CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter

11)

20
Chapter Audit of Insurance Companies

Q.1 As an auditor of Life Insurance Company, how will you verify the ‘Commission Payable’ to its
Agents? [Study Material – ICAI]
Ans.: Verification of Commission Payable by Life insurance company:
Insurance business is generally solicited by the Insurance agents. The remuneration of agent
is paid by way of commission which is calculated by applying percentage to premium
collected by him. Commission is payable towards generation of new business and towards
settlement of renewal premium. The Auditor during his review of Commission paid to Agents
should mainly consider the following:
1. Review the system established by the Insurer with respect to calculation of commission
to eligible agents accurately and processing the same in timely manner.
2. Review the commission payment system is in sync with the premium collection system.
3. Check whether commission paid is within the limit prescribed under Insurance Act.
4. Check whether commission is clawed-back on the cancelled policies.
5. Check the completeness of commission processing system.
Q.2 What is the ‘Actuarial Process’ in Life Insurance Business and what is the role of Auditor
with respect to the same? [Study Material – ICAI]
Ans.: Actuarial Process:
 The job of actuary or actuarial department in any Life Insurance Company involves,
detailed analysis of data to quantify risk. The actuarial department is calculating and
modelling hub of the Company. Within the department fundamentals of Insurance
business is determined from pricing to policy valuations techniques.
 The role of Actuaries in life insurance business is to concentrate on following key areas:
1. Product Development/ Pricing and Experience analysis.
2. Model Development.
3. Statutory Valuations and reserving.
4. Business Planning.
5. Solvency management.
6. Management reporting on various business valuations and profitability models of
the Life Insurance business.
Role of Auditor:
 To certify, whether the actuarial valuation of liabilities is duly certified by the appointed
actuary, including to the effect that the assumptions for such valuation are in
accordance with the guidelines and norms, if any, issued by the authority and/or the
Actuarial Society of India in concurrence with the IRDA.

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CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter
11)

 For this purpose, auditors generally rely on the Certificate issued by the Appointed
Actuary, certifying the Policy liabilities. However, he may discuss with the Actuaries
with respect to process followed and assumptions made by him before certifying the
Policy liabilities.
Q.3 R.O.K. & Co. and TNK & Co. were appointed as the joint statutory auditors at the AGM of
Auspic General Insurance Co. Ltd. Apart from the aforesaid audit, R.O.K. & Co. is also being
appointed as a joint statutory auditor of one another General Insurance Company and TNK
& Co. is appointed as a joint statutory auditor of Life Insurance Company. How many further
audits can be accepted by R.O.K. & Co. and TNK & Co., respectively, of either general or life
insurance companies? [MTP - March 21 (4 Marks)]
Ans.: Appointment of Statutory Auditor in case of Insurance companies:
 Appointment of statutory auditors in the General Insurance Corporation of India, and its
subsidiaries and the divisions as well as other public sector Insurance Companies is made
by the C & AG of India.
 However, in the case of others, auditor is appointed at the AGM after ensuring that the
auditor satisfies the compliance requirements with the relevant sections of the IRDAI
Guidelines on Corporate Governance.
 These guidelines pose certain restrictions on the number of insurance companies a
statutory auditor can audit. Currently, an auditor can conduct audit only for 3 insurance
companies and not more than 2 life or 2 general. The Guidelines also mandate a
mandatory joint audit for all insurance companies.
 In the given case, R.O.K. & Co. is joint statutory auditor of Auspic General Insurance Co.
Ltd. and of one another General Insurance Company. Accordingly, it can now, further,
accept only one audit and that too of a Life Insurance Company only.
 Further, TNK & Co. is joint statutory auditor of Auspic General Insurance Co. Ltd. as well
as of one Life Insurance Company. Accordingly, it can now, further, accept only one audit
of either a Life Insurance Company or a General Insurance Company.
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Law stated in this publication is upto 31.10.2020 and is relevant for May 2021 Exams and onwards.
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