TIDM57HB
RNS Number : 0758A
Hongkong & Shanghai Banking Corp Ld
21 March 2017
Opinion
What we have audited
The consolidated financial statements of The Hongkong and
Shanghai Banking Corporation Limited ('the Bank') and its
subsidiaries (together, 'the group') set out on pages 65 to 143,
which comprise the:
-- consolidated balance sheet as at 31 December 2016;
-- consolidated income statement for the year then ended;
-- consolidated statement of comprehensive income for the year then ended;
-- consolidated statement of changes in equity for the year then ended;
-- consolidated statement of cash flows for the year then ended; and
-- notes to the consolidated financial statements, which include
a summary of significant accounting policies.
Our opinion
In our opinion, the consolidated financial statements give a
true and fair view of the consolidated financial position of the
group as at 31 December 2016, and of its consolidated financial
performance and consolidated cash flows for the year then ended in
accordance with Hong Kong Financial Reporting Standards ('HKFRSs')
issued by the Hong Kong Institute of Certified Public Accountants
('HKICPA') and have been properly prepared in compliance with the
Hong Kong Companies Ordinance.
Basis for Opinion
We conducted our audit in accordance with Hong Kong Standards on
Auditing ('HKSAs') issued by the HKICPA. Our responsibilities under
those standards are further described in the Auditor's
Responsibilities for the Audit of the Consolidated Financial
Statements section of our report.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the group in accordance with the HKICPA's
Code of Ethics for Professional Accountants ('the Code'), and we
have fulfilled our other ethical responsibilities in accordance
with the Code.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the
consolidated financial statements for the current period. These
matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
Key audit matters identified in our audit are summarised as
follows:
-- IT access management
-- Impact of the Deferred Prosecution Agreement ('DPA')
-- Investment in associate - Bank of Communications Co., Limited ('BoCom')
-- The present value of in-force long-term insurance business
('PVIF') and liabilities under non-linked life insurance
contracts
-- Impairment of loans and advances to customers
Key audit matters (continued)
a IT access management
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Nature of the key audit How our audit addressed
matter the Key Audit Matter
All banks are highly dependent Access rights were tested
on technology due to the over the various aspects
significant number of of technology relied upon
transactions that are for financial reporting.
processed daily. The audit Specifically, the audit
approach relies extensively tested that:
on automated controls * New access requests to applications, operating
and therefore procedures systems and databases were properly reviewed and
are designed to test access authorised;
and control over IT systems.
It was identified that
the group's controls over * Application, operating systems and database user
individuals access rights access rights were removed on a timely basis when an
to operating systems, individual left the group or moved role;
applications, and data
used in the financial
reporting process required * Access rights to applications, operating systems and
improvement. Access rights databases were periodically monitored for
are important as they appropriateness; and
ensure that changes to
applications and data
are authorised and made * Highly privileged access to applications, operating
in an appropriate manner. systems and databases was monitored.
Ensuring staff only have
appropriate access, and
that the access is monitored, Other areas that were
are key controls to mitigate independently assessed
the potential for fraud included password policies,
or error as a result of security configurations,
a change to an application controls over changes
or underlying data. to applications and databases
A number of enhancements and that business users,
to the control environment developers and production
were made by management support personnel did
during the year but some not have access to change
controls were not fully applications, the operating
remediated and we have systems or databases in
assessed the risk of material the production environment.
misstatement arising from As a consequence of deficiencies
access to technology as identified in the controls
significant for the audit. a range of other procedures
were performed:
Matters discussed with * Where inappropriate access was identified, we have
the Audit Committee understood the nature of the access and obtained
The original approach additional evidence of the appropriateness of the
discussed with the Audit activities performed;
Committee was based on
the control enhancements
proposed by management, * Additional substantive testing was performed on
and involved the testing specific year-end reconciliations (custodian, bank
of new and improved control account and suspense account reconciliations) and
processes. This was supplemented confirmations with external counterparties; and
with other control and
substantive procedures
required for the periods * Testing was performed on other compensating controls
of the year when the changes such as business performance reviews.
would not yet have been
effective. As the timing
of the enhancements to A significant amount of
controls changed during the group's technology
the year, we reflected processes and controls
this in the nature and were undertaken in shared
extent of testing and service centres located
our final approach was outside of Hong Kong.
discussed with the Audit Our audit testing of access
Committee. rights controls was also
In the Audit Committee performed in the shared
meetings, there was a service centre locations.
discussion on the status
of the control remediation
programme, work performed
by management and results
of testing performed.
