Strategic Report | Governance | Financial Statements | 133
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 in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Financial statements - Group
Financial statements - Company
Overall materiality How we determined it
£26,722,500 (2022: £21,778,000).
£12,760,000 (2022: £12,852,000).
1% of Total Equity plus net of tax contractual service margin (“CSM”) In determining our materiality, we considered financial metrics alongside additional non-financial factors such as nature of the entity, its industry and the economic environment. The engagement team has considered the primary focus of the users of the financial statements, including shareholders, policyholders and regulators and has determined that an equity based benchmark would be the most appropriate given the primary focus of the users of the financial statements continues to be the capital position of the Group. In addition, the income statement is driven largely by balance sheet movements in insurance contract liabilities for long-term products. Total equity plus net of tax CSM is considered an indication of the valuation of the current in-force business as it reflects the in-force profits to be released over the duration of the existing contracts.
1% of Total Equity
Rationale for benchmark applied
In determining our materiality, we considered financial metrics which we believed to be relevant and concluded that total equity was the most appropriate benchmark. The primary use of the financial statements is to determine the entity’s ability to pay dividends and the users will therefore be focussed on distributable reserves, a balance captured using a total equity benchmark.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £3,900,000 and £20,100,000. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality. We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2022: 75%) of overall materiality, amounting to £20,042,000 (2022: £16,333,500) for the Group financial statements and £9,570,000 (2022: £9,639,000) for the Company financial statements. In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate. We agreed with the Group Audit Committee that we would report to them misstatements identified during our audit above £1,336,000 (Group audit) (2022: £1,100,000) and £700,000 (Company audit) (2022: £700,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions relating to going concern Our evaluation of the directors’ assessment of the Group’s and the Company’s ability to continue to adopt the going concern basis of accounting included: • Obtained the directors’ going concern assessment and challenged the rationale for downside scenarios adopted and material assumptions made using our knowledge of the Group’s business performance, review of regulatory correspondence and obtaining further corroborating evidence; • Considered management’s assessment of the regulatory solvency coverage and liquidity position in the forward looking scenarios considered; • Assessed the impact of severe, but plausible, downside scenarios which removed certain actions which are not necessarily within management’s control; including the impact of the UK Government’s Leasehold and Freehold Reform Bill and the associated consultation on potential restrictions to the level of residential ground rents, issued on 9 November 2023; • Assessed the impact of the factors outlined in Note 35, which could erode the Group’s capital resources and / or the quantum of risk to which the Group is exposed; • Assessed liquidity of the Group and Company, including the Group’s ability to pay policyholder obligations, suppliers and creditors as amounts fall due; • Assessed the ability of the Group and the Company to comply with covenants; and • Reviewed the disclosures included in the financial statements, including the Basis of Preparation.
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