Auditing of a insurance company

7/27/2019 Auditing of a insurance company

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INTRODUCTION

TheliberalisationofinsurancesectorhaschangedthenatureofStateinvolvementininsurance fromcontrollingoperations toestablishingandmonitoringmarket functioningrules,

prudential

regulations,

focussing

on

solvency

requirements

and

customer

protection

measures.Accordingly,theGovernmentofIndia,withaviewtoachievingeffectiveregulation,

decidedtoestablisharegulatoroftheinsuranceindustry.ThedecisionoftheGovernmentwastranslatedintorealitybytheenactmentofInsuranceRegulatoryandDevelopment

Authority (IRDA)Act in theyear1999.The InsuranceRegulatoryandDevelopmentAuthority

Act,1999(Authorityinbrief)providedfortheestablishmentofanAuthoritytoprotecttheinterestsofholdersofinsurancepolicies,toregulate,promoteandensureorderlygrowthoftheinsuranceindustryandformattersconnectedtherewithorincidentalthereto.TheAuthority

hasbeenassigned theduty to regulate,promoteandensureorderlygrowthof the insurance

businessandre-insurancebusiness.

ThegeneralinsurancebusinessinIndiaisgovernedbytheInsuranceAct,1938whichisbasedontheBritishInsuranceAct.TheActwasamendedin1969forsocialcontroltogovern

thegeneralinsurancebusinessonhealthylines.However,itwasfeltthattherestillexistedsomescope forimprovement.Inviewofthis,onMay13,1971 thegovernmentnationalisedthegeneralinsuranceindustrybyanordinancewhichbecametheGeneralInsurance(Nationalisation)Act,1972.At that time therewere63domestic insurancecompaniesand44

foreign, insurancecompaniesoperating in India.Themanagementsofall the107companies

weretakenoverbytheGovernmentandaccordinglytheGeneralInsuranceCorporation(GIC)

wasformedasagovernmentcompanyonNovember22,1972.TheGICastheholdingcompany isentrustedwith the taskofsuperintending,controllingandcarryingon thegeneral

insurancebusiness in thecountry. Itssubsidiaries inallthefourzonesof thecountryviz.,the

OrientalFire&General InsuranceCompany (nowknownas theOriental InsuranceCo.Ltd.),

theNationalInsuranceCompanyLtd., theNewIndiaAssuranceCompanyLtd.andtheUnited

IndiaInsuranceCompanywriteallclassesofdirectbusinessofgeneralinsuranceexceptaviationwhichiswrittenbytheGIC.


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LEGAL FRAMEWORK

Itisimportantfortheauditortofamiliarisehimselfwithvariousstatutesgoverningtheinsuranceindustry.Theauditor,whilefamiliarisinghimselfwithvariousrules,regulations,relevantnotifications,shouldalsolookintotheimportantaspectsarisingoutofthosewhichmighthaveaneffectondeterminationofnature, timingandextentofauditprocedures,while

performinghisroleasanauditor

TheprimarylegislationswhichdealwiththeinsurancebusinessinIndiaaretheInsuranceAct,

1938andtheIRDAAct,1999.Variousaspectsrelatingtoauditaredealtwitharoundtheframeworkofthefollowingstatutesandrulesmadethereunder:

(a) TheInsuranceAct,1938(includingInsuranceRules,1939);

(b) TheInsuranceRegulatoryandDevelopmentAuthorityAct,1999;

(c) TheInsuranceRegulatoryandDevelopmentAuthorityRegulationsframedundertheIRDA,Act,1999;

(d) TheCompaniesAct,1956;and

(e) TheGeneralInsuranceBusiness(Nationalisation)Act,1972(includingRulesframedthereunder).

Somerelevantstatutoryprovisionsarediscussedbelow:

Insurer-Section2(9)of the InsuranceAct,1938(hereinafterreferred toas the Act)defines

thetermInsureras:

(a)anyindividualorunincorporatedbodyofindividualsorbodycorporateincorporatedunderthelawofanycountryotherthanIndia,carryingoninsurancebusinessnotbeingapersonspecifiedinsub-clause(c)ofthisclausewhich

(i) carriesonthatbusinessinIndia,or

(ii)hashisor itsprincipalplaceofbusiness,employsa representative,ormaintainsaplaceofbusiness,inIndia;(b) anybodycorporatenotbeingapersonspecified insub-clause(c)ofthisclausecarrying

on thebusinessof insurance,which isabodycorporate incorporatedunderany law for

the timebeing inforce inIndia;orstands toanysuchbodycorporate intherelationofa

subsidiarycompanywithinthemeaningof theIndianCompaniesAct,1913,(7of1913),

asdefinedbysub-section(2)ofSection2ofthatAct;and

(c) anypersonwho in Indiahasastandingcontractwithunderwriterswhoaremembersof


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theSocietyofLloydswherebysuchpersonisauthorisedwithinthetermsofsuchcontracttoissueprotectionnotes,covernotes,orotherdocumentsgrantinginsurancecovertoothersonbehalfoftheunderwriters,

butdoesnot includeaprincipalagent,chiefagent,specialagent,oran insuranceagent

oraprovidentsociety.

PolicyHolder-Section2(2)ofthe InsuranceAct,1938definesthetermpolicyholderasaperson towhomthewholeofthe interestof thepolicyholderin thepolicyisassignedonceand forall,butdoesnot includeanassigner thereofwhose interest in thepolicy isdefensible

orisforthetimebeingsubjecttoanycondition.

Prohibitionof InsuranceBusinessbyCertainPersons -Prior to the InsuranceRegulatory

andDevelopmentAuthorityAct,1999coming into force,asperSection2Cof the InsuranceAct,1938,theinsurancebusinesscouldbetransactedbyapubliccompany,aco-operativesocietyoranybodycorporate.Allthethreekindsoforganisationswerepermittedtoengagein

thebusinessofanyclassofinsurance.Thirdprovisotosection2C(1)oftheInsuranceAct,1938(insertedbytheIRDAAct,1999)prohibitspersonsotherthananIndianinsurancecompanytobegintotransacttheinsurancebusinessafterthecommencementoftheInsuranceRegulatoryandDevelopmentAuthorityAct,1999.Thus,theenterprisesthatwereengagedintheinsurancebusinesspriortothecommencementoftheIRDAAct,1999continuetoexistbutanewinsuranceindustryentrantcanonlybeanIndianinsurancecompany.Theprovisoinsertedundersection2C(1)oftheActisreproducedbelow:

Providedalso thatno insurerother thanan Indian InsuranceCompanyshallbeginto carryon anyclassofinsurance businessin IndiaunderthisActon orafterthecommencementoftheInsuranceRegulatoryandDevelopmentAuthorityAct,1999.

ThedefinitionofIndian InsuranceCompanygivenundersection2(7A)ofthe InsuranceAct,1938isalsoreproduced:

AnIndianinsurancecompanymeansaninsurerbeingacompany-

(a) whichisformedandregisteredundertheCompaniesAct,1956;

(b) inwhich theaggregateholdingofequitysharesbya foreigncompany,eitherby itselfor

throughitssubsidiarycompaniesornomineesdoesnotexceed26%ofthepaidupequity

capitalofsuchIndianinsurancecompany;and


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orre-insurancebusiness.

Explanation:Forthepurposesofthisclause,theexpressionforeigncompanyshallhavethe

meaningassignedtoitunderClause(23A)ofsection2oftheIncome-taxAct,1961(43of1961).

The Insurance (Amendment)Act,2002providesaspersub-section (3)ofSection2C thatan

insurancecooperativesocietymaycarryonanyclassofinsurancebusinessinIndia.