--------------------------------- ---------------------------------------------------------------
Relevant references in the Annual Report and Accounts 2016
* Risk Report, Operational Risk, page 41
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Key audit matters (continued)
b Impact of the Deferred Prosecution Agreement ('DPA')
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Nature of the key audit How our audit addressed
matter the Key Audit Matter
HSBC Holdings plc and The likelihood of the
HSBC Bank USA NA ('HBUS') DPA being breached and
entered into a DPA with a restriction to US dollar
the US Department of Justice clearing imposed was assessed
('DoJ'), the Federal Reserve through:
Board and the United Kingdom's * Inquiry with the Monitor, whose role is explained on
Financial Conduct Authority page 42, to understand the status of his work, his
('FCA') in 2012 regarding assessment of management's progress against the
non-compliance with the requirements of the DPA and his reporting to the DoJ
US Bank Secrecy Act, anti-money and FCA.
laundering rules, and
sanctions laws. The duration
of the DPA is five years. * Reading the 2016 Monitor report and the eleven
If the DOJ was to conclude country reports issued during the year.
that a breach of the DPA
had occurred, there are
a number of potential * Reading a sample of the detailed reports produced by
penalties that could be the compliance function that undertook testing of
imposed that could have controls and processes related to the DPA, and an
a material adverse effect assessment of their findings.
on HSBC Holdings plc and
its subsidiaries business.
This could include loss Each HSBC Holdings plc
of business and withdrawal Risk Committee meeting
of funding, restrictions was attended during the
on US dollar clearing year. At each meeting
functions through HBUS the status of the Global
or revocation of bank Standards Programme, which
licences. aims to address the DPA
As a subsidiary of HSBC recommendations, was discussed.
Holdings plc, the loss The related discussion
of the ability to clear was observed.
US dollars through HBUS Minutes of the HSBC Holdings
could have a significant plc Financial System Vulnerabilities
adverse impact on the Committee meetings, at
going concern status of which the findings of
the Bank in the future. the Monitor were discussed,
were inspected.
Matters discussed with Compliance with the DPA
the Audit Committee was discussed with Group
In considering going concern Legal.
as the basis of preparation
of the consolidated financial
statements, a discussion
was held with the Audit
Committee about our assessment
of the risk of HSBC Holdings
plc and HBUS not meeting
the requirements of the
DPA and the impact on
the going concern assumption
of the Bank.
At the Audit Committee
meeting held prior to
approving the group's
Annual Report and Accounts,
a summary of our testing
procedures and findings
was discussed.
-------------------------------- ---------------------------------------------------------------
Relevant references in the Annual Report and Accounts 2016
* Risk Report, Top and emerging risks, page 21
* Risk Report, Financial Crime Risk, page 42
* Note 43: Legal proceedings and regulatory matters,
page 141
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Key audit matters (continued)
c Investment in associate - Bank of Communications Company, Limited ('BoCom')
------------------------------------------------------------------------------------------------------
Nature of the key audit How our audit addressed
matter the Key Audit Matter
The Bank holds 19.03% Controls in place over
of the listed equity of the value in use model
BoCom at 31 December 2016. were tested, including
This investment is accounted senior management review
for as an associate using controls over the inputs,
the equity method, because assumptions and output
of the significant influence of the model.
that comes from the shareholding. With the assistance of
The market value of BoCom our valuation experts,
has remained below the the appropriateness of
carrying value for a prolonged the model was reviewed
period. At 31 December and challenged and the
2016, the market value discount rate used within
of the investment based the model was independently
on the share price was recalculated.
HK$79.2bn compared with Inputs used in the determination
the carrying value of of assumptions within
HK$122.8bn. the model were challenged
This is considered an and corroborating information
indicator of potential was obtained with reference
impairment under HKFRSs. to external market information,
An impairment test was third party sources, including
performed by the Bank analyst reports, and historical
using a value in use model publically available BoCom
to estimate the investment's information.
value assuming it continues The year-end meeting between
to be held in perpetuity the Bank and senior BoCom
rather than sold. The executive management,
estimated value in use held specifically to identify
at 31 December 2016 was facts or circumstances
HK$124.8bn and on this impacting management assumptions,
basis no impairment was was observed.
recorded. The share of The mathematical accuracy
BoCom's profits has been of the model was tested.
recognised in the consolidated Disclosures made in the
income statement. Annual Report and Accounts
The value in use model in relation to BoCom were
determines the present reviewed.
value of the Bank's share
of BoCom's future cash
flows. The model is dependent
on many assumptions, both
short-term and long-term
in nature. These assumptions
are derived from a combination
of management estimates,
analysts' forecasts and
market data and are highly
judgemental.
Matters discussed with
the Audit Committee
Discussions with the Audit
Committee were focused
on:
* The continued appropriateness of the value in use
model given the period of time that the carrying
value has been in excess of market value;
* The key assumptions used in the model with a
particular focus on the assumptions with the highest
level of uncertainty including the long-term profit
growth rate and the long-term loan impairment charge;
* The reasonably possible alternative assumptions that
were considered to identify those assumptions to
which the value in use was most sensitive and to
demonstrate the impact on the value in use of a
movement in those assumptions; and
* The overall justifications for the divergence between
the value in use and market value.
During these discussions,
management confirmed their
view that the model, assumptions
and cash flow forecasts
remained appropriate.
-------------------------------------------------------------- --------------------------------------
Relevant references in the Annual Report and Accounts 2016
* Financial Review, page 14
* Note 1: Basis of preparation and significant
accounting policies , page 75
* Note 15: Interests in associates and joint ventures,
page 106
------------------------------------------------------------------------------------------------------
Key audit matters (continued)
d The present value of in-force long-term insurance
business ('PVIF') and liabilities under non-linked
life insurance contracts
-----------------------------------------------------------------------
Nature of the key audit How our audit addressed
matter the Key Audit Matter
The group has recorded The controls that management
an asset for PVIF of HK$44,077 had established over the
million and liabilities valuation of the PVIF
under non-linked life insurance asset and the liabilities
contracts of HK$332,057 under non-linked life
million as at 31 December insurance contracts were
2016. tested. These included
The determination of these controls over policy data
balances requires the use reconciliations from the
of appropriate actuarial policyholder administration
methodologies and also system to the actuarial
highly judgemental assumptions. valuation system, controls
Such assumptions include over assumption setting,
the long term economic controls over the review
returns of insurance contracts and determination of valuation
issued, assumptions over methodology, system access
policyholder behaviour and user acceptance testing
such as longevity, mortality controls over the actuarial
and persistency, and management models used, and controls
assumptions over the future over the production and
costs of obtaining and approval of the actuarial
maintaining the group's results.
insurance business. The appropriateness of
Small movements in these the models, methodologies
assumptions can have a and assumptions used (including
material impact on the assumptions over the long
PVIF asset and the liabilities term economic returns
under non-linked life insurance of insurance contracts
contracts. issued, assumptions over
policyholder behaviour
Matters discussed with such as longevity, mortality
the Audit Committee and persistency, and assumptions
We discussed with the Audit relating to future costs
Committee the results of of obtaining and maintaining
our testing procedures the insurance business)
over key assumptions used were reviewed with the
in the valuation of the assistance of our actuarial
PVIF asset and the liabilities experts.
under non-linked life insurance Management's key judgements
contracts including testing and assumptions were evaluated
of changes made during and challenged with the
the reporting period to assistance of our actuarial
the models and to the basis experts. Our challenge
of the calculation of the and evaluation included
risk free discount rate. whether these judgements
were supported by relevant
experience, market information
and formed a reasonable
basis for setting the
assumptions.
-------------------------------- -------------------------------------
Relevant references in the Annual Report and
Accounts 2016
* Risk Report, Risks of insurance manufacturing
operations , page 44-49
* Note 1: Basis of preparation and significant
accounting policies, page 83
* Note 16: Goodwill and intangible assets, page 110
-----------------------------------------------------------------------
Key audit matters (continued)
e Impairment of loans and advances to customers
----------------------------------------------------------------------------
Nature of the key audit How our audit addressed
matter the Key Audit Matter
Impairment allowances The controls management
represent management's has established to support
best estimate of the losses their collective and individual
incurred within the loan impairment calculations
portfolios as at the balance were tested.
sheet date. They are calculated For collective impairment,
on a collective basis controls over the completeness
for portfolios of loans and accuracy of the data
of a similar nature and input to the models were
on an individual basis tested. The appropriateness
for significant loans. of the models used to determine
The calculation of both the impairment allowance
collective and individual was independently assessed
impairment allowances and management's review
is inherently judgemental of key assumptions within
for any bank. the models were tested.
The group's collective The appropriateness of
impairment allowances the collective modelling
are calculated using models methodology was independently
which approximate the assessed and model calculations
impact of current economic were tested through re-performance.
and credit conditions The appropriateness of
on large portfolios of management's judgements
loans. The inputs to these was also independently
models are based on historical assessed with respect to
loss experience with judgement calculation methodology
applied to determine the and segmentation, economic
assumptions used to calculate factors and other judgemental
impairment. Model overlays overlays, the period of
are applied where data historical loss rates used,
driven parameters or calculations loss emergence periods
are not considered representative and the valuation of recovery
of current risks or conditions assets.
of the loan portfolios. For impairment allowances
For specific impairment on individual loans, the
allowances, judgement controls over credit file
is required to determine review processes, approval
when an impairment event of external collateral
has occurred and then valuation vendors, and
to estimate the expected controls over the approval
future cash flows related and recording of significant
to that loan to determine individual impairments
the impairment. were tested.
The audit was focused For impairment allowances
on impairment due to the on individual loans, the
materiality of the loan appropriateness of provisioning
balances and associated methodologies and policies
impairment allowances was independently assessed
and the subjective nature for a sample of loans.
of the impairment calculations. An independent view was
formed on the level of
Matters discussed with allowances booked based
the Audit Committee on review of the detailed
We discussed with the loan, security and counterparty
Audit Committee details information in the credit
of our testing procedures files, including management's
and our findings over evidence to determine when
individual and collective the impairment event occurred
impairment allowances. and, where available, independently
We also discussed with obtained market information.
the Audit Committee changes Calculations for a sample
to risk factors relevant of discounted cash flows
to the collective allowance were re-performed.
models as well as judgements
made on individually significant
loan impairments.
---------------------------------- ----------------------------------------
Relevant references in the Annual Report and Accounts 2016
* Risk report, Credit Risk, page 23-32
* Note 1: Basis of preparation and significant
accounting policies, page 77
* Note 2: Operating profit-Loan impairment charges and
other credit risk provisions, page 88
* Note 11: Impairment allowances against loans and
advances to customers, page 101
----------------------------------------------------------------------------
Other Information
The directors are responsible for the other information. The
other information comprises the information included in the
Financial Highlights, Report of Directors, Financial Review, Risk
Report, Capital and Statement of Directors' Responsibilities
sections of the Annual Report and Accounts 2016, but does not
include the consolidated financial statements and our auditor's
report thereon, which we obtained prior to the date of this
auditor's report, and the Supplementary Notes on the Financial
Statements 2016 and the list of the directors of the Bank's
subsidiary undertakings (consolidated in the financial statements)
during the period from 1 January 2016 to 21 February 2017, which
are expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not
cover the other information and we do not and will not express any
form of assurance conclusion thereon.
In connection with our audit of the consolidated 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 consolidated
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
that we obtained 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 Supplementary Notes on the Financial Statements
2016 and the list of the directors of the Bank's subsidiary
undertakings (consolidated in the financial statements) during the
period from 1 January 2016 to 21 February 2017, if we conclude that
there is a material misstatement therein, we are required to
communicate the matter to the Audit Committee and take appropriate
action considering our legal rights and obligations.
Responsibilities of Directors and the Audit Committee for the
Consolidated Financial Statements
The directors are responsible for the preparation of the
consolidated financial statements that give a true and fair view in
accordance with HKFRSs issued by the HKICPA and the Hong Kong
Companies Ordinance, and for such internal control as the directors
determine is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the consolidated 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.
The Audit Committee is responsible for overseeing the group's
financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated
Financial Statements
Our objectives are to obtain reasonable assurance about whether
the consolidated 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. We report our
opinion solely to you, as a body, in accordance with section 405 of
the Hong Kong Companies Ordinance and for no other purpose. We do
not assume responsibility towards or accept liability to any other
person for the contents of this report.
Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with HKSAs 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 consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise
professional judgement and maintain professional scepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated 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.
--
Auditor's Responsibilities for the Audit of the Consolidated
Financial Statements (continued)
-- 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 concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the consolidated
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 consolidated financial statements, including the disclosures,
and whether the consolidated 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 consolidated 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 Audit Committee 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 Audit Committee with a statement that we
have complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we
determine those matters that were of most significance in the audit
of the consolidated financial statements for 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.
The engagement partner on the audit resulting in this
independent auditor's report is Mr. Mervyn Robert John Jacob.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 21 February 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
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