Refer to page 78 (Audit Committee report).

The Group is subject to a number of laws and regulations. These include, but are not limited to, anti-bribery, anti-money laundering, sanctions checking and those relevant to publicly traded companies.

Failure to comply with any of these applicable laws and regulations could have a material financial and reputational impact on the business.

The Directors reviewed their policies in these areas during the year and did not record any material instances of non-compliance.

Our audit procedures in respect of this area included:

Obtaining an understanding of the relevant legal and regulatory framework within which the Group operates and assessing the design and operation of its key controls over this framework.

We discussed the applicable policies and procedures with divisional and group management, including internal legal counsel. We reviewed Board papers, and internal audit reports for any recorded instances of potential non-compliance, and maintained a high level of vigilance when carrying out our other audit procedures for indications of noncompliance.

We reviewed the Group’s documentation and correspondence with respect to relevant legal matters. We had discussions with the Group’s internal and external legal advisors in respect of these matters.

Refer to page 78 (Audit Committee report), page 116 (accounting policy) and page 128 (financial disclosures).

The Group holds provisions in respect of claims and construction related liabilities that have arisen, or that prior claims experience indicates may arise, subsequent to the completion of certain developments, as well as in relation to other matters of litigation including legal disputes.

The determination and valuation of provisions is judgmental by its nature and there is a risk that the estimate is incorrect and the provision is materially misstated.

Our audit procedures in respect of this area included:

Enquiring of Group Directors and divisional management, and inspecting board minutes for actual and potential claims arising in the year, and challenging whether provisions are required for these claims.

For all significant known issues and claims provided for we inspected the calculation of the provision held and compared this to third party evidence, where available.

For claims that past events indicated may arise, we evaluated settled and potential issues and considered any differences in the development portfolio then and now, such as increasing complexity of construction, as evidence for the calculation of the provision.

In respect of open matters of litigation, we had discussions with the Group’s internal and external legal advisors and reviewed correspondence in respect of these matters.

We assessed each provision against the requirements of the relevant accounting standards and assessed whether the Group’s disclosures present the potential liabilities of the Group in accordance with accounting standards.

Refer to page 78 (Audit Committee report) and page 115 (accounting policy).

It is the Group’s policy to recognize 100% of revenue on property units when contracts are exchanged and the building work is physically complete, being the point at which the Group is satisfied it has discharged its obligations to the buyer.

Contract exchange, including the payment of a deposit, may have occurred sometime in the past. However, the legal completion of the sale, being the point at which the balance of the sale is paid for and title transfers, remains dependent on the receipt of final payment. The recognition of revenue is generally before legal completion, and as such is potentially more subjective than recognizing at this latter point.

The risk is that the unit is not physically complete or that the buyer is unable to complete the purchase, as should either of these be the case the revenue should not be recognized.

The group also recognized revenue and resultant profit on the disposal of a portfolio of ground rents in the period. The risk pertaining to the sale of ground rents is whether the risks and rewards of ownership of the assets have transferred to the purchaser at the balance sheet date and that the transaction is presented appropriately in the financial statements.

Our audit procedures in respect of this area included:
Testing controls over property sales including:

• documentation evidencing internal and third party physical inspection and confirmation of build complete status; and
• customer background checks including checks of availability of funds.

For a sample of property sales in the year, we inspected the paperwork confirming legal completion.

For a sample of sales recorded close to the year end where the final payment was not yet received, we performed the following tests:

• performed site visits to verify build completion status;

• inspected the internal sign-off sheets to check that sales recorded in the year had gone through the Group’s approval process for sale of properties;

• after the year end, and up to the date of signing the audit report, we confirmed whether final payments from buyers had been made and appeared as receipts in the bank statements. Where significant amounts were still outstanding we considered other information, such as correspondence agreeing subsequent payment and reasons for this, or reasons for known rescissions, in evaluating the recoverability of these amounts and appropriateness of related revenue recognition.

We also performed a physical inspection on a sample of properties for which the sale had not been recognized to check that these did not meet this criterion for revenue recognition.

We reviewed the contract for the sale of ground rent assets in the period. We considered the treatment in conjunction with the revenue recognition principles of the group’s accounting policy to ascertain if revenue and profit is appropriately recognized in the correct accounting period.