RegistrationofIndianInsuranceCompanies-Section3oftheInsuranceAct,1938requires

everyinsurertoobtainacertificateofregistrationbeforecommencementofinsurancebusiness in India.Thesectionempowers theAuthority tomake regulations for registrationof

insurers.ItmaybenotedherethatnoinsurerotherthananIndianinsurancecompanycancommencetheinsurancebusinessaftertheenactmentoftheIRDAAct,1999.Theregistration

ofIndianinsurancecompaniesisdoneinaccordancewiththeInsuranceRegulatoryandDevelopmentAuthority (Registrationof Indian InsuranceCompanies)Regulations,2000.The

salientfeaturesoftheseRegulationsareasfollows:

LicensingofInsuranceAgents-Section42oftheInsuranceAct,1938requiresthatapersondesirousofbecominganinsuranceagentforthepurposeofsolicitingorprocuringinsurancebusinessshouldnotsufferfromanyofthedisqualificationsmentionedinsub-section (4)ofSection42oftheAct. Inorder tobequalifiedundersub-section (4),apersondesirousofbecominganinsuranceagentshouldpossesstherequisitequalificationsandpracticaltrainingforaperiodnotexceeding12months,asmaybespecifiedbytheregulations

madebytheAuthorityinthisbehalf.ItmaybenotedthattheAuthorityhasissuedIRDA(LicensingofInsuranceAgents)Regulations,2000.Aninsuranceagentseekingrenewalofhis

license isalsorequiredtocomplywiththeIRDA(Licensingof InsuranceAgents)Regulations,

2000.Thereisalsoastringentcodeofconductprescribedfortheinsuranceagentsandforthoseseekingrenewaloflicense,atleast50hoursoftrainingisaprerequisite.


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FeaturesofAccountingSystemofInsuranceCompanies

Thesystemofrecording,classifyingandsummarisingthetransactionsininsurancecompanies,is,insubstance,nodifferentfromotherentities.However,incaseofinsurancecompanies, the ledgeraccountsspecially thoseofpremiums,claims,commissions,etc.need

tobegivengreaterattention.ThefunctionsofaccountingsystemingeneralinsurancebusinessunderITenvironmentmaybebasedon:

Underwritingmodule

Claimsmodule

Agencymanagementmodule

Accountsmodule

Investmentmodule

Reinsurancemodule

Everyinsurer,afterthecommencementoftheInsuranceRegulatoryandDevelopmentAuthorityAct,1999,inrespectofinsurancebusinesstransactedandinrespectofshareholdersfunds,isrequiredtoprepareaBalanceSheet,aProfitandLossAccount,aseparateAccountofReceiptsandPayments,aRevenueAccountforeachyearinaccordance

withtheRegulationsmadebytheAuthority.Sub-section1Bofsection11,oftheInsuranceAct,1938,specifiesthateveryinsurershouldkeepseparateaccountsrelatingtofundsofshareholdersandpolicyholders.

12.4.1FormandContentsofFinancialStatements-Section11(1A)oftheInsuranceAct,1938provides-

Everyinsurer,onorafterthecommencementoftheInsuranceRegulatoryandDevelopmentAuthorityAct,1999,inrespectofinsurancebusinesstransactedbyhimandinrespectofhisshareholdersfunds,shall,attheexpirationofeachfinancialyear,preparewithreferencetothatyear,abalance-sheet,aprofitandloss

account,aseparateaccountofreceiptsandpayments,arevenueaccountinaccordancewiththeregulationsmadebytheAuthority.

TheAuthority,inpursuanceofthepowersconferredtoitbytheprovisionsofSection114Aofthe

InsuranceAct,1938,hasissuedregulationsforthepreparationofthefinancialstatementsandauditorsreportofcompaniescarryingoninsurancebusiness.TheRegulationscontainthree


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oftheRegulationslaysdowntheaccountingprinciples,disclosuresformingpartoffinancialstatements,generalinstructionsforpreparationoffinancialstatements,thecontentsofthemanagementreportandtheformatsinwhichthefinancialstatementsofaninsurercarryingongeneralinsurancebusinessshouldbedrawnup.ScheduleBisinfiveparts,coveringvariousaspectsrelatedtothepreparationoffinancialstatements,whichformthemainbasisforpreparationoffinancialstatementsofgeneralinsurancecompanies.Thefivepartshavebeenoutlined in the followingparagraphs.ScheduleC to theRegulations laysdown thematters tobe

dealtwithby theauditors reportofan insurancecompany.ScheduleC isapplicable to insurers

carryingongeneralinsurancebusinessaswellaslifeinsurancebusiness.

12.4.2RequirementsofScheduleBtotheIRDA(PreparationofFinancialStatementsandAuditorsReportofInsuranceCompanies)Regulations,2002

PartIAccountingPrinciplesforPreparationofFinancialStatements

1. ApplicabilityofAccountingStandards 2. Premium

3. PremiumDeficiency 4. AcquisitionCosts5.Claims6. RecognitionofSurplusarisinginnon-

participatingfundsasprofit/lossintheProfit&LossAccount

7. Loans 8. CatastropheReserve

PARTII:DisclosuresformingpartofFinancialStatements

PartIII:GeneralInstructionsforPreparationofFinancialStatements

PartIV:ContentsofManagementReport

PartV:PreparationofFinancialStatement


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AuditofAccounts

Undersection12oftheInsuranceAct,1938,thefinancialstatementsofeveryinsurerarerequiredtobeauditedannuallybyanauditor.Section2(4)oftheInsuranceAct,1938defines

the term auditorasapersonqualifiedunder theCharteredAccountantsAct,1949 toactas

anauditorofacompany.Theauditor,forauditoffinancialstatements,hasthepowerstoexercisetherightsvestedin,anddischargethedutiesandbesubjecttotheliabilitiesandpenaltiesimposedonauditorsofcompaniesundertheCompaniesAct,1956.

TheprovisionsofSection12oftheInsuranceAct,1938applyonlyinacasewherethefinancialstatementsof the insurerarenotsubject toauditunder theCompaniesAct,1956.A

companycarryingongeneralinsurancebusinessissubjecttoauditrequirementslaiddownundertheCompaniesAct,1956.Thefinancialstatementsundersection12includeBalanceSheet,ProfitandLossAccountand

RevenueAccount.Section12of the InsuranceAct,1938doesnotcover the requirement for

auditoftheReceiptsandPaymentsAccountofan insurer.ItmaybenotedthattheInsurance

RegulatoryandDevelopmentAuthorityAct,1999 insertedanewsub-section (1A) inSection11oftheInsuranceAct,1938.Thesub-sectionhasanoverridingeffectoversub-section(1)of

section11thatprescribedthefinancialstatementstobepreparedbyaninsurer.Thenewsub-

sectionrequiresthatafterthecommencementsofIRDAAct,1999,every insurer, inrespectof

insurancebusinesstransactedbyhimandinrespectofhisshareholdersfunds,shouldprepare,attheendofeachfinancialyear,aBalanceSheet,aProfitandLossAccount,aseparateAccountofReceiptsandPaymentsandaRevenueAccount inaccordancewith the

regulationsmadeby the IRDA.SinceReceiptsandPaymentsAccounthasbeenmadeapart

offinancialstatementsofaninsurer,itisimplied thattheReceiptsandPaymentAccountisalsorequiredtobeaudited.

TheAuthority,inexerciseofthepowersconferredbytheInsuranceAct,1938,issuedtheIRDA(PreparationofFinancialStatementsandAuditorsReportofInsuranceCompanies)Regulations,2000.TheseRegulations require theauditorofan insurancecompany to report

whether theReceiptsandPaymentsAccountof the insurer is inagreementwith thebooksof

accountandreturns.TheauditorisalsorequiredtoexpressanopinionastowhethertheReceiptsandPaymentsAccounthasbeenprepared inaccordancewith theprovisionsof the

relevantstatutesandwhether theReceiptsandPaymentsAccountgivesa trueand fairview


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12.5.1Appointmentofauditors-TheappointmentofstatutoryauditorsintheGeneralInsuranceCorporationofIndia,anditssubsidiariesandthedivisionsismadebytheComptrollerandAuditorGeneralof India,as in thecaseofotherpublicsectorundertakings.

