Audit committee report
for the year ended 30 September
The audit committee conducted its work in accordance with the written terms of reference approved by the board (information on this is recorded in the corporate governance report) and is pleased to present its report in terms of the King Code, the Companies Act and the Listings Requirements of the JSE (the Listing Requirements) for the financial year ended 30 September 2018.
The committee is satisfied that it has performed both the statutory requirements for an audit committee as set out in the King Code, the Companies Act, the Listing Requirements, as well as the functions set out in the terms of reference, and that it has therefore complied with its legal, regulatory or other responsibilities.
During the year under review the audit committee consisted of SS Ntsaluba (chairman), FNO Edozien, M Lynch-Bell, N Mnxasana and HH Hickey (appointed 15 November 2017). Six meetings were held in the year. Details of attendance are included in the integrated report available at www.barloworld.com.
The chief executive officer, finance director, group executive: human capital, internal auditor, external auditor and finance executives also attend meetings of the audit committee as invitees. The internal and external auditor both have unrestricted access to the audit committee and regularly have confidential meetings without members of executive management being present.
External auditThe committee
- Nominated and recommended to shareholders that Deloitte & Touche be appointed as independent external auditors for the company and its subsidiaries (excluding the Barloworld Logistics group) and the appointment of Mr B Nyembe as the independent designated auditor for the company for the financial year ending 30 September 2019 in compliance with the Companies Act and the Listings Requirements of the JSE Limited. Following the 2018 audit, Deloitte and Touche has been the external auditor of Barloworld for 100 years and B Nyembe has been the designated auditor for the past three years
- In line with the group’s commitment to transformation, we nominated and recommended to shareholders of Barloworld Logistics Africa Proprietary Limited, a subsidiary of Barloworld Limited, that SizweNtsalubaGobodo-Grant Thornton be appointed as independent external auditors of the Barloworld Logistics business for the financial year ending 30 September 2019. This will be the second year that SizweNtsalubaGobodo-Grant Thornton have been the external auditors for the Barloworld Logistics business
- Received confirmation from the external auditor that it is independent of the group
- Concluded that, together with mandated partner rotation at various levels and other policies and procedures in force, the numerous changes in the management of the Barloworld group during the external audit firm’s tenure mitigate the risk of familiarity between the external auditor and management
- Considered the quality controls processes of the external auditor and specifically audit quality reviews conducted over the designated auditor, including those performed by the Independent Regulatory Board for Auditors (IRBA) as part of its routine review process
- Considered and confirmed the proposed external audit fees for each division and the group in consultation with group management and approved the external audit engagement letter
- Reviewed and approved the policy for non-audit services that can be provided by the external auditor and the pre-approval authorisation process for these services that the external auditor may provide, and
- Considered to its satisfaction the independence, objectivity and effectiveness of the external auditor and ensured that the scope of its additional (non-audit) services provided were, individually and in aggregate, in compliance with the group’s policies in this regard. Refer to note 3 of the financial statements where fees paid to Deloitte and Touche are disclosed.
Key audit matters
The committee has considered the following key audit matters during the financial year ended 30 September 2018:
- Valuation of goodwill and intangible assets:
The committee spent time understanding the significant estimates and judgements applied in management’s valuation and impairment assessments and challenged these where necessary. The committee deliberated over management’s determination of the cash generated units to which goodwill is allocated and was satisfied with management’s conclusions. The committee assessed management’s value-in-use calculations by considering, among others, the following:
- The reasonableness of management’s assumptions used in determining future cash flows
- The terminal value and discount rates applied in management’s value-in-use calculations
- The work of management’s independent expert who assisted with the determination of the weighted average cost of capital (WACC) rates applied by management in its value in use calculations.
- The sensitivity analysis performed by management over the value-in-use calculations.
We are satisfied that the impairments recognised fairly reflect the expected value-in-use of the underlying assets and that the remaining goodwill and intangibles have sufficient headroom to support their carrying value.
The committee also assessed management’s disclosures in this regard and concluded that the disclosures presented in notes 11 and 12 are fairly presented in terms of International Financial Reporting Standards (IFRS).
The external auditor:
- Explained the audit procedures applied to test management’s value-in-use calculations
- Explained the role of corporate finance specialists in executing their audit procedures
- Considered the financial statement disclosure requirements of IFRS
- Challenged the work of management’s independent expert who assisted with the determination of the WACC rates applied in management’s value-in-use calculations.
Based on the audit work performed, the auditor was satisfied with the impairments recognised and the resulting carrying value of goodwill and intangible assets as presented in notes 11 and 12 to the financial statements.
- Determination of net realisable value of dealer parts exchange components and remanufactured inventories (Rebuilt inventories):
The committee considered the changes in circumstances and new information arising in the year that directly influenced management’s decision to re-assess their methodology for determining the Rebuilt inventories net realisable value (NRV) provision. In assessing this matter, the committee specifically considered the principles in IAS 2 Inventories and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8).
The committee noted that the Barloworld Rebuild Centre (BRC), established in May 2012, is an integral part of Equipment Southern Africa’s strategy to provide cost effective and timely parts solutions to its customers to avoid downtime. It was recorded that in April 2018 the BRC became a certified Caterpillar remanufacturing dealer. This world-class certification warrants that the BRC meets Caterpillar’s standards of excellence for quality, cleanliness and efficient processes. In turn, the committee was satisfied that, through this certification, Rebuilt inventories produced in this facility are considered to be of a high quality and thus selling prices are valued accordingly.
