Extract from Auditor's Report

Statement of Profit and Loss for the year ended 30 June 2020 ( Baygon Ltd )

The Group The Company

	2020	2019	2020	2019
		(Restated)		(Restated)
	Rs '000	Rs '000	Rs '000	Rs '000
Expected credit losses - (Provision) / Reversal	(248,897)	5,555	(335,421)	(18,021)

Key Audit Matter

Expected credit loss under IFRS 9 IFRS 9 Financial Instruments requires an entity to incorporate reasonable and supportable information about past events, current conditions and forecasted future economic conditions into the assessment of expected credit losses (ECL) for trade and other receivables. Such an assessment should be based on information at the reporting date and adjusted for subsequent available information where applicable. The current year results were affected by ECL charges of Rs 248.9 million and Rs 335.4 million at Group and Company level respectively. ECLs are calculated both for individually significant receivables and collectively on a portfolio basis which require the use of statistical models incorporating loss data and assumptions on the recoverability of customers outstanding balances. The Covid-19 pandemic has given rise to uncertainty in the economic conditions and IFRS 9 requires management to incorporate forecasts of future economic conditions on a probability weighted basis. The Group has refined its model to take into account the severity and potential impact of the pandemic on the expected losses of financial assets.

How the matter was addressed in the audit

Procedures performed on trade and other receivables at Group and Company level: We verified whether the ECL methodology developed by management for trade and other receivables and loans receivable from related parties are consistent with the requirements of IFRS 9. We tested managements key assumptions and judgements used in the models to determine the expected credit loss such as the loss rate by comparing these to historical data. We also ensured the completeness and internal consistency of data used and its mathematical accuracy by performing the following procedures: (1) testing the age buckets per industry balances of the balances due for the relevant periods (2) ensuring proper allocation of payments (3) agreeing the balances at year end to source data such as the general ledger (4) verifying that the formulas were properly applied throughout to obtain the expected credit loss (5) testing the classification of individual debtors by industry. We also ensured that the overlay applied on top of the probability of default to the different industry sectors analysed between low, medium and high risk was reasonable.

Question :

Review the KAM and critically assess if this item meets the requirements of ISA701 Communicating Key Audit Matters in the Independent Auditor's Report in terms of determining Key Audit Matters and Communicating Key Audit Matters.