Theappointment

ofauditors

oftheagencies

abroad

ismade

bytheBoard

ofDirectors

ofeach

company.

12.5.2RightsanddutiesofBranchAuditors-Itisapracticethatthedivisionalofficespreparesa trialbalance inamanner that itprovides informationrequiredtobe includedinthe

various formatsof financialstatementsprescribed in the InsuranceAct.Each trialbalance, in

whichare incorporated the figures relating to thebranchesof thedivisions, is required tobe

auditedandthereportthereonisfurnishedtothestatutoryauditors.ThedivisionsofthecompaniescarryingongeneralinsurancebusinessaretreatedforthepurposesoftheCompaniesAct,1956astheirbranches.Itfollowsthatthebranchauditorsappointedtoconducttheauditofthedivisionshave thesamerightsandobligationsunderthestatuteasthoseofthe,statutoryauditorstowhomtheyareexpectedtosubmittheirreport.

12.5.3AuditorsReport-TheAuthorityhasprescribedthematterstobedealtwithbytheAuditorsReportvideRegulation3underScheduleCofIRDA(PreparationofFinancialStatementsandAuditorsReportof InsuranceCompanies)Regulations,2000.TheSchedule

Cisreproducedbelow-

Thereportoftheauditorsonthefinancialstatementsofeveryinsurershalldealwiththespecifiedherein-

1. (a) That theyhaveobtainedall the information andexplanationswhich,to thebestoftheirknowledgeandbelief,werenecessaryforthepurposesoftheirauditandwhethertheyhavefoundthemsatisfactory;

(b) Whetherproperbooksofaccounthavebeenmaintainedbytheinsurersofarasappearsfromanexaminationofthosebooks;

(c) Whetherproperreturns,auditedorunaudited,frombranchesandotherofficeshave

beenreceivedandwhethertheywereadequateforthepurposeoftheiraudit;

(d) Whether theBalanceSheet,RevenueAccountsandProfitandLossAccountdealt

withbythereportandtheReceiptsandPaymentsAccountareinagreementwiththebooksofaccountandreturns;

( ) Wh th th t i l l ti f li biliti i d l tifi d b th i t d


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accordancewiththeguidelinesandnorms,ifany,issuedbytheauthorityand/orthe

ActuarialSocietyofIndiainconcurrencewiththeAuthority.

2. Theauditorsshallexpresstheiropinionon:

(a) (i) WhethertheBalanceSheetgivesatrueandfairviewoftheinsurersaffairsasattheendofthefinancialyear/period;

(ii)Whether theRevenueAccountgivesa trueand fairviewof thesurplusor thedeficitforthefinancialyear/period;

(iii)Whether theProfitandLossAccountgivesa trueand fairviewof theprofitorlossforthefinancialyear/period;

(iv)Whether theReceiptsandPaymentsAccountgivesa trueandfairviewof thereceiptsandpaymentsforthefinancialyear/period;

(b) Thefinancialstatementsstatedat(a)abovearepreparedinaccordancewiththerequirementsof the InsuranceAct,1938(4of1938), the InsuranceRegulatoryand

DevelopmentAuthorityAct,1999 (41of1999)and theCompaniesAct,1956 (1of1956),totheextentapplicableandinthemannersorequired.

(c) Investmentshavebeenvalued inaccordancewiththeprovisionsoftheActand the

Regulations.

(d) TheaccountingpoliciesselectedbytheinsurerareappropriateandareincompliancewiththeapplicableAccountingStandardsandwiththeaccountingprinciples,asprescribedintheseRegulationsoranyorderordirectionissuedbythe

Authorityinthisbehalf.

3. Theauditorsshallfurthercertifythat:

(a) theyhavereviewedthemanagementreportandthatthereisnoapparentmistakeor

materialinconsistencieswiththefinancialstatements;and

(b) the insurerhascompliedwith the termsandconditionsoftheregistrationstipulated

bytheAuthority.

4. Acertificatesignedby theauditors(which is inaddition toanyothercertificateor report

whichisrequiredbylawtobegivenwithrespecttothebalancesheet)certifyingthat:

(a) theyhaveverifiedthecashbalancesandthesecuritiesrelatingtotheinsurersloans,reversionsandlifeinterests(inthecaseoflifeinsurers)andinvestments;

(b) theextent,ifany,towhichtheyhaveverifiedtheinvestmentsandtransactions


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AuditProceduresThe importantpartof thebusinessoperationsofgeneral insurancecompaniescomprises the

issuanceofpoliciesforrisksassumedandtoindemnifytheinsuredforlossestotheextentcoveredbysuchpolicies.Infinancialterms,theseoperationsgettranslatedintothereceiptandrecordingofpremiumsandtherecordingandsettlementofclaims.Bothpremiumsandclaimshaveasignificantimpactontheinsurancecompaniesrevenues,itwouldbeanimportantpartofthedutyoftheauditortosatisfyhimselfthatthefinancialtransactionsinvolvingboth theseoperationshavebeen fairlyandproperly recorded in the relevantbooks

ofaccount.Theauditorshouldalsoensure that the legalrequirementsas tothedisclosureof

theseitemsarecompliedwithinthefinancialstatements.

Premium-Insurancepremiumiscollectedupon issuingpolicies.It istheconsideration

forbearing theriskby the insurancecompany.Theassumptionof theriskstartson the issue

ofreceiptbasedontheacceptanceofproposalformorcovernotebytherespectiveunderwritingdepartment.This receipt is recordedas thepremium income in thebooksof the

insurancecompany.Premiummaybeacceptedeitherincash/cheque/DemandDraft/payorder,bankguarantee,cashdeposit,etc.Thepremiumcollectionsarecredited toaseparate

bankaccountandnowithdrawalsarenormallypermittedfromthataccountformeetingthegeneralexpenditure.Asperthepolicyoftheinsurancecompany,thecollectionsaretransferred to theRegionalOfficeorHeadOffice.Assoonas the insurancepolicy is issued,

anentryismadeintheRegisterofPoliciesshowingalltherelevantdetails.

NoRiskAssumptionwithoutPremium -Noriskcanbeassumedby the insurerunless the

premium isreceived.Accordingtosection64VBoftheInsuranceAct,1938,noinsurershould

assumeanyrisk in India inrespectofany insurancebusinessonwhichpremium isordinarily

payable inIndiaunlessanduntil thepremiumpayable isreceivedor isguaranteed tobepaid

bysuchpersoninsuchmannerandwithinsuchtime,asmaybeprescribed,orunlessanduntildepositofsuchamount,asmaybeprescribed,ismadeinadvanceintheprescribedmanner.Thepremiumreceiptofinsurancecompaniescarryingongeneral insurancebusiness

normallyariseoutofthreesources,viz.,premiumreceivedfromdirectbusiness,premiumreceivedfromreinsurancebusinessandtheshareofco-insurancepremium.

VerificationofPremiums-Verificationofpremium isofutmostimportancetoanauditor.The

auditor should apply inter alia the following procedures for verification of premium


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internalcontrolsandcompliance thereofas laiddown forcollectionand recordingof the

premiums.

