the Subsequent to the completion of our initial risk assessment, percentage of completion of the sampled contracts; and modified opinions were received from PwC component teams • we assessed the accounting for cost of sales in respect of the relating to revenue and cost of sales on open contracts, contracts subject to testing, including testing the consistency of representing approximately 5% of recognised Group revenue accounting for contract progress with the revenue recognition across four Content components as a consequence of estimates and extending our testing over the completeness of identifying significant control deficiencies. These significant recognition of liabilities (by testing payments made after the year control deficiencies also impacted two other Content end to check the period to which they related) over and above components in respect of the accuracy of percentage of that originally planned across six components. completion of open contracts. In addition, we identified a risk of error in relation to the misapplication of IFRS 15 Revenue The procedures performed in respect of four components where from Contracts with Customers (‘IFRS 15’) given the varying component auditors identified significant control deficiencies in the levels of understanding of this standard by management systems, processes and controls pertaining to the accuracy of the within these six components. These issues reinforced our percentage of completion on open contracts, and which resulted initial risk assessment and resulted in extended testing by the in the issuance of modified opinions by those PwC component Group audit team. audit teams, related to the assessment of the stage of delivery of the performance obligations on open contracts where revenue is recognised over time. During the course of our audit, management completed a reassessment of the revenue recognition on 26 open contracts in these four components resulting in a material adjustment to revenue and adjustments to cost of sales which collectively did not have a material impact on loss before tax. Following management’s reassessment, the Group audit team extended the scope of the procedures described above, compared to that originally planned, across all six relevant Content components (both those components where modified opinions were received from PwC component teams and the components audited by the Group audit team) to consider a wider range of contracts and management’s revised assessment taking into account any additional supporting evidence provided by management. Based upon the procedures performed, we concluded that, following management’s reassessment and adjustment, management’s judgment in respect of the application of IFRS 15 and the estimation of revenue recognition on open contracts was reasonable. 102 S4Capital Annual Report and Accounts 2021