Independent auditors' report to the members of Exeter Friendly Society Limited

Report on the financial statements

Opinion

In our opinion, Exeter Friendly Society’s group financial statements and Society financial statements (the “financial statements”):

We have audited the financial statements, included within the Annual Report, which comprise: the group and Society Consolidated Statements of Financial Position as at 31 December 2019; the group and Society Consolidated Statements of Comprehensive Income; the group and Society Consolidted Statement of Cash Flows for the year then ended; and the notes to the financial statements which include a description of the significant accounting policies.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard as applicable to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the Society.

Other than those disclosed in note 10 to the financial statements, we have provided no non-audit services to the group or Society in the period from 1 January 2019 to 31 December 2019.

Our audit approach

Overview

Materiality

  • Overall group materiality: £2,450,000 (2018: £2,417,000) based on 1.3% of the group’s Unallocated Divisible Surplus.
  • Overall Society materiality: £2,328,000 million (2018: £2,291,000) based on 1.19% of the Society’s Unallocated Divisible Surplus.

Audit scope

  • The group consists of one financially significant component, being Exeter Friendly Society Limited (the ‘Society’). This reporting unit was therefore subject to an audit of its complete financial information.

Key audit matters

  • Morbidity assumptions used in the valuation of the long term business insurance contracts (group and Society)
  • The impact of events after the reporting period in relation to COVID-19 (group and Society)

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.

Capability of the audit in detecting irregularities, including fraud

Based on our understanding of the group and Society and its industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of UK and European regulatory principles, such as those governed by the Prudential Regulation Authority and the Financial Conduct Authority, and we considered the extent to which non-compliance might have a material effect on the financial statements of the group and Society. We also considered those laws and regulations that have a direct impact on the financial statements of the group and Society such as the Friendly Society Act 1992 and the Prudential Regulation Authority’s regulations. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce expenditure and management bias in accounting estimates and judgemental areas of the financial statements such as the valuation of long term business insurance contracts. Audit procedures performed by the group engagement team included: 

There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.

Key audit matters

Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, 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. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.

Key audit matter

How our audit addressed the key audit matter

Morbidity assumptions used in the valuation of the long term business insurance contracts (group and Society)

Refer to page 32 (Audit Committee Report), page 56 (accounting policies) and note 22 to the financial statements The group and Society financial statements include long term insurance contracts for the estimated cost of settling claims associated with income protection and life products. We focused on the morbidity assumptions to which the valuation is most sensitive. The directors derive these assumptions with reference to historical experience and the application of expert judgement.

Our work to address the valuation of the long term insurance contracts was supported by our in-house actuarial specialists and included the following procedures:

  • We tested the underlying data used in the year-end valuation and experience analysis which supports management’s judgements in setting the morbidity assumptions.
  • We tested the accuracy of the calculations used in the experience analysis.
  • We compared the methodology used to set the assumptions against recognised actuarial practices and assessed the reasonableness of any expert judgements in arriving at the final assumptions by applying our industry knowledge and experience.

Through the procedures detailed above, we have found the morbidity assumptions used to value the long term insurance contracts were supported by the evidence obtained.

The impact of events after the reporting period in relation to COVID-19 (group and Society)

As discussed within the Strategic Report on page 12 and note 29 of the financial statements, the start of 2020 has seen an outbreak of Coronavirus (COVID-19). As at 31 December 2019 only a limited number of cases had been reported to the World Health Organisation.

Since then, the virus has spread across multiple countries and caused significant disruption to supply chains and travel with a corresponding impact on the markets. The impact of COVID-19 is considered to be a non-adjusting post balance sheet event.

Management have performed an impact assessment of the COVID-19 outbreak considering the financial volatility and have prepared the financial statements on a going concern basis.

In considering whether the group and Society can meet its obligations as they fall due, management have estimated the impact of the potential claims exposure, reduction in investment values as a result of the volatile market conditions and the change in solvency capital surplus.

We have obtained and assessed management’s analysis of the impact of COVID-19 on the group and Society financial statements. This included the following:

• Evaluated management’s stress and scenario testing and challenged management’s key assumptions; • Considered alternative stress testing performed by management as part of the Own Risk and Solvency Assessment (‘ORSA’) process;

• Assessed the mitigating actions that management have put in place;

• Obtained and reviewed board papers in relation to COVID-19; and

• Assessed the disclosures made by management in the financial statements. Based on the work performed and the evidence obtained, we consider the disclosure of the impact of COVID-19 within the financial statements to be appropriate.

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the group and the Society, the accounting processes and controls, and the industry in which it operates.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements

Society financial statements

Overall materiality

£2,450,000 (2018: £2,417,000).

£2,328,000 (2018: £2,291,000).

How we determined it

1.3% of the group’s Unallocated Divisible Surplus (‘UDS’).

1.19% of the Society’s Unallocated Divisible Surplus (‘UDS’).

Rationale for benchmark applied

We consider the UDS to be the most relevant measure to apply as this represents the value of the members’ interests in the Society.

We consider the UDS to be the most relevant measure to apply as this represents the value of the members’ interests in the Society. To reduce the level of aggregation risk for the group audit, materiality for the Society has been restricted to ensure it does not exceed 95% of the group’s overall materiality.

For the one component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The materiality allocated to this component was £2,328,000.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £122,500 (group audit) (2018: £120,850) and £116,400 (Society audit) (2018: £114,450) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Conclusions relating to going concern

ISAs (UK) require us to report to you when:

We have nothing to report in respect of the above matters.

However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and the Society’s ability to continue as a going concern.

Reporting on other information

The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

With respect to the Directors’ Report, we also considered whether it had been prepared in accordance with the Friendly Societies Act 1992 and the regulations made under it.

Based on the responsibilities described above and our work undertaken in the course of the audit, the Friendly Societies Act 1992 requires us also to report certain opinions and matters as described below.

Directors’ Report

In our opinion, based on the work undertaken in the course of the audit, the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements and has been prepared in accordance with the Friendly Societies Act 1992 and the regulations made under it.

In light of the knowledge and understanding of the group and the Society and their environment obtained in the course of the audit, we did not identify any material misstatements in the Directors’ Report.

Responsibilities for the financial statements and the audit

Responsibilities of the Directors for the financial statements

As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also responsible for 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.

In preparing the financial statements, the Directors are responsible for assessing the group’s and Society’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 the Directors either intend to liquidate the group or the Society or to cease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the financial statements

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 error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.

Use of this report

This report, including the opinions, has been prepared for and only for the Society’s members as a body in accordance with Section 73 of the Friendly Societies Act 1992 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other required reporting

Friendly Societies Act 1992 exception reporting

Under the Friendly Societies Act 1992 we are required to report to you if, in our opinion

● we have not received all the information and explanations and access to documents we require for our audit; or

● adequate accounting records have not been kept by the group or Society, or

● the financial statements are not in agreement with the accounting records.

We have no exceptions to report arising from this responsibility.

Appointment

Following the recommendation of the audit committee, we were appointed by the Members on 26 June 2008 to audit the financial statements for the year ended 31 December 2008 and subsequent financial periods. The period of total uninterrupted engagement is 12 years, covering the years ended 31 December 2008 to 31 December 2019.

Sue Morling (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

Bristol

15 April 2020