Opinions and conclusions arising from our audit

1 Our opinion on the financial statements is unmodified

We have audited the financial statements of Vesuvius plc for the year ended 31 December 2013 which comprise the Group income statement, the Group statement of comprehensive income, the Group statement of cash flows, the Group and Company balance sheets, the Group statement of changes in equity, and the related notes. In our opinion:

  • the financial statements give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2013 and of the Group's profit for the year then ended;
  • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union;
  • the parent company financial statements have been properly prepared in accordance with UK Accounting Standards; 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.

2 Our assessment of risks of material misstatement

In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows:

Recognition of a US deferred tax asset (£29.2 million):

Refer to the Audit Committee Report, accounting policy and financial disclosures.

The risk: The Group has recognised a deferred tax asset in respect of unutilised losses and other temporary differences arising in the US. In addition the Group has losses and other temporary differences for which no deferred tax asset has been recognised in these financial statements. The recognition or otherwise of a deferred tax asset in respect of these losses and other temporary differences is based on judgement in respect of the timing and quantum of expected future profits and the ability of the Group to offset any of its accumulated losses against these expected profits. This is one of the key judgemental areas on which our audit concentrated.

Our response: In this area, our audit procedures included, among others, using our own tax specialists to assist in assessing and challenging the assumptions and judgements made by the Directors. In assessing the level of deferred tax asset balances recognised in the Group balance sheet we compared the assumptions used in respect of future taxable profit forecasts in respect of the relevant components to the Group's long-term forecasts. We considered, amongst other things, historical levels of US tax profits, the historical accuracy of forecasts, and the growth forecasts used by the Group. This included critically assessing the assumptions and judgements made by the Directors in those growth forecasts, by using our knowledge of the Group and the industry in which it operates and by comparing certain assumptions to externally derived data. We also assessed the adequacy of the Group's disclosures setting out the basis of the deferred tax balance and the level of estimation involved.

Current tax provisions (£45.0 million):

Refer to the Audit Committee Report, accounting policy and financial disclosures.

The risk: Provisions for tax contingencies require the Directors to make judgements and estimates in relation to income tax issues and exposures. This is one of the key judgemental areas that our audit concentrated on due to the Group operating in a number of tax jurisdictions, the complexities of transfer pricing and other international tax legislation, and the time taken for tax matters to be agreed with the tax authorities.

Our response: In this area our audit procedures included, among others, the use of our own global tax specialists to assess the Group's tax positions, and its correspondence with the relevant tax authorities to analyse and challenge the assumptions used to determine tax provisions based on our knowledge and experience of the application of international and local legislation by the relevant authorities and courts. We also considered the adequacy of the Group's disclosures in respect of tax and uncertain tax positions.

Provisions (£56.1 million):

Refer to the Audit Committee Report, Note 3  and  Note 35, accounting policy and financial disclosures.

The risk: Provisions are measured at the Directors' best estimate of the Group's ultimate liability to settle an obligation arising from a past event. In providing for known or probable costs, resulting from indirect tax, legal, regulatory, or environmental requirements, the Directors use their judgement, experience, and where appropriate receive external advice, in order to make provisions in the financial statements for such matters. This is one of the key areas on which our audit concentrated as a result of the impact that a material legal, regulatory, or environmental claim might have on the Group's financial position and result for the year.

Our response: In this area our audit procedures included, among others; obtaining an understanding from the Directors of the basis for their best estimates, challenging the basis used with reference to the latest available corroborative information and in light of our understanding of the business gained throughout the audit process, and obtaining third party confirmations. In addition we met with the Group's in-house legal counsel to discuss the nature of ongoing claims, and obtained formal confirmations from the Group's external legal advisers for all significant litigation. We also assessed whether the Group's disclosures about provisions, contingent liabilities, and the movements in the year were appropriate.

3 Our application of materiality and an overview of the scope of our audit

The materiality for the Group financial statements as a whole was set at £7.0 million. This has been determined with reference to a benchmark of Group profit before taxation (of which it represents 6.7%), which we consider to be one of the principal considerations for members of the Company in assessing the financial performance of the Group.

We agreed with the Audit Committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £0.4 million, in addition to other audit misstatements below that threshold which we believe warranted reporting on qualitative grounds.

Audits for Group reporting purposes were performed by component auditors in the following countries: Germany, the UK, Switzerland, India, China, Mexico, Poland, Belgium, and Italy. In addition, specified audit procedures were performed for Group reporting purposes by component auditors in the US and Brazil. Combined, these audits and specified audit procedures covered 72% of the Group's revenue, 74% of the Group's profit before tax, and 83% of the Group's total assets. The segmental disclosure in Note 5 sets out the individual significance of specific geographical locations.

The audits and procedures undertaken for Group reporting purposes at the key reporting components of the Group were all performed to materiality levels set by, or agreed with, the Group audit team. These local materiality levels were set individually for each component and ranged from £0.1 million to £6.7 million.

Detailed instructions were sent to all the auditors in these locations. These instructions covered the significant areas that should be covered by the component audit teams (which included the relevant risks of material misstatement detailed above) and set out the information required to be reported back to the Group audit team. The Group audit team visited key reporting components in the following countries: Brazil, China, the UK, the US, Germany, and Mexico. Telephone meetings were also held with the auditors at these locations and all other key reporting component locations that were not visited.

For those components for which audits or specified audit procedures for Group reporting purposes are not performed, the Group audit team communicates with the component auditors regularly throughout the year particularly in relation to any control findings that may impact on the overall strategy for the Group audit. Local statutory audits are performed at the majority of these components but generally these are to be completed after the date of this report.

4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified

In our opinion:

  • the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
  • 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.

5 We have nothing to report in respect of the matters on which we are required to report by exception

Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

  • we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors' statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy; or
  • the Audit Committee Report does not appropriately address matters communicated by us to the Audit Committee.

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

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; or
  • 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, set out on, 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 2010 UK Corporate Governance Code specified for our review.

We have nothing to report in respect of the above responsibilities.

Scope of report and responsibilities

As explained more fully in the Directors' Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the Company's members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.

Paul Korolkiewicz (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London, E14 5GL
4 March 2014