FINANCIAL STATEMENTS

Independent auditor’s report to the shareholders of KCB Group Plc (Continued)

Key audit matters (continued)

Key audit matter How our audit addressed the key audit matter
Credit risk assessment and determination of expected credit losses on
loans and advances at amortised cost

As explained in Note 2 and 4 of the financial statements, determining Reviewed the Group’s methodology for determining expected credit
expected credit losses on loans and advances is complex, judgmental losses, including enhancements in the year, and evaluated this against
and involves significant estimation uncertainty. IFRS 9, Financial the requirements of IFRS 9, Financial Instruments.
Instruments, requires the Directors to measure expected credit losses
on a forward-looking basis reflecting a range of future economic Tested the individual entities applied the system extracts of ‘days past
conditions. The standard adopts a 3-stage model approach where the due (DPD)’ report in categorising the loan book into the three stages
loans and advances are categorised in stage 1, 2 and 3 depending on required by IFRS 9. For a sample of loans, we recalculated the DPD
whether the facilities are performing, have a experienced significant applied in the model and agreed these to the DPD reports from the IT
increase in credit risk or are in default. systems and the respective customer files.

Changes to the assumptions and estimates used by management could Reviewing judgments applied in the staging of loans and advances;
generate significant fluctuations in the Group’s financial results and Tested the completeness of restructured loans listing and, on a
materially impact the valuation of the portfolio of loans and advances. In sample basis, assessed the rationale for the restructures and the
addition, the evolving economic impact of the COVID-19 pandemic has appropriateness of their subsequent measurement in accordance with
heightened the general risk of credit default and significant increase IFRS 9 requirements.
in credit risk, increasing the uncertainty around the management
judgements and estimation process. Obtained an understanding of the basis used to determine the
probabilities of default (PDs), loss given default (LGD) and exposures at
The calculation of the expected credit losses involves complex default (EAD), including the post write-off recovery rates for unsecured
mathematical models that are prone to data integrity or configuration facilities and the COVID-19 impact overlays.
errors, or mathematical formulaic errors.
We tested the completeness and accuracy of the historical data used
Our audit procedures focused on the following areas that have a in derivation of PDs, LGDs and EADs, and re-calculated the outcomes
significant impact on the calculation of the expected credit losses: on a sample basis. For LGD, we tested the assumptions on the timing
• the judgments made to determine the categorisation (staging) of the cash flows based on historical empirical evidence. In addition,
of individual loan and advances accounts in line with IFRS 9. for secured facilities, we agreed the collateral values used in the ECL
In particular, the identification of Significant Increase in Credit model to external valuer reports.
Risk (“SICR”) and Default requires consideration of quantitative
and qualitative criteria. This is a key area of judgement as this On a sample basis, we tested the reasonableness of EADs for both on
determines whether a 12-month or lifetime PD is used; and off-balance sheet exposures, including the applied cash conversion
• the assumptions applied in deriving the probabilities of default factors.
(PDs), loss given default (LGD) and exposures at default (EAD)
for the various segments of loans and advances, including any We corroborated the assumptions used for determination of forward-
adjustments in relation to COVID-19 overlays; and looking information (FLI) in the models using publicly available
• the appropriateness of forward-looking information used in information.
the models; and
• the conceptual logic, soundness and accuracy of the expected We reviewed and assessed adequacy of the disclosures in the financial
credit losses models used by the entities in the Group statements on the key judgements and assumptions in accordance with
the requirement of IFRS 9.

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 FINANCIAL STATEMENTS

Independent auditor’s report to the shareholders of KCB Group Plc (Continued)

Key audit matters (continued)

Key audit matter How our audit addressed the key audit matter

Information Technology systems and controls over financial reporting

The Group’s financial accounting and reporting processes are dependent We assessed and tested the design and operating effectiveness of the
on complex information technology systems and applications. Specifically, controls over the integrity of information technology (IT) systems and
the calculation, recording and financial reporting of financial transactions applications that are relevant for financial accounting and reporting.
and balances are significantly dependent on automated processes.
We tested controls over programs development and changes, access to
Weaknesses in the design and operating effectiveness of the automated programs and data and IT operations including compensating controls
accounting procedures and related IT dependent manual controls could where necessary. We also tested certain aspects of the security of the IT
result in material errors in the financial information. systems including logical access management and segregation of duties.

Our audit focus on information technology systems and applications Where, either design or operating effectiveness control deficiencies
and controls over financial reporting included the following areas: were identified, we altered our audit approach to test the compensating
• management of logical access to critical systems including controls or increased the level of our tests of detail. These additional
privileged access and developer access to production procedures mitigated the deficiencies or provided the additional audit
environment; comfort.
• controls over changes of programs and systems developments;
• automated application controls relating to processing of We validated any manual adjustments to information generated by
transactions, accounting and financial reporting; and the IT systems and applications and assessed the appropriateness of
• interfaces between the core financial reporting systems to the adjustments.
banking systems and applications, including any manual
adjustments to financial information.

Other information
The other information comprises Corporate information, Report of the directors, Directors’ remuneration report and Statement of directors’
responsibilities which we obtained prior to the date of this auditor’s report, and the rest of the other information in the Integrated Report and
Financial Statements which are expected to be made available to us after that date but does not include the financial statements and our auditor’s
report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in this report, we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.

If, based on the work we have performed on the other information we have received prior to the date of this auditor’s report we conclude that
there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

When we read the rest of the other information in the Integrated Report and Financial Statements and we conclude that there is a material
misstatement therein, we are required to communicate the matter to those charged with governance.

102 INTEGRATED REPORT & FINANCIAL STATEMENTS

 FINANCIAL STATEMENTS

Independent auditor’s report to the shareholders of KCB Group Plc (Continued)

Responsibilities of the directors for the financial statements

The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial
Reporting Standards and the requirements of the Companies Act, 2015, and for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing,
as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate
the Group or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made
by the directors.
• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as
a going [Link] we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related
disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue
as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to
express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the Group audit. We
remain solely responsible for our audit opinion.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and where applicable
actions taken to eliminate threats or safeguards applied.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the Group’s
financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law
or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest
benefits of such communication.

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Independent auditor’s report to the shareholders of KCB Group Plc (Continued)

Report on other matters prescribed by the Companies Act, 2015

Report of the directors

In our opinion the information given in the report of the directors on page 93 is consistent with the financial statements.

Directors’ remuneration report

In our opinion the auditable part of the directors’ remuneration report on pages 94 to 98 has been properly prepared in accordance with the
Companies Act, 2015

Certified Public Accountants

Nairobi

17 March 2021

FCPA Michael Mugasa Practicing certificate No. 1478

Signing partner responsible for the independent audit

104 INTEGRATED REPORT & FINANCIAL STATEMENTS