Theauditorshouldascertain thatall thecovernotesrelating to the risksassumedhave

beenseriallynumberedforeachclassofbusiness.Theauditorshouldalsoverifythatthere isanadequate internalcheckon the issueofstationerycomprisingofcovernotes,

policydocuments,stamps,etc.Theauditormayapplysamplingtechniquesforverificationoflargervolumeoftransactions. Theauditorshouldensure thatpremium inrespectofrisks inceptingduring the relevant

accountingyearhasbeenaccountedaspremiumincomeofthatyearonthebasisofpremium revenuerecognitiondiscussed in thisChapter.Theauditor,aspartofhisaudit

procedures,shouldmakeanassessmentofthereasonabilityoftheriskpatternestablishedbythemanagement.Theauditorshouldalsoseewhetherthepremiumreceivedduringtheyearbutpertainingtoriskcommencinginthefollowingyearhasbeen

accountedforundertheheadPremiumReceivedinAdvanceandhasbeendisclosedseparately.Normally,suchinstancesrelatetotheissueofcovernotesandcertificatesat

theendoftheaccountingyearrelatingtoriskscommencinginthenextaccountingperiod.Generally, there isacolumn in thePremiumRegistercalledCommencementof

Risk,indicatingthedateandtimefromwhichtheriskunderthepolicyissuedhascommenced.Theauditorshouldverifythatpolicydocumentshavenotbeenissued,orwhereissued,thecompanywasnotatrisk,incase:

(a) premiumhadnotbeencollectedatall;

(b) premiumhadbeencollectedbuttherelevantchequeshavebeendishonoured;(referChequeDishonouredBook);

(c) premiumhadnot immediatelybeencollecteddue to furnishingofabankguarantee

orcashdepositbuteither thedepositorguaranteehad fallenshortorhasexpired

or thepremiumhadbeencollectedbeyond thestipulated time limit (i.e., there isa

shortfallinbankguaranteeaccountorcashdepositaccountoftheinsured);

(d) premiumhadnotbeencollectedduetoriskcoverbeingincreasedorwherestipulatedlimitshavebeenexhaustedinrespectofopendeclarationpolicies(i.e.,wherepremiumhasaccruedbuthasnotbeenreceived);and

(e) instalmentsofpremiumhavenotbeencollectedintimeinrespectofcertaincategoriesofpolicies,e.g.,marine-cum-erectionpolicieswherefacilityhasbeen


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centofthetotalpremiumpayablebyinstalments).

Theauditorshouldexaminewhetherthereinsurancecompanyisnotunderariskinrespectofamountlyingatcreditandoutstandingasattheyear-endinthefollowingaccounts:

(a) DepositPremiumAccount;

(b) PremiumReceivedinAdvanceAccount;

(c) InspectorsDepositsAccount;and

(d) AgentsPremiumAccounts

Theauditorshouldverifythecollectionslodgedbyagentsafterthebalancesheetdateto

seewhetheranycollectionpertainstoriskcommencingfortheyearunderaudit.Theauditorshouldalsocheckthatthepremiumhasbeenrecordedoriginallyatthegrossfigure,i.e.,withoutprovidingforunexpiredrisksandreinsurances.

Incaseofco-insurancebusiness,where thecompany isnot the leader,becauseof the

non-availabilityoftherelevantinformationinmanycasesthepremiumisnotbookedeventhoughtheriskhascommencedduringtherelevantaccountingyear.Theauditorshouldseethatthecompanysshareofthepremiumhasbeenaccountedforonthebasisof theavailable informationonnatureof riskand theprovisionalpremiumcharged

bytheleadinginsurer.Theauditorshouldexaminethecommunicationsissuedtothecompanybytheleadinginsurersadvisingthemofthecompanysshareofpremiumincome.Suchcommunicationsshouldbeseeneven in respectof thepost-auditperiod.

Where thecompany is the leader, theauditorshouldobtainareasonableassurancethat

only thecompanysownshareofpremiumhasbeenshownas incomeandaccountsof

theothercompanieshavebeencreditedwiththeirshareofthepremiumcollected.

TheauditorshouldcheckwhetherPremiumRegistershavebeenmaintainedchronologically, foreachunderwritingdepartment,givingfullparticulars includingservice

taxchargedasperacceptanceadviceonaday-to-daybasis.TheauditorshouldverifywhetherthefiguresofpremiummentionedintheregistertallywiththoseinGeneralLedger.

Wherepolicieshavebeenissuedwithaprovisiontocollectpremiumperiodically(i.e.,under instalmentclause,specialdeclarationpolicyorperiodicaldeclarationunderopenpolicies inmarine insurance), theauditorshouldcheckwhetherpremiaarecollectedas

andwhentheybecomedue.


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yearunderaudit.Alsoexaminewhetherinstalmentsofpremiumfallingdueinthesubsequentyearhavenotbeenrecognisedintheaccountsasoutstandingpremium.

Theauditorshouldverifytheyearendtransactionstocheckthatamountsreceivedduringtheyearinrespectofriskscommencing/instalmentsfallingdueonorafterthefirstdayofnextfinancialyeararenotcreditedtopremiumaccountbutcreditedtoPremiumReceivedinAdvanceAccount.

Theauditorshouldverify thecollectionsremittedbyagents immediatelyafter thecut-off

datetoverifytheriskassumedduringtheyearunderauditonthosecollections.

Theauditorshouldalsocheckthat incaseofcancellationofpolicies/covernotes issued,

noriskhasbeenassumedbetweenthedateofissueandsubsequentcancellationthereof.

Wherepremiumoriginallyreceivedhasbeenrefunded, theauditorshouldverifywhether

theagencycommissionpaidonsuchpremiumhasbeenrecovered.

Theauditorshouldverifywhetherservice taxhasbeencharged from the insured,at the

ratesinforce,onthetotalpremiumforallclassesofbusinessotherthanthoseexempted

underservicetaxlaws.CheckwhetherservicetaxsocollectedisdisclosedunderCurrentLiabilitiestotheextentnotdepositedinGovernmentsAccount.

Inthecaseofco-insurancebusiness,theauditorshouldverifywhetherservicetaxatthe

rates in forceon thewholepremiumhasbeenchargedorcollected from the insuredby

thecompanyincaseitistheleader.

CheckthatservicetaxsocollectedonpremiumchargedtrainedfromtheinsuredbythecompanyhavebeenregularlydepositedintheGovernmentsAccount.

Claims-Thecomponentsofthecostofclaimstoan insurercomprisetheclaimsunderpoliciesandclaimsettlementcosts.Claimsunderpoliciescomprisetheclaimspaid for losses

incurred,andthoseestimatedoranticipatedclaimspendingsettlementsunderthepolicies.Settlementcostofclaims includessurveyorfee, legalexpenses,etc.Aliabilityforoutstanding

claimsshouldbebroughttoaccountonthefollowing:

DirectBusiness;

InwardReinsuranceBusiness;and

Co-Insurancebusiness

The liabilityincludesfuturepayments inrelationtounpaidreportedclaimsandclaimsincurred


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differencebetween theestimatedliabilitiesforoutstandingclaimsinrespectofclaimsunderpolicies,whetherdueor intimatedat thebeginningandat theendof thefinancialperiod.The

accountingestimatealso includesclaimscostadjusted forsalvagevalue if there issufficient

degreeofcertaintyofitsrealisation.

CheckthatservicetaxsocollectedonpremiumchargedtrainedfromtheinsuredbythecompanyhavebeenregularlydepositedintheGovernmentsAccount.

