AAK Annual Report 2020

AAK Annual Report 2020 124 Market valuation of inventory and complete- ness, and market valuation related to open sales and purchase contracts The Group applies hedging of fair value in relation to raw materials in inventory, meaning that a change in the price of the hedge has a direct impact on the value of the inventory. Open sales and purchase contracts are recognized according to IFRS 9, and thus measured and recognized at market value on the balance sheet date. Recog­ nition of raw material purchases is complex and fluctuations in the price of raw materials can have a significant impact on the financial information. An incorrect valuation of contracts and inventory has a direct impact on the Group’s costs and earnings. The Group’s raw material purchasing process is based on the premise that the underlying currency and raw materials are hedged as soon as a sales contract has been signed. A possible omission in recognizing entered contracts would limit AAK’s possibilities to implement appropriate risk management and would also affect the recognized result. How the Group works with risk management and the measurement of sales and entered purchase contracts is described in Note 3. In order to verify that sales and purchase contracts are complete, remeasured at market value, comprise existing contracts and that inventory is measured at market price, our audit included a combination of: • Verification that the recognition of entered sales and purchase contracts are complete and measured at market value, and that inventory is measured at market value. We have assessed the accounting effects. • Gained an understanding of, and tested, the internal control aimed at identifying signed sales and purchase contracts. In addition, we have also tested the Group’s internal controls for updating and registering market prices. • We have also carried out substantive testing, to ensure the existence and registration of signed sales and purchase contracts, inbound deliveries of inventory, and registered market prices. • In addition, we have assessed the complete- ness and correctness of the disclosures presented in the annual report. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. Based on our professional judgment we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Key audit matters Key audit matters of the audit are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consol- idated accounts as a whole, but we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter