Strategic Shareholder Climate and Risk Financial Financial Barclays PLC 403 report information sustainability report Governance review review statements Annual Report 2022 KPMG LLP’s independent auditor’s report to the members of Barclays PLC (continued) 4. Key audit matters What we mean Key Audit Matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, 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. We include below the Key Audit Matters in decreasing order of audit significance together with our key audit procedures to address those matters and our results from those procedures. These matters were addressed, and our results are based on procedures undertaken for the purpose of our audit of the financial statements as a whole. We do not provide a separate opinion on these matters. 4.1 Impairment allowances on loans and advances at amortised cost, including off-balance sheet elements Financial Statement Elements FY22 FY21 Our assessment of risk vs FY21 Our results Impairment allowances on loans and advances £6.2bn £6.3bn FY22: & Our assessment is that the risk has increased since FY21. at amortised cost, including off-balance sheet Acceptable This is due to the increased macroeconomic uncertainty elements seen during the year considering rising interest rates and FY21: inflationary pressures. Acceptable Description of the Key Audit Matter Our response to the risk Our procedures to address the risk included: Subjective estimate The estimation of expected credit losses Risk assessment: We performed granular and detailed risk assessment procedures over the entirety (“ECL”) on financial instruments, involves of the loan and advances at amortised cost including off-balance sheet elements within the Group’s significant judgement and estimates. The key financial statements. As part of these risk assessment procedures, we identified which portfolios are areas where we identified greater levels of associated with a risk of material misstatement including those arising from significant judgements management judgement and therefore over the estimation of ECL either due to inputs, methods or assumptions. increased levels of audit focus in the Group’s Controls testing: We performed end to end process walkthroughs to identify the key systems, estimation of ECLs are: applications and controls used in the ECL processes. We tested the relevant manual, general IT and • Model estimations – Inherently judgemental application controls over key systems used in the ECL process. modelling and assumptions are used to Key aspects of our controls testing involved evaluating the design and implementation and testing the estimate ECL which involves determining operating effectiveness of the key controls over the: Probabilities of Default (“PD”), Loss Given Default (“LGD”), and Exposures at Default • completeness and accuracy of the key inputs into the IFRS 9 impairment models; (“EAD”). ECLs may be inappropriate if certain • application of the staging criteria; models or underlying assumptions do not • model validation, implementation and monitoring; accurately predict defaults or recoveries over time, become out of line with wider • authorisation and calculation of post model adjustments and management overlays; industry experience, or fail to reflect the • selection and implementation of economic variables and the controls over the economic scenario credit risk of financial assets. As a result, selection and probabilities; and certain IFRS 9 models and model • credit reviews that determine customer risk ratings used in the models for wholesale customers. assumptions are the key drivers of complexity and uncertainty in the Group’s Our credit risk modelling expertise: We involved our own credit risk modellers who assisted in the calculation of the ECL estimate. following: • Economic scenarios – IFRS 9 requires the • evaluating the Group’s impairment methodologies for compliance with IFRS 9; Group to measure ECLs on an unbiased • inspecting model code for the calculation of certain components of the ECL model to assess its forward-looking basis reflecting a range of consistency with the Group’s model methodology; future economic conditions. Significant management judgement is applied in • evaluating for a selection of models which were changed or updated during the year as to whether determining the forward-looking economic the changes (including the updated model code) were appropriate by assessing the updated model scenarios used as an input to calculate ECL, methodology against the applicable accounting standard; the probability weightings associated with • reperforming the calculation of certain adjustments to assess consistency with the qualitative the scenarios and the complexity of models adjustment methodologies; used to derive the probability weightings. • assessing and reperforming, for a selection of models, the reasonableness of the model predictions by comparing them against actual results and evaluating the resulting differences; • evaluating the model output for a selection of models by inspecting the corresponding model functionality and independently implementing the model by rebuilding the model code and comparing our independent output with management’s output; and • independently recalculating a selection of model assumptions using more recent data for certain portfolios. This is used to develop a range for ECL which is compared to management’s point estimate