RegistersandRecords-Thefollowingregisterandrecordsaregenerallypreparedinrespect

ofclaims:

ClaimsIntimationRegister;

ClaimsPaidRegister;

ClaimsDisbursementBankBook;

ClaimsDockets,normallycontainingthefollowingrecords:

Claimintimation,claimform,particularsofpolicy,surveyreport,Photographshowingdamage,repairersbills,letterofsubrogation,policereport,fireservicereport,claimsettlementnote,claimsatisfactionnote,salvagereport,salvagedisposalnote,claimsdischargevoucher,etc.;

Reportofqualityassuranceteam;and

Salvageregister

TheClaimAccountisdebitedwithallthepaymentsincludingrepaircharges,firefightingexpenses,policereportfees,surveyfees,amountdecreedbytheCourts,travelexpenses,photographcharges,etc.TheprovisionforclaimsincurredbutnotreportedisnotmadeatBranch/DivisionalOfficelevelbutattheHeadOfficelevel.

VerificationofClaims

ClaimsProvisions-Theauditorshouldobtainfromthedivisions/branches,theinformationforeachclassofbusiness,categorizing theclaimsvalue-wisebeforecommencingverification

oftheclaimsprovisions,sothatappropriatestatisticalsamplingtechniquesmaybeapplied,to

ensurethatrepresentativevolumeofclaims isverifiedforeachclassofbusiness.Theauditor

shoulddeterminethetotalnumberofdocumentstobecheckedgivingdueimportancetoclaim

provisionsofhighervalue.

Theoutstandingliabilityattheyear-endisdeterminedatthedivisions/brancheswheretheliabilityoriginatesforoutstandingclaims.Thereafter,basedonthetotalconsolidatedfigurefor

allthedivisions/branches,theHeadOfficeconsidersafurtherprovisioninrespectof


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viewthefollowing:

(i) thatprovisionhasbeenmade forallunsettledclaimsasat theyear-endon thebasisof

claims lodged/communicatedby thepartiesagainst thecompany.Thedateof loss (and

not thedateofcommunication thereof) is important for recording/ recognizing theclaim

asattributable toaparticularyear. Incertaincircumstances, theclaimsare incurredbytheinsurancecompanybutarenotreportedatthebalancesheetdatebytheinsured.Suchclaimsareknownasclaimsincurredbutnotreported(IBNR).Theauditorshouldcheck therecords forsubsequentperiods toascertain thatadequateprovisionhasbeen

createdforsuchclaimsalso.

(ii)thatprovisionhasbeenmadeforonlysuchclaimsforwhichthecompanyislegallyliable,consideringparticularly,(a)thattheriskwascoveredbythepolicy,ifinforce,andtheclaimsaroseduringthecurrencyof thepolicy;and(b) thatclaimdidnotariseduring the

periodthecompanywasnotsupposedtocovertherisk,e.g.,wherethepremiumwasnot

paidorwherechequescoveringpremiumhavebeendishonoured(refersection64VBof

theInsuranceAct,1938)orwhereatotallossunderapolicyhasalreadybeenmet/settled.

(iii)that theprovisionmade isnormallynot inexcessof theamount insuredexcept insomecategoriesofclaimswheremattersmaybesub-judiceinlegalproceedingswhichwilldetermine thequantumofclaim, theamountofprovisionshouldalso includesurvey fee

andotherdirectexpenses.

(iv)thatindeterminingtheamountofprovision,eventsafterthebalancesheetdatehavebeenconsidered,e.g.,(a)claimssettledforamateriallyhigher/loweramountinthepost-

auditperiod;(b)claimspaidbyotherinsurancecompaniesduring theyearunderauditandcommunicated tocompanyafter thebalancesheetdatewhereothercompaniesare

theleadersinco-insurancearrangements;and(c)furtherreportsbysurveyorsorassessors.

(v) thattheclaimsstatusreportsrecommendedtobepreparedbytheDivisionalManageron

largeclaimsoutstandingattheyear-endhavebeenreviewedwiththecontentsofrelevant filesordockets fordetermining excess/shortprovisions.Thesaid reportshould

becompleteas tomaterial facts toenable theauditor to takea fairviewof theprovision

made.

(vi)thatindeterminingtheamountofprovision,theaverageclausehasbeenappliedin


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suchpaymentshavebeenbookedtoclaims.

(viii)thatincaseofco-insurancearrangements,thecompanyhasmadeprovisionsonlyinrespectofitsownshareofanticipatedliability.

(ix)thatwhereveranunduly long timehaselapsedafterthefilingof theclaimandtherehasbeennofurthercommunicationandnolitigationorarbitrationdisputeisinvolved,thereasonsforcarryingtheprovisionhavebeenascertained.

(x) thatwhereverlegaladvicehasbeensoughtortheclaimisunder litigation,theprovisions

ismadeaccordingtothelegaladvisorsviewanddifferences,ifany,areexplained.

(xi)thatinthecaseofamountspurelyinthenatureofdepositswithcourtsorotherauthorities,adequateprovisionismadeanddepositsarestatedseparatelyasassetsand

provisionsarenotmadenetofsuchdeposits.

(xii)thatnocontingentliabilityiscarriedinrespectofanyclaimintimatedinrespectofpoliciesissued.

(xiii)thattheclaimsareprovidedfornetofestimatedsalvage,whereverapplicable.(xiv) that intimationof loss is receivedwithina reasonable timeand reasons forunduedelay

inintimationarelookedinto.

(xv)thatprovisionshavebeenretainedasat theyearend inrespectofguaranteesgivenbycompanytovariousCourtsforclaimsunderlitigation.

(xvi) thatdueprovisionhasbeenmadeinrespectofclaimslodgedatanyofficeofthecompanyother than theone fromwhere thepolicywas taken,e.g.,avehicle insuredat

MumbaihavingmetwithanaccidentatChennainecessitatingclaim intimationatoneof

theofficesofthecompanyatChennai.

Incasesofmaterialdifferencesin theliabilityestimatedbythemanagementand thatwhichoughttobeprovidedintheopinionoftheauditor,thesamemustbebroughtoutintheauditorsreportafterobtainingfurtherinformationorexplanationfromthemanagement.Fordeterminingtheadequacyoftheprovisionsinrespectofanycategoryofbusiness,theauditor

mayresort to themethodof testing theactualpayments,wherevermade,with theprovisions

madeearlierforthatcategoryofbusiness.Whethersuchliabilityhasbeenestimatedinthepastonafairandrealisticbasiscan,thus,beexaminedbylookingintocurrentyearspaymentsagainstprovisionsoftheearlieryear.

ClaimsPaid -Theauditormaydetermine theextentofcheckingofclaimspaidon thesame

lineassuggestedforoutstandingclaims.Otheraspectsinrespectofclaimspaidtobe


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ofcompanysshareandthebalancehasbeendebitedtootherinsurancecompanies.

(ii)thatincaseofclaimspaidonthebasisofadvicesfromotherinsurancecompanies(where thecompanyisnottheleaderinco-insurancearrangements),whethershareofpremiumwasalsoreceivedbythecompany.Suchclaimswhichhavebeencommunicatedaftertheyear-endforlosseswhichoccurredpriortotheyearendmustbe

accountedforintheyearofaudit.

(iii)that theclaimspaymentshavebeendulysanctionedby theauthorityconcernedandthepaymentsoftheamountsaredulyacknowledgedbytheclaimants;

(iv)thatthesalvagerecoveredhasbeendulyaccountedforinaccordancewiththeprocedureapplicabletothecompanyandaletterofsubrogationhasbeenobtainedinaccordancewiththelaiddownprocedure;

(v) thattheamountsofthenatureofpureadvances/depositswithCourts,etc.,inmattersunder litigation/arbitration havenotbeentreatedasclaimspaidbutareheldasassetstill

finaldisposalofsuchclaims.Insuchcases,fullprovisionshouldbemadeforoutstanding

claims;

(vi)thatpaymentmadeagainstclaimspartiallysettledhavebeendulyvouched.Insuchcases,thesanctioningauthorityshouldbethesameastheonewhichhaspowersinrespectofthetotalclaimedamount;

(vii)thatincaseoffinalsettlementofclaims,theclaimanthasgivenanunqualifieddischargenote,notinvolvingthecompanyinanyfurtherliabilityinrespectoftheclaim;and

(viii)thatthefiguresofclaims,wherevercommunicatedfortheyearbytheDivisiontotheHeadOfficeforpurposesofreinsuranceclaims,havebeenreconciledwiththetrialbalance-figure.

