SECTION A:
REPORTING AS PER REVISED INTERNATIONAL AUDITING STANDARDS (ISAS) ON AUDIT REPORTING
Compilers’ Note
The International Auditing and Assurance Standards Board (IAASB) has issued revised and new International Standards on Auditing (ISAs) for audit reporting. These audit reporting ISAs are applicable for all reports issued after 15th December 2016 onwards.
With a view to align the Standards on Auditing (SAs) in India, ICAI has also issued revised reporting standards which are effective for audits of financial statements for periods beginning on or after April 1, 2018.
One of the key features of the revised audit reports is the inclusion of a paragraph called “Key Audit Matters” (KAM). KAM are defined as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. KAM are selected from matters communicated with TCWG.
Given below are some illustrations of the KAM paragraph included in the audit reports of some listed entities in the UAE for audit reports issued after 15th December 2016 for the year 2016.
EMIRATES ISLAMIC BANK PJSC
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditors’ responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The result of our audit procedures, including the procedures performed to address the matters below, provide the basis of our audit opinion on the accompanying consolidated financial statements.
(a) Impairment of financing and investing receivables
Due to the inherently judgmental nature of the computation of impairment provisions for financing and investing receivables, there is a risk that the amount of impairment may be misstated. The impairment of financing and investing receivables is estimated by management through the application of judgment and the use of subjective assumptions. Due to the significance of financing and investing receivables and related estimation uncertainty, this is considered a key audit risk. The corporate financing and investing receivables portfolio generally comprise larger receivables that are monitored individually by management. The assessment of financing and investing receivables loss impairment is therefore based on management’s knowledge of each individual borrower. However, retail financing and investing receivables generally comprise much smaller value receivables to a much greater number of customers. Provisions are not calculated on an individual basis, but are determined by grouping product into homogeneous portfolios. The portfolios are then monitored through delinquency statistics, which drive the assessment of financing and investing receivables loss provision. The portfolios which give rise to the greatest uncertainty are typically those where impairments are derived from collective models, are unsecured or are subject to potential collateral shortfalls.
The risks outlined above were addressed by us as follows:
– For corporate customers, we tested the key controls over the credit grading process, to assess if the risk grades allocated to the counterparties were appropriate. We then performed detailed credit assessment of all financing and investing receivables in excess of a defined threshold and financing and investing receivables in excess of a lower threshold in the watch list category and impaired category together with a selection of other financing and investing receivables.
– For retail customers, the impairment process is based on projecting losses based on prior historical payment performance of each portfolio, adjusted for current market conditions. We have tested the accuracy of key data from the portfolio used in the models and reperformed key provision calculations.
– We compared the Group’s assumptions for collective impairment allowances to externally available industry, financial and economic data. As part of this, we critically assessed the Group’s estimates assumptions, specifically in respect to the inputs to the impairment models and the consistency of judgement applied in the use of economic factors, loss emergence periods and the observation period for historical default rates. We have made use of specialists to assess the appropriateness of the collective impairment calculation methodology.
Other information
Management is responsible for the other information. Other information consists of the information included in the Group’s 2016 Annual Report, other than the consolidated financial statements and our auditors’ report thereon. We obtained the report of the Bank’s Board of Directors, prior to the date of our auditors’ report, and we expect to obtain the remaining sections of the Group’s 2016 Annual Report after the date of our auditors’ report.
NATIONAL GENERAL INSURANCE CO (PSC)
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
1. Insurance contract liabilities
Refer to note 5 and 13 of the financial statements.
Valuation of these liabilities involves significant judgement, and requires a number of assumptions to be made that have high estimation uncertainty. This is particularly the case for those liabilities that are recognised in respect of claims that have occurred, but have not yet been reported (“IBNR”) to the Company. IBNR and life assurance fund is calculated by an independent qualified external actuary for the Company.
Small changes in the assumptions used to value the liabilities, particularly those relating to the amount and timing of future claims, can lead to a material impact on the valuation of these liabilities and a corresponding effect on profit or loss. The key assumptions that drive the reserve calculations include loss ratios, estimates of the frequency and severity of claims and, where appropriate, the discount rates for longer tail classes of business.
