The document provides an overview of the audit process for insurance companies in India. It discusses key aspects that must be audited including premiums, claims, commissions, operating expenses, investments, cash and bank balances, outstanding premiums, and agents' balances. It also outlines the legislation and guidelines that apply, the composition and role of the audit committee, eligibility requirements for appointing statutory auditors, and the internal control system. The objectives of the audit are to ensure compliance with relevant laws and regulations and adherence to sound accounting practices.
1. Audit of Insurance companies
Presented By
ADITYA JAISWAL MCI14002
NIKITA PRASAD MCI14009
BHAGYA L.B. NARZARY
MCI14014
JUHILIKA DAS MCI14015
PRANJIT SHARMA MCI14024
PADUM CHETRY MCI14026
2. INTRODUCTION
According to section 2 of Insurance Act 1938, a ―Indian insurance company‖
means any insurer being a company—
1. which is formed and registered under the Companies Act, 2013;
2. in which the aggregate holdings of equity shares by a foreign company, either
by itself or through its subsidiary companies or its nominees, do not exceed
twenty-six per cent. paid-up equity capital of such Indian insurance company;
3. whose sole purpose is to carry on life insurance business or general insurance
business or re-insurance business.
3. Legislation relating to Insurance
companies
Following acts and rules contain important statutory provisions relevant to the
audit of life insurance companies-
The Insurance Act 1938.
The Insurance Rules 1939.
The Income Tax Act 1961.
The Companies Act 2013.
The Life Insurance Corporation Act 1956.
4. Conti…
Following acts and rules contain important statutory provisions relevant to the
audit of general insurance companies: -
The Insurance Act 1938.
The Insurance Rules 1939.
The Income Tax Act 1961.
The Companies Act 2013.
The Income Tax Rules 1962.
Employees State Insurance Act 1948
5. Guidelines for Corporate Governance for insurers in
India
IRDAI issued Guidelines on Corporate Governance for insurance companies on 5th
August, 2009. Some of the mandatory committee to be formed are
1) Audit Committee
2) Investment Committee
3) Risk Management Committee
4) Policyholders Protection Committee
5) Nomination and Remuneration Committee
6) Corporate Social Responsibility Committee
7) With Profits Committee
6. Audit Committee (mandatory)
Every Insurer shall constitute an Audit Committee as per Section 177 of the
Companies Act, 2013.
The committee should oversee the financial statements, financial reporting,
statement of cash flow and disclosure processes both on an annual and
quarterly basis.
The Chairperson of the Audit Committee should be an Independent Director of
the Board with an accounting/finance/audit experience and may be a
Chartered Accountant or a person with a strong financial analysis background.
The association of the CEO in the Audit Committee should be limited to
occasions where the Audit Committee requires eliciting any specific information
concerning audit findings. As required under Section 177 of the Companies Act,
2013, the Audit Committee shall comprise of a minimum of three directors,
majority of whom shall be Independent Directors.
The Audit Committee will oversee the efficient functioning of the internal audit
department and review its reports. The Committee will additionally monitor the
progress made in rectification of irregularities and changes in processes
wherever deficiencies have come to notice.
7. The Audit Committee shall have the oversight on the procedures and
processes established to look after the issues relating to maintenance of
books of account, administration procedures, transactions and other matters
having a bearing on the financial position of the insurer, whether raised by
the auditors or by any other person.
The Audit Committee shall discuss with the statutory auditors before the audit
commences, about the nature and scope of audit as well as have post-audit
discussions to address areas of concern.
8. Appointment of Statutory Auditors by
Insurers
The provisions of the companies’ act would apply for the appointment of an
auditor. The auditor of an insurance company is appointed at the annual general
meeting of the company and the approval of the authority is required before the
appointment is made. With the latest amendment to the Insurance Act, 1938 and
the Companies Act, 2013, Authority (IRDAI) has issued the revised guidelines as
under:
Insurers shall comply with the provisions relating to appointment of Auditors as
contained in the Companies Act, 2013. Additionally, insurers shall also comply
with the provisions contained in these guidelines.
On recommendation of the Audit Committee, the Board shall appoint the
statutory auditors, subject to the shareholders’ approval at the general meeting
of an Indian insurance company. The remuneration of the auditors shall also be
approved by the shareholders in the general meeting.
