CONSOLIDATED ACCOUNTS 371 Allowances for Expected Credit Losses (“ECL”) in the financial services business See Note 2(e)(v) to consolidated financial statements The key audit matter How the matter was addressed in our audit As at 31 March 2024, the carrying value of loan assets measured at amortised cost, aggregated Rs 106,344 crores (net of allowance of expected credit loss Rs 3,682 crores). Significant judgement is used in classifying these loan assets and applying appropriate measurement principles. ECL on such loan assets measured at amortised cost is a critical estimate involving greater level of management judgement. As part of risk assessment, the component joint auditors determined that the ECL on such loan assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes for the consolidated financial statements. The elements of estimating ECL which involved increased level of audit focus are the following: • Q ualitative and quantitative factors used in staging the loan assets measured at amortised cost; • B asis used for estimating Probabilities of Default (“PD”), Loss Given Default (“LGD”) and Exposure at Default (“EAD”) at product level with past trends; • J udgements used in projecting economic scenarios and probability weights applied to reflect future economic conditions; and • A djustments to model driven ECL results to address emerging trends. The audit procedures applied by the component joint auditors of the component included: Examined the policies approved by the respective Board of Directors of the component that articulate the objectives of managing each portfolio and their business models. Component joint auditors also verified the methodology adopted for computation of ECL (“ECL Model”) that addresses policies approved by the respective Board of Directors, procedures and controls for assessing and measuring credit risk on all lending exposures measured at amortised cost. The audit procedures related to the allowance for ECL included the following, among others: Testing the design and operating effectiveness of the following: • C ompleteness and accuracy of the Exposure at Default (“EAD”) and the classification thereof into stages consistent with the definitions applied in accordance with the policy approved by the respective component’s Board of Directors including the appropriateness of the qualitative factors to be applied; • C ompleteness, accuracy and appropriateness of information used in the estimation of the PD and LGD for the different stages depending on the nature of the portfolio; and • A ccuracy of the computation of the ECL estimate including reasonableness of the methodology used to determine macro-economic adjustment basis forward looking information. Test of details on a sample in respect of the following: • A ccuracy and completeness of the input data such as period of default and other related information used in estimating the PD; • The mathematical accuracy of the ECL computation by using the same input data as used by the Group. • C ompleteness and accuracy of the staging of the loans and the underlying data based on which the ECL estimates have been computed. • A ssessed whether the disclosures on key judgements, assumptions and quantitative data with respect to impairment loss allowance in consolidated financial statements are appropriate and sufficient. Information Technology and General Controls in financial services business: The key audit matter How the matter was addressed in our audit The financial services business of Group is dependent on its Information Technology (“IT”) systems due to the significant number of transactions that are processed daily across such multiple and discrete IT systems. Also, IT application controls are critical to ensure that changes to applications and underlying data are made in an appropriate manner and under controlled environments. Appropriate controls contribute to mitigating the risk of potential fraud or errors as a result of changes to applications and data. On account of the pervasive use of its IT systems, the testing of the general computer controls of the IT systems used in financial reporting was considered to be a Key Audit Matter. The audit procedures applied by the joint auditors of the component included: With the assistance of IT specialists, the joint auditors of the subsidiary obtained an understanding of the Component’s IT applications, databases and operating systems relevant to financial reporting and the control environment. For these elements of the IT infrastructure the areas of focus included access security (including controls over privileged access), program change controls, database management and network operations. In particular: • Joint auditors of component tested the design, implementation, and operating effectiveness of the financial services business’s general IT controls over the IT systems relevant to financial reporting. This included evaluation of controls over segregation of duties and access rights being provisioned / modified based on duly approved requests, access for exit cases being revoked in a timely manner and access of all users being recertified during the period of audit. • Joint Auditors of the component also tested key automated business cycle controls and logic for the reports generated through the IT infrastructure that were relevant for financial reporting or were used in the exercise of internal financial controls with reference to financial statements. Tests included testing of the compensating controls or alternate procedures to assess whether there were any unaddressed IT risks that would materiality impact the Financial Statements.
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