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

Report on the financial statements

Opinion

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

● give a true and fair view of the state of the group’s and the Society’s affairs as at 31 December 2018 and of the group’s and the Society’s income and expenditure and cash flows for the year then ended;

● have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and

● have been prepared in accordance with the requirements of the Friendly Societies Act 1992.

We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated Statement of Financial Position which includes the group and Society Statements of Financial Position as at 31 December 2018; the Consolidated Statement of Comprehensive Income which includes the group and Society Statements of Comprehensive Income, and the Consolidated Statement of Cash Flows which includes the group and Society Statements 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 2018 to 31 December 2018.

Our audit approach

Overview

Materiality

  • Overall group materiality: £2,417,000 (2017: £1,991,000) based on 1.3% of the group’s Unallocated Divisible Surplus (‘UDS’).
  • Overall Society materiality: £2,291,000 (2017: £1,891,000) based on 1.23% of the Society’s Unallocated Divisible Surplus (‘UDS’).

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 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 regulatory principles, such as those governed by the Prudential Regulation 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 UK Corporate Governance Code – An Annotated version for mutual insurers. 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 the 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 28 (Audit Committee Report), page 51 (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 terminsurance contracts were supported by the evidence obtained.

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.

The group consists of one financially significant component, being Exeter Friendly Society Limited (the 'Society'). This reporting component is the ultimate parent company in the group and required an audit of its complete financial information which was performed by the group engagement team. The group has one other trading company, a holding company and three dormant entities. None of these reporting units were material to the audit of the group financial statements and therefore were not subject to specific audit procedures.

There is a centralised finance function which oversees all reporting units within the group. In addition to the head office in Exeter, we visited one other location where our testing primarily focused on the recording and processing of Private Medical Insurance ('PMI') claims at the Society.

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

£2,417,000 (2017: £1,991,000).

£2,291,000 (2017: £1,891,000).

How we determined it

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

1.23% 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 £2,291,000 (2017: £1,891,000).

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £120,850 (group audit) (2017: £99,000) and £114,550 (Society audit) (2017: 94,000) 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. For example, the terms on which the United Kingdom may withdraw from the European Union, are not clear, and it is difficult to evaluate all of the potential implications on the group’s and Society’s trade, customers, suppliers and the wider economy.