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Exhibit WITN00740124
Audit results report for the 52 weeks ended 25 March 2012
Post Office Limited
14 May 2012
Ernst & Young LLP
2] ERNST & YOUNG
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nit - Exhibit WITNO0740124
i SY ERNSTAY
Ht ‘ a RNST & YOUNG Ernst & Young LLP
4 More London Place
London SE 2AF
Private and confidential
14 May 2012
The Audit Committee
Post Office Limited
148 Old Street
London
EC1V 9HQ
www.ey.com/uk
Dear Members of the Audit Committee
Audit results report
We are pleased to attach our audit results report for the forthcoming meeting of the Audit Committee.
This report summarises our preliminary audit conclusion in relation to Post Office Limited's financial
position and results of operations for the 52 week period from 27 March 2011 to 25 March 2012 (‘the
period”). We plan to issue our final conclusion following the Audit Committee scheduled for 23 May 2012.
Our audit was designed to express an opinion on the financial statements for the period ended 25 March
2012 and address current statutory and regulatory requirements. This report contains our findings
related to the areas of audit emphasis, our views on the company's accounting policies and judgements
and material internal control findings.
This report also contains our final summary of audit differences, communications regarding our
independence, a summary of communications we are required to make to you and a draft management
representation letter.
This report is intended solely for the information and use of the Audit Committee, Board of Directors and
management. It is not intended to be, and should not be, used by anyone other than these specified
parties.
We welcome the opportunity to discuss the contents of this report with you at the audit committee
meeting scheduled on 23 May 2012.
Yours faithfully
For and on behalf of Ernst & Young LLP
Angus Grant
Partner
Enc.
The UK firm Ernst & Young LLP isa limited liability
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Contents
Contents
Overview.....
Scope of the audit.
Significant findings from the audit.
Control themes and observations....
Considerations for the coming year....
Status of the audit
Noe P ens
Summary of audit differences.
Appendix A Required communications with the Audit Committee...
Appendix B Management representation letter for statutory reporting..
Appendix C Independence report...
Appendix D Fair & transparent fees...
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Overview
Overview
This has been an eventful and exciting year for Post Office Limited (POL’) given the
attention and preparations for separation from the Royal Mail Group. Despite the challenges
faced by the business as part of this process, the annual results close process of POL,
including the P11 hard close, was well executed by the business and finance teams.
The coming year ahead poses additional challenges and opportunities with further
separation-related activity and the beginning of network transformation projects across the
business.
Despite the continued restructuring of the finance function during the year, with the
POL finance team taking further steps to be able to help us prepare to deliver a standalone
audit from Royal Mail, there was no impact on the quality or timeliness of the information
provided for audit.
We have received full co-operation from both management and the Royal Mail teams
with whom we work and are substantially complete, subject to a few outstanding matters as
noted in section six.
In the following pages, we provide you with a summary of our audit scope and status, our
areas of focus around significant audit and accounting issues, findings from our controls
testing, our required independence communications and a draft management representation
for your review.
Significant audit and accounting issues
Refer to section three
The following significant items were discussed and agreed with management:
» Going Concern: We have reviewed management's draft going concern paper to the
Board, and agree with the conclusion with respect to the appropriateness of the going
concern basis of preparation for the POLfinancial statements.
» — IT: In conjunction with our IT specialists, we have assessed the manage change and
logical access IT controls to be ineffective, which was the same conclusion we reached
in the prior year. However, through additional compensating testing we have been able
to rely on the IT systems supporting the POL financial statements.
» Counterparty Risk: Management continues to be proactive in its assessment of
counterparty risk. One highlight of the year was that by settling ATM transactions with
the Bank of Ireland a day earlier, management has reduced its exposure by up to £30m
during weekends compared to the previous year.
» Long Term Investment Plan (LTIPs): Management has overstated the LTIP accrual by
£1.9m as at the end of FY2011/12 as disclosed in the Summary of Audit Differences
(SAD) section of this report (Section 7). Management has elected to leave this difference
as an unrecorded adjustment.
>» Employee Benefits: We concur with management that it is appropriate to accrue for
NFSP payments totalling £5.75m, and £3.4m relating to Crown Transformation
Payments in accordance with IAS19, Employee Benefits.
» GRNI Accrual: Based on our discussions with management and our detailed audit
procedures, we conclude that the GRNI accrual at year end is reasonable and fairly
stated
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Overview
» WH Smith Income Guarantee — Onerous Contract: We have assessed management's
assumptions with regards to the WHS onerous provision (a legacy issue arising from the
contract signed with WH Smith in 2006) noting them to be reasonable in the current
circumstances.
» Exceptional Charge - Fixed Asset Impairment: Management continues to assess that
they should fully impair fixed assets as they are purchased. We continue to agree that
POL's accounting policy for impairment and disclosure of the charge as an exceptional
item under FRS and IFRS is reasonable.
Audit approach
Our risk based audit approach took into account the following key inputs:
» Business and financial risks relevant to the financial statements.
>» Developments in financial reporting and auditing standards.
» The quality of systems and processes.
» Changes in the business and regulatory environment.
» Management's views on all of the above.
By considering these inputs, our audit was focused on the areas that matter, and our
feedback is therefore more likely to be relevant to the business. For POL, our audit testing
strategy is controls based with significant reliance placed on key systems and processes that
we are able to test throughout the year. We have assessed the internal control environment
for the purposes of our external audit and consider it to be effective for the period ended 25
March 2012.
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Overview
Control themes and observations
Refer to section four
The key internal control findings arising from our audit work are:
» Key controls tested around revenue and payroll were deemed to be operating effectively.
In particular, we noticed a continued improvement in the payroll process during the
current year in response to our management letter comments raised in the prior year.
» Our audit continued to identify continuing IT contro! weaknesses, which in our view
reflects the continued need for control improvements by the outsource provider Fujitsu,
and for the POL governance and control approach to continue to evolve. However, we
should note that there were improvements from the prior year, notably in the two highest
risk areas identified. We ultimately obtained mitigating audit evidence to rely on the IT
control environment.
> — In light of the continued separation of POL from Royal Mail, with POL taking on more
activities which Royal Mail had previously carried out on their behalf (such as the
statutory financial statement preparation process), the finance team was resilient and
well prepared for the year end. We noted no adverse impact on the quality of
information produced.
Detailed control observations and recommendations are currently being discussed with
management and will be reported in our forthcoming management letter.
Scope update and status of the audit
Refer to sections two and six
We undertook our audit in accordance with the scope set out in our engagement letter dated
24 February 2012, and attached as Appendix E to this report.
We have undertaken the majority of our audit procedures and the audit is substantially
complete. Key procedures outstanding relate to review of detailed narrative disclosures in the
statutory financial statements and obtaining a number of third party bank confirmations.
Summary of audit differences
Refer to section seven
» We report one factual difference in relation to LTIPs.
» The impact of unadjusted audit differences at 25 March 2012 would be to increase profit
before tax for the year by £2.7m,
» The unadjusted amounts are not material to the presentation and disclosures of the
financial statements for the period ended 25 March 2012.
Our opinions and confirmations
>» We anticipate issuing an unqualified audit opinion on the POL financial statements for
the period ended 25 March 2012.
» We confirm our independence as your external auditor in this report in Appendix C.
» We confirm that our fees for non-audit services during 2011/12 have been reviewed in
order to maintain our independence as your external auditor.
Finally, we would like to thank management for the assistance and cooperation we have
received throughout the audit. We have appreciated the continued commitment to challenge
and improve the overall contro! environment and the quality and timeliness of information
provided for the audit.
