Mantenimiento Productivo Total (TPM)

The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:

Risk How the scope of our audit responded to the risk

The methodology and assumptions used in setting insurance reserves

Insurance reserves include the Group’s insurance liabilities from continuing business totalling £4.7 billion as detailed in note 30, and the insurance liabilities held for sale, in relation to the International operations, totalling £553.4 million as detailed in note 5. The determination of the value of the insurance reserves requires significant judgment in the selection of key

assumptions and methodologies. Management exercises significant judgement in respect of the trends in bodily injury claims frequency and severity, the propensity for large claims to settle as periodic payment orders (“PPOs“), the likely outcome of the government’s consultation on the Ogden discount rate used by the courts to calculate claims for long- term damages and other regulatory developments.

We have tested the design and implementation and operating effectiveness of the key controls over the end-to-end reserving process. We also tested the completeness and accuracy of the underlying data used in the actuarial calculations through performing reconciliations on the data back to the financial ledger and the actuarial data used by our Deloitte actuarial specialists. Having done this, we worked with those specialists to: • consider the suitability of the methodology used in setting

insurance reserves;

• challenge management’s key assumptions and judgements against industry benchmark; and

• assess whether the reserving methodology has been applied consistently across periods.

We also performed work to understand the sensitivity of insurance reserves to changes in key assumptions and methodology.

Risk How the scope of our audit responded to the risk The valuation of investments including complex financial

instruments and their accounting treatment in accordance with IAS 39 and IFRS 13

The Group’s financial investments shown in notes 25 and 19 represent the largest number on the balance sheet, £6.3 billion. The Group’s investment portfolio has become more diversified with introduction of an infrastructure debt portfolio during 2014. The valuation of financial investments held at fair value is based on a range of inputs. Many of the inputs required can be obtained from readily available liquid market prices and rates. Where observable market data is not available, for example, when determining the valuation of investment property, estimates must be developed based on the most appropriate source data and are subject to significant judgement.

We have performed audit procedures over the valuation and accounting of investments held by the Group. We have tested the design and implementation and operating effectiveness of the key controls over the investment valuation process. On a sample basis we have tested their valuation at the year end. We also performed a review of sources and systems used by the Group for valuation and compared valuations to those obtained from an independent source using various data points where there was a degree of subjectivity. We have reviewed the classification and accounting treatment of the Group’s investment portfolio in line with the accounting polices set out in note 1.12 to the consolidated financial statements. We also have used our financial instrument valuation specialists, where appropriate, to test the valuation of complex financial instruments, such as derivatives and compliance with the hedge accounting rules. We have checked that the Group’s disclosures satisfied the requirements of IAS 39, IFRS 7 and IFRS 13.

IT server migration

Towards the end of 2014, the Group began its program of transitioning onto new IT servers independent from RBS Group infrastructure. There is a risk with a large and complex migration of this nature of data loss and significant business interruption. There is also a risk that the controls surrounding the new servers are inadequate.

We have tested the design and implementation and operating effectiveness of general IT controls around key IT processes on the migrated applications and infrastructure, and have understood the governance process over the IT migration itself. We have tested the Group’s reconciliation of key financial data pre- and post-migration to check the completeness and accuracy of the data migrated.

Transformation projects

There is a risk that the business transformation programmes undertaken by the Group could impact the internal financial reporting control environment, in particular, in areas of the business where there has been significant headcount reduction or new processes and procedures have been introduced. There is a risk that there may no longer be an appropriate level of review or adequate segregation of duties.

We have tested the design and implementation and operating effectiveness of key business processes that have been subject to change. We have tested the processes to determine whether appropriate segregation of duties continues to exist within the Group’s system of internal controls. For example, our procedures included an assessment of the impact to the control environment and processes from the wider implementation of the new claims system in the Commercial division.

Reinsurance asset valuation

The valuation of the reinsurance asset in respect of the ceded part of the insurance reserves, as detailed in note 21, requires significant judgement to reflect the credit risk exposure to long-term assets arising from PPOs.

We have tested the design and implementation and operating effectiveness of the key controls over the reinsurance asset measurement and valuation process.

We have challenged management’s key assumptions over credit risk and the calculation methodology, including a comparison of the underlying credit ratings for key reinsurance counterparties to independent sources. We have also considered the consistency of the approach with the prior year. Revenue recognition

Due to the large number of policies underwritten by the Group there is a risk that the revenue recorded in the financial statements and the flow of premium information from the underwriting systems to the financial reporting ledger is not complete and accurate.

We have tested the design and implementation and operating effectiveness of the key controls over revenue recognition, focusing on the flow of information from the underwriting systems to the financial reporting ledger. In addition, we performed substantive analytical testing procedures on the gross and unearned premium balances.

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The Audit Committee’s consideration of these risks is set out on page 61.

Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.