Page 72 - 86395_CCB - 2024 Annual Report (web)

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Key audit matters

● The application of key judgements and assumptions in relation to applying expected credit loss
provisioning on loans and advances to customers
● The appropriateness of assumptions used in the accounting for the effective interest rate of loans
and advances to customers

Materiality

● Overall materiality: £1,790,000 (2023: £2,000,000) based on 5% of profit before tax.
● Performance materiality: £1,343,000 (2023: £1,500,000).

The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement
in the financial statements.

Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most
significance in the audit of the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not due to fraud) identified by the
auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters, and any
comments we make on the results of our procedures thereon, were addressed in the context of our
audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

The key audit matters below are consistent with last year.

Key audit matter How our audit addressed the key audit matter
The application of key judgements and assumptions in relation
to applying expected credit loss provisioning on loans and
advances to customers
The Company holds £21,123k of expected credit loss (‘ECL’) With the support of our credit risk modelling specialists and
provisions against loans and advances to customers in economic experts, we performed the following procedures.
accordance with IFRS 9 (2023: £22,777k) against total We assessed the reasonableness and likelihood of the
outstanding balances of £1,225,716k (2023: £1,106,055k). forward looking economic assumptions and weightings
The Company divides its lending activities into two sub- assigned to the scenarios using a benchmarking tool
portfolios, being real estate finance and asset finance. ECL developed by our economic experts. The severity and
provisions recorded over each of these portfolios are £18,667k magnitude of the scenarios, specifically the real estate
and £2,456k respectively (2023: £20,350k and £2,427k). forecasts, were compared to external forecasts and data
The calculation of expected credit losses requires the use of from historical economic downturns. Sensitivities of the
forward looking information, reflecting management’s view of ECL provision to the chosen scenarios was considered.
potential future economic scenarios. This can give rise to We separately engaged our economic experts to consider
increased estimation uncertainty. The standard also requires the reasonableness of the Company’s hazard rate and
management to make judgements regarding when a loan has undrawn equity forecasts, which the real estate finance
experienced a ‘significant increase in credit risk’. ECL is most sensitive to.
Uncertainty also arises in respect of calculating ECL provisions We assessed the reasonableness of management’s
for defaulted ‘Stage 3’ exposures due to the Company pursuing selection of staging criteria and their definition of a
individual work out strategies for each exposure, due to the ‘significant increase in credit risk’. We engaged our risk
potential impacts on customer behaviour in the rising inflationary modelling specialists to re-perform the application of these
and interest rate environment in the UK. staging thresholds.
We tested the complete capture of defaulted exposures by
We focussed our work on provisioning for the real estate finance ensuring loans meeting the operational definition of default
portfolio because there is a larger degree of estimation are included in the portfolio of Stage 3 loans. We
uncertainty in respect of this portfolio due to this portfolio challenged management on the judgements used in
constituting 86% of total lending (2023: 88%) and the individual determining the provisions for Stage 3 exposures. We
assets in this portfolio are generally larger. engaged our modelling specialists to test the collateral
In particular we focused on: haircuts used by management. We obtained and reviewed
a sample of credit files and other evidence considered by