The valuation of these liabilities depends on accurate data about the volume, amount and pattern of current and historical claims since they are often used to form expectations about future claims. If the data used in calculating insurance liabilities, or for forming judgements over key assumptions, is not complete and accurate then material impacts on the valuation of these liabilities may arise.
Our response: Our audit procedures supported by our actuarial specialists included:
– evaluating and testing of key controls around the claims handling and case reserve setting processes of the Company. Examining evidence of the operation of controls over the valuation of individual reserve for outstanding claims and consider if the amount recorded in the financial statements is valued appropriately;
– obtaining an understanding of and assessing the methodology and key assumptions applied by the management. Independently re-projecting the reserve balances for certain classes of business;
– assessing the experience and competence of the Company’s actuary and degree of challenge applied through the reserving process;
– checking sample of reserves for outstanding claims through comparing the estimated amount of the reserves for outstanding claims to appropriate documentation, such as reports from loss adjusters; and
– assessing the Company’s disclosure in relation to these liabilities including claims development table is appropriate.
2. Insurance and other receivables
Refer to note 4, 5 and 11 of the financial statements.
The Company has significant premium and insurance receivables against written premium policies. There is a risk over the recoverability of these receivables. The determination of the related impairment allowance is subjective and is influenced by judgements relating to the probability of default and probable losses in the event of default.
Our response:
– our procedure on the recoverability of insurance and other receivables included evaluating and testing key controls over the processes designed to record and monitor insurance receivables;
– testing the ageing of trade receivables to assess if these have been accurately determined. Testing samples of long outstanding trade receivables where no impairment allowance is made with the management’s evidences to support the recoverability of these balances;
– obtaining balance confirmations from the respective counterparties such as policyholders, agents and brokers;
– verifying payments received from such counterparties post year end;
– considering the adequacy of provisions for bad debts for significant customers, taking into account specific credit risk assessments for each customer based on period overdue, existence of any disputes over the balance outstanding, history of settlement of receivables liabilities with the same counterparties; and
– discussing with management and reviewing correspondence, where relevant, to identify any disputes and assessing whether these were appropriately considered in determining the impairment allowance.
3. Valuation of investment properties
Refer to note 5 and 9 of the financial statements.
The valuation of investment properties is determined through the application of valuation techniques which often involve the exercise of judgement and the use of assumptions and estimates.
Due to the significance of investment properties and the related estimation uncertainty, this is considered a key audit matter.
Investment properties are held at fair value through profit or loss in the Company’s statement of financial position and qualify under Level 3 of the fair value hierarchy as at 31st December 2016.
Our response:
– We assessed the competence, independence and integrity of the external valuers and read their terms of engagement with the Company to determine whether there were any matters that might have affected their objectivity or may have imposed scope limitations on their work:
– We obtained the external valuation reports for all properties and confirmed that the valuation approach is in accordance with RICS’ standards and is suitable for use in determining the fair value in the statement of financial position;
– We carried out procedures to test whether property specific standing data supplied to the external valuers by management is appropriate and reliable; and
– Based on the outcome of our evaluation, we determined the adequacy of the disclosure in the financial statements.
MASHREQBANK PSC
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
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Key Audit
Matter
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How our
Audit Addressed the Key Audit Matters
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Impairment
of loans and advances and islamic financing
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The management
exercises significant judgment when determining both when and how much to
record as loan impairment provisions.
Because of the significance of these judgements and the size of loans
and advances and Islamic financing, the audit of allowance for related
impairment provisions is a key area of focus. At 31st December
2016, the total of gross loans and advances and Islamic finance was AED 64
billion (2015: AED 63 billion) against which allowance for impairment
provisions of AED 3.3 billion were recorded (2015: AED 2.8 billion).
Judgement is applied to determine appropriate parameters and assumptions used
to calculate impairment.