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2 of the audit
Scope of the audit
We are required by the primary audit team of the Royal Mail Group Plc to perform a full scope
audit of POL for the period ended 25 March 2012 in accordance with International Financial
Reporting Standards (IFRS) and Clarified ISAs (UK and Ireland) as required in the
engagement instructions received by us from them.
We are also engaged to provide a full scope audit on the stand-alone financial statements of
POL to confirm with reasonable assurance that they are free of material misstatement.
The services above are set in the Royal Mail Group Plc engagement letter provided to the
Royal Mail Group Plc Audit Committee dated 24 February 2012. A copy of the engagement
letter is attached at Appendix E for your reference.
In addition to the key areas of audit emphasis discussed later in this report, we
performed other procedures as required by auditing, ethical and independence standards,
company law and other regulations as outlined below:
Mandatory procedures required by auditing standards on
» Addressing the risk of fraud and error.
» — Significant disclosures included in the financial statements.
» — Entity-wide controls.
» Reading other information contained in the financial statements and reporting whether it
is inconsistent with our understanding and the financial statements.
» Auditor independence.
Procedures required by company law
» —Opining on whether the information contained in the directors report is consistent with
the financial statements.
>» Auditing the disclosures that unquoted companies are required to make with respect to
directors’ remuneration.
Regulatory audit and other assurance related requirements
In addition to the statutory audit requirements we are required, as auditors of the Company,
to perform procedures on a number of reports required by postal regulation and related
matters, including:
» Procedures in connection with the Post Office Limited credit facilities from BIS, DVLA
motor vehicle license transactions and the Bank of England note circulation scheme.
Where appropriate, we design the above procedures together with our statutory audit
procedures to maximise the efficiency and leverage the work already performed.
Materiality
For the purposes of determining whether the accounts are free from material error, we define
materiality as the magnitude of an omission or misstatement that, individually or in the
aggregate, in light of the surrounding circumstances, could reasonably be expected to
influence the economic decisions of the users of the financial statements. Our evaluation of it
requires professional judgement and necessarily takes into account qualitative as well as
quantitative considerations implicit in the definition. We would be happy to discuss with you
your expectations regarding our detection of misstatements in the financial statements.
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Significant findings from the audit
Significant findings from the audit
The following outlines the basis for our assessment of the level of subjectivity and level of risk
involved in accounting matters reported to you. In addition, our assessment of where
judgments and estimates fall in a range of possible outcome is also highlighted below.
Level of subjectivity
This rating applies only to significant estimates and indicates the level of subjectivity in the
estimate as well as the reliability of the underlying data used to develop the estimate.
Subjectivity
rating Description
High Estimate involves significant judgment and is made with little verifiable historical experience, current
trend information or market and industry comparative information.
Medium Estimate still involves some judgment and is made with verifiable historical experience, current trend
information, or market industry comparative information.
Low Estimate involves limited judgment and is made with verifiable historical experience, current trend
information, or market industry comparative information.
Assessment of management's judgments and accounting treatment
This measure provides an indication of where in the range of possible acceptable outcomes
the estimate has been recorded. The evaluation of any estimate or treatment being in the
upper (more conservative) or lower range (less conservative) of acceptable outcomes does
not imply the estimate/treatment is not in accordance with GAAP, or the preferred accounting
treatment has not been applied to the estimate.
Measure Description Range
The estimate/treatment is within the lower range of acceptable outcomes resulting in aless; yy
bow conservative treatment.
Medium The estimate is within the mid range of acceptable outcomes. LoM oH
ign _ The estimateftreatment is within the upper range of acceptable outcomes resultingina I ay
more conservative treatment.
3.1. Issues dashboard
The following ‘dashboard’ summarises the significant accounting matters outlined in this
report. It seeks to provide the Audit Committee with an overview of the subjectivity involved
and our assessment of where the accounting treatment falls within a range of acceptable
outcomes. The detail of each accounting matter is set out after the dashboard.
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Significant findings from the audit
Items included in this report:
Accounting and audit matters that have Level of Ernst & Young
come to our attention during the audit subjectivity assessment
Going Concern Medium LM H
IT Controls Medium =oL MH
Long Term Incentive Plan (LTIPs) Medium =L M H
Counterparty Risk Medium =oL M H
Employee Benefits Medium L M H
GRNI Accrual Medium LL M H
WHS Income Guarantee- Onerous Contract High Lo oM oH
Project Gamma High L MoH
Exceptional Charge: Fixed Asset Impairment High Lo M H
POSS Provision Medium =oL M H
POCA Low Lo oM oH
Vendor Creditor - IPS Reconciliation Medium LL M H
Former Agents Debt Low Lo oM oH
WHS TUPE Provision- CWU Litigation Low Lo oM oH
Going Concern
Level of subjectivity Medium
Ernst & Young assessment L MH
Description and conclusion
POL has historically operated in net liability position and has generally had a net cash outflow
(excluding government State Aid funding) in prior years. The Company has been reliant on
State Aid to remain a going concern which has historically been provided for only one year at
a time and extended by one year towards the end of each financial year. As a result,
management's going concern assessment in prior years was dependant on funding being
extended. In light of these factors, we have continued to consider managements assessment
of going concern and whether the company would be able to meet its liabilities for the ensuing
twelve-month period.
For the current period assessment, on 28 March 2012, POL management received
confirmation that their application for State Aid had been successfully approved, including
approval for the funding of its £1.55b working capital facility for 2012/13 to 2014/15, along
with the Network Subsidy Payment for the following year amounting to £210m.
We have reviewed POL's draft going concern assessment and reviewed managements
forecasts to demonstrate that the business is a going concern. Based on the forecasts in the
going concern paper, as a result of the working capital facility being approved, there is
expected to be borrowing headroom over the next three years, enabling POL to meet its
liabilities as they fall due.
In light of the above, and our review of managements assumptions and forecasts underlying
its going concern assessment, we concur with managements assessment that POL can
continue as a going concern.
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Significant findings from the audit
IT Controls
Level of subjectivity Medium
Emst & Young assessment Lo oM oH
Description and conclusion
IT underpins a significant proportion of Post Office's transactions, including all over the
counter transactions at all branch locations. Our audit process is designed around reliance
on certain IT applications and reliance on electronic audit evidence. We have therefore
evaluated the IT general control environment, tested IT controls regarding user access,
program changes and IT security to gain assurance that the systems supporting the data
produced by the IT systems are subject to a robust control environment.
We have completed all of our required procedures and concluded that the IT systems can
support our audit conclusions.
From our review we have noted that action has been taken by Post Office resulting in
remediation of some of the observations raised in the prior year audit, including our area of
greatest concern from 2010/11, change management. However, improvement is still to be
made to the IT control environment, including POLSAP and HNGX. One important area is
control over privileged users; in particular, for POLSAP management should ensure access is
strictly controlled and monitored. As in previous years, we have been able to perform
additional procedures to mitigate the risk associated with this observation in addition to
additional procedures required to mitigate other findings from our audit.
Given that this is a continued area of focus for improvement, we will issue a detailed letter to
management highlighting our recommendations to fully embed and continue to improve the IT
control environment. We anticipate issuing this at the conclusion of the statutory audit in
June 2012.
Long Term Investment Plan (LTIPs)
Level of subjectivity Medium
Emst & Young assessment L MH
Description and conclusion
To incentivise current employees, POL utilises a long-term incentive plan to reward
employees for meeting certain targets and expectations. Currently, POL has two outstanding
reward schemes - the first, the ‘2010/11 award’ will be paid based on the level of operating
profit and network transformation targets met in FY 2012/13, and the second, the ‘2011/12
award’ will be paid based on the level of operating profit and network transformation targets
met in FY2013/14. Under the terms of the LTIP scheme, the bonus to be paid will vary based
on the level of profit achieved. At a high level, both awards set out a maximum pay-out of
140% of salary should the stretch targets for operating profit and network transformation be
achieved.