In particular we considered the transfer of risks and rewards made under the agreement and timing of these. We have recalculated the profit on disposal recorded for the transaction, and verified revenue recorded to the sale agreement.

We have also considered the adequacy of the Group’s disclosures in respect of the judgements taken in recognizing revenue for property units prior to legal completion and the adequacy of the disclosure of the Group’s accounting policy with regards sales of ground rent assets, and the disclosure of the specific transaction undertaken in the period.

Refer to page 78 (Audit Committee report), pages 115 to 117 (accounting policy) and page 127 (financial disclosures).

The Group recognizes profit on each sale by reference to the overall site margin, which is the forecast profit percentage for a site that may comprise multiple phases and can last a number of years. The recognition of profit is therefore dependent on the Group’s estimate of future selling prices and builds costs, which form the basis of their forecasts, including an appropriate allowance for risk.

Future selling prices are dependent on market conditions, which can be difficult to predict and be influenced by broader political and economic factors.

Future build costs are subject to a number of variables including the accuracy of designs, market conditions in respect of materials and sub-contractor cost and construction issues.

Inventory represents the costs of land, materials, design and related production and site costs to date. It is held at the lower of cost and net realizable value, the latter also being based on the forecast for the site. As such errors in these forecasts can impact the assessment over the carrying value of inventories and gross profit.

There is also a risk that costs are inappropriately capitalized within inventories or that the allocation of costs that relate to the whole site, such as land and infrastructure, is inappropriate across development phases, resulting in a material misstatement of inventory or gross profit.

Our audit procedures in respect of this area included:

Testing the Group’s controls by checking approvals over reviewing and updating selling price and cost forecasts, authorizing and recording of costs.

We inspected the site forecasts on a sample basis and challenged the assumptions for future costs and sales.

We corroborated a sample of forecast costs back to supplier agreements or tenders. We also consider, based on the risks highlighted by build cost review meetings and wider industry cost indices, the appropriateness of allowances made for cost increases and for risks inherent in longer term developments.

We corroborated forecast sales prices against recent prices achieved in the relevant local market, and considered factors that may influence the achievable price on future sales.

We compared the margin recognized in the year on any units sold to the forecast site margin over the life of the development.

We inspected the minutes and attended a selection of management’s build cost review meetings. At these meetings management review actual costs and revenues against detailed site budgets. Estimates of future costs and selling prices in the forecasts are challenged by management including reference to tendered works packages, actual costs incurred and forward sales reservation prices.  Our inspection of the minutes and attendance at a selection of meetings included assessing whether the appropriate individuals attended the meetings and that the valuations and costs to complete forecasts for all developments were discussed, challenged and the valuations updated as appropriate.

We agreed a sample of additions in the inventory balance to invoice and/or payment, including checking that they were allocated to the appropriate site and development phase and met the definition of inventory costs.

For all new land acquisitions we inspected purchase contracts to understand the terms and any deferred or contingent payments. We re-performed the calculation of such amounts to check the amounts recorded. For a sample of both pre-development and active sites we evaluated the reliance on planning and other third party actions to achieve the forecast and considered the impact on carrying values.

We evaluated the sensitivity of the forecast margin to a change in sales prices and costs and considered whether this indicated a risk of impairment of the inventory balance.

We considered the adequacy of the Group’s disclosures over inventory and the degree of judgement and estimation involved in arriving at the forecast, resultant profit and carrying value of inventory.

Refer to page 78 (Audit Committee report), page 117 (accounting policy) and pages 120 and 121 (financial disclosures).

Share-based payments is a complex accounting area including assumptions utilized in the fair value calculations and judgements regarding accounting for modifications. There is a risk in the financial statements that amounts are incorrectly recognized and/or inappropriately disclosed.

The Group has made changes to share-based long term incentive plan awards which vest in September 2016 and in future periods.

This requires further complex accounting considerations regarding classification and treatment of modifications which could result in a material impact to the Income Statement.

Our audit procedures in respect of this area included:

We made inquiries of the directors to understand the share-based payment schemes in place and the changes made to the awards.

We have also inspected communications made to scheme members regarding these changes, and evidence of shareholder approval.

We considered whether changes to the schemes met the criteria to be treated as a modification to the scheme and whether the resulting accounting treatment was appropriate.

For equity-settled options we recalculated the estimated charge which reflected the best estimate of the number of options expected to vest.

