KENANGA ANNUAL REPORT 2019

112 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 As at 31 December 2019, the loans, advances and financing represent 31.14% and 31.79% of the total assets of the Group and of the Bank respectively, and the debt instruments carried at amortised cost and fair value through other comprehensive income represent 13.67% and 14.13% of the total assets of the Group and of the Bank respectively. The measurement of expected credit loss (“ECL”) requires the application of significant judgement and increased complexity which include the identification of on-balance sheet and off-balance sheet credit exposures with significant deterioration in credit quality, assumptions used in the ECL models (for exposures assessed individually or collectively) such as the expected future cash flows, forward looking macroeconomic factors and probability-weighted multiple scenarios. Our audit procedures included the assessment of key controls over the origination, segmentation, ongoing internal credit quality assessments, recording and monitoring of the loans, advances and financing and the investments. We assessed the processes and effectiveness of key controls over the transfer criteria (for the three stages of credit exposures under MFRS 9 in accordance with credit quality), impairment measurement methodologies, governance for development, maintenance and validation of ECL models, inputs, basis and assumptions used by the Group and the Bank in staging the credit exposures and calculating the ECL. For staging and identification of credit exposures with significant deterioration in credit quality, we assessed and tested the reasonableness of the transfer criteria applied by the Group and the Bank for different types of credit exposures. We evaluated if the transfer criteria are consistent with the Group’s and the Bank’s credit risk management practices. INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF KENANGA INVESTMENT BANK BERHAD (INCORPORATED IN MALAYSIA)