In the current year, Management has accrued on the basis that whilst it is likely that POL will
meet their targets to trigger a bonus, it is unlikely that stretch targets will be achieved. Per
discussion with management, and review of FY2012/13 budget and strategic plan with both
assuming that the stretch targets will not be achieved, we concur with managements basis
for calculating the bonus accrual.
However, upon our review of the accounting we noted that management had fully accrued for
the 2010/11 award and 2011/12 award as at the end of FY2011/12, resulting in an accrual of
£3.5m in the balance sheet at 25 March 2012. According to IAS19, Employee Benefits, we
note that bonuses of this nature should be accrued on a straight-line basis, as the benefits
earned by employees would be attributable to their services between the grant of the award
and the payment date (the ‘vesting period’). Therefore, in POL's situation, the LTIP obligation
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Significant findings from the audit
should be accrued on a straight-line basis from the grant date (FY2010/11 and FY 2011/12)
to the date it's fully vested (FY 2012/13 and 2013/14, respectively). Therefore, we have
raised an adjustment to reduce the current year accrual by £1.9m as at 25 March 2012.
Please see the SAD section of this report (Section 7) for further details.
Counterparty Risk
Level of subjectivity Medium
Emst & Young assessment L MH
Description and conclusion
In light of the current economic environment, POL undertakes a review of all counterparties to
assess their exposure and relative risk of their trading partners. In particular, given the
concentration of risk associated with the Bank of Ireland (Bol), POL has performed a more
detailed assessment to determine if steps should be taken to mitigate any perceived risk.
As part of their assessment, management undertakes steps to assess the level of risk and
ensure that they are aware of POL’s exposures and have appropriate detailed contingency
plans in place, in particular focusing on Instant Saver and general banking areas. This
contingency plan was prepared in October 2010 at the height of the banking crisis and
management continues to believe this to be relevant in the current year. Management noted
that the first stages of the contingency plan were deployed successfully when the Irish
banking crisis was widely reported in the media. This plan takes into account all similar types
of banking and how they would cope with customer related issues (e.g. all deposits taken in
one day) and/or counterparty related issues such as liquidation of a third party.
It is noted that the counterparty risks associated with the Bol mainly relate to the daily trading
balance which is owed from BOI to POL with the most significant exposure in respect to the
ATM debtor. On any given weekday the exposure is approximately £20-30m; however on a
Sunday, the exposure could be approximately £80m, as it would include the full weekends
transactions. This represents a reduced exposure of £20m-£30m to the BO! compared to
what we noted in the prior year as BOI now settles transactions one day earlier as compared
to the prior year.
Therefore, based on our discussions with management, we are satisfied that management
continues to assess and respond to counter party risk appropriately.
Employee Benefits
Level of subjectivity Medium
Emst & Young assessment L MoH
Description and conclusion
In the current year financial statements, three employee/agent related accruals have been
made in respect of NFSP (National Federation of Sub Postmasters) and Crown
Transformation payments. We have considered the aspects of each accrual individually,
assessing whether its accounting treatment was reasonable, and summarised as follows:
Firstly, on 23 March 2012, POL made an offer by letter to pay two lump sum payments to
agents totalling £5.75m to be paid at the end of April or May 2012. The payments are
detailed as follows:
e A payment of £3m (plus National Insurance at 10%) to the agency network as a
remuneration settlement for sub-postmasters in order to support network stability and
alleviate hardship.
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e An additional payment of approximately £2.75m (plus National Insurance at 10%) to
commercial agency branches. This is also made to support network stability and
alleviate hardships.
Secondly, POL agreed to make a Business Transformation Payment to Crown staff on the
basis of sign up and delivery of transformational change in working practices, and made the
offer to Crown staff in post on 23 March 2012. These business transformation payments
totalled £3.4m.
In respect of the above payments, we concluded that they met the criteria of short term
employee benefits as per the requirements of IAS 19- Employee Benefits and FRS 20 —
Other Employee Benefits, and have therefore been appropriately accrued at 25 March 2012.
Additionally, with regards to the £3.4m payment to Crown staff, we have also assessed and
concurred with management's decision to present this as an exceptional item given that it
relates to the business transformation related programme.
GRNI Accrual
Level of subjectivity Medium
Emst & Young assessment tL oM H
Description and conclusion
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Significant findings from the audit
POL operates a manual two-way matching purchasing system whereby purchase orders are
input along with an expected delivery date and automatically classified as “Goods Received
Not Invoiced” (GRNI) accruals as soon as the expected delivery date is reached. When the
subsequent invoice is received and recorded, the GRNI accrual is closed and the amount is
posted in the creditors ledger.
The risk underlying the current system is that if goods are not received, and a manual
adjustment amending the expected delivery date is not made, the GRNI accrual risks being
overstated. As a result, the process involves a high degree of manual adjustment and
overview. In prior years, with high volumes of capital activity, the GRNI balance was
significant and we noted than an ageing of the accrual highlighted a number of old balances.
However, in the past two years, management has addressed this risk by regularly monitoring
its GRNI balances across the business to ensure that the GRNI balance is not overstated.
We noted that the GRNI balance increased significantly during the current year by £15.2m, to
a closing balance of £43.3m at year end.
The increase in GRNI was mainly due to an increase in marketing efforts by POL towards
year-end, particularly in regards to market flagging products such as insurance and
telephony, increased project spend on developing revenue lines such as ATMs and AEI
through the purchase of new equipment and commencement of the network transformation
project.
However, whilst there was a large increase in GRNI balances, we noted that the ageing of the
GRNI accrual has improved from prior year with 99.8% of the accrual relating to items less
than six months old (compared to 93.5% in the prior year).
Based on our discussions with management and detailed audit of the accrual, we concluded
that the movement and ageing of the GRNI accrual is reasonable at 25 March 2012.
WH Smith Income Guarantee— Onerous Contract
Level of subjectivity High
Ernst & Young assessment LM oH
Description and conclusion
In 2006, POL entered into an agreement with WH Smith, which saw it transfer 85 existing
branches to WHS shops (as franchises) between 2006 and 2008. As part of the franchise
contract, POL guaranteed a certain level of gross contribution in return for WHS meeting
certain service and performance standards. This guarantee was intended to limit WHS
financial exposure in the event WHS was not able to achieve 90% of forecast gross
contribution at a portfolio level.
However, since the inception of the contract, the required income thresholds have not been
met by the WHS shops and has meant that POL has been liable to pay WHS the forecast
contribution guarantee and leading to a provision being made for the WH Smith contribution
guarantee. The contract has been treated as onerous for the previous three years, and it
does not appear likely that income thresholds will be achieved until the anticipated end of all
contracts by FY2017/18.
The current year saw, for the first time, branches under the agreement closed, which required
POL to revisit the original contracts and agreements in place. Upon revisiting the agreements
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Significant findings from the ai
with its solicitors, Lovells, POL management noted that the individual branch agreements,
which ended at various different dates, override the overall franchise agreement which ends
in 2014/15. As a result of this review, a true-up to the provision of £3.5m was made in the
current year to extend POL's obligation to mirror the end dates in the individual branch
agreements.
