Independent auditor's report to the members of next plc

We have audited the Group financial statements of NEXT plc for the year ended 25 January 2014 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes 1 to 32. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the Group 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 International Standards on Auditing (ISAs) (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

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 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.

Our assessment of risks of material misstatement

We consider that the following areas present the greatest risk of material misstatement in the financial statements and consequently have had the greatest impact on our audit strategy, the allocation of resources and, the efforts of the engagement team, including the more senior members of the team;

  • The assessment of the directory debt provision;
  • The assessment of inventory provisions;
  • The assessment of underlying risk and valuation of, financial instruments; and
  • The risk of misstatement arising from management override of internal controls with regard to estimates and other provisions relevant to the retail environment.

Our application of materiality

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements on our audit and on the financial statements. For the purposes of determining whether the financial statements are free from material misstatement we define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable person, relying on the financial statements, would be changed or influenced.

We also determine a lower level of performance materiality which we use to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

When establishing our overall audit strategy, we determined a magnitude of uncorrected misstatements that we judged would be material for the financial statements as a whole. We determined materiality for the Group to be £35 million, which is approximately 5% of pre-exceptional pre-tax profit.

On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement is that performance materiality for the Group should be 50% of materiality, namely £17.5 million. Our approach is designed to have a reasonable probability of ensuring that the total of uncorrected and undetected audit differences does not exceed our materiality for the financial statements as a whole.

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.7 million, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

An overview of the scope of our audit

The Retail and Directory business operations accounting for 95% of the Group's revenue and 93% of total segment profit were subject to a full scope audit. The overseas Group purchasing division, Lipsy and Property Management contribute 5% of total segment profit and were subject to specific scope audits in areas where we assessed there was a risk of material misstatement. For the remaining components of the Group, we performed other procedures to confirm there were no significant risks of material misstatement in the Group financial statements.

In view of the nature of the main risk areas noted above, the Group audit team is supported by experts in auditing the financial instruments and their valuation.

The principal way in which we scoped our response to the risks noted above was as follows:

  • We checked management's categorisation of the debtor book based on payment in accordance with agreed terms. We challenged the reasonableness of the key assumptions in determining management's provision for future default, being the Group's assumed default rates (which represent the likelihood of eventual default for debt within each category), and expected recovery rates on such debts, in combination with evidence of historical default and recovery rates, current performance, and any observed changes in debtor profile in the current period. We checked the arithmetical accuracy of the provision based on management's assumptions and compared the underlying debtor book categorisation to the financial accounting system and the mapping of external affordability data.
  • The adequacy of the inventory provision depends on the level of stock on hand which is expected to be sold below cost plus attributable selling costs. We examined the Group's historical trading patterns of stock sold at full price, stock marked down below full price in a sale period, and the element of inventory that is passed to clearance; along with the related margins achieved for each of these sales channels. We then challenged the reasonableness of the inventory provision taking into account a combination of the evidence of these historical trading patterns and any observed changes to the current year buying cycle.
  • We determined the different types of financial instruments held by the Group and the level of risk inherent in each of the transaction types. We analysed the features of a selected sample of financial instruments by comparison to the originating contractual agreements. With our experts we challenged the reasonableness of the valuation of the selected sample where the Group's valuation was outside a reasonable tolerance of our own expectations.
  • We performed analytical procedures and journal entry testing in order to identify and test the risk of misstatement arising from management override of controls, which in addition to the risks disclosed above, focused on accruals and provisions of a judgemental nature capable of being manipulated by management. These comprised of accruals for sales returns, gift card exposure, share based payments and LTIP arrangements; along with provisions for dilapidations, onerous leases and vacant leasehold properties.

Opinion on financial statements

In our opinion the Group financial statements:

  • give a true and fair view of the state of the Group's affairs as at 25 January 2014 and of its profit for the year then ended;
  • have been properly prepared in accordance with IFRSs as adopted by the European Union; and
  • have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.

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 Group financial statements are prepared is consistent with the Group financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the ISAs (UK and 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 financial statements; or
  • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
  • is otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed.

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

  • certain disclosures of directors' remuneration specified by law are not made; or
  • we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

  • the directors' statement, in relation to going concern; and
  • the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code specified for our review.

Other matter

We have reported separately on the parent company financial statements of NEXT plc for the year ended 25 January 2014 and on the information in the Directors' Remuneration Report that is described as having been audited.

Ernst Young LLP

Nigel Meredith
Senior Statutory Auditor
for and on behalf of Ernst & Young LLP, Statutory Auditor
Birmingham
20 March 2014

Notes:

  1. The maintenance and integrity of the Next plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
  2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions