Arohan Financial Services Limited | Annual Report 2022-23

| 106 Annual Report | 2022-2023 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, 2023 (cont’d) Sr. No Key Audit Matter How the Key Audit Matter was addressed in our audit The Expected Credit Loss is measured at 12-month ECL for Stage 1 loan assets and at lifetime ECL for Stage 2 and Stage 3 loan assets. Significant management judgement and assumptions involved in measuring ECL is required with respect to: • determining the criteria for a significant increase in credit risk • factoring in future economic assumptions • techniques used to determine probability of default, loss given default and exposure at default. These parameters are derived from the Company’s internally developed statistical models and other historical data. In view of the above, the measurement of impairment loss on loans was determined to be a Key Audit Matter in our audit of the financial statements. • Understood and challenged the aforesaid assumptions through our understanding of the risk profile of the customers of the Company. • Reconciled the total financial assets considered for ECL estimation with the books of account to ensure the completeness. • Verified, on test check basis, whether appropriate staging of assets have been performed basis their days past due. Further, performed an overall assessment of the ECL provision levels at each stage. • Verified assets in stage 1, 2 and 3 on sample basis and tested that they were allocated to the appropriate stage. For samples of exposure, verified the appropriateness of determining Exposure at Default (EAD), PD and LGD. • Assessed the adequacy and appropriateness of disclosures in compliance with the Ind AS 107 in relation to ECL especially in relation to judgements used in estimation of ECL provision. 2 Information Technology (“IT”) Systems and Controls The Company has a complex IT system to support its recording of customer’s operational data, business processes, ensuring complete and accurate processing of financial transactions and supporting the overall internal control framework. In particular, the IT system is used for recording all disbursements and collections, identification and tagging of pledged loans to customers and calculating interest income and overdue days. Our audit procedures with respect to this matter include, but were not limited to the following: • Involved IT specialists as part of the audit for the purpose of testing the IT general controls and application controls (automated and semi- automated controls) to determine the accuracy of the information produced by the Company’s IT systems. • Obtained a comprehensive understanding of IT applications landscape implemented at the Company. It was followed by process understanding, mapping of applications to the same and understanding financial risks posed by people-process and technology. Independent Auditor's Report