Another key assumption in the calculation of the onerous provision is the amount of forecast
mails revenue (commission received from Royal Mail Group for the sale of stamps over POL
counters). Through the inter-business agreement with Royal Mail Group, POL earns
commission based on a percentage of product prices. Given the April 2012 rise in stamp
prices, POL expects revenues to increase, thereby reducing the level of provision that is
required. As a result, POL released £5.8m of the contract provision.
The overall provision has decreased by £4.0m, from £12.9m to £8.9m at 25 March 2012,
mainly due to the net decrease of £2.3m as discussed above coupled with the net decrease
of £1.7m related to utilisation and unwinding of the discount on the provision.
We have considered all assumption changes in relation to the provision and deem the
forecasts to be reasonable and the onerous provision at 25 March 2012 to be fairly stated.
Project Gamma
Level of subjectivity High
Emst & Young assessment Lo oM H
Description and conclusion
‘Project Gamma’ relates to an agreement with the Bank of Ireland (Bol) whereby POL is paid
to maintain and upgrade Crown branches for the provision of financial services. We noted
that £6.1m of ‘Gamma’ revenue has been recognised in the period in accordance with the
schedule agreed between the Bank of Ireland and POL at the end of FY2010/11.
However, as a result of renegotiations between the Bol & POL during the current period,
there has been a change in the expected revenues to be received under the agreement.
Under the revised terms of the agreement, POL will now receive £76m in total revenue over
the period between 2008/09 to 2019/20, which is an increase from the £65m agreed in
FY2010/11.
POL has accounted for this change by recalculating the revenue (£76m less revenue
recognised to date) to be recognised over the remaining length of the contract going forward,
while still aligning to the phasing of costs to be incurred. The impact on the current year has
been an additional £2.0m in revenues earned through the agreement.
We have reviewed management's assessment noting that treatment and recalculation of
revenue recognised in the current period is consistent with the amended agreement. We note
that management continues to recognise revenue in line with the services provided and
accordingly we concur with the revenue recognised in the current period and forecasted
revenues remaining to be earned under the agreement.
Exceptional Charge: Fixed Asset Impairment
Level of subjectivity High
Emst & Young assessment Lo oM oH
Description and conclusion
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Significant findings from the audit
In FY2002/03, POL adopted a policy of fully impairing all fixed asset additions made during
the year in which they are purchased, except for freehold land & buildings and building shells.
Management's justification for adopting the above policy is mainly due to the fact that the
company has historically, and continues to be, a loss making entity absent the Network
Subsidy Payment it receives from the Government. Further, as all fixed assets (except for
freehold land & buildings and building shells) are bespoke to the companys activities, their
recoverable amounts are deemed to be below carrying value and thus impaired accordingly.
The policy to impair the above assets is in line with the requirements of IFRS and UK GAAP
(IAS 36 ‘Impairment of Assets’ and FRS 11 ‘Impairment').
The fixed asset impairment charge for the year amounted to £36.2m (PY: £33.6m). The year
on year increase is mainly due to the procurement of hardware to implement new Pin-Pad
systems at POL branches and software development costs. P12 also saw the beginning of
the implementation of some network transformation projects, for which plans were finalised in
the second-half of the year.
As an additional factor in the decision to impair, POL is embarking on a major programme of
network change costing £500m over the next three years, which is included within the
£1.55bn State Aid funding package. Investment of this scale will lead to significant cash
outflows for the immediate years. The degree of transformational change and the impact on
cash flow would impact the future profits of the Company and accordingly management
believes that POL will continue to be a loss making entity in future years. As such,
management continues to assess that they should fully impair their fixed assets.
We note that the above treatment is consistent with prior periods and continues to be
appropriate given the Company's forecasted loss making position in future years, net cash
outflow and reliance on State Aid funding. Additionally, we continue to assert that disclosure
of the charge as an exceptional item under FRS 3 and IAS 36 is reasonable.
POSS Provision
Level of subjectivity Medium
Ernst & Young assessment L MH
Description and conclusion
In May 2010, POL announced that they would no longer be issuing savings stamps and told
the public to redeem savings stamps in their possession. POL also announced to the public
that there would be no expiry period for the savings stamps in issue and guaranteed that they
would redeem all savings stamps upon presentation.
At 25 March 2012, the total Post Office savings stamps liability was £1.3m, representing a
decrease of £2.5m from the prior year liability of £3.8m. The movement during the year is due
to utilisation for presented stamps and the release of £1.7m of the provision, as.
management's review of the redemptions in the current year and revised forecast of
redemptions in the next few years indicated that a lower provision was required. We obtained
the clients forecasts for future savings stamps provision and performed sensitivity testing on
the assumptions used by management.
Overall, we conclude that the decrease in the provision is in line with our expectation based on
declining redemption rates which are expected to continue. Accordingly, we believe that the
assumptions used by management are reasonable and the provision at period end is
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Significant findings from the audit
appropriate.
POCA
Level of subjectivity Low
Ernst & Young assessment Lo oM ou
Description and conclusion
In 2009, Post Office Limited signed a contract for the Post Office Card Account (‘POCA"”) with
the Department of Work & Pensions (“DWP”) for six years up to March 2015. As part of this
contract, the DWP agreed to make one-off payments relating to the “regulatory changes’ (an
upfront payment to cover any changes to POCA accounts due to changes in regulation) and
the “migration of accounts” (a payment to cover costs associated to migration of 700,000
POCA accounts). Both one-off payments were received in the 2009/10 and 2010/11 financial
years, respectively and are being recognised evenly across the life of the contract in
accordance with IAS18.
In the current year, revenue recognised under POCA was £3.9m.
There have been no changes in the treatment of POCA revenue from the prior year, which is
consistent with our expectations as there have been no changes to the agreement or
accounting principles applied by management.
Vendor Creditor - IPS Reconciliation
Level of subjectivity Medium
Emst & Young assessment Lo oM oH
Description and conclusion
POL has an agreement to supply passport services to the public on behalf of the government
department Identity & Passport Services (IPS). POL is liable to IPS to return the proceeds of
the IPS services sales after deducting its commission.
In the current year, we noted that POL overprovided for the IPS creditor balance by £0.8m.
There has been an ongoing system fault on IPS's side, which has resulted in issues in
maintaining accurate data for the amount receivable from POL. This has lead to POL being
under-invoiced in the year. However, POL maintains a record of the amounts owed to IPS by
recording each transaction in Horizon as it occurs at a POL branch. POL have provided IPS.
with a record of settlement differences (“the difference between the amount invoiced by IPS
and the actual amount owed”) and have settled these in addition to the invoices.
At year end, the last three weeks’ “settlement differences” are estimated (which total £4.7m
and are the source for the £0.8m difference), with the actual figures available six weeks after
year end (mid-May). As per management's best estimate, the IPS Vendor creditor liability is
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Significant findings from the audit
£13.9m at year end, which is £0.8m lower than the amount stated in the accounts of £14.7m.
Whilst this difference is currently immaterial for Group reporting purposes and is only a
material adjustment for the purposes of our statutory audit, we note that the above difference
may change as there is an element of unpredictability on the above ‘settlement differences”
estimate. As such, we continue to follow up with management to obtain the final “actual”
amounts, which are expected to be finalised in the w/c 14 May. We have included the £0.8m
overstatement as an unrecorded difference in our SAD schedule. We will accordingly update
the overstatement difference to reflect the final difference that management should be
adjusting for when they receive the actual data. We plan on providing an update to the Audit
Committee on this matter.
Former Agents Debt
Level of subjectivity Low
Emst & Young assessment L MH
Description and conclusion
Former Agents Debt is 100% provided for as the recoverability associated with this debt is
unpredictable and often requires a large expense to take agents to court in the event of
default. Although it is POL’s policy to chase all agents with debt, given the level of uncertainty
attached to this debt, management fully provides against it.