Commission- It isawell-known fact that insurancebusiness issolicitedby insurance

agents.Theremunerationofanagentispaidbywayofcommissionwhichiscalculatedbyapplyingapercentage to thepremiumcollectedbyhim.Commission ispayableto theagents

forthebusinessprocuredthroughthemandisdebitedtoCommissiononDirectBusinessAccount.Thereisaseparateheadforcommissiononreinsuranceacceptedwhichusuallyarise incaseofHeadOffice.Itmaybenotedthatundersection40ofInsuranceAct,1938,no

commissioncanbepaidtoapersonwhoisnotanagentoftheinsurancecompany.

Theauditorshould,interalia,dothefollowingforverificationofcommission: Vouchdisbursemententrieswith reference to thedisbursementvoucherswithcopiesof


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forceandincometaxisdeductedatsource,asapplicable.

Testcheckcorrectnessofamountsofcommissionallowed.

Scrutiniseagentsledgerand thebalances,examineaccountshavingdebitbalances, ifany,andobtain informationon thesame.Necessary rectificationofaccountsandotherremedialactionshavetobeconsidered.

Checkwhethercommissionoutgofortheperiodunderauditbeendulyaccounted.

InterestandBankcharges-AllexpensesincurredtowardsmaintenanceofBankAccount, interestandothercharges leviedbybankers to thenormalcourseofbusinessother

thanbankexpensesrelatingtoinvestments(interest,bankcharges,custodialcharges,etc.)areshownunderthehead,InterestandBankCharges.AnyotherinterestchargedontheborrowingswhichcouldnotformpartoftheRevenueAccountnottobeincludedunderthishead.


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ItemsRelatingtoBalanceSheetFollowingarethebroadclassesofitemsinabalancesheet.

Investments-Thelegalrequirementsforinvestmentsbyenterprisescarryingongeneral insurancebusinessareprovidedundersections27B,27Cand27Dof the Insurance

Act,

1938.

Sub-section

(1)

of

section

27B

lays

down

that

no

insurer

carrying

on

generalinsurancebusinesscaninvestorkeepinvestedanypartof itsassetsotherwisethaninanyof

theapprovedinvestmentsmentionedinthesection.Sub-section(3),however,givesaleverage toan insurerto investorkeep investedanypartofitsassetsotherwise than inanapprovedinvestmentifthefollowingconditionsaresatisfied:

(a) suchinvestmentsshouldnotexceed25%ofthetotalinvestments;and

(b) suchinvestmentsaremadewiththeconsentofalltheDirectors.

TheconsentofDirectorsappointedundersection34CoftheInsuranceAct,1938isnotnecessary.However,suchDirectorsshouldnotobjecttotheinvestmentssomadeorcontinued.

Sub-section(4)ofsection27Brequiresthatan insurershouldnot investorkeep investedany

partofitsassetsinthesharesofanyoneinsurancecompanyoraninvestmentcompanywhichconstitutesmorethantenpercentofthetotalassetsoftheinsurerortwopercentofthe

subscribedsharecapitalordebenturesoftheinsurancecompaniesorinvestmentcompanyconcerned.Similarconsiderationsalsoapplytotheinvestmentinsharesordebenturesofany

othercompanynotbeingan insurancecompaniesor investmentcompany. Insuchcases,the

limitoftwopercentofthesubscribedsharecapitalordebenturesoftheinsurancecompanying

companyorthe investmentcompanyconcernedistobereadastenpercent{sub-section(5)}.

Accordingtosub-section(6),an insurercannot invest inthesharesordebenturesofaprivate

company.Itmay

be

noted

that

incase

an

investment

has

been

made

inthe

partly

paid

up

sharesofacompany,theuncalledliabilityonthesharesistobeaddedtotheamountinvestedforthepurposeofcomputingthepercentagesreferredtoabove.

Section27CoftheInsuranceAct,1938prohibitsaninsurerfrominvesting,directlyorindirectly,fundsofthepolicy-holdersoutsideIndia.Itimpliesthatthefundswhichdonotbelongtopolicy-holderscanbeinvestedoutsideIndia.Examplesofsuchfundsthatdonotbelongtothepolicyholdersarethesharecapital,amountofloansraised,balanceslyinginfreereserves,etc.


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time,mannerandotherconditionsofinvestmentsofassetsheldbyaninsurer.TheAuthorityhas

alsobeengranted thepowerof framingspecificdirectionswithregardto time,mannerandother

conditionssubjecttowhichthefundsofpolicy-holdersaretobeinvested inthe infrastructureand

socialsector.TheAuthorityalsohasthepowertoissueinstructionstoasingleinsurer,aftertaking

intoaccountthenatureofbusinessand the interestsofthepolicyholders,themannerandother

conditionsof investmentofassets tobeheld,provided the insurer isgivenadueopportunityof

beingheardbeforedirectionsareissuedbytheAuthority(Section27D).

AuditProcedures-Theauditorsprimaryobjectiveinauditofinvestmentsistosatisfyhimself

astotheirexistenceandvaluation.Examinationofcompliancewithstatutoryandregulatoryrequirements isalsoan importantobjective inauditof investments insofarasnon-compliance

mayhaveadirectandmaterialaffectonthefinancialstatements.

Theauditorshouldverifythe investmentscripsphysicallyatthecloseofbusinesson thedate

thebalancesheet.Inexceptionalcaseswherephysicalverificationofinvestmentscripsonthe

balancesheetdate isnotpossible, theauditorshouldcarryout thephysicalverificationona

dateasneartothebalancesheetdateaspossible.Insuchacase,heshouldtakeintoconsiderationanyadjustments forsubsequent transactionsofpurchase,sale,etc.Heshould

takeparticularcare tosee thatonlygenuine investmentsareproducedbeforehim,and thatsecuritiesheldbytheinsurancecompanyonbehalfofothers(e.g.,thoseheldassecurityagainst loans)arenotshown tohimas the insurancecompanysown investments.Toensure

this, theauditorshouldrequire thatall investmentscrips in thepossessionof the insurance

companywhetherbelongingtoitortoborrowersshouldbeproducedbeforehimsimultaneously.Theauditorshouldkeepthemunderhiscontroluntilhecompleteshischecking.Normally,theinvestmentsofaninsurancecompanyareheldbytheinsurancecompany itselforadepository(inthecaseofdematerialisedsecuritiesotherthangovernment

securities).

InvestmentsarenormallydealtwithattheHeadOfficeandnotatthebranches.However,sometimes,forrealisationofinterest,etc.andothersimilarpurposes,investmentsofaninsurancecompanymaybeheldatBranchOfficesalso.Insuchcases,theauditorshouldexaminetherecordmaintainedattheHeadOfficetorecorddetailsofinvestmentsheldatotherlocationsandrequesttherespectivebranchauditorstophysicallyverifysuchinvestmentsasapartoftheiraudit.Theauditorshouldobtainawrittenconfirmationtothiseffect from thebranchauditors. Incase theverificationhasbeendoneonadateother than


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alsobeobtainedfromthebranchauditors.Thebranchauditorsshouldreportwhetheradequate recordsaremaintainedbythebranch forthesecuritiesheldbyitonbehalfoftheHeadOffice.