For cash-settled schemes we inspected the vesting price and recalculated the amounts to be recognized in the financial statements.

For all schemes, we verified the inputs to the calculations by reference to, where appropriate, external data.

We considered the adequacy of the Group’s disclosures in respect of the treatment of share-based payments in the financial statements, including the judgement over equity or cash settlement, and over the disclosure of this choice in its accounting policies.

The goodwill and David Wilson Homes brand intangible asset arose upon the acquisition of Wilson Bowden (see note 4.2).

The Group’s assessment of impairment of goodwill and intangible assets is a judgmental process which requires estimates concerning the forecast future cash flows associated with the goodwill and brand assets held, the discount rates and the growth rate of revenue and costs to be applied in determining the value in use.

As described in the previous significant risk, the outcome of the EU referendum has resulted in greater political and economic uncertainty which may impact selling prices, sales rates and build costs, especially in the longer term.

There were no impairments in the current year (2015: £nil).

Our work involved the following:

• We have assessed the design and implementation of the Group’s controls relating to Management’s impairment review of goodwill and intangible assets.

• We have tested the accuracy of the underlying model to assess whether the processes are applied to the correct input data and the outputs are mapped accurately.

• We challenged each of the key assumptions employed in the annual goodwill impairment test. This included reference to our internal valuation specialists’ benchmarking of the weighted average cost of capital rate (‘WACC’) employed as the discount rate employed, including its methodology and constituent inputs, comparison to independent market forecasts of revenue and cost growth in the housebuilding sector and an assessment of the Group’s historic forecasting accuracy.

• We have tested Management’s sensitivity analysis in relation to the key inputs to the goodwill impairment test model, as well as performing our own sensitivity analysis which included changes to volume, margin, incentives and the discount rate applied. This included consideration of the outcome of the EU referendum.

• We have reviewed the appropriateness of the disclosures provided in accordance with IAS 36 ‘Impairment of Assets’.

The Group’s assessment of the carrying value of land and work in progress, being the lower of cost and net realizable value, is a judgemental process. This requires the estimation of selling prices, sales rates and costs to complete, determined on a site by site basis. These factors drive the gross margin for each site and hence the profit recognized at the point of sale.

The outcome of the EU referendum has resulted in greater political and economic uncertainty which may impact selling prices, sales rates and build costs, especially in the longer term. Such assumptions impact the Group’s assessments on the carrying value of land and work in progress.

The net impairment charge for the year was £8.6m (2015: £11.7m).

In addition, revenue recognition on social housing developments accounted for under IAS 11 ‘Construction Contracts’ requires additional judgement in calculating the revenue and profit to be recognised, estimating the total expected costs to complete each site and the percentage of completion at the balance sheet date.

Our work involved the following:

• We have tested the design, implementation and operating effectiveness of the Group’s controls relating to the determination of costs to complete as this is the most significant judgement applied to each site valuation. We attended a number of valuation meetings across all regions that review the carrying value of land and work in progress of individual sites. A sample of sites were also visited to enable us to verify how surveyors measure the degree of build completion of the developments against the costs incurred to date and to measure the subcontractor accruals at the year end.

• For multi-phased sites we have performed procedures to validate the appropriateness of actual and forecast margin maintained across the individual phases of the entire site.

• We have reviewed the land acquisition appraisal process and viability assessment at acquisition and tested the design, implementation and operating effectiveness of the key controls.

• We have sample tested and agreed certain costs incurred to date included within land and work in progress as well as reviewing the proportion of that expenditure recognised as a cost of sale in the year in respect of units sold.

• We have used IT interrogation tools to test the model prepared by Management to calculate the net realisable value of sites to ascertain the mechanical accuracy of the formulae being applied to the inputs to specific sites.

• We have tested each of the key assumptions within Management’s model on forecast sales values, sales rates and costs to complete which support the basis of the carrying value of land and work in progress. We have compared the Group’s assumptions to external market forecasts for sales price inflation and build cost inflation and have tested a sample of sites to current market data on sales rates, sales prices and cost assumptions. We have also tested the accuracy of costs to complete assumptions on a sample basis.

• We have performed independent sensitivity analysis, informed by external forecasts, to measure the impact on the carrying value of land and work in progress through possible deviations around the assumptions applied by management. This included consideration of the outcome of the EU referendum.

