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Financials
Independent auditor's report

for the year ended 31 March 2018

To the board of directors and shareholders of Telkom SA SOC Limited

Report on the audit of the consolidated financial statements

Opinion

We have audited the consolidated and separate financial statements of Telkom SA SOC Ltd and its subsidiaries (the group) set out on pages 14 to 100, which comprise the consolidated and separate statement of financial position as at 31 March 2018, and the consolidated and separate statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information.

In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position as at 31 March 2018, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) and the requirements of the Companies Act of South Africa.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the consolidated and separate financial statements section of our report. We are independent of the group in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code) and the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) and other independence requirements applicable to performing the audit of the group. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code, IESBA Code, and in accordance with other ethical requirements applicable to performing the audit of the group. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

Key audit matter     How our audit addressed the matter

Joint audit arrangement dissolved prior to imminent sign-off (Consolidated and separate financial statements)

As disclosed in note 42 to the financial statements, the board notified shareholders on 7 May 2018 of the termination of the appointment of Nkonki Inc. as joint auditor of Telkom following the firm’s filing for voluntary liquidation.

As party to a joint audit arrangement, we would normally jointly issue an auditors’ report on the annual financial statements, thereby sharing responsibility for the audit. In a joint audit relationship, each of the signing firms is fully responsible for the professional quality of the audit and the resultant audit opinion.

In order to support the audit opinion, joint auditors normally design an audit strategy that ensures a reasonable balance of work between the joint auditors, including a cross review of the other joint auditor’s working papers.

The change from a joint audit arrangement to the sole sign-off of the audit opinion is a significant area of audit focus, due to the need to align our audit effort and working papers to this new circumstance. Because we are no longer able to share the completion of work with the joint auditor, we have implemented additional procedures to ensure that we have sufficient appropriate audit evidence, and that our documentation is complete, in order to support our audit opinion as sole auditor for this financial year.

   

Our audit response to the dissolution of the joint audit arrangement included, amongst other things, the following:

  • Increased oversight by the firm’s Executive Committee;
  • Increased executive involvement by assigning additional senior audit partners to the engagement to support the lead engagement partner in this endeavour;
  • Obtaining, reviewing and filing all Nkonki working papers on our documentation tool;
  • Additional detailed reviews was performed based on the status of work performed by Nkonki up to the date of the announcement by Telkom ; as well as an assessment of the adequacy and quality of the work performed to this date;
  • Additional audit procedures were performed to complete work initially allocated to Nkonki, as deemed necessary;
  • Re-performance of some test of controls and substantive testing undertaken by Nkonki, as deemed necessary;
  • Additional staff and manager resources were assigned to attend to the increased scope of the engagement;
  • Increased scope of the work performed by the Engagement Quality Reviewer in line with the requirements of ISQC1.

Revenue recognition – multiple revenue processes running on multiple legacy systems and manual adjustments

(Consolidated and separate financial statements)

Revenue recognition is a key area of audit focus, that we spend a significant amount of our audit efforts on every year.

By its nature, revenue recognition in the industry is highly complex given the complexity of the accounting standards in dealing with multiple element arrangements, the highly automated nature of the systems supporting revenue recognition and billing, the significant volumes of transactions; as well as complexities relating to differing product and service offerings which is priced dynamically.

The audit of revenue at Telkom is further complicated by the various revenue streams operating on various different legacy systems, resulting in the need for many manual journal entries to be posted in respect of deferred revenue, interface corrections, discount allocations, manual billings in the National Value Added Services environment and allocation of BCX / Enterprise revenue and interest.

Furthermore, the migration of fixed line consumer customers to a new billing system which commenced in 2017 was expedited in 2018 and was substantially concluded by year-end.

Revenue as well as the accounting policies relating thereto are disclosed in notes 2.2.5, 2.3.9 to 2.3.20 and note 4 respectively to the financial statements.