The accounting
policies and critical judgments relative to the calculations of the
impairment provisions on loans and advances and Islamic financing are
summarised in Note 3.14 and Note 4.1 to the consolidated financial statements
respectively.
The Group uses two
methods in its calculations of impairment provisions on loans and advances
and Islamic financing:
Individually assessed facilities
These represent
mainly corporate facilities which are assessed individually by the Group’s
Credit Risk Unit in order to determine whether there exists any objective
evidence that a loan is impaired.
Impaired
facilities are measured based on the present value of expected future cash
flows discounted at the original effective interest rate or at the observable
market price, if available, or at the fair value of the collateral if the
recovery is entirely collateral dependent.
Impairment loss is
calculated as the difference in between the facilities carrying value and its present value or recoverable
amount calculated as above.
Collectively assessed facilities
The management of
the Group assesses, based on historical experience and the prevailing
economical and credit conditions, the magnitude of performing retail and wholesale facilities which may be impaired
but not identified as of the reporting date.
Allowances against
performing loans and advances are reassessed on a periodical basis using
modelled basis for different portfolios with common features and allowances are adjusted accordingly based
on the judgment of management and
guidance received from the Central Bank of the UAE.
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Our audit
procedures included the assessment of controls over the approval, recording
and monitoring of loans and advances, and evaluating the methodologies,
inputs and assumptions used by the Group in calculating collectively assessed
impairments, and assessing the adequacy of impairment allowances for individually assessed loans
and advances.
We tested the
design, implementation and operating effectiveness of the key controls to
determine which loans and advances are impaired and provisions against those
assets. These included testing:
u System-based and manual
controls over the timely recognition of impaired loans and advances;
u Controls over the impairment
calculation models including data inputs;
u Controls over
collateral valuation estimates
u Controls over governance and
approval process related to impairment provisions, including continuous
reassessment by the management.
We also assessed
whether the financial statement disclosures appropriately reflect the Group’s
exposure to credit risk.
Individually assessed facilities
We tested a sample
of individual facilities (including loans that had not been identified by
management as potentially impaired) to form our own assessment as to whether
impairment events had occurred and to assess whether adequate impairments
provisions had been recorded in a timely manner.
Where impairment
had been identified, we tested the estimation of the future expected cash
flows prepared by management to support the calculation of impairment,
challenging the assumptions, including realisation of collateral held. This
work involved assessing the work performed by external experts used by the
Group to value the collateral.
We examined a
sample of facilities which had not been identified by management as potentially impaired and formed our own
judgment as to whether that was appropriate to support management’s
conclusion.
Collectively assessed facilities
For the collective
impairment models used by the Group, we tested a sample of the data used in
the models as well as evaluating the model methodology and re-performing the
calculations. For the key assumptions used in the model, we challenged
management to provide objective evidence that they were appropriate and
included all relevant risks. Further, we considered our industry experience
and knowledge to consider the appropriateness of the provision.
We recalculated
the collective impairment provision as per the Bank’s policies and IFRS and
compared it with the calculations as per UAE Central Bank to ensure adequacy
of the provision.
We performed
certain test procedures to ensure past due payments are reflected in the
right bucket. We have also involved our IT auditors to provide us assurance
on the accuracy of the ageing reports generated by the system and its related
configuration.
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Valuation
of financial instruments including derivatives
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The fair value of
financial instruments is determined through the application of valuation
techniques which often involve the exercise of judgement by management and
the use of assumptions and estimates. Due to the significance of financial
instruments (financial instruments measured at fair value represent 3% of
total assets) and the related estimation uncertainty, this is considered a
key audit risk. Fair values are generally obtained by reference to quoted
market prices, third party quotes, discounted cash flow models and recognised pricing models as appropriate.
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Our audit
procedures included the assessment of controls over the identification,
measurement and management of valuation risk, and evaluating the
methodologies, inputs and assumptions used by the Group in determining fair
values. For the Group’s fair value models, we assessed the appropriateness of
the models and inputs. We compared observable inputs against independent
sources and externally available market data.
