ING Direct 2015 Annual Report Download - page 238

Contents
Who we are
Report of the
Management
Board
Corporate
Governance
Consolidated
annual accounts
Parent company
annual accounts
Other
information
Additional
information
Independent auditor’s report - continued
Our key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the annual
accounts. We have communicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive
reflection of all matters discussed.
These matters were addressed in the context of our audit of the consolidated annual accounts as a whole and in forming our opinion
thereon. We do not provide a separate opinion on these matters.
Loan Loss Provisions (page 58)
The appropriateness of loan loss provisions is a key area of judgement for management. The identification of impairment and the
determination of the recoverable amount are an inherently uncertain process involving various assumptions and factors including the
financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices. The use
of different modelling techniques and assumptions could produce significantly different estimates of loan loss provisions. Associated
risk management disclosure is complex and dependent on high quality data. Specific ING Bank portfolios of focus included the SME
lending portfolios in Belgium and the Netherlands and the lending portfolios with loans to large corporates in Russia and Ukraine.
We assessed and tested the design and operating effectiveness of the controls over individual and collective impairment calculations
including the quality of underlying data and systems. For loan loss provisions calculated on an individual basis we tested the
assumptions underlying the impairment identification and quantification including forecasts of future cash flows, valuation of
underlying collateral and estimates of recovery on default. This included taking into consideration the impact of forbearance. For loan
loss provisions calculated on a collective basis we tested, supported by our specialists, the underlying models including the model
approval and validation process. We also tested the appropriateness and accuracy of the inputs to those models, such as recovery and
cure rates, and where available, compared data and assumptions made to external benchmarks. Finally we assessed and tested the
design and operating effectiveness of the controls over related disclosures including forbearance and cover values.
Fair values of financial instruments and hedge accounting (page 104)
Fair value measurement, hedge accounting and associated valuation adjustments can be a subjective area and more so for areas of
the market reliant on model based valuation or with weak liquidity and price discovery. Also, considering the current low interest rate
environment, existing prepayment models could lose their predictive value required for the hedge accounting applied. Valuation
techniques and models used can be subjective in nature and involve various assumptions regarding pricing and pre-payment
behaviour. The use of different valuation techniques and assumptions could produce significantly different estimates of fair value
and/or hedge effectiveness. Associated risk management disclosure is complex and dependent on high quality data. Specific areas of
focus include the valuation of financial instruments with high estimation uncertainty for which observable market prices or market
parameters are not available.
We assessed and tested the design and operating effectiveness of the controls over valuation, independent price verification, hedge
accounting and model approval. We performed additional procedures for areas of higher risk and estimation with the assistance of our
valuation specialists. This included a challenge of pre-payment assumptions made for hedge accounting and, where relevant,
comparison of judgements made to current and emerging market practice and re-performance of valuations on a sample basis. We
also assessed the impact of other sources of fair value information including collateral disputes and gains or losses on disposal. Finally
we assessed and tested the design and operating effectiveness of the controls over related disclosures including valuation sensitivity
and fair value hierarchy.
Reliability and continuity of electronic data processing (page 210)
ING Bank is dependent on the IT-infrastructure for the continuity of their business processes. In the last few years, investments were
made in the improvement of IT- systems and processes. As part of our audit procedures we tested IT- security, change and application
controls embedded in ING Bank’s key processes. In addition we assessed the impact of changes during the year either from ongoing
internal restructuring initiatives or from external factors such as regulatory developments.
We assessed the reliability and continuity of electronic data processing only to the extent necessary within the scope of the audit of
the annual accounts. Our work consisted of assessing the developments in the IT infrastructure and analysing the impact on the IT-
organisation.
Responsibilities of the Management Board and Supervisory Board for the annual accounts
The Management Board is responsible for the preparation and fair presentation of these annual accounts in accordance with IFRS-EU
and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the Report of the Management Board in accordance with
Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the Management Board is responsible for such internal control as it determines is
necessary to enable the preparation of the annual accounts that are free from material misstatement, whether due to fraud or error.
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