Investmentsshouldnotnormallybeheldbyanyotherperson(aslaiddownintheCityEquitableFire InsuranceCo.case). Ifany investmentsaresoheld,properenquiryshouldbe

made toensure that there issomejustification for it,e.g.,sharesmaybeheldbybrokers for

thepurposeoftransferorsplitting-up,etc.Sharesmayalsobelodgedwiththecompaniesconcerned for transferetc.When investments areheldbyanyotherpersononbehalfof theinsurancecompany,theauditorshouldobtainacertificatefromhim.Thecertificateshouldstatethereasonforholdingtheinvestment(e.g.,insafecustodyorassecurity).

InrespectofscriplessdealingsininvestmentsthroughtheOTCExchangeofIndia,theauditor

shouldverify the interimandotheracknowledgements issuedbydealersaswellas theyear-

endconfirmationcertificatesofthedepositoryorganisation.

Theauditorshouldalsoexaminewhethersecuritieslodgedfortransferarereceivedbackwithina reasonableperiod.Similarly,heshouldexaminewhethersharecertificates,etc.arereceivedwithinareasonableperiod,ofthe lodgingoftheallotmentadvice.Incasethereisan

unusualdelay inregistrationof transfers,etc., theauditorshouldsee thatadequate follow-up

actionhasbeen taken.Hemay, inappropriatecases,alsoenquire from the issuers,or their

registrars,aboutthedelays.Incaseswheretheissuer/registrarhasrefusedtoregisterthetransferofsecuritiesinthenameoftheinsurancecompany,theauditorshouldverifythevalidityofthetitleoftheinsurancecompanyoversuchsecurities.

Theauditorshouldexaminewhethertheportfoliooftheinsurancecompanyconsistsofanysecuritieswhosematuritydateshavealreadyexpired.Itispossiblethatincomeonsuchinvestmentsmayalsonothavebeenreceived.Incasetheamountofsuch investmentsorthe

incomeaccruedthereonismaterial,theauditorshouldseekanexplanationfromthemanagementonthisaspect.Heshouldalsoconsiderwhetheranyprovisionforlossonthisaccountisrequired.Similarly,whereincomeonanysecurityislongoverdue,theauditorshouldconsiderwhetherprovisionisrequiredinrespectofsuchincomeaccruedearlier.

Investmentsinsecuritiesnow-a-daysconstituteasubstantialpartoftotalassetsofmanyinsurancecompanies.Methodofvaluationof investments followedbyan insurancecompany

may,therefore,haveasignificanteffectonitsBalanceSheetandProfitandLossAccount.Theauditorshouldexaminewhetherthemethodofaccountingfollowedbytheinsurance


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guidelinesoftheInsuranceRegulatoryandDevelopmentAuthority(discussedearlierinthisChapter)andtheaccountingpolicyfollowedbytheinsurancecompanyinrespectofinvestments.Theauditorshouldexamine theappropriatenessofaccountingpolicies followed

bytheinsurancecompany.Incaseanyoftheaccountingpoliciesisnotappropriate,theauditorshouldconsider theeffectofadoptionofsuchpolicyon the financialstatementsand,

consequently,onhisauditreport.

Achange in themethodofvaluationof investmentsconstitutesachange inaccountingpolicy

andadequatedisclosureregardingthefactofthechangealongwith its financialeffectshould

bemadeinthebalancesheet.

Theauditorshouldexaminewhether income from investments isproperlyaccountedfor.This

aspectassumesspecialimportanceincaseswheretheinsurancecompanyhasoptedforreceiptofincomethroughtheElectronicClearingService.

Theremaybecaseswherethecertificatesoftaxdeductionatsource(TDS)receivedalongwith the intereston investmentsare foundmissing.This increases the incidenceoftaxon the

insurancecompany.TheauditorshouldseethatthereisapropersystemforrecordingandmaintenanceofTDScertificatesreceivedbytheinsurancecompany.

CashandBankBalances-CashandBankbalancesatBranchOffice/Divisional Office

levelalsoconstitutesignificantitemsrelatedtobalancesheet.Theauditorshouldapplythefollowingauditproceduresforverificationofclaims.

Theauditorshouldphysicallyverifycashbalancecollectionand imprest formeetingday

todayexpenditures,postagestampsbalance,revenue,policy,licencefees,frankingmachinebalance.Theauditorshouldalsoobtainacertificate from themanagement for

theabovementionedbalancesasatthebalancesheetdate.Ifforsomereason,thephysicalverificationoftheaboveonthebalancesheetdateisnotpossiblethenthesame

canbedoneatasubsequentdateandbywayofbackwardcalculations,cash inhandat

thebalancesheetdatecanbeverified.

Theauditorshouldalsocheckwhether latecollectionsofcashandchequeson the last

workingdayofthefinancialyear,whichcouldnotbedeposited intobankaccounton the

sameday,havebeenidentifiedandbookedasCashinHandandChequesinHandAccount,respectively.

Theauditormayapplytestcheckonthebanktransactions.

TheauditorshouldalsocheckBankReconciliationstatementandlongoutstanding


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accounts.

TheauditorshouldphysicallyverifyTermDepositReceiptsissuedbybankers.

Theauditorshouldverifythedepositsandwithdrawalstransactionsatrandomandcheck

whethertheAccountisoperatedbyauthorisedpersonsonly

Theauditorshouldverifythesubsequentrealisationsforallitemsappearinginthereconciliation.

Incaseof funds, in-transit,heshouldverify that thesameareproperly reflectedaspart

ofbankbalance.

OutstandingPremiumandAgentsBalances-Thefollowingaretheauditprocedures

tobefollowedforverificationofoutstandingpremiumandagentsbalances:

Scrutiniseandreviewcontrolaccountdebitbalancesandtheirnatureshouldbeenquired

into.

Examineinoperativebalancesandtreatmentgivenforoldbalanceswithreferencetocompanyrules.

Enquireintothereasonsforretainingtheoldbalances

Verifyolddebitbalanceswhichmayrequireprovisionoradjustment.Notesofexplanationmaybeobtainedfromthemanagementinthisregard.

Checkage-wise,sector-wiseanalysisofoutstandingpremium.

Verifywhetheroutstandingpremiumshavesincebeencollected.

Checktheavailabilityofadequatebankguaranteeorpremiumdepositforoutstandingpremium ProvisionforTaxation-Thestepstobeconductedbytheauditorforauditandverificationaregivenbelow:

(i) Theauditorshouldcheckwhether theprovision for taxationhasbeenmadeafter taking

intoaccounttheabovespecificprovisionsapplicabletoinsurancecompaniescarryingon

generalinsurancebusiness.

(ii)Itshouldbeseenbyauditorwhetherforthepurposeofcomputationnotonlytheprofitasdisclosedby theannualaccounts,copiesofwhicharerequiredunder theInsuranceAct,

1938tobefurnishedtotheControllerofInsurance,istakenbutalsoalltheotheraccountsfurnishedbythecompanytotheControllerofInsuranceistakenintoaccount.

(iii)TheauditorshouldassessthepasttrendregardingtheapproachoftheIncomeTaxDepartment,thedecisionofthevariousappellateforumsincludingtheHighCourtandtheSupremeCourtvis-a-visthecomputationmade.


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(v) TheauditorshouldseewhetherdeductionsunderChapterVIAof the IncomeTaxAct,

1961whichprovidesfordeductionhavebeenmadeincomputingtotalincomeisproperly

takenintoaccount.

(vi)Theauditorshouldexaminewhetherincomecomputationrelatingtoforeignbranchesandother incomeearnedoutside India isdealtwithproperlyasper thedouble taxation

avoidanceagreement,ifany,enteredintowiththosecountries.

(vii)Itshouldbeseenwhethertheexemptionprovisionrelatingtotaxdeductedatsourcefromcertaincategoriesofincomeasexemptedundersection35AoftheGeneralInsurance(BusinessNationalisation)Act,1972hasbeenproperlyavailed.

