Independent Auditors' Report to the members of Consort Medical plc

Report on the Group Financial Statements

Our opinion

In our opinion:

  • the financial statements, defined below, give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 30 April 2014 and of the Group's profit and Group's and Parent Company's cash flows for the year then ended;
  • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
  • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
  • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

This opinion is to be read in the context of what we say in the remainder of this report.

What we have audited

The Group and Parent Company financial statements (the "financial statements"), which are prepared by Consort Medical plc, comprise:

  • the Consolidated and Company balance sheets as at 30 April 2014;
  • the Consolidated income statement and statement of comprehensive income for the year then ended;
  • the Consolidated and Company statements of changes in shareholders' equity and cash flow statements for the year then ended; and
  • the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.

The financial reporting framework that has been applied in their preparation comprises applicable law and IFRSs as adopted by the European Union and, as regards the Parent Company, as applied in accordance with the provisions of the Companies Act 2006.

Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual Report and Accounts (the "Annual Report"), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.

What an audit of financial statements involves

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ('ISAs (UK & Ireland)'). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

  • whether the accounting policies are appropriate to the Group's and Parent Company's circumstances and have been consistently applied and adequately disclosed;
  • the reasonableness of significant accounting estimates made by the directors; and
  • the overall presentation of the financial statements.

In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Overview of our audit approach

Materiality

We set certain thresholds for materiality. These helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the Group financial statements as a whole to be £800,000. This represents, approximately, 5% of the Group's profit before taxation from continuing operations, being, in our view, the most relevant measure of performance of the Group. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £40,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Overview of the scope of our audit

The Group has one component, being the Bespak division, which is supported by a centralised head office function. The Bespak division consists of three reporting units. The Group financial statements are a consolidation of these reporting units and the centralised function.

In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at these reporting units by us, as the Group engagement team.

We audited the complete financial information of the three Bespak reporting units. We also performed audit procedures over material account balances and transaction classes at the head office function, as well as assessing the risk of material misstatement in the remaining balances through the application of analytical procedures.

Areas of particular audit focus

In preparing the financial statements, the directors made a number of subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily focused our work in these areas by assessing the directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.

In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.

We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas of focus identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is set out in the Corporate Governance.

Area of focusHow the scope of our audit addressed the area of focus
Goodwill impairment
We focused on this area because the determination of whether or not an impairment charge for goodwill was necessary involved significant judgements in relation to anticipated future milestones and growth assumptions in Bespak's injectables business.
 We evaluated management's future cash flow forecasts for the injectables cash-generating unit within Bespak, including the process by which they were drawn up, and tested the underlying calculations. We challenged:
  • management's expectation of successful launch of injectable devices by assessing qualitative information in the public arena regarding the development and FDA approval of such devices;
  • management's key assumptions for future revenues generated on successful launch by comparing to actual results and the historical accuracy of management's forecasts; and
  • the discount rate by assessing the cost of capital for the Company.
We also performed a sensitivity analysis around the key assumptions. Having ascertained the extent of change in those assumptions that either individually or collectively would be required for the goodwill to be impaired, we considered the likelihood of such a movement in those key assumptions arising.
Contingent consideration on disposal of King Systems in the prior year
We focused on this area because the determination of the fair value of contingent consideration is based on uncertain future milestones and events and is inherently judgemental.
 We evaluated the fair value determined by management, including the process by which it was calculated, and tested the underlying calculations. We challenged management's assumptions of future sales of the King Vision product following its launch, and the anticipated timing of collection by assessing the performance of King Systems subsequent to disposal.
We also performed a sensitivity analysis around the key assumption over the timing and amount of contingent consideration expected to be received. Having ascertained the extent of change in this assumption that would be required to materially affect the determined fair value, we considered the likelihood of such a movement in this key assumption arising.
Risk of fraud in revenue recognition
ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition because of the pressure management may feel to achieve the planned results.
We focused on the timing of revenue recognition and its presentation in the income statement.
 As the foundation of the evidence we obtained regarding the revenue recognised during the year, we evaluated the relevant IT systems and tested the internal controls over the completeness, accuracy, timing and presentation of revenue recognised in the financial statements. We traced a sample of sales prices per accounting records to signed customer contracts. We also tested manual journal entries posted to revenue accounts to identify unusual or irregular items and we interrogated the accounting system to match revenue transactions with cash receipts to obtain assurance over the occurrence and timing of revenue transactions.
Risk of management override of internal controls
ISAs (UK & Ireland) require that we consider this.
 We assessed the overall control environment of the Group, including the arrangements for staff to "whistle-blow" inappropriate actions, and interviewed Group senior management. We examined the significant accounting estimates and judgements relevant to the financial statements for evidence of bias by the directors that may represent a risk of material misstatement due to fraud. We also tested manual journal entries and considered significant judgements made in respect of major contracts.

Going Concern

Under the Listing Rules we are required to review the directors' statement in relation to going concern. We have nothing to report having performed our review.

As noted in the directors' statement, the directors have concluded that it is appropriate to prepare the Group's and Parent Company's financial statements using the going concern basis of accounting. The going concern basis presumes that the Group and Parent Company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors' use of the going concern basis is appropriate.

However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group's and the Parent Company's ability to continue as a going concern.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

  • the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
  • the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

Other matters on which we are required to report by exception

Adequacy of information and explanations received

Under the Companies Act 2006 we are required to report to you if, in our opinion:

  • we have not received all the information and explanations we require for our audit; or
  • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
  • the Parent Company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Directors' remuneration

Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors' remuneration specified by law have not been made. We have no exceptions to report arising from this responsibility.

Corporate Governance Statement

Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company's compliance with nine provisions of the UK Corporate Governance Code ('the Code'). We have nothing to report having performed our review.

In the Statement of Directors' Responsibilities of the Annual Report, as required by the Code Provision C.1.1, the directors state that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group's performance, business model and strategy. In the Corporate Governance, as required by C.3.8 of the Code, the Audit Committee has set out the significant issues that it considered in relation to the financial statements, and how they were addressed. Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:

  • the statement given by the directors is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit; or
  • the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We have no exceptions to report arising from this responsibility.

Other information in the Annual Report

Under ISAs (UK & Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:

  • materially inconsistent with the information in the audited Group financial statements; or
  • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Parent Company acquired in the course of performing our audit; or
  • is otherwise misleading.

We have no exceptions to report arising from this responsibility.

Responsibilities for the financial statements and the audit

Our responsibilities and those of the directors

As explained more fully in the Statement of Directors' Responsibilities, the directors are responsible for the preparation of the Group and parent Company financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Stuart Newman (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Cambridge
16 June 2014