Georgia Healthcare Group PLC Annual Report 2018 Financial Statements Independent Auditor’s Report to the Members of Georgia Healthcare Group plc Overview of our audit approach Key audit matters • Risk of fraud in recognition of healthcare, pharma and medical insurance revenue. • Valuation of hospitals and clinics and land and office buildings. • Goodwill impairment. Audit scope • We performed an audit of the complete financial information of 3 components and audit procedures on specific balances for a further 1 component. • The components where we performed full or specific audit procedures accounted for 93% of profit before tax and non-recurring items, 96% of revenue and 96% of total assets. Materiality • We used a group materiality of GEL 2.8m which represents 5% of profit before tax and non-recurring items. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Risk Our response to the risk Key observations communicated to the Audit Committee Risk of fraud in recognition of healthcare, Our procedures were performed by component Based on the procedures performed, we pharma and medical insurance revenue teams and the primary audit team in all full and did not identify any evidence of material (GEL 846m, 2017: GEL 746m) specific scope components. misstatement in the revenue recognised • We obtained an understanding of the different in the year. Refer to the Audit Committee Report (page 77); revenue streams and revenue models across the Accounting policies (pages 135 and 136) and Notes Group, namely healthcare, pharmaceutical and In particular, the Group properly applied IFRS 26 and 27 of the Consolidated Financial Statements insurance businesses; 15 for the year ended 31 December 2018. (pages 159 and 160). • We evaluated the relevant controls in the revenue cycle by assessing the design and We are satisfied that the disclosures in the Investors’ and analysts’ expectations of the Company testing the operational effectiveness of key financial statements are in accordance with could result in pressure on management to overstate controls across all revenue streams subject the IFRS. revenue growth. There is a risk that management to our designated fraud risk; may override controls through manipulating revenue •We inspected sales contracts and terms and and hence increasing profit. conditions of a sample of new contracts to confirm that revenue was recognised in a manner In 2017 the Group early adopted IFRS15 –Revenue consistent with IFRS 15; from contracts with customers. There were no • We performed test of details on a sample of material misstatements identified in the prior year manual and topside adjustments to revenue, audit, however application of IFRS15 remains a high including those adjustments made for long term risk area due to the complexity of the standard and treatments in the healthcare business by obtaining relatively little experience in its application. supporting evidence for the measurement of revenue and the appropriateness of the period in Specific considerations include: which transactions were recorded; Manual adjustments in respect of long-term • On a sample basis we audited the completeness • and appropriateness of the calculations related to treatments and revenue cut-off in GHG’s corrections and rebates from the government, by hospital business. benchmarking the historical average of corrections • Fictitious retail sales in the pharma business. and rebates to the current year adjustment; • Revenue cut-off in the wholesale pharma We obtained an understanding of the process business. • followed by management to identify potentially We also considered the cut-off risk in the impaired receivable balances in the healthcare recognition of gross insurance premiums for business and inspected a sample of invoices not the insurance business. approved by the Government as at 31 December 2018 and tested subsequent settlement; There is a risk that management may override • We performed cut-off testing procedures for a control to intentionally misstate revenue transactions, sample of transactions either side of year end; either through recording revenue in the incorrect • We selected key items and a representative sample period in the wholesale pharmaceutical, medical and tested recorded transactions by agreeing insurance and hospitals business or by recording revenue details to supporting documentation, and fictitious transactions in the revenue from retail for the revenue from the pharmaceutical business pharmaceutical business. we ran correlation analysis of cash and revenue by using data analytics; The risk has remained consistent with the prior year. •For insurance premiums, we recalculated the unearned premium reserve and related income statement accounts; • We performed analytical procedures by comparing monthly and yearly trends to understand the movements and identify unusual trends in revenue recognition; • We performed journal entries testing based on predetermined criteria to identify and test the risk of misstatement arising from management override of controls; and • We considered whether the presentation and disclosure of revenue in the financial statements is in accordance with IFRS 15 for healthcare and pharmaceutical revenue, and insurance revenue under IFRS 4. 114