Provision for payments to former agents at year end was £7.2m, representing a £1.4m (or
5%) decrease from prior year end. Former Agents Debt has decreased due to fewer agents
leaving during the period or having their positions terminated as a result of fraudulent or
negligent behaviour.
We have reviewed managements calculation of debt and have concluded that the policy to
provide 100% remains reasonable given the continued low level of recoverability of old debts
and uncertainty of recoverability of current debts (3% of former agents debt was recovered in
the current year, amounting to £230,000).
WH Smith TUPE Provision— CWU Litigation
Level of subjectivity Low
Ernst & Young assessment Lo MH
Description and conclusion
In FY2009/10, management recognised a £2.4m liability regarding a claim involving the
Communication Workers Union (CWU). The claim related to the extent of redundancy costs
arising from the consultation period held with POL employees when POL committed to the
WH Smith contract (which led to WH Smith taking over 70 main Post Offices). The provision
remained unchanged in FY2010/11.
During 2011/12, POL received a favourable ruling in respect of this claim and was cleared of
any future liability and accordingly released the provision held for this matter in this periods
results.
We have reviewed correspondence with CMS Cameron McKenna LLP confirming that the
time period for the CWU to appeal expired on 22 September 2011. Given this ruling and the
fact that the CWU has exhausted all appeals, the release of the provision in the current period
is appropriate.
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Significant findings from the audit
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Control themes and observations
Control themes and observations
As part of our audit of the financial statements, we obtained an understanding of internal
control sufficient to plan our audit and determine the nature, timing and extent of testing
performed. Although our audit was not designed to express an opinion on the effectiveness of
internal of internal control we are required to communicate to you any significant deficiencies
in internal control.
We can confirm that on the basis of our audit work performed, we did not identify any
significant deficiencies in internal controls other than the control deficiencies reported below.
However, we anticipate providing a detailed letter incorporating certain recommendations for
process improvements noted by us in the performance of our procedures at the conclusion of
this year’s audit cycle.
4.1 Current year observations
IT Control observations
Background
During the 2010/11 audit, we identified significant control weaknesses in POL's IT
environment which, in our view, reflected a need for improvement on the part of service
provider Fujitsu and also a change in approach on the part of POL in terms of the
governance, risk and control framework over its business critical systems. These
weaknesses in the IT control environment, together with the lack of an ISAE 3402 (formerly
SAS70) report on Fujitsu's control environment contributed to a lengthy and inefficient audit
process. In addition, Fujitsu's shared service delivery model, lack of key audit contacts’
knowledge of POL's end- to-end processes and lack of availability of documentation together
made it time consuming for either POL or EY to gain assurance that effective controls were in
place and were operating as expected. The complexity of the audit process was further
compounded by the significant changes made to the key financial systems environment
during the audit period, including the progressive replacement of Horizon with Horizon Next
Generation (HNGX) across the branch estate and the consolidation of the POLFS and
SAPADS system into a single SAP system (POLSAP).
During the process we received great support from Lesley Sewell and her team, which
included securing from Fujitsu an audit liaison contact and the sponsorship of the Fujitsu
account leader. At the completion of the audit, POL and Fujitsu accepted that control
improvements were required and high-level action plans were agreed by Fujitsu, POL and
ourselves to initiate remediation activity and improve the audit process for 2011/12.
2011/12 IT audit
At an early stage in this audit cycle, the three parties took part in a workshop to consider the
control framework for POL and to agree planning milestones and protocols. As a result of this,
the continuing sponsorship from Lesley and her team, and the commitment of Fujitsu, the audit
process for 2011/12 has improved significantly over the previous year. Whilst there were minor
delays in providing some documentation, the IT audit was largely delivered and completed within
the agreed timeframe. During the year, we understand Fujitsu initiated discussions to commission
an ISAE 3402 report for FY2012/13.
We noted that the IT general contro! environment for POLSAP and HNGX has improved in
comparison with 2010-11. However we observed that some of the control improvements had not
been fully implemented or embedded at the time of the audit and that there were some
remediation efforts that were not completely aligned with our expectations. There were also some
findings from the previous audit which require further work to close.
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Control themes and observations
Since the completion of the IT audit, we have discussed our control observations with POL
and Fujitsu management, and are currently finalising our management letter which will
provide details of our findings, observations and agreed management actions.
Looking forward — ISAE 3402 report
We understand that planning for the provision of the ISAE 3402 report for the Fujitsu services
supporting the POL account is in progress. We welcome this, and intend to place reliance on
the report to reduce the extent of our testing. We should point out that the reliance we will be
able to place on the report will be dependent on the opinion expressed in it. In the event that
control exceptions are identified in the report, we will need to perform additional procedures
to address the remaining risks.
Other Control observations
We continue to utilise a controls based approach in respect of the identified significant
processes of revenue, purchasing, cash settlements and payroll. Our controls testing
approach focuses on the controls implemented across the entire POL business, including the
London head office, Bolton (payroll), Chesterfield (shared services), branches and cash
centres. Whilst we test controls in London, Bolton and Chesterfield annually, we rotate our
cash centre and branch visits each year.
Financial statement close process
Management continues to employ a robust system of internal controls around its
financial reporting and financial statement close process. We note that there is appropriate
rigor over both the P11 hard close and P12 year-end processes with all key balances
reconciled in a timely manner and supported by appropriate documentation
Payroll process
The POL payroll process is independent of the payroll process and systems that
support the rest of Royal Mail Group Plc. It covers approximately 20,000 employees and
agents, which primarily include front line workers and agents working at Post Offices around
the country. The system supporting this process is a SAP-HR module.
During past audits, we took a fully substantive audit approach to payroll due to a number of
control deficiencies over the review of joiners and leavers and a lack of documentation of a
number of review controls. Following efforts in the prior year to improve the process, the
payroll process has received a high level of management focus and attention. As such, our
work in this area was completed with no significant findings identified and we are therefore
able to rely on controls in this area. Whilst we did not find any exceptions which inhibit us
from relying on the payroll controls, we did identify an exception relating to the review of
quarterly bonus calculations at the London head office. As this was an area of focus for us at
P11 and P12, this finding did not impact our audit strategy in respect of payroll.
Transactional, branch and cash centre process and controls
For the revenue, purchasing and cash settlements processes, we note that the controls
framework remains consistent with the prior year with no significant findings from our testing.
We have completed our walkthroughs and the results of our testing indicate that we will
continue to be able to rely on controls.
Additionally, our controls testing in respect of branches and cash centres was completed with
no findings to communicate to you.
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Considerations for the coming year
Considerations for the coming year
Looking forward — considering the impact of separation
There were two key post balance sheet events at the end of the current financial year:
(1) Post Office Limited was transferred from under the ownership of Royal Mail Group Limited
to Royal Mail Holdings plc (as part of the wider restructuring that is expected to leave Post
Office under HM Government ownership); and
(2) Certain assets and liabilities of the Royal Mail Pension Plan (RMPP) were transferred to
HM Government, leaving RMPP fully funded.
