Independent Auditor’s Report on the Consolidated and Separate Annual Financial Statements

To the shareholders of Clover Industries Limited

Report on the Audit of the Consolidated and Separate Annual Financial Statements

Opinion

We have audited the consolidated and separate financial statements of Clover Industries Limited and its subsidiaries (the Group), set out here, which comprise the consolidated and separate statements of financial position as at 30 June 2017, and the consolidated and separate statements of comprehensive income, consolidated and separate statements of changes in equity and consolidated and separate statements of cash flows for the year then ended, and notes to the consolidated and separate financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of the Group as at 30 June 2017, 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 (IFRS) and the requirements of the Companies Act, 2008 and JSE Listing Requirements.

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 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) that is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Part A and B) together with other ethical requirements that are relevant to our audit of the consolidated financial statements in South Africa, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IRBA Code. 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.

Key audit matter	How this matter was addressed in our audit
Rebates and Credit Note Provisions
As described in the Accounting Policies in note 2.4.1 to the Annual Financial Statements, the Group raises deductions from revenue in the form of trade terms (rebates) and credit notes. Rebates from trade term agreements are accounted for at year end based on the estimated outcome for sales to date for agreements which only conclude on a date after year end. Trade term agreements are typically concluded with large customers at a product level, and include a fixed component, a variable component as well as a growth hurdle component. The various types of trade term agreements differ in their targets, percentages applied, and product categories and relate to different periods, for each customer. In addition, there is judgment as to whether the growth incentives will be reached for each agreement as sales patterns differ for each customer and when taking into account that the growth incentives are typically negotiated over a calendar year, which doesn’t coincide with the financial reporting period. The determination of the rebates accounted for at year end requires the disaggregation of large volumes of information at a product level to consider the evidence for the assumptions referred to above. This requires a high degree of audit effort due to the large volume of data, high number of agreements at a product level for various customers and the fact that the agreements are not co-terminus with the company’s year end In addition to rebates, the Group has a large volume of credit notes which arise from short deliveries, product returns and price variances. Significant audit effort is required to assess the appropriateness of the provision for credit notes based on product mix analysis and historical trends taking into the short/limited shelf life of many of the Group’s perishable products.	Our audit responses included testing the effectiveness of the Group’s controls pertaining to the accuracy and completeness of rebates and authorisation of credit notes issued to customers. With respect to rebates recognised as an expense during the year, as well as the rebate provision: On a sample basis we inspected the rebate terms in the agreement and agreed them to inputs used in the calculation; On a sample basis we vouched payments and deductions to supporting documentation; We agreed the sales volumes recorded in the stand-alone trade terms system to the sales data warehouse; We agreed the sales volumes in the sales data warehouse to the sales volumes recorded in the general ledger We independently recalculated the rebate provision as at year-end and compared to the recorded provision; On a sample basis we selected material manual journals, and vouched it to supporting documentation. With respect to the credit note provision: We tested the arithmetical accuracy of the calculation and agreed the amount calculated to the amount recognised in the accounting records; We assessed management’s estimates to accrue for credit notes at year end; We compared the assumptions to historical credit notes issued and to current trends; and We assessed sales transactions taking place at and before year end date as well as credit notes issued after the year end date to assess whether revenue was recognised in the correct period.
Deferred tax assets on assessed losses
As disclosed in note 2.4.2 and note 15, the Group has recognised deferred tax assets related to estimated and assessed losses related to certain statutory entities. In order to recognise the deferred tax assets, management has made certain judgements and assumptions in relation to the future taxable income of the entities, including appropriate commercial and tactical plans, thereby concluding on the recoverability of those individual assets. The assumptions primarily relate to various approved strategies in relation to optimising current product range / mix, the introduction of new products, strategic pricing and marketing support initiatives, the reformulation of recipes, as well as efficiencies arising from the historical investment in supply chain assets and distribution network, Significant audit attention is required to assess and vouch how the assumptions adjust the historic cash flows to determine the estimate future cash flows. We also consider the degree of uncertainty of those changes and the entity’s ability to execute on those plans given the challenging macro-economic environment.	We reviewed and challenged management’s assumptions used in projecting future taxable profits, consistency of these forecasts with the budgets and the likelihood of generating future taxable profits to support the recognition of deferred tax assets. We compared key inputs used within the forecasts to externally available data such as economic forecasts and the historical data and performance. In addition we assessed the sensitivity of the outcomes to reasonably possible changes in assumptions. Lastly, we assessed whether the Group’s disclosures of the application of judgement in estimating recognised and unrecognised deferred tax asset balances appropriately reflect the Group’s deferred tax position.

Other Information

The group’s directors are responsible for the other information. The other information comprises the information included in Group’s Integrated Annual Report for the year ended 30 June 2017 that includes the Directors’ Report, the Audit Committee Report and the Company Secretary’s Certificate as required by the Companies Act, but does not include the consolidated and separate annual 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 accompanying 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 and Separate Financial Statements

The company directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with IFRSs and the requirements of the Companies Act, 2008, 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 and Company’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 and Company or to cease operations, or have no realistic alternative but to do so.

The directors are responsible for overseeing the Group’s financial reporting process.

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 and separate 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 and separate 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 and Company’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 and separate 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 or Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate 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 and separate 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 to the directors, we determine those matters that were of most significance in the audit of the consolidated and separate 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 04 December 2015, we report that Ernst & Young Inc. has been the auditor of Clover Industries Limited for 23 years.

Ernst & Young Inc.

Director – Derek Engelbrecht

Registered Auditor

Chartered Accountant (SA)

11 September 2017

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Annual financial statements