Barclays 2014 Annual Report Download - page 250

248 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Independent Auditors’ report
The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).
We designed our audit by determining materiality and assessing the
risks of material misstatement in the financial statements. We looked at
where the Directors made subjective judgements, in particular in
respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently
uncertain. As in all of our audits, we also addressed the risk of
management override of internal controls, including evaluating
whether there was evidence of bias by the Directors that represented a
risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our
audit, including the allocation of our resources and effort, are identified
as ‘areas of focus’ in the table below. This is not a complete list of all
risks identified by our audit. For each of the areas of focus we have set
out how we developed our audit to address these specific areas in
order to provide an opinion on the financial statements as a whole; the
comments made on the results of our procedures should be read in
this context. All of these areas of focus were discussed with the Board
Audit Committee. Their report on those matters that they considered
to be significant financial statement reporting issues is set out on
pages 41 to 43.
Area of focus How our audit addressed the area of focus and what we found
Valuation of complex or
illiquid trading portfolio
assets and liabilities,
financial assets and
liabilities and derivative
financial instruments held
at fair value
We focused on this area because for some of these
assets and liabilities the external evidence
supporting the Group’s valuations was limited
because of the lack of a liquid market and the
Directors’ judgement was required.
In particular we focused on the principal
judgements and assumptions over the valuation of
assets and liabilities with unobservable
parameters. This included:
Q The revision in the current year of the basis of
valuation of the £17.4bn Education, Social
Housing and Local Authority (‘ESHLA’) loan
portfolio which is held at fair value; and
Q The derivative valuation adjustments made by
management including those made to reflect
the costs of funding of uncollateralised
derivatives and counterparty credit risk.
See Notes 14 to 18 to the financial statements on
pages 275 to 295.
We assessed and tested the design and operating
effectiveness of the controls over valuations and model
approval. In those cases where the external information
supporting the Group’s valuations was limited and the
Directors’ judgement was required, we examined the Group’s
internal price verification processes and controls that test
those judgemental valuations against other information
which, while not always directly comparable, may be
indicative of the appropriate valuation. Where the Group used
external pricing sources we examined the processes and
controls operated by those sources.
We determined that we could rely on the controls operated by
the Group and the external pricing sources for the purposes of
our audit.
In addition we tested material valuations in detail and sought
additional external evidence. We assessed the methodologies
used, and the judgements and assumptions made, in
evaluating unobservable valuation parameters.
We made our own examination of collateral disputes, market
auctions and gains and losses on disposals and other events
which could provide evidence about the appropriateness of
the Group’s valuations. For the more significant financial
instruments, we evaluated the valuation models used by the
Group or made our own valuations and compared the results
of our work to that of the Group. In some cases, this resulted
in a different valuation to that calculated by management; but
in our view the differences were within a reasonable range of
outcomes in the context of the inherent uncertainties
disclosed in the financial statements.
In relation to the particular matters set out opposite:
Q We considered the appropriateness of the revision in ESHLA
valuation methodology in the light of the changes in the
current year, and we examined the revised methodology,
seeking corroborative evidence for assumptions made
where these were available;
Q We assessed the methodology for the derivative valuation
adjustments and compared it with our knowledge of
current and emerging practice; the methodology, which is
consistent with that used in previous years, was acceptable,
but there is, as yet, no clearly accepted market practice; and
Q We examined relevant transactions to corroborate the
methodology for the derivative valuation adjustments and
the assumptions made; and we found some comparable
transactions, albeit limited in number.
Overall, in our view, in the context of the inherent
uncertainties as disclosed in the financial statements, these
valuations were within a reasonable range of outcomes.