These two events are expected to have the following audit and IT implications, which is not
meant to be exhaustive but provided to illustrate that the audit may ‘look and feel’ differently
next year:
Impact on substantive and non-IT related testing
Our understanding of the POL business indicates that management should continue to
consider the effects of separation on the following areas:
» With POL no longer being a subsidiary of Royal Mail Group, management may elect to
consolidate the results of POFS and FRES in the POL annual report and accounts for the
first time;
>» Possible requirement for POL to produce IFRS consolidated accounts and no longer
exempt from producing cash flow statements and other disclosure requirements, should
Royal Mail Holdings pic only produce stand-alone financial statements;
» Assessment of tax implications of carve-out for POL once Royal Mail Group not part of
same group, for example, use of tax losses and implications for charging VAT on
transactions with Royal Mail Group;
» Consideration of separate tax and VAT teams for POL and need to acquire knowledge in
these specialist areas;
» Accounting for lease, property and other asset transfers into POL books and records;
» Development of pension accounting facilities at POL level;
>» Appointment of actuary to value go-forward defined benefit plan; and
>» Development of a governance structure and strategy with regards to treasury and cash
management.
Impact on IT
Our experience indicates the following as key areas requiring significant management focus
during the separation process:
» Development of a transition plan and transitional services agreements with Royal Mail
Group to maintain and monitor the third party contractual obligations during the period of
separation including ensuring service levels are met;
» Review of the contracts and service level agreements that Royal Mail Group has with its
third party service providers, in particular, CSC, to help ensure they meet POL's business
requirements;
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Considerations for the coming year
» Maintenance of restricted access to sensitive data such as payroll information during the
transition period;
» Implementation of measures to gain assurance regarding completeness and accuracy of
data as a result of data migration activities where services are transferred from Royal
Mail Group to POL;
» Assessment of the impact on existing enterprise software licence arrangements and
associated re-negotiation with vendors; and
» Segregation/separation of networks and email systems.
We understand that POL is working closely with Royal Mail Group to agree the separation
plan, and aims to complete the process over the coming two years, where appropriate.
However, in light of POL’s transformation plans and the associated reshaping of its IT
strategy, which may entail the implementation of significant new systems, we understand
POL anticipates that some use of Royal Mail Group services will continue for approximately
three years.
Impact on the financial statement audit
There are currently two key systems that support POL's financially significant processes that
are operated by Royal Mail Group and reviewed as part of the Royal Mail Group IT audit.
These systems are SAP ESFS, which supports the processing of branch returns, fixed
assets, purchasing and general ledger transactions, and SAP HR- HRP, which supports the
payroll for POL employees. The existing audit approach adopted for these two systems is
based on the audit efficiencies gained from assessing the controls managed by third party
provider, CSC, which are common across Royal Mail Group's key financial systems. Whilst
Royal Mail Group continues to provide these services, we would anticipate requesting
comfort over these systems from the Royal Mail Group audit team. To the extent that POL
migrates relevant data and applications to itself or implements new systems to cover these
requirements over time, they will fall within the scope of the POL IT audit.
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Status of the audit
Status of the audit
Our audit work in respect of the opinion on the Company's financial statements is
substantially complete. The following items relating to the completion of our audit procedures
were outstanding at the date of drafting this report.
Item Actions to resolve Responsibility
Letter of representation To be signed/ dated Management
contemporaneous to our audit Audit Committee
opinion, which will coincide with
the date of the Royal Mail Group
opinion.
Subsequent events To be completed through the date Management
procedures of our audit opinion, per the Emst & Young
timing above (matters to be
updated include: management
inquiries, review of latest
management accounts).
Confirmations Awaiting receipt of all bank Management
confirmations, anticipated tobe — Ernst & Young
received by 23 May 2012.
Annual report and accounts ~—»_—_- Finalisation of unrecorded IPS Management
adjustment, which will be Emst & Young
compared to actuals in w/c 14
May 2012;
» Incorporation of Ernst &
Young review comments on
disclosure notes;
> Finalisation by management
of disclosures related to tax
and pensions; and
» Audit report to be signed by
Ernst & Young and financial
statements to be approved by
management to coincide with
the date of the Royal Mail
Group financial statements
and opinion.
Tax The review is in process and no Management
adjustments have been noted to Ernst & Young
date.
On the basis of our work performed to date, we anticipate issuing an unqualified auditors
report in respect of the POL financial statements for the period ended 25 March 2012.
However, until we have completed our outstanding procedures, it is possible that further
matters requiring amendment may arise.
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Summary of audit differences
Summary of audit differences
In the normal course of any audit, we identify misstatements between amounts we believe
should be recorded in the financial statements and amounts actually recorded. These
differences are classified as ‘known’ or ‘judgemental’. Known differences represent items that
can be accurately quantified and relate to a definite set of facts or circumstances.
Judgemental differences generally involve estimation and relate to facts or circumstances
that are uncertain or open to interpretation.
We highlight the following misstatements identified during the course of our audit. These
have been corrected by management:
» £1.3m reclassification from customer prepayments to trade creditors in relation to the
DVLA creditor at period end.
In addition we highlight the following misstatements which have not been corrected by
management (all figures in £m):
Assets Assets non- Liabilities Liabilities Income/
current current current non-current expenses
Uncorrected misstatements (em)
Debit! Debit/ —_Debit/ Debit/ _Debiti(Credit)
(Credit) (Credit) (Credit) (Credit) Current period
Errors
> LTIP Bonus Creditor 19 (1.9
> IPS Creditor 08
(0.8)?
Income statement total (37)
Balance sheet totals 1,052 16 (964) (228)
Income effect of uncorrected misstatements (27)
(before tax)
Less: tax effect at current year marginal rate O7
Cumulative effect of uncorrected (2.0)
misstatements before turnaround effect
0
Turnaround effect.
Cumulative effect of uncorrected (2.0)
misstatements, after turnaround effect
There are no amounts that we identified that are individually or in aggregate material to the
presentation and disclosures of the consolidated financial statements for the period ended 25
March 2012.
Note 1: This error is an overstatement of the LTIP Bonus accrual for the current year. The LTIP Bonus creditor was
overstated by £1.9m as management accrued for the full LTIP expense of the 2010/11 award and 2011/12 award by
the end of the current period. This is assessed by EY to be not in compliance with IAS19 which requires that the
award for such benefits be spread evenly over the lifetime of the bonus award until vested/paid.
Note 2: This error is an overstatement of the IPS Creditor for the current year, which has been discussed in detail in
Section 3 of this report
Note 3: turnaround effect is the post-tax impact of uncorrected misstatements identified in the prior period, on results
of the current period
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Appendix A Required communications with the
Audit Committee
There are certain communications that we must provide to the audit committee of UK clients.
These are detailed here:
Required communication Reference
Terms of engagement Engagement Letter was
Confirmation by the audit committee of acceptance of terms of engagement. signed on 24 February 2012
Est & Young to provide a copy of the engagement letter. and is attached as Appendix
Planning and audit approach
3 - _ Presented at Group level and
Communication of the planned scope and timing of the audit including any limitations.