• A sample of construction contracts for social housing developments have been tested by verifying the costs incurred to date and recalculating the percentage of completion at the balance sheet date. A selection of these schemes have been reviewed with a sample of costs agreed to third party surveyors’ certificates, total sales values agreed to contracts, and the recognition formula verified to support revenue recognised.

• We have reviewed the appropriateness of the Group’s disclosures within the Annual Report and Financial Statements relating to the estimation uncertainty.

Refer to the Audit Committee Report (page 57); Accounting policies (page 97); and Note 16 of the Consolidated Financial Statements (page 112)

At 31 December 2016 the Group was carrying shared equity receivables on the balance sheet of £148.7m (2015 – £177.9m).

The carrying value of these available-for-sale financial assets is based on a number of assumptions which contain inherent uncertainties and which require management judgement.

We performed the following procedures over this risk area:

• We performed walkthroughs to understand the key processes and identify key controls;

• We critically assessed the appropriateness of key assumptions
such as:

• House price inflation
• Discount rate
• Recoverability

• We performed sensitivity analysis over key assumptions

• We tested a sample of amounts settled in the year to ensure that they had been appropriately derecognized

• We confirmed the existence of a sample of amounts recognized on the balance sheet by reference to the original loan documentation

• We assessed the integrity and arithmetical accuracy of the calculations within management’s valuation model; and

• We assessed the adequacy of the related disclosures in the Financial Statements.

Based on our audit procedures we have concluded that the available for sale asset – shared equity receivable is not materially misstated.

Refer to Accounting policies (page 97); and Note 5 of the Consolidated Financial Statements (page 102)

The Group has reported revenues for the year of £3,136.8m (2015 – £2,901.7m). There is potential for material misstatement within revenue, particularly in relation to revenue being recorded in the wrong period, due to cut off errors or management bias.

We performed the following procedures over this risk area:

• We performed walkthroughs to understand the key processes and identify key controls;

• We tested key revenue controls;

• We performed procedures using EY bespoke data analytics tools to test the appropriateness of journal entries recorded in the general ledger by correlating sales postings with cash receipts throughout the year;

• We assessed whether revenue was recorded in the correct period by testing whether a sample of house sales recorded within 2 weeks either side of the year end had legally completed; and

• We validated any material manual journals to assess for any evidence of management bias by corroborating to supporting documentation.

Based on our audit procedures we have concluded that revenue is appropriately recognised, and that there was no evidence of management bias.

Refer to the Audit Committee Report (page 57); Accounting policies (page 97); and Note 17 of the Consolidated Financial Statements (pages 112 and 113)

At 31 December 2016, the Inventory balance includes WIP of £617.2m (2015 – £517.9m) and Land of £1,946.4m (2015 – £2,046.7m).

The carrying value of Inventory is determined by reference to a number of assumptions which are subject to levels of inherent estimation.

The carrying value of Inventory is assessed by management for impairment by reference to current market inputs and assumptions.

In performing the assessment, management undertake bimonthly valuations to determine the expected outcome of each development and hence identify if any impairment is required.

The same judgements are also used to determine the margin on each development which is used to determine the profit to be recognised.

We performed the following procedures over this risk area:

• We performed walkthroughs to understand the key processes and identify key controls;

• We performed testing on the Group’s controls over the bimonthly valuation process. In testing these controls we attended a valuation meeting to observe the level of rigour management apply in challenging the assumptions within the site valuations.

We inspected a sample of valuation meeting minutes in respect of the valuation meetings held throughout the year. This included ensuring that the appropriate individuals were in attendance at the meeting together with confirming the process which is undertaken to challenge the margin, forecast costs to compete and any other factors that could impact on the margin and confirm that any updates were made to the forecasts;

• For a sample of development sites based on factors such as size and risk, we compared the estimated and actual costs and margin across the development lifecycle. We validated the key drivers for changes in costs and margin in order to assess management’s ability to forecast accurately;

• We critically assessed the appropriateness of key assumptions and the commercial viability of sites as determined by management;

• We assessed the appropriateness of any provisions included within the calculations, comparing movements to prior periods, re‑computing calculations and performing sensitivity analysis on sites where the margin was close to breakeven; and

• We assessed the adequacy of the related disclosures in the Financial Statements.

Based on our audit procedures we have concluded that the Inventory balance and profit recognised in the year are not materially misstated.