9. The eligibility, qualifications and other
requirements of the auditors
1. The Auditor of an insurer shall be a firm, including a Limited Liability Firm,
constituted under the LLP Act, 2008.
2. The Firm should have been established and in continuous practice for at least
15 years.
3. The auditor should have:
a) a minimum of 5 full-time partners, of whom,
(i) at least 2 should have been in full-time practice as partners exclusively
associated with the firm for a continuous period of minimum of 10 years, and
(ii) at least 2 other partners should have been in continuous association with the
audit firm either as partner or as employee for a minimum period of 5 years, and
(iii) one partner in full-time practice with the firm as a partner for a minimum
period of 1 year, and
(iv) out of the total partners of the firm, at least two should be FCA and be in
practice for a minimum period of 5 years as FCA.
10. OR (Alternatively),
a minimum of 7 Chartered Accountants,
(i) of which not less than 2 are partners in full-time practice exclusively
associated with the firm for a continuous period of a minimum of 10
years, and
(ii) at least 3 other Chartered Accountants in continuous association with
the audit firm as partner or employee for a minimum period of 5 years,
and
(iii) at least 2 Chartered Accountants should be FCA and be in practice for
a minimum period of 5 years as FCA.
4. At least one partner or employee of the audit firm should possess the
DISA/ Certified Information Systems Auditor (CISA)* or equivalent
qualification as may be recognized by the IRDAI from time to time and
such partner or employee must be involved in the audit of the insurer.
5. The Audit firm should have a minimum experience of 5 years in audit
of entities in the financial sector. At least one of the joint statutory
auditors of an insurer must have experience in insurance company audits
of at least two years.
* Information system of audit and control association (ISACA),
11. 6. Insurers are also advised to file a Return on an annual basis as per the
enclosed (Format A3) giving details of Chartered Accountant firms
engaged in various capacities like Statutory Auditors, Internal Auditors,
Concurrent Auditors, Tax Auditors etc.
If it comes to the notice of the Authority that the appointment of auditors
by insurers is not in line with these guidelines, the appointment can be
cancelled and it shall be open for the Authority to consider such further
action as may be deemed necessary in this regard.
An insurer shall not remove its statutory auditor without the prior
approval of the Authority.
The maximum Number of Statutory Audits of Insurers that can be
accepted by an audit firm at a time is as follows:
An Audit firm shall be entitled to carry out Statutory Audits of
not more than three Insurers (Life/Nonlife/Health /Reinsurer) at a time.
Conti….
12. Rotation of Joint Auditors
Each insurer shall have a minimum of two auditors as joint
auditors.
An audit firm which completes the tenure of five years at the
first instance in respect of an insurer may be reappointed as
statutory auditors of that Insurer for another term of five years.
Thus, an audit firm may be appointed as statutory auditors by an
insurer for a continuous period of up to ten years.
13. Audit of accounts
Under section 12 of the Insurance Act, 1938, the financial
statements of every insurer are required to be audited annually by
an auditor.
IRDA Act, 1999, every insurer, in respect of insurance business
transacted by him and in respect of his shareholders‘ funds, should
prepare, a Balance Sheet, a Profit and Loss Account, a separate
Account of Receipts and Payments and a Revenue Account in
accordance with the regulations made by the IRDA at the end of
each financial year .
14. Rights and duties of Branch
Auditors
The branch auditors is appointed to conduct the audit of the
divisions have the same rights and obligations under the statute as
those of the, statutory auditors to whom they are expected to
submit their report.
16. 1. PREMIUM
Insurance premium is collected upon issuing policies. It is the
consideration for bearing the risk by the insurance company.
The premium collections are credited to a separate bank
account and no withdrawals are normally permitted from that
account for meeting the general expenditure. As per the policy
of the insurance company, the collections are transferred to the
Regional Office or Head Office. No Risk shall be assumed by
the insurer without receipt of premium according to section
64VB of the Insurance Act, 1938.
17. VERIFICATION OF PREMIUM
Verification of premium is of utmost importance to an auditor. The auditor
should apply the following procedures: -
• Before commencing verification of premium income, the auditor should
look into the internal controls and compliance which are laid down for
collection and recording of the premiums.
• Cover notes should be serially numbered
• The auditor should check whether Premium Registers have been
maintained chronologically, giving full particulars including service tax
charged as per acceptance advice on a day -to-day basis.
• The auditor should verify whether the figures of premium mentioned in
the register tally with those in General Ledger.