In light of the above change in circumstances that transpired in the current financial year, the committee reviewed management’s revised estimate of the NRV provision recognised against Rebuilt inventories. The committee challenged the categorisation of Rebuilt inventories, including factors that management applied in determining inventory turns, and also considered the appropriateness of the sliding scale applied to calculate the Rebuilt inventory NRV provision. The committee was satisfied that management undertook a sufficiently robust process to determine the NRV of Rebuilt inventories and that the revised estimation technique was in accordance with IAS 2. After careful consideration the committee concurred that management’s change in estimating the Rebuilt inventories NRV provision represented a change in estimate resulting from of a change in circumstances in the current year. The committee further assessed management’s disclosures in this regard and concluded that the disclosures presented in note 17 to the financial statements comply with IAS 8.
The external auditor:
- Explained its audit procedures to test the valuation of inventory and to review management’s calculations of the net realisable value
- Explained its considerations for concurring that the change in management’s technique for determining the NRV of Rebuilt inventories was considered a change in estimate in accordance with IAS 8
- Considered the financial statement disclosure requirements of IAS 8.
Based on the audit work performed, the auditor was satisfied with the valuation of Rebuilt inventory.
Key areas of focus
In addition to executing on its statutory duties and the considering key audit matters, the committee also addressed the following key areas of focus during the year ended 30 September 2018.
- New accounting standards
The committee considered new standards, in particular IFRS9 and IFRS15, interpretations and amendments to standards in issue that are not yet adopted but are likely to affect the financial reporting in future years and disclosure thereof in the annual financial statements.
- Mandatory audit firm rotation
The IRBA’s requirement for mandatory audit firm rotation will be effective for the group’s financial year ending 30 September 2024. The audit committee concluded that the group should appoint a new external audit firm for the group’s financial year ending 30 September 2020. This process will commence in early 2019.
- Reviewed the appropriateness of the internal audit charter and recommended the approval of the charter by the board
- Approved the one-year operational internal audit work plan as well as the capacity and resources within the internal audit function to execute its work plan and monitored adherence of internal audit to its annual plan
- Monitored and supervised the functioning and performance of internal audit, compliance with its charter and reviewed and approved the annual risk based audit plans, resources and budgets. Reviewed the appropriateness of the group’s combined assurance model to ensure that the significant risks identified in the high-level risk assessments are adequately addressed
- Received and reviewed reports from both internal and external auditors concerning the effectiveness of the internal control environment, systems and processes as well as their concerns arising out of their audits and requested appropriate responses from management
- Reviewed the results of the financial control management self-assessments as contained in the Barloworld internal control matrix which is completed in respect of all business units and operations in the group
- Reviewed and evaluated the nature and extent of the documented review of internal financial controls performed by internal audit and evaluated whether any weaknesses identified in such financial controls were considered sufficiently material to be reported to the board and the stakeholders
- Reviewed the report prepared by internal audit regarding the risk management process in the group and the level of embeddedness of such processes within each operating division
- Reviewed the group information security policy and the results of the internal self-assessments of the levels of control in place across the group
- Reviewed the results of divisional and business unit disaster recovery self-assessments, the testing of such plans and the internal audit review of such disaster recovery plans
- Reviewed the performance and confirmed the suitability and expertise of the group head of internal audit Miss G Dimitriadis; and considered the appropriateness of the expertise and adequacy of the resources of the group’s internal audit function, and
- To further the transformation agenda of the group, nominated and recommended the appointment of MASA as a co-sourcing partner to Barloworld’s existing internal audit function for the 2018 financial year following Nkonki’s announcement that it would enter into voluntary liquidation in April 2018.
Based on the results of the formal documented review of the group’s system of internal controls and risk management conducted by internal audit function during the 2018 financial year and having given due consideration to the results of assurance activities of various assurance providers including considering information and explanations given by management and discussions with the external auditor on the results of the audit, nothing has come to the attention of the committee that caused it to believe that the group’s system of internal controls and risk management is not effective and that the internal financial controls do not form a sound basis for the preparation of reliable financial statements.
Expertise and experience of finance director and the finance function
- Reviewed the performance and confirmed the suitability and expertise of the group finance director, DG Wilson
- Considered the appropriateness of the expertise, diversity and adequacy of resources of the group’s financial function and the effectiveness of the senior members of management responsible for the financial function
- Was actively involved in the appointment of O Ighodaro, CFO-designate, who will succeed DG Wilson as finance director at the next annual general meeting (AGM) of the company planned for February 2019
- Considered accounting treatments, significant or unusual transactions and accounting judgements
- Considered the appropriateness of accounting policies and any changes made
- Met separately with management, external audit and internal audit and the chairman attended the risk and sustainability committee meetings
- Made appropriate recommendations to the board of directors regarding the corrective actions to be taken as a consequence of audit findings
- Reviewed the process in place for the reporting of concerns and complaints relating to accounting practices, internal audit, content of auditing of the group’s financial statements, internal controls of the group and any related matters. The committee can confirm that there were no such complaints during the year under review
- Reviewed and recommended for adoption by the board such financial information that is publicly disclosed which for the year included:
- The interim results for the six months ended 31 March 2018
- The audited annual results for the year ended 30 September 2018, and
- Reviewed the working capital packs prepared by management to support the board’s going concern statement at reporting dates as well as the solvency and liquidity tests required in terms of the Companies Act 71 of 2008.
The audit committee considered the Barloworld Limited consolidated and company financial statements, and the summarised financial statements, (together the financial statements) for the year ended 30 September 2018. The audit committee has also considered the non-financial information as disclosed in the integrated report and has assessed its consistency with operational and other information known to audit committee members. The committee has also considered the external assurance provider’s report and is satisfied that the information is reliable and consistent with the financial results. The financial statements have been prepared using appropriate accounting policies, which conform to IFRS.
At the meeting held on 13 November 2018 the audit committee recommended the financial statements for the year ended 30 September 2018 for approval to the board.
Audit committee chairman
For and on behalf of the Barloworld Limited audit committee
16 November 2018