(viii)Also,theauditorshouldcheckwhetherthegrossingupofTDSrelatingtotheincomehasbeenproperlydonefortheproposeofcomputationoftaxableincome.

(ix)Theauditorshouldensurethattheprovisionsofthe IncomeTaxAct,1961regardingthetaxtobedeductedatsourcehavebeenproperlycompliedwith,relatingtothepayments

/creditsforwhichtheTDSprovisionsoftheIncomeTaxActandapplicableandtheamountsodeductedare remittedwithin thestipulated time.AlsocheckTDS implication

ontheinterestpaid/payableandincludedonclaimsettlement/outstandingclaims.

(x) TheauditormayalsoassesstheapplicabilityoftheWealthTaxAct,1957withreference

totheassetsofthecompanyattheendoftheyear.

(xi)Theauditorshouldseethesystemofservicetaxcollectionandthepaymenttothestatutoryauthoritiesandtheinternalsystemincludingthefilingofstatutoryreturns.

(xii)Theexaminationofsalestaximplicationonthesaleofsalvageshouldalsobeseenas itisapplicabletotherespectivestatesandthepasttrendinthisregard.

(xiii)Theauditorshouldcheck the liabilityunder theVATandwhetherprovision foradequateamounthasbeenmadeinthebooksornot.

(xiv)Theauditorshouldverifythatadequateprovisionhasbeenmadeforadditionalliabilityrelating toearlieryears forwhichdemandshavebeen received in thecurrentyearandwherethecompanyhasgone intoappeal, thefact thatnoprovisionhasbeenmadeand

thatanappealhasbeenpreferredhastobedisclosedinthenotestoaccounts.


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SolvencyMargin

Section64VAoftheInsuranceAct,1938,interalia,requireseveryinsurertomaintainanexcessofthevalueofitsassetsovertheamountof itsliabilitiesatall times.TheexcessisknownasSolvencyMargin.Inthecaseofaninsurercarryingongeneralinsurancebusiness,

thesolvencymarginshouldbethehighestofthefollowingamounts:

(a) fiftycrorerupees(onehundredcroresofrupeesincaseofareinsurer);or

(b) asumequivalenttotwentypercentofnetpremiumincome;or

(c) asumequivalenttothirtypercentofnetincurredclaims,

subjecttocreditforreinsuranceincomputingnetpremiumsandnetincurredclaimsbeingactualbutapercentage,determinedby the regulationbutnotexceeding fiftypercent. Itmay

benotedthatconditionsregardingmaintenanceoftheabovementionedsolvencymarginmay

berelaxedbytheAuthorityincertainspecialcircumstances.

If,atanytime,aninsurerdoesnotmaintaintherequiredsolvencymargin,theinsurerisrequired tosubmita financialplan to theAuthority indicating theplanofaction tocorrect the

deficiencyinthesolvencymargin.If,onconsiderationoftheplan,theAuthorityfindsitinadequate,theinsurerhastomodifythefinancialplan.

Maintenanceofsolvencymarginhasagreatimportanceforaninsurancecompanyconsideringtheirsizeandnatureofbusinessandalsoinvolvementofpublicmoney.Sub-section (2C)ofSection64Astates thatifaninsurer fails tocomplywith the requirementsoftheInsuranceAct,1938,itshalldeemedtobeinsolventandmaybewoundupbytheCourt.

IRDARegulations-Subsection(3)ofSection64VoftheActrequiresthateveryinsurershouldvaluetheassetsand liabilities inthemanner laiddownbytheSection64Vand

inaccordancewiththeregulationswhichmaybemadebytheAuthorityinthisbehalf.

TheAuthorityhasissuedIRDA(Assets,LiabilitiesandSolvencyMarginofInsurers)Regulations.TheRegulationslaydownmannerofvaluationofassetsand liabilities,theforms

inwhichassetsandliabilitiesaretobedisclosed,themannerofdeterminationofsolvencymarginsandtheformatofcertificatetobesignedbytheauditors.

EveryInsurerisrequiredprepareastatementofvalueofassetsinFormIRDA-Assets-AA.A

statementof theamountof liabilities incaseofgeneral insurancebusiness is tobeprepared

inFormHGandastatementofSolvencyMargin inFormKGasspecified intheInsurance

RegulatoryandDevelopmentAuthority(Assets,LiabilitiesandSolvencyMarginofInsurers)Regulations.Thestatementofassets, liabilitiesandsolvencymarginare tobecertifiedbyan


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oftheperiodtowhichtheyrefertoalongwiththeauditedaccountsandstatements.Thesalientfeaturespertainingtothevaluationofassetsarediscussedbelow:

StatementofSolvencyMargin -Every insurer is required todetermine the required

solvencymargin,theavailablesolvencymarginandthesolvencyratiointheFormKG.ThestatementofsolvencymarginistobepreparedinaccordancewithSection64VAoftheInsuranceAct,1938andthesameistobecertifiedbytheauditor.


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TradecreditInsurance

"Trade Credit Insurance business" means the business of effecting contracts of insurance in

respectoftradecreditinsurancetransactions.

"Trade credit insurance" means insurance of suppliers against the risk of non-payment of

goods or services by their buyers who may be situated in the same country as the supplier

(domestic risk) or a buyer situated in another country (export risk) against non-payment as a

result of insolvency of the buyer or non-payment after an agreed number of months after due-

date (protracted default) or non-payment following an event outside the control of the buyer or

the seller (political risk cover). Political risk cover is available only in case of buyers

outsideIndiaandincountriesagreeduponattheproposalstage.

"TradeCredit Insurance transaction"meansa transactionbetween twopersons forsupplyof

goodsorservicesonopenandagreedterms.

"TradeCreditinsurancepolicy"isaconditionalinsurancecontractbetweentwoparties(insurerandseller)thatcannotbe tradedand isalwaysdirectlyrelatedtoanunderlying trade

transaction,which iseither thedeliveryofgoodsorofservices.Thecorrect fulfilmentof this

tradetransactionandsatisfactionofthecontracttermswhichisessentialforcreditcovertoexist.

BasicRequirementsofaTradeCreditInsuranceProduct:Aninsurershalloffertradecreditinsuranceproductonlyifallrequirementsmentionedbelowaremet:

1. Policyholder'slossisnon-receiptoftradereceivablearisingoutofatradeofgoodsorservices.

2. Policyholderisasupplierofgoodsorservicesinconsiderationforafairmarketvalue.

3. Policyholder'stradereceivabledoesnotariseoutoffactoringorreversefactoringarrangementoranyothersimilararrangement.

4. Policyholderhasacustomer(i.e.Buyer)whoisliabletopayatradereceivabletothepolicyholderinreturnforthegoodsandservicesreceivedbyhimfromthepolicyholder,in

accordancewithapolicydocumentfiledwiththeinsurer.

5. PolicyholderundertakestopaypremiumfortheentirePolicyPeriod.

6. AnyotherrequirementthatmaybespecifiedbytheAuthorityfromtimetotime.


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BIBLIOGRAPHY

www.icai.org/resource_file

www.icaew.com

www.hkicpa.org.hk/file

www.naic.org

www.statutes.legis.state
http://www.icai.org/resource_filehttp://www.icai.org/resource_filehttp://www.hkicpa.org.hk/filehttp://www.hkicpa.org.hk/filehttp://www.naic.org/http://www.naic.org/http://www.statutes.legis.state/http://www.statutes.legis.state/http://www.naic.org/http://www.hkicpa.org.hk/filehttp://www.icai.org/resource_file


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Auditing of a insurance company

Documents

Transcript of Auditing of a insurance company