Study on Mothercare

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1.Company Background

2.History Timeline of Mothercare

3.Management Structure

a)Board of Directors structure

b)Major Shareholders

3. Audit

4.Internal control system

5.Audit risks

6. The Statement of Comprehensive of Income

i.Revenue Analysis

ii.Operating profit or loss

iii.Other exceptional items

iv.Finance Costs


6.The Statement of financial position

i.Intangible assets

ii.Property plant and equipment


iv.Trade and other receivables

v.Cash/ cash equivalent

vi.Derivative Financial Instrument



i.Cash generated from operations

ii.Investment Activities

iii.Cash inflow from Financial Activities

iv.Cash or cash equivalents

9. Audit Programme

i.Audit Strategy

9. Reference

1. Company Background

Mothercare is a retail outlet supplying products for newborns up to eight year olds and mums to be. Mothercare began by opening its first ever store in 1961 in Surrey, originally concentrating on primarily selling pushchairs, nursery furniture and maternity clothing. However due to its success its range expanded beyond this to clothing for children up to the age of eight however initially only up to the age of five. Mothercare began its distribution within the UK although they now operate internationally through their franchises within Europe, Middle East, Africa and Far East.

Mothercare holds the aim of continuing the expansion of the company into the world’s leading specialist of mother and baby products. The achievement of the Early Learning Centre (ELC) which was begun in June 2007 was one of the major stepping stones into achieving this aim. In order to achieve this aim successfully Mothercare aim to create original products under their own name and the name of the ELC. In order to achieve this growth Mothercare have created a specific strategy which is focuses on four key factors. These include;

  • Maximising the synergies from the integration of the Early Learning Centre;
  • Restructuring the combined Mothercare and Early Learning Centre property portfolio;
  • Continuing the rapid growth of Direct; and
  • Driving the international reach of the Mothercare and Early Learning Centre brands. (

Mothercare have already begun integrating ELC stores within some of its Mothercare shops with its first integration in 2008. The next stage of Mothercare’s strategy is to integrate ELC stores throughout every franchise internationally. By doing this Mothercare expects to increase its margin throughout the franchises. Eventually Mothercare aims to open new stores in countries with existing Mothercare stores and open new stores in countries who do not already have these stores.

2.History Timeline of Mothercare




Mothercare opened its first store in Surry and was founded by Selim Zilkha and Sir James Goldsmith. initially the business focused on pushchairs, nursery furniture and maternity clothing, but it expanded its range to include clothing for children up to the age of five and later up to the age of eight


Mothercare started its mail order business that is buying goods through the telephone and they get delivered by mail


Mothercare was listed on the London Stock Exchange to become a PLC


Mothercare merged with Habitat, a retailer of household furniture in the U.K, and other European countries to form Habitat Mothercare PLC


Habitat Mothercare PLC expanded internationally by franchising with selected partners abroad


Habitat Mothercare PLC merged with British Home Stores which primarily focused on clothing and household items such as bed linen and formed Stonehouse PLC


Stonehouse was rationalised in order for the PLC to be more efficient, especially by dispensing superfluous(extra) personnel or equipment


Stonehouse PLC acquired Children’s World from Boots and renamed the stores to Mothercare world stores


British Home Stores was sold to Phillip Green. Mothercare became the sole brand and the holding company name was changed from Stonehouse PLC to Mothercare PLC


Mothercare acquired Chelsea Stores Holding the parent company of the Early Learning Centre brand founded in 1974, for £85 million thus 49 million in shares and assume £36 million in debt. Mothercare also launched Gurgle, a pregnancy and parenting social network website


Mothercare PLC acquired 50 % of Gurgle


Mothercare PLC acquired Blooming Marvellous which caters for mums to be, who want fashionable maternity wear as well as offering a range of clothes and toys for children. It was founded in 1983 as a mail order company.


Major restructuring occurred resulting in Early Learning Centre stores moving into Mothercare stores near the area

3.Management Structure

a) Board of Directors structure

Alan C Parker


Simon Calver

Chief Executive Officer(Executive Director)

Matt Smith

Chief Financial Officer(Executive Director)

David Williams

Independent Non executive director

Richard Rivers

Independent Non executive director

Angela Brav

Independent Non executive director

Lee Ginsberg

Independent Non executive director

Amanda McKenzie

Independent Non executive director

Mothercare PLC’s board of directors consists of eight members. It is structured as follows, the chairman, five independent non executive directors and two executive directors. The role of the board of directors includes providing adequate information about the company at any given point. This includes preparation of final accounts showing a true and fair view of the company, which is required by law. Mothercare’s final accounts have been prepared in accordance to international accounting standards and the company’s act 2006.

b) Major Shareholders



% Held

M&G Investment Management Ltd.

as of 30 Apr 2013



FIL Investments International

as of 21 Oct 2013



DC Thomson & Co. Ltd. Pension Fund

as of 30 Apr 2013



Allianz Global Investors Europe GmbH

as of 30 Apr 2013



Capital Research & Management Co. (Global Investors)

as of 30 Apr 2013



Aberdeen Asset Managers Ltd.