• The auditor should verify whether instalments falling due on or before the
balance sheet date, whether received or not, have been accounted for as
premium income as for the year under audit.
18. CLAIMS
Claims under policies comprise the claims paid for losses incurred, and
those estimated or anticipated claims pending settlements under the
policies. Settlement cost of claims includes surveyor fee, legal
expenses, etc. The Claim Account is debited with all the payments
including repair charges, fire fighting expenses, police report fees,
survey fees, amount decreed by the Courts, travel expenses, photograph
charges, etc.
19. VERIFICATION OF CLAIMS
The auditor should obtain from the divisions/branches, the information for each
class of business. The auditor should determine the total number of documents to
be checked giving due importance to claim provisions of higher value.
After that auditor should look after the following views-
• Check whether provision has been made for all unsettled claims.
• Check whether provision has been made for only such claims for which the
company is legally liable.
• Check whether provision made is normally not in excess of the amount insured.
• To check in case of co-insurance arrangements, the company has made
provisions only in respect of its own share of anticipated liability.
• To check claimed paid should be duly sanctioned by the authority concerned
20. 3.COMMISSION
An insurance business is solicited by insurance agents. The
remuneration of an agent is paid by way of commission which is
calculated by applying a percentage to the premium collected by him.
Commission is payable to the agents for the business procured through
the and is debited to Commission on Direct Business Account.
21. VERIFICATION OF
COMMISSION
The auditor can do the verification of commission in the
following way-
• Voucher disbursement entries with reference to the
disbursement vouchers with copies of commission bills and
commission statements.
• Check whether the vouchers are authorized by the officers-
in –charge as per rules and income tax is deducted at source,
as applicable.
• Test check correctness of amounts of commission allowed.
• To check whether commission outgo for the period under
audit been duly accounted or not.
22. 4.OPERATING EXPENSES
RELATED TO INSURANCE
BUSINESS
All the administrative expenses in an insurance company are broadly classified
under 13 heads as mentioned in Schedule IV.
The auditor should check whether the required are as per Insurance Act:
• Expenses in excess of Rs.5 Lakhs or 1% of net premium, whichever is higher,
should be shown separately; and
• Expenses not directly relating to insurance business should be shown
separately for example, expenses relating to investment department, bank
charges etc.
23. INVESTMENTS
The auditor should keep in mind the following provisions of the Insurance Act, 1938 while examining
the investments-of an insurance company.
Provisions related to Investments
a. An insurance company can only invest in approved securities. However, it can invest otherwise
than in approved securities if the following conditions are satisfied.
• Such investments should not exceed 25% of the total investments; and
• Such investments are made with the consent of board of directors.
b. An insurer should not invest in shares or debentures of insurance or Investment Company in
excess of least of the following:
• 10% of its own total assets;
• 2% of the investee’s subscribed share capital or debentures.
c. An insurer company should not invest in shares or debentures of a company other than insurance
or investment company in excess of least of the following
• 10% of its own total assets;
• 10% of investee’s subscribed share capital or debentures.
d. An insurance company cannot invest in shares and debentures of a private company.
e. The insurance companies cannot invest the funds of its policy holders outside India.
24. VALUATION OF INVESTMENT
AS 13 i.e. “Accounting for investments”, do not apply to insurance companies.
The salient features of valuation guidelines laid down for insurance companies are
discussed as follows:
a. Real Estate Investment Property - Such investments should be valued at
historical cost less accumulated depreciation and impairment loss.
b. Debt Securities - Debt securities including Government Securities and
Redeemable Preference Shares are required to be considered as ‘held till
maturity’ securities and shall be measured at historical cost.
c. Equity securities and derivate instruments traded in active markets - the
equity securities and derivative instruments that are listed are required to be
measured at the fair value at the balance sheet date.
25. CASH AND BANK
BALANCESThe auditor should apply the following audit procedures for verification of
claims:
• The auditor should check whether late collections of cash and cheques on
the last working day of the financial year, which could not be deposited into bank
account on the same day, have been identified and booked as Cash in Hand and
Cheques in Hand Account, respectively.
• The auditor may apply test check on the bank transactions.
• The auditor should also check Bank Reconciliation statement.
• The auditor should obtain confirmation of Bank Balances for all operative and
inoperative accounts.
• The auditor should physically verify Term Deposit Receipts issued by bankers.
