| 130 Annual Report | 2024-2025 Independent Auditor's Report Impairment loss allowance on loans to customers Refer to the accounting policies in "Note 35 to the financial statements: Impairment of financial assets". "Note 3 (i) a to the financial statements: Material Accounting Policies - use of estimates and judgments" and ''Note 7 to the financial statements: Loans” Arohan Financial Services Limited Independent Auditors’ Report of even date on the financial statements of Arohan Financial Services Limited for the year ended March 31, 2025 (cont’d) The key audit matter How the matter was addressed in our audit Impairment loss allowance on loans of Rs. 22,919 lakhs as at 31 March 2025 Charge to statement of profit and loss: INR 5,385 lakhs for the year ended 31 March 2025 Under Ind AS 109, Financial Instruments, impairment loss allowance is determined using expected credit loss ("ECL") model. Recognition and measurement of impairment loss allowance on loans involves significant judgement and estimates. The key areas where increased levels of audit focus in the Company's estimation of impairment loss allowance on loans are: a) Data inputs - The application of ECL model requires several data inputs. This increases the risk of irrelevant data used to create assumptions in the model. b) Model estimations - Inherently judgmental models are used to estimate impairment loss allowance on loans which involves determining Probabilities of Default, Loss Given Default, and Exposures at Default. The Probabilities of Default and the Loss Given Default are the key drivers of estimation complexity in ECL model and hence are considered the most significant judgmental aspect of the Company's modelling approach. c) Economic scenario: Ind AS 109 requires the Company to measure impairment loss allowance on loans in an unbiased forward- looking basis reflecting a range of future economic scenarios. Significant judgement is applied in determining the economic scenarios used and the probability weights applied to them. In view of the significance of the matter, we applied the following audit procedures in this area, among others to obtain sufficient audit evidence: Testing of design and operating effectiveness of controls: Performing end to end process walkthroughs to identify the key systems, applications and controls used in computation of impairment loss allowance on loans. Testing the relevant manual, general IT and application controls over key systems used in the impairment of loss allowance on loans. Key aspects of our testing of the design, implementation and operating effectiveness involves the following: a) Testing the key controls over the completeness and accuracy of the key inputs, data and assumptions into the Ind AS 109 impairment models. b) Testing the key 'Governance Framework' controls over evaluation, implementation and model monitoring. c) Testing the key controls over the application of the staging criteria. d) Testing the key controls relating to selection and implementation of key macro-economic variables and the controls over the scenario selection and application of probability weights. e) Testing the key controls operating over the information used in the computation of impairment loss allowance on loans including system access, change management, program development and computer operations.
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