as of 30 Apr 2013



Financière de l'Échiquier SA

as of 30 Apr 2013



Aberforth Partners LLP

as of 30 Apr 2013



Legal & General Investment Management Ltd.

as of 01 Oct 2013



RCM (UK) Ltd.

as of 01 Oct 2013



Total = 68.85%

A Majority of the shares is still owned by Mothercare. As shown in the table above Mothercare owns around 30% of the shares. M&G investment is the next major shareholder with a holding of 15.99%

3. Audit

The oxford dictionary and thesaurus defines audit as an examination of the accounts. According to ISA 200 (Objectives and general principles governing an audit of financial statement), the accounts are audited because it adds value to the company. Users of the accounts such as potential investors, suppliers and mostly the shareholders’ value the independent opinion of an auditor that the accounts represent a true and fair view of the company. This also means the accounts reflect the economic reality and comply with the statutory and regulatory provisions (Meylak, 2013)

4.Internal control system

As an external auditor, there must be an understanding of the client’s internal control system. It’s the board of directors’ responsibility to review and monitor the effectiveness of the company’s internal control system and the non executive directors’ challenge and scrutinise its effectiveness and integrity of the system (Mothercare annual report, 2013). The corporate governance report has been reviewed and is fairly comprehensive in the notes to the accounts. The audit report has no negative comments on the company’s corporate governance and therefore the external auditors have essentially agreed with the corporate governance report.

Although the internal control system appears to be a sound system, we have identified the following risks

5.Audit risks

Audit risk is the risk that an auditor might have an inappropriate opinion and claim that the financial statements show a true and fair view of the company when they might be missing a material item. IAS 315 states the guidelines on how an auditor should access risk in a company (Millichampet al., 2008).

Looking into Mothercare, Research has shown no previous issues

  • The company shows that its well managed
  • Auditor are yet to give a negative comment
  • The company is a well established and has been operating in the same industry for years

Taking the above factors into consideration, inherent risk in Mothercare is likely to be minimal. The other major risk is that Mothercare’s transactions are mainly cash transactions. As far as an auditor is concerned, cash transactions is equals to risk. Although cash is risk, research has shown that Mothercare’s internal control on cash appears to be highly monitored and secured, therefore the risk is also minimised.

Martyn (2010) stated that the following factors have to be considered by an auditor in exercising the judgement as to which risks are significant,

  1. Whether the risk is related to recent economic, accounting or other development and therefore requires specific attention
  2. Whether the risk is fraud related
  3. Whether the risk is due to complexity transactions
  4. Whether the risk involves significant transaction related parties
  5. Whether the risk involves significant transactions that are outside the normal course of the business for the entity or that otherwise appear to be unusual.

Analysing Mothercare’s annual financial statements would therefore show if there has been any unusual transactions that took place. High differences in last year’s figure and this year’s figure would represent risk.

6. The Statement of Comprehensive of Income

The Statement of Comprehensive Income for the year ending




% Change





Cost of Sales




Gross profit




Admin Costs




Retail Operating Profit / Loss




Loss on disposal of Property Interest




Other exceptional items




Share results from associates




Loss from operations




Net Finance cost




Total loss before tax








Loss for the Period attributable to the Shareholders of the parent Company




Source: Mothercare annual report, 2013

i. Revenue Analysis

The decrease in revenue has been further assessed for risk. The 8% decrease in revenue from £812.7m to £749.4 was due to Mothercare’s closure of some stores. Mothercare closed 56 of its loss making UK stores

ii. Operating profit or loss

Operating profit in the income statement was £12.8m (2012:£ -6.9m). This was due to the closure of some of its loss making stores. This resulted in a £8.1m decrease in administration costs and a 10% decrease in cost of sales.

iii. Other exceptional items

Other exceptional items decreased to £15.4m (2012: £69.3m). There was no goodwill impairment this year resulting to a £55m decrease in other exceptional items. There was a small increase in restructuring costs due to Mothercare incorporating Early Learning Centre into its stores.

iv. Finance Costs

Finance costs for 2013 were £3.7m (2012: £0.5m). The increase was due to bank charges and loan interest that increased from £1.3m to £3.9m.

v. Taxation

A few deferred adjustments and changes in taxation percentage charge affected the overall tax due this year from a credit £11.1m to a £0.5m charge

6. The Statement of financial position

Balance sheet

2013 £million

2012 £million

Intangible assets



Property plant and equipment



Current Assets




Trade and other receivables



Cash/cash equivalent



Current liabilities

Derivative Financial Instrument







Retain Deficit



i. Intangible assets

Mothercare plc intangible asset is computer software which is amortised on a straight-line basis over their expected useful life, normally five years. Although there is a decrease from £22.1m to £19.7m it is not a significant risk however as an auditor it is worth checking whether the asset is correctly valued and the right rate is amortised and whether the asset actually exists, since this cost can be seen as a risk to the stated profit of the year.

ii. Property plant and equipment

The company’s tangible asset has a decrease of £16.7m compared from the previous year amount of £86.3m. There is a high risk in this area due to the fact that the group operates in various locations which existence may be challenging. In this case the auditor must look at the disposals during the year, attain sales conformation through cash movements and ensure that these transactions are correctly recorded. The auditors will also need to examine the ownership evidence or leasing documentation.