For a sample of
instruments with the assistance of our own valuation specialists, we
critically assessed the assumptions and models used, by reference to what we
considered to be available alternative methods and sensitivities to key
factors.
We have also
assessed the adequacy of the Bank’s disclosures including the accuracy of the
categorisation into the fair value measurement hierarchy and adequacy of the
disclosure of the valuation techniques, significant unobservable inputs,
changes in estimate occurring during the period and the sensitivity to the
key assumptions.
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Valuation of Insurance contract liabilities
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As at 31st December 2016,
net insurance contract liabilities amounted to AED 1.5 billion, as detailed
in note 18 to these consolidated
financial statements.
As set out in note 3.l8 and note 4.6,
valuation of these liabilities requires professional judgment and also
involve number of assumptions made by management.
This is particularly the case for
those liabilities that are based on the best-estimate of technical reserves
that includes ultimate cost of all claims incurred but not settled at a given
date, whether reported or not, together with the related claims handling
costs and related technical reserves. A range of methods are used by
management and the internal actuary /
independent external actuary to determine these provisions. Underlying these
methods are a number of explicit or implicit assumptions relating to the
expected settlement amount and settlement patterns of claims.
Furthermore, valuation of life
insurance contract liabilities involves complex and subjective judgement made
by management and the internal actuary
/ independent external actuary about variety
of uncertain future outcomes, including the estimation of economic
assumptions, such as investment
return, discount rates, and operating
assumptions, such as expense, mortality and persistency. Changes in
these assumptions can result in
material impacts to the valuation of these liabilities.
The valuation of these liabilities
also depends on accurate data about
the volume, amount and pattern of current and historical claims since they
are often used to form expectations about future claims. As a result of all
of the above factors, insurance contract liabilities represent a significant risk
for the Group.
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Our audit procedures included:
u Testing the underlying Group
data to source documentation.
u Evaluating and testing of
key controls around the claims handling and case reserve setting processes of
the Group.
u Evaluating and testing of
key controls designed to ensure the integrity of the data used in the
actuarial reserving process.
u Checking samples of claims
case reserves through comparing the estimated amount of the case reserve to
appropriate documentation, such as reports from loss adjusters.
u Re-performing
reconciliations between the claims data recorded in the Group’s systems and
the data used in the actuarial reserving calculations.
In addition, with
the assistance of our actuarial specialists, we:
u performed necessary reviews
to ascertain whether the results are appropriate for financial disclosure.
u reviewed the actuarial
report compiled by the independent external actuaries of the Group and
calculations underlying these provisions, particularly the following areas;
• appropriateness
of the calculation methods and approach (actuarial best practice)
• review
of assumptions
• sensitivities
to key assumptions
• risk
profiles
• consistency
between valuation periods
• general
application of financial and mathematical
rules
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IT systems and controls over financial reporting
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We identified IT systems and controls
over financial reporting as an area of focus because the Bank’s financial
accounting and reporting systems are vitally dependent on complex technology
due to the extensive volume and variety of transactions which are processed
daily and there is a risk that automated accounting procedures and related
internal controls are not accurately designed and operating effectively. A
particular area of focus related to logical access management and segregation
of duties. The incorporated key controls are essential to limit the potential
for fraud and error as a result of change to an application or underlying
data. Our audit approach relies on automated controls and therefore
procedures are designed to test access and control over IT systems.
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We assessed and
tested the design and operating effectiveness of the controls over the continued integrity of the IT
systems that are relevant to financial reporting. We examined the framework
of governance over the Group’s IT organisation and the controls over program
development and changes, access to programs and data and IT operations,
including compensating controls where required. We also tested the accuracy and
completeness of key computer generated reports heavily used in our testing
such as aging report of overdue loans and advances.
In events
deficiencies are noted during our testing affecting applications and
databases, we performed a combination of controls testing and substantive
testing in order to determine whether we could place reliance on the
completeness and accuracy of system generated information. In addition and
where appropriate, we extended the scope of our substantive audit procedures.
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