discussed herein
Significant findings from the audit
> Our view about the significant qualitative aspects of accounting practices including
accounting policies, accounting estimates and financial statement disclosures
Significant difficulties, if any, encountered during the audit
> Significant matters, if any, arising from the audit that were discussed with
management
> Written representations that we are seeking
> Expected modifications to the audit report
» Other matters if any, significant to the oversight of the financial reporting process
Misstatements Discussed herein
> Uncorrected misstatements and their effect on our audit opinion
> The effect of uncorrected misstatements related to prior periods
> Arequest that any uncorrected misstatement be corrected
> Inwriting, corrected misstatements that are significant
Fraud Enquiries to be performed
» Enquiries of the audit committee to determine whether they have knowledge of any With Audit Committee
actual, suspected or alleged fraud affecting the entity
> Any fraud that we have identified or information we have obtained that indicates that
a fraud may exist
» Adiscussion of any other matters related to fraud
Related parties No such significant matters
Significant matters arising during the audit in connection with the entity related parties noted
including, when applicable:
> Non-disclosure by management
Inappropriate authorisation and approval of transactions
Disagreement over disclosures
Non-compliance with laws and regulations
Difficulty in identifying the party that ultimately controls the entity
External confirmations None noted
>» Managements refusal for us to request confirmations
> Inability to obtain relevant and reliable audit evidence from other procedures
Discussed herein
’
vrvy
Consideration of laws and regulations None noted that would have a
» Audit findings regarding non-compliance where the non-compliance is material and ™aterial effect on the financial
believed to be intentional. This communication is subject to compliance with statements as per our
discussions with
management and legal
counsel
legislation on tipping off
» Enquiry of the audit committee into possible instances of non-compliance with laws
and regulations that may have a material effect on the financial statements and that
; Enquiries to be performed
the audit committee may be aware of Pat nei Conpatten
Independence Independence report in
Communication of all significant facts and matters that bear on Ernst & Yourig Appendix C of this report
objectivity and independence
Communication of key elements of the audit engagement partnds consideration of
independence and objectivity such as:
> The principal threats
» Safeguards adopted and their effectiveness,
> Anoverall assessment of threats and safeguards
> Information about the general policies and process within the firm to maintain
objectivity and independence
Emst & Young
22
Other communications as detailed in the ethical standards:
>
>
’
>
>
Relationships between Emst & Young, the company and senior management
Services provided by Ernst & Young that may reasonably bear on the auditors
objectivity and independence
Related safeguards
Fees charged by Ernst & Young analysed into appropriate categories such as
statutory audit fees, tax advisory fees, other non-audit service fees
A statement of compliance with the ethical standards
The audit committee should also be provided an opportunity to discuss matters
affecting auditor independence
Going concern
Events or conditions identified that may cast significant doubt on the entity's ability to
continue as a going concer, including:
>
>
>
Significant deficiencie
Whether the events or conditions constitute a material uncertainty
Whether the use of the going concern assumption is appropriate in the preparation
and presentation of the financial statements
The adequacy of related disclosures in the financial statements
internal controls identified during the audit
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Independence report in
Appendix C of this report
No such conditions noted and
further discussed herein
Discussed herein, and in
management letter to be
provided to Board at later
date
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Appendix B Management representation letter for
statutory reporting
xx June 2012
Ernst & Young
1 More London Place
London SE1 2AF
Dear Sirs,
This representation letter is provided in connection with your audit of the financial statements
of Post Office Limited (‘the Company”) for the 52 weeks ended from 27 March 2011 to 25
March 2012 (“the period”). We recognise that obtaining representations from us concerning
the information contained in this letter is a significant procedure in enabling you to form an
opinion as to whether the financial statements give a true and fair view of the financial
position of Post Office Limited as of 25 March 2012 and of its financial performance (or
operations) and its cash flows for the period then ended in accordance with UK GAAP.
We understand that the purpose of your audit of our financial statements is to express an
opinion thereon and that your audit was conducted in accordance with International
Standards on Auditing (UK and Ireland), which involves an examination of the accounting
system, internal control and related data to the extent you considered necessary in the
circumstances, and is not designed to identify - nor necessarily be expected to disclose —all
fraud, shortages, errors and other irregularities, should any exist.
Accordingly, we make the following representations, which are true to the best of our
knowledge and belief, having made such inquiries as we considered necessary for the
purpose of appropriately informing ourselves:
A. Financial Statements and Financial Records
1. We have fulfilled our responsibilities, as set out in the terms of the audit engagement
letter dated 24 February 2012, for the preparation of the financial statements in
accordance with UK GAAP.
2. We acknowledge, as members of management of the Company, our responsibility for
the fair presentation of the financial statements. We believe the financial statements
referred to above give a true and fair view of (or ‘present fairly, in all material respects’)
the financial position, financial performance (or results of operations) and cash flows of
the Company in accordance with UK GAAP, and are free of material misstatements,
including omissions. We have approved the financial statements.
3. The significant accounting policies adopted in the preparation of the financial statements
are appropriately described in the financial statements.
4. As members of management of the Company, we believe that the Company has a
system of internal controls adequate to enable the preparation of accurate financial
statements in accordance with UK GAAP that are free from material misstatement,
whether due to fraud or error.
5. We believe that the effects of any unadjusted audit differences, summarised in the
accompanying schedule, accumulated by you during the current audit and pertaining to
the latest period presented are immaterial, both individually and in the aggregate, to the
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financial statements taken as a whole. We have not corrected these differences
identified by and brought to the attention from the auditor because we do not believe that
they are material to the reader's understanding of the financial statements.
B. Fraud
1. We acknowledge that we are responsible for the design, implementation and
maintenance of internal controls to prevent and detect fraud.
2. We have disclosed to you the results of our assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
3. We have disclosed to you all significant facts relating to any frauds, suspected frauds or
allegations of fraud known to us that may have affected the Company (regardless of the
source or form and including, without limitation, allegations by “whistle-blowers”),
whether involving management or employees who have significant roles in internal
control. Similarly, we have disclosed to you our knowledge of frauds or suspected frauds
affecting the entity involving others where the fraud could have a material effect on the
financial statements. We have also disclosed to you all information in relation to any
allegations of fraud or suspected fraud communicated by employees, former employees,
analysts, regulators or others, that could affect the financial statements.
C. Compliance with Laws and Regulations
1. We have disclosed to you all known actual or suspected noncompliance with laws and
regulations whose effects should be considered when preparing the financial
statements.
D. Information Provided and Completeness of Information and Transactions
1. We have provided you with:
° Access to all information of which we are aware that is relevant to the preparation of
the financial statements such as records, documentation and other matters as
agreed in terms of the audit engagement.
e Additional information that you have requested from us for the purpose of the audit
and
e Unrestricted access to persons within the entity from whom you determined it
necessary to obtain audit evidence.
2. All material transactions have been recorded in the accounting records and are reflected
in the financial statements.
3. We have made available to you all minutes of the meetings of shareholders, directors
and committees of directors (or summaries of actions of recent meetings for which
minutes have not yet been prepared) held through to the most recent meeting on 18
April 2012.
4. We confirm the completeness of information provided regarding the identification of
related parties. We have disclosed to you the identity of the Companys related parties
and all related party relationships and transactions of which we are aware, including
sales, purchases, loans, transfers of assets, liabilities and services, leasing
arrangements, guarantees, non-monetary transactions and transactions for no
consideration for the period ended, as well as related balances due to or from such
parties at the year end. These transactions have been appropriately accounted for and
disclosed in the financial statements.
Emst & Young
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We have disclosed to you, and the Company has complied with, all aspects of
contractual agreements that could have a material effect on the financial statements in
the event of non-compliance, including all covenants, conditions or other requirements of
all outstanding debt.
E. Liabilities and Contingencies
1.
All liabilities and contingencies, including those associated with guarantees, whether
written or oral, have been disclosed to you and are appropriately reflected in the financial
statements.
We have informed you of all outstanding and possible litigation and claims, whether or
not they have been discussed with legal counsel.
We have recorded and/or disclosed, as appropriate, all liabilities related litigation and
claims, both actual and contingent, and have disclosed in Note [X] to the financial
statements all guarantees that we have given to third parties?
F. Subsequent Events
1.
Other than those disclosed, there have been no events subsequent to period end which
require adjustment of or disclosure in the financial statements or notes thereto.
G. Accounting Estimates
1. We believe that the significant assumptions we used in making accounting estimates,
including those measured at fair value, are reasonable.