iii. Inventory

The group inventory has seen an increase of £11.5m from £99.1m, which it indicates a significant audit work will need to be carried out to examine the increase compared to the year before. Millichanp and Taylor (2012) illustrates that auditors must attend stock counts, the purpose of this is not only to gather evidence but also to check the internal controls of the company, which also provides substantive evidence for the auditors.

iv. Trade and other receivables

The trade and other receivables have decreased from £74.7m to £58.1m. The auditor must gather proper and sufficient evidence which verifies the receivables assertions. He/she is only interested in confirming the totals and is not interested in any other amount other than he/she suspects fraud. A compliance test will also be undertaken to determine internal controls level within the trade and other receivables and also substantive testing.

The group has a limited exposure to credit risk as most of the business is cash generating. Other receivables includes prepaid rents and rates and VAT, however the auditors need to check the paying-in slips to verify that the monies lodged in reputable is what the directors asserted.

v. Cash/ cash equivalent

Morthercare plc cash/ cash equivalent increased dramatically by £15.8m from £1.8m. The statement of cash flow will reveal the details of this increase. The cash amount should reflect those in the statement of financial position bank account. This is clearly a high risk area of the group, as most of its turnover is dealt with cash. The auditors approved mothercare’s corporate government, which they found the groups’ internal controls to be sound.

vi. Derivative Financial Instrument

This area can be seen as the highest risk because of its complexity. However the report shows an increase of £1m from £(0.3)m 2013 to £(1.3)m 2012. The derivative financial instruments deal with credit risk, liquidity risk, commodity price risk, interest rate and the foreign currency exchange risk. The auditor needs to value these areas in accordance with the IAS 39 that deals with determining the fair values.

vii. Provisions

The amount of £(24.5)m that the group put aside for anticipating expenditure and losses has increased by £3.1m in comparison with the previous year. The annual report states that the provision made for the year are for shops closures and the onerous lease costs. The onerous lease costs have been made for vacant, trading stores and partly let for the shorter of the remaining period of the period and leases (Annual Report, p. 102). The auditor therefore needs to assess the provisions in relation to shop closure as it is a significant audit risk.


Most of Mothercare’s sales transactions are on cash basis. Cash as mentioned above is a major risk in terms of auditing. Therefore an analytical procedure on the cash flow statement to view the differences and comparison between last year and this year’s figures will be carried out as follows:

Table 4: Mothercare’s cash flow statement extract showing where significant changes in amounts occurred







Cash flow from Operating Activities




Cash flow from Investing Activity

Acquisition of Plant, Property and Equipment




Cash flows from Financial Activities

Dividend Paid



Bank loan



Net (decrease)/increase in cash or cash equivalent




Source: Mothercare annual report, 2013

i. Cash generated from operations

Cash from operation has increased by 1.2million.Although cash from operations has increased; auditors should spend more time looking at the following significant changes:

Movement in Provision according to the data has increased for £(8.0m) to £(15.8m).The policies on provisions should be considered carefully by the auditor.

Receivables have decreased to by £18.3m. Auditors should therefore look at whether the company has changed its policies on receivables collection period.

Payables have increased to by £11.8m. Auditors should therefore look at whether the company has changed its policies on payables payment period.

An Income tax of £2.5m has been paid this year compared to a £4.1m the company received last year. Auditors should also review on what caused the changes.

ii. Investment Activities

There has been a decrease from (£21.7m) to (£13m). The acquisition and disposal of plant and property has to be inspected for existence (e.g. paperwork and deeds) and also inspected physically. The company has also shown that there are restructuring some of their stores which could therefore result in the buildings being undervalued. The auditors should review on how the stores have been revalued and at what basis.

iii. Cash inflow from Financial Activities

The net cash out flow from financial activity has increased significantly from £7.1m to £25.8m.The main reasons are as follows

  • No dividends were paid to shareholders this year compared to the £11.9m paid last year
  • Bank loan increased from £20m to £30m. This will have an impact on future profits due to increased bank interest charges. Auditors should review the loan repayment contract, repayment date and interest charges.

iv. Cash or cash equivalents

The company’s cash has increased to £16.8m. This area is prone to risk and therefore the auditors should ask questions to directors as to how this has increased since the breakdown of the increased figure is not mentioned. In addition to the answers from directors, the auditors can view the cashbook and bank statements to see if it matches with the assertion.

9. Audit Programme

i. Audit Strategy

Our audit strategy of Mothercare will be risk based. This requires us to first understand our client, and the environment in which the client operate, including the internal controls. If the internal controls are week, it means we have to do more substantives testing. Getting the information will involve obtaining information through inquiry from the relevant people, observation and checking of processes and documents, and performance of analytical procedures on key financial information, Fraser S. (2014). We need to review last year’s working papers. Any prepared management accounts need to be reviewed. These reports will assist us in some areas of concern and identify areas of audit risks.

After doing the above a meeting with the senior management of the company will be arranged.

9. Reference

Fraser S (2014) Risk based Audit Approach [online ] Available from : . [Last accessed on 08/02/2014]