• The auditor should verify the deposits and withdrawals transactions at random
and check whether the Account is operated by authorized persons only .
• In case of funds, in -transit, he should verify that the same are properly
reflected as part of bank balance.
26. OUTSTANDING PREMIUM AND
AGENTS’ BALANCE
The audit procedures, which may be followed with regards to agent’s balance, are
as follows:
a. Verify whether agent’s balances and outstanding balances in
outstanding premium account have been listed, analyzed and reconciled for the
purposes of audit.
b. Verify whether recoveries of large outstanding have been made in post
audit period.
c. Verify whether there is any old outstanding debit or credit balances as at
the yearend which require adjustment. A written explanation may be obtained
from the management is to their nature.
d. Verify that agent’s balances do not include employees’ balances and
balances of other insurance companies.
e. Verify that no credit of commission is given to agents for businesses directly
procured by it.
27. Internal Control System of an Insurance Company:-
The Internal Control System for an insurance company is designed
with the intention to create an appropriate framework for both
insurance undertakings and supervisory authorities.
The Internal Control System of an insurance company address the
following major requirements:-
• Governance Structure.
• Board of Directors.
• CEO.
• Key Management Functions.
• Role of appointed Actuaries.
• External audit – Appointment of Statutory Auditors.
• Disclosures .
• Relationship with stakeholders.
• Interaction with the Supervisor
• Whistle blower policy.
28. Objective of Internal Control System:
•Compliance with the law
•Structure, responsibilities and functions
•Sound and judicious principles
29. Components of Internal Control System
1. Control structure
2. Risk assessment
3. Control procedure
4. Information and communication
5. Monitoring
30. Applicability of Accounting Standards:-
• AS-3 (Cash Flow Basis)
• AS-4 (contingencies and events occurring after the balance
sheet date)
• AS-9 ( Revenue Recognition)
31. Books and Registers to be maintained:-
Registers:- Books of Accounts :-
1. Register of Policies 1. Cashbook.
2. Register of Claims 2. Ledger.
3. Subsidiary Records.
4.Control Register.
32. Submission of Reports and Returns
U/s 18 of the Insurance Act 1938, every insurer is
required to furnish to the authority a certified copy of
every report on the affairs of the concern. The audited
accounts and statements shall be printed and four copies
thereof shall be furnished as returns to the Authority
within 6 months.
33. The matters to be dealt for the preparation of
Financial Statements and Auditor’s Report of
Insurance Companies have been prescribed by
the authority in Regulation 3 under Schedule
C of IRDA
34. The report of the auditors on the financial
statements
1. That they have obtained all the
information and explanations.
2. Examination of books of accounts.
3. Audited or unaudited proper returns
from branches and other offices.
4. Examination Revenue Accounts, Profit
and Loss Account and Balance Sheet
and Receipts & Payments Account.
5. The duly certification of actuarial
valuation of liabilities.
35. The auditors shall express their
opinion on
1. (i) a true and fair view of Balance Sheet
(ii) a true and fair view of Revenue Account
(iii) a true and fair view of Profit and Loss
Account
(iv) a true and fair view of Receipts and
Payments Account
2. In accordance with the requirements of the
Insurance Act, 1938, the Insurance Regulatory
and Development Authority Act, 1999 and the
Companies Act, 1956, to the extent applicable
and in the manner as so required.
3. Investments in accordance with the provisions
of the Act and the Regulations.
4. Appropriate Accounting policies and applicable
Accounting Standards.
36. The auditors shall further certify that
1. Management report properly reviewed
2. The insurer has complied with all the terms
and conditions of the registration specified
by the Authority.
37. A certificate signed by the auditors
must certify that
1. Verified the cash balances
and the securities and life
interest
2. Extension can be done in
case of trusts.
3. No part of the assets
applied in contravention of
the provisions of the
Insurance Act, 1938.
38. Important points in regard to Audit
report of Insurance Companies-
1. Direction of C & AG-
2. Tax Audit
3. Applicability of CARO, 2003
39. AUDIT REPORT OF LIC
FY-2015-16
AuditLIC-Annual-Report-2015-16.pdf
40. Case Study
• CASE-I (Senior LIC officer gyps over 300 clients of 54
lakh)
• CASE-II (Tampering with the Computer and
Generation of Bogus Policies on which Claims were
paid)
• CASE-III (Tampering with Claim Cheque - Bharat
Heavy Electrical Ltd. (BHEL))