   

Our audit approach to revenue recognition is multi-faceted to respond to the different streams of revenue, processes, risks of material misstatement, legacy and new systems as well as differences in the IT systems and environments supporting these. Our audit approach included, but was not limited to, an appropriate combination of the following procedures, depending on the circumstances:

  • Obtained an understanding of the different processes and controls operating in the different revenue processes incl. IT general controls and application controls;
  • Considered whether the IT systems and environments supports the operating effectiveness of application controls or not and design our audit response accordingly;
  • Performed tests of controls on significant revenue processes and IT applications;
  • Performed substantive analytical review procedures and tests of details on revenue transactions including contract reviews on significant new contracts;
  • Performed risk based journal entry testing on manual journal entries posted to revenue. Tested reconciliations between usage data, billing systems and the general ledger;
  • Tested the allocation of revenue to separately identifiable components of multiple element arrangements;
  • Obtained confirmations from national and international operators in the interconnect environment;
  • Recalculated the deferred revenue, assessed the reasonability and completeness of estimations and assumptions used within the deferred revenue calculations and performed a comparison and sensitivity analyses with reference to global trends for Telecommunication companies;
  • Assessed the competence, capabilities and objectivity of management’s experts.

Deferred tax assessment

(Consolidated and separate financial statements)

As disclosed in notes 2.2.6 and 17 to the financial statements, the group has significant unrecognised deferred tax assets in respect of provisions, other allowances and tax losses.

The recognised deferred tax asset is determined by taking into account management’s best estimate of future taxable income calculated over the period which management believes to be the most reliable estimate for purposes of IAS 12 calculations of deferred tax assets.

We focused our audit attention on the matter because of the significant judgment and estimation involved in determining the period used as well as the forecasted future taxable income for the purpose of assessing the value of the deferred tax asset recognised. We focused specifically on the following areas:

  • Adjustments to future taxable profits based on various scenarios relating to the possible timing and extent of the “in-principle” approved divisionalisation of subsidiaries that comprise the group.
  • There is a higher degree of uncertainty associated to these adjustments as the commercial terms of the envisaged transactions between Telkom and the subsidiaries have not been concluded and are subject to further deliberations between stakeholders, including consideration of relevant Regulations and Legislation.
  • Adjustments to forecasted future taxable profits of the company relating to the reconsideration of inter-company charges between Telkom and BCX as approved by the board.

There is a higher degree of uncertainty associated to these adjustments as the commercial terms between Telkom and BCX have not been concluded and are subject to further deliberations between stakeholders.

   

Our audit procedures involved, amongst others, the following:

  • We evaluated management’s calculation of the deferred tax balance, the future taxable income as well as the period used in the calculation in terms of IFRS. Taking into account the group’s tax position, we evaluated the timing of forecasted taxable profits per the board approved 3 year business plans using our knowledge and experience of the industry and of the application of relevant tax legislation.
  • We engaged with various executives responsible for the financial, tax, legal and operational considerations on which the assumptions were based in order to assess the reasonability thereof in terms of our knowledge and understanding of the business and evidence provided by management in support of the estimates.
  • We involved our tax specialists to assess the reasonability of the tax adjustments processed to the forecast taxable income for temporary and permanent differences incorporated into the taxable profits calculation taking into account their experience reviewing Telkom’s tax computations.
  • We assessed the deferred tax asset recognised for impairment taking into account the future taxable profit calculation and actual utilisation of the deferred tax asset against the forecasts.
  • We assessed whether the evidence obtained in performing our procedures resulted in convincing evidence in support of the valuation of the deferred tax asset as required by IAS 12.
Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report as well as the directors' report, the audit committee's report and the company secretary's certificate as required by the Companies Act of South Africa. The other information does not include the consolidated financial statements and our auditor's report thereon.

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements

or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed,

we conclude that there is a material misstatement of this other information; we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the directors for the consolidated financial statements

The directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the consolidated and separate financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
  • Conclude on the appropriateness of the directors' use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements.

We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirements

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that:

  • Ernst & Young Inc. has been the appointed auditor of Telkom SA SOC Limited for 20 years, since 1998.

Ernst & Young Inc.

Director - Delanie Lamprecht

Registered Auditor

Chartered Accountant (SA)

25 May 2018