Barclays 2015 Annual Report Download - page 248

246 I Barclays PLC Annual Report 2015 home.barclays/annualreport
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. In particular,
we looked at where the Directors made subjective judgements, for
example 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. We have also set out how we
tailored our audit to address these specific areas in order to provide an
opinion on the financial statements as a whole, and any comments we
make on the results of our procedures should be read in this context.
This is not a complete list of all risks identified by our audit. 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 44 to 46.
We have gained an understanding, evaluated the design and tested the
operating effectiveness of the controls in each process below. The table
sets out further work performed to address the areas of focus.
Area of focus How our audit addressed the area of focus
Impairment of loans
and advances to
customers
We focused on this area because the Directors
make complex and subjective judgements over
both timing of recognition of impairment and
the estimation of the size of any such
impairment.
In wholesale loans and advances, the material
portion of impairment is individually
calculated. For retail loans and advances, the
material portion of the impairment is
calculated on a modelled basis for portfolios of
loans and advances.
We focused our audit on the following areas of
impairment specifically relating to:
 the key assumptions and judgements made
by the Directors that underlie the calculation
of modelled retail impairment (including in
relation to a number of model changes that
were implemented in 2015). Key
assumptions and judgements include the
emergence period used for unidentified
impairment, the probability of default
calculation and the loss given default
calculation
 the post model adjustments recorded in
response to a range of identified internal
factors, such as known data and system
issues impacting specific impairment
models, and external factors such as the
persistently low interest rate environment in
the UK
 the completeness of the customer accounts
that are included in the impairment
calculation, including how unidentified
impairment (customers that have had a loss
event that has not yet manifested itself in a
missed payment or other indicator) and
forbearance are taken account of.
In addition, in wholesale we considered the
impact of lower oil, gas and commodity prices
on the creditworthiness of relevant
counterparties.
See Notes 7 and 20 to the financial statements
on pages 265 and 295 respectively and the
relevant parts of the Risk review to which they
are cross-referred.
We assessed and tested the design and operating effectiveness of the
controls over impairment data and calculations. These controls included
those over the identification of which loans and advances were impaired,
the granting of forbearance, the data transfer from source systems to
impairment models and model output to the general ledger, and the
calculation of the impairment provisions. In addition, we tested IT
controls for impairment systems. We determined that we could rely on
these controls for the purposes of our audit.
We tested the entity and business unit level controls over the end to end
model process including in relation to model build, model monitoring,
the annual validation process and governance committee approvals. We
determined that we could rely on these controls for the purposes of our
audit.
In addition, we performed detailed testing on a sample of new and
existing models used to calculate both unidentified and identified
impairment. This testing varied by portfolio, but typically included
testing of the coding used in impairment models, re-performance of the
calculation, testing the extraction of data used in the models including
the ‘bucketing’ into delinquency bandings, and testing and applying
sensitivities to the underlying critical assumptions.
We tested a sample of post model adjustments, including considering
the basis for the adjustment, the logic applied, the source data used, the
key assumptions adopted and the sensitivity of the adjustment to these
assumptions.
Where impairment was individually calculated, we tested controls over
the timely identification of potentially impaired loans. We determined
that we could rely on these controls for the purposes of our audit. We
also tested a sample of loans and advances to ascertain whether the
loss event (that is the point at which impairment is recognised) had
been identified in a timely manner including, where relevant, how
forbearance had been considered. Where impairment had been
identified, we examined the forecasts of future cash flows prepared by
management to support the calculation of the impairment, challenging
the assumptions and comparing estimates to external evidence where
available. We found no material exceptions in these tests.
We examined a sample of loans and advances which had not been
identified by management as potentially impaired and formed our own
judgement as to whether that was appropriate including using external
evidence in respect of the relevant counterparties. We found no material
exceptions in these tests.
For customers with exposure to the oil, gas and commodity prices, we
increased our sample testing of cases individually assessed for
impairment, included those customers identified on the watchlist, and
those that remained in the ‘good book’. In addition, we tested relevant
post model adjustments held and considered the completeness of the
unidentified impairment provision for these customers.
In the case of some impairment provisions, we formed a different view
from that of management, but in our view the differences were within a
reasonable range of outcomes in the context of the overall loans and
advances and the uncertainties disclosed in the financial statements.
Independent Auditors’ report to the members of Barclays PLC
Independent Auditors’ report