KENANGA ANNUAL REPORT 2018

102 KENANGA INVESTMENT BANK BERHAD Key audit matters (cont’d.) Risk area and rationale Our response Expected credit losses of loans, advances and financing and investments not carried at fair value through profit or loss (cont’d.) With respect to individually assessed ECL which are mainly in relation to the impaired assets in Stage 3, we reviewed and tested a sample of loans, advances and financing and investments to evaluate the timely identification by the Group and the Bank of exposures with significant deterioration in credit quality or which have been impaired. For cases where impairment has been identified, we assessed the Group’s and the Bank’s assumptions on the expected future cash flows, including the value of realisable collaterals based on available market information and the multiple scenarios considered. We also challenged the assumptions and compared estimates to external evidence where available. We also assessed whether the financial statement disclosures are adequate and appropriately reflect the Group’s and the Bank’s exposures to credit risk. 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. Refer to summary of significant accounting policies in Note 3.4(j), significant accounting judgements, estimates and assumptions in Note 4(ii) and the disclosures of fair value of financial instruments in Note 51 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. INDEPENDENT AUDITORS’ REPORT to the Members of Kenanga Investment Bank Berhad (Incorporated in Malaysia)