KENANGA ANNUAL REPORT 2017

Key audit matters (Cont’d.) Risk Area and Rationale Our Response Impairment assessment of loans, advances and financing The impairment allowances of loans, advances and financing are estimated by management through the application of judgment and use of highly subjective assumptions. Due to the significance of loans, advances and financing and the related estimation uncertainty, this is a key area of focus in our audit. Larger, individually significant loans, advances and financing, mainly in the Bank and a money lending subsidiary, are assessed on an individual basis. Collective assessments are made on portfolio basis for other loans, advances and financing, which are homogenous in nature. Relevant details have been disclosed in Note 3.4(g)(iii) and (iv) (Summary of significant accounting policies), Note 4(iii) (Significant accounting estimates and judgments), Note 10 (Loans, advances and financing) and Note 50(a) (Financial risk management – Credit risk) to the financial statements. Our audit procedures included assessment of system-based and manual controls over the timely recognition, recording and monitoring of impaired loans, advances and financing; evaluating the methodologies, inputs and assumptions used by the Group and the Bank in calculating collective impairment allowance; assessing the adequacy of individual impairment allowance for individually assessed loans, advances and financing; and assessing if sufficient disclosures have been made in the financial statements. In the current year, we continue to pay particular attention to the loans, advances and financing which are unsecured, partially secured or are subject to potential collateral shortfalls. For individually assessed loans, we selected a sample of loans and tested the estimation of the future expected cash flows from customers and where applicable, realisation of collaterals held. We also examined selected individually significant exposures which had not been identified by management as potentially impaired and formed our own judgment as to whether that was appropriate. For the collective impairment model used by the Group and the Bank, we tested a sample of data used in the model and tested the calculations within the model. We assessed whether the modelling assumptions used considered all relevant risks and are reasonable in light of historical experience and circumstances of the customers. Fair value measurement of financial instruments When fair values of financial assets and financial liabilities recorded on the statements of financial position cannot be derived from active markets, they are determined by the Group using a variety of valuation techniques that include the use of financial models. The inputs to these models are taken from observable market where possible, but where this is not feasible, judgment is required to establish fair values. Judgments include considerations of liquidity and model inputs such as volatility for longer-dated derivatives and discount rates, prepayment rates and default rate assumptions for asset-backed securities. Relevant details have been disclosed in Note 3.4(f)(iv) (Summary of significant accounting policies), Note 4(ii) (Significant accounting estimates and judgments) and Note 51 (Fair value of financial instruments) to the financial statements. Our audit procedures included reviewing and evaluating management’s rationale for selecting and using the valuation models to assess if the use of such models was appropriate. Our audit procedures also included, among others, testing management’s controls related to the development and calibration of the model and confirming that management had determined it was not necessary to make any adjustments to the output of the model to reflect the assumptions that marketplace participants would use in similar circumstances. Annual Report 2017 83 independent auditors’ report to the Members of Kenanga Investment Bank Berhad (Incorporated in Malaysia)