KENANGA ANNUAL REPORT 2020

118 5 1 2 3 4 6 7 FINANCIAL STATEMENTS 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 2020, loans, advances and financing represent RM1,869,249 or 28.4% and RM1,856,996 or 29.72% of the total assets of the Group and of the Bank respectively, and the instruments carried at amortised cost and fair value through other comprehensive income represent 14.64% and 15.41% of the total assets of the Group and of the Bank respectively. MFRS 9 requires the Group and the Bank to account for impairment losses on loans, advances and financing, and investments carried at amortised cost and fair value through other comprehensive income using forward- looking expected credit loss (“ECL”) approach. The measurement 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. For the measurement of ECL, we assessed and tested reasonableness of the Group’s and the Bank’s ECL models, including model input, model design and model performance and management overlays for significant portfolios. We challenged whether historical experience is representative of current circumstances amid the COVID-19 pandemic environment and of the recent losses incurred in the portfolios and assessed the reasonableness of forward looking adjustments, macroeconomic factor analysis and probability- weighted multiple scenarios, and the use of management overlays which require substantial judgment involved. Refer to summary of significant accounting policies in Note 3.4(k)(ii), significant accounting judgements, estimates and assumptions in Note 4(iii), the disclosures of loans, advances and financing and investments in Note 9 and 7 to the financial statements. We evaluated if changes in modeling approaches, parameters and assumptions are needed and if any changes made were appropriate. We also assessed, tested and monitored the sensitivity of the credit loss provisions to changes in modelling assumptions. 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. INDEPENDENT AUDI TORS ’ REPORT to the Members of Kenanga Investment Bank Berhad (Incorporated in Malaysia)