2 / 6 Key Audit Matters How our audit addressed the Key Audit Matter The value of loans to customers Loans to customers represents a considerable part of the Company’s total assets. The assessment of loan loss provisions is a model-based framework which includes assessments with elements of management judgment. The framework, is complex, includes considerable volumes of data and judgmental parameters, which is the basis for a risk classification of loans. The Company’s risk classification and internal controls related to the identification of loans with a heightened credit risk is central for the valuation of loans to customers. The framework and the use of management judgment affect the profit for the period and is important for the compliance with the capital adequacy regulations. In line with IFRS 9, credit losses should be based on more forward-looking information, so that it reflects expected losses. The use of models to determine expected credit losses entails judgement. In our audit we have focused on: • Managements process for identification of loans which represent a significant increase in credit risk. • Assumptions and judgments made by management of the underlying parameters such as the probability of default (PD) and loss given default (LGD) and calculations made. • Classification of the various loans by risk. • How the loans are classified into different stages. We have evaluated and tested the design and effectiveness of controls related to the loan loss provision models. Testing of these controls, focusing on the risk classification of the loans, were performed to verify the models’ input parameters, to verify that the model made mathematically accurate calculations and to test elements of the capital adequacy regulations. We concluded that we could base our audit on these controls. We checked the accuracy of the data used in the calculation of the loan loss provision by tracing data back to registration in the systems on a sample basis. The impact of the pandemic, including the impact on the loan loss model, was discussed with management. We also tested whether the models made mathematically accurate calculations, for the portfolio of loans for which our testing was not based on test of controls. To ensure that the setting of parameters related to the probability of default were appropriate, we interviewed management and challenged the relevance and the methods applied. The test results showed that management had used appropriate assumptions in their evaluation of parameters. We obtained a detailed understanding of the processes and tested the controls associated with: • the calculation and methodologies used; • whether the models used were in accordance with the applicable framework and worked as intended; • the reliability and accuracy of the data used for calculation purposes in the models. Our testing of internal controls did not indicate material errors in the modelling or deviations from IFRS 9. We tested whether the models classified loans in the correct stage and whether the loans were subject to significant increased credit risk by sample size testing of Komplett Bank / Annual Report 2022 87
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