2. Accounting estimates recognised or disclosed in the financial statements:
« We believe the measurement processes, including related assumptions and models,
we used in determining accounting estimates is appropriate and the application of
these processes is consistent.
e The disclosures relating to accounting estimates are complete and appropriate in
accordance with the applicable financial reporting framework.
« The assumptions we used in making accounting estimates appropriately reflects our
intent and ability to carry out specific courses of action on behalf of the entity, where
relevant to the accounting estimates and disclosures.
e No subsequent event requires an adjustment to the accounting estimates and
disclosures included in the financial statements.
Going Concern
1.
Contingent Liab!
1.
Note 1 to the financial statements discloses all of the matters of which we are aware that
are relevant to the Company's ability to continue as a going concern, including
significant conditions and events, our plans for future action, and the feasibility of those
plans.
ies
We are unaware of any violations or possible violations of laws or regulations the effects
of which should be considered for disclosure in the financial statements or as the basis
of recording a contingent loss (other than those disclosed or accrued in the financial
statements).
Emst & Young I 26
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2. We are unaware of any known or probable instances of non-compliance with the
requirements of regulatory or governmental authorities, including their financial reporting
requirements, and there have been no communications from regulatory agencies or
government representatives concerning investigations or allegations of non-compliance.
Yours Faithfully,
Finance Director
Chief Executive Officer
Emst & Young I 27
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Appendix C Independence report
The APB Ethical Standards and ISA (UK and Ireland) 260 “Communication of audit matters with those
charged with governance”, requires us to communicate with you on a timely basis on all significant facts
and matters that bear upon our independence and objectivity. The Ethical Standards, as revised in
December 2010, require that we communicate formally both at the planning stage and at the conclusion of
the audit, as well as during the course of the audit if appropriate. The aim of these communications is to
ensure full and fair disclosure by the auditor to those charged with governance of the audit client on matters
in which they have an interest.
Matters to be communicated at the planning stage include:
» the principal threats, if any, to objectivity and independence identified by the audit, including
consideration of all relationships between the company (including its affiliates, directors and senior
management) and us, including all services provided to the company (including its affiliates, directors
and senior management), by Ernst & Young LLP and its network firms (‘Ernst & Young”), that we
consider may reasonably bear on our independence and objectivity;
» the safeguards adopted and the reasons why they are considered to be effective, including any
Engagement Quality Reviewer review;
» the overall assessment of threats and safeguards;
» information about the general policies and process within the firm to maintain objectivity and
independence.
Matters to be communicated at the conclusion of the audit include:
» awritten disclosure of relationships (including the provision of non-audit services) that bear on the
auditor's objectivity and independence, the threats to auditor independence that these create, any
safeguards that have been put in place and why they address such threats, togther with any other
information necessary to enable the auditor's objectivity and independence to be assessed;
» the total amount of fees that Ernst & Young have charged the company and its affiliates for the
provision of services during the period ended 25 March 2012 analysed into the appropriate categories.
» where there are contingent fee arrangements for non audit services provided by Ernst & Young, we
are required to disclose these arrangements, as well as the amounts of any future services that have
been contracted, and details of any written proposal to provide non-audit services that has been
submitted;
» any inconsistencies between APB Ethical Standards and the companys policy® for the supply of non-
audit services by Ernst & Young and any apparent breach of that policy;
> aconfirmation that we are independent;
» astatement that the engagement team, others within Ernst & Young as appropriate, Ernst & Young
and our network firms have complied with relevant ethcial requirements reagrding independence.
We are also required to provide you with an opportunity to discuss any matters affecting our independence.
* The Combined Code on Corporate Governance (provision C3.2) requires audit committees to develop the company’s policy on the
engagement of the external auditors to supply non-audit services.
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Relationships, services and related safeguards
We highlight the following significant facts and matters that may be reasonably considered to bear
upon our objectivity and independence, including the principal threats, if any. However we have adopted the
safeguards noted below to mitigate these threats along with the reasons why they are considered to be
effective.
Description of relationship or
service and related independence
threat duration
Period provided!
Safeguards adopted and reasons
considered to be effective
Service 1: AF Report- AAF 01/06
report on POL Note Circulation
Scheme related services to the Bank basis
of England for the year ended 31
December 2011 and to be performed
in April 2012.
Service 2: Agreed-upon procedures
performed which relate to testing of
covenants relating to the loan from basis
the Department of Business,
Innovation and Skills (BIS). This is a
standard Agreed-Upon Procedures
service which has been performed for
the past four years and is in the
process of being performed in May
2012.
Performed on
Performed on
Service 3: Agreed-upon procedures Performed on
performed to ensure that the amount
which is collected by Post Office basis
Limited on behalf of the DVLA for
road tax is subsequently paid over to
the DVLA. This is a standard agreed-
upon procedures service which has
been performed for the past five
years, and is in the process of being
performed in May 2012
Service 4: Advisory- Review of March 2012
saving commissions within the
proposed distribution agreement
between POL and Bank of Ireland
continued annual
continued annual
continued annual
Not a prohibited service
These are standard agreed-upon-procedures,
where management instructs us on exactly the
procedures to be performed and we conclude
by issuing a factual findings report only.
Not a prohibited service
These are standard agreed-upon-procedures,
where management instructs us on exactly the
procedures to be performed and we conclude
by issuing a factual findings report only.
Not a prohibited service
These are standard agreed-upon-procedures,
where management instructs us on exactly the
procedures to be performed and we conclude
by issuing a factual findings report only.
Not prohibited service for EY
Separate teams used
Standard ring-fencing between audit and
advisory teams
Conflict of interest with Bank of Ireland was also
managed via standard ring fencing procedures
Went through complete review exercise to
ensure in line with EY independence rules
Advisory engagement not advocating anything
with regards to financial systems, more related
to performance improvement and benchmarking
which has no link to our audit
Overall, we consider that the safeguards that have been adopted appropriately mitigate the
principal threats identified and we therefore confirm that Ernst & Young is independent and the objectivity
and independence of the audit engagement partner and the audit engagement team have not been
compromised.
Emst & Young
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Exhibit WITN00740124
Other required communications
Ernst & Young LLP (E&Y) has policies and procedures that instil professional values as part of firm
culture and ensure that the highest standards of objectivity, independence and integrity are maintained.
Details of the key policies and processes in place within E&Y for maintaining objectivity and independence
can be found in our annual Ernst & Young LLP Transparency Report which the Firm is required to publish
by law. The most recent version of this Report is for the year ended 30 June 2011 and can be found here:
http://www.ey.com/UK/en/About-us/About-EY---Transparency-Report.
We are not aware of any inconsistencies between the company policy for the supply of non audit services
and APB Ethical Standards. We are not aware of any apparent breach of that policy.
We confirm that in our professional judgment, the firm is independent.
We confirm that the engagement team and others within the firm, the firm and network forms have complied
with relevant ethical requirements regarding independence.
Emst & Young I 30
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Appendix D Fair & transparent fees
Financial statement audit 195,000
Total 2012 audit fees £195,000
BIS covenants agreed-Upon procedures 12,500
DVLA statement agreed-upon procedures 14,200
Bank of England AAF report 80,000
Total recurring non-audit related fees 106,700
Advisory project 4,708
Non-recurring non-audit fees 4,708
Total 2012 Non-audit fees £111,408
Total Ernst & Young Fees { £306,408
Emst & Young I34
Ernst & Young LLP
Assurance I Tax I Transaction I Advisory
www.ey.com/uk
The UK firm Emnst & Young LLP is a limited lability
partnership register
ragistered number 0C300001 and is a member firm
of Ernst & Young Global Limited
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
© Emst & Young LLP 2010, Published in the UK
Allrights reserved.
R441
Ernst & Young
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