Audit of Insurance Companies

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Audit of Insurance Companies

Insurance auditors while conducting insurance audits will review credit policy and procedures, tax records, risk assessments, and other financial records of insurance. This is done to ensure that appropriate insurance standards and premiums are applied and that insurance companies adhere to the rules. Some of the key areas to be considered during insurance audits are claims and commissions. In addition, insurance auditors must also maintain quality control between insurance companies and policyholders. This article will discuss the audit of insurance companies.

Table of Contents

Meaning of Indian Insurance Company

The Companies Act, 2013 requires the registration of an Indian insurance company. A foreign company’s overall holdings of equity shares, whether held directly or through subsidiary companies or nominees, shall not exceed 26% of the insurance company’s paid-up equity capital. The major purpose of an Indian Insurance Company is to do life insurance, general insurance, or reinsurance operations.

While conducting insurance audits, insurance auditors must evaluate policy and liability processes, tax papers, risk appraisal, and other financial records of insurance. This is done to guarantee that suitable insurance rates and premiums are imposed and that insurance businesses adhere to regulatory requirements. Claims and commissions are two of the most important areas to verify during insurance audits. Additionally, insurance auditors must maintain quality control between insurance companies and policyholders.

Insurance Audit and Role of Insurance Auditor

Every insurer’s financial accounts must be yearly audited by an auditor as required by Section 12 of the Insurance Act, 1938. By the regulations established by the IRDA after each financial year, every insurer is required to prepare a balance sheet, a profit and loss account, a separate account of receipts and payments, and a revenue account concerning the insurance business he transacts and the funds of his shareholders.

An insurance company’s central and branch auditors are chosen at the annual general meeting of the business, with the consent of the C & AG needed before the appointment is made. The Insurance Act of 1938 and the Companies Act, 2013 have recently been amended, and the Insurance Regulatory and Development Authority of India (IRDAI) has released updated recommendations requiring insurers to adhere to the Companies Act, 2013 provisions regarding the appointment of auditors. In addition, insurers must follow the rules outlined in these recommendations. The Board will designate the statutory auditors by the Audit Committee’s proposal, subject to the approval of the shareholders at the annual meeting of an Indian insurance company.

The statutory auditors to whom they are required to submit their report have the same rights and duties as the branch auditors authorized to undertake the audit of the divisions. However, the branch auditors at the divisional level attested that the financial statements of the branches within the divisions were properly included in the division’s trial balance.

An insurer cannot remove its statutory auditor without the Authority’s prior consent. More than three insurers (life, nonlife, health, and reinsurer) cannot have their audits accepted by the same auditing company at once. If it is discovered that the insurers’ appointment of auditors does not follow the rules, the appointment may be canceled.

Meaning of an Insurance Audit

In terms of Section 12 of the Insurance Act, 1938, the financial statements of all insurers must be audited annually by the auditor. As determined by IRDA, 1999, all insurers in respect of their insurance business and shareholders’ funds must provide:

  • Balance Sheet
  • Profit and Loss Account
  • Different Receipts Account
  • Payments and Income Account

All of this must be done following IRDA rules at the end of each financial year.
An insurance audit is an independent audit of accounting records that reflects the expert’s opinion on its accuracy.

Audit Testing

The auditor will spend time in the field of financial data testing to ensure the accuracy and completeness of the financial statements. For example, this could include a CPA who collects a random sample of fifty disbursements and then checks them to make sure checks are paid to the right seller and that they are recorded at the right price. The main types of tests are:

  • Controlling Test: Related to the audit procedures performed based on the automated procedures and hands that contribute to the completeness and accuracy of the financial statements. An example of such a control is the monthly reconciliation of bank accounts. The auditor may inspect this control by examining a reconciliation sample. The Auditor-General will assess the effectiveness of these controls and their ability to prevent and reduce the risk of fraud.
  • Substantive Test: In addition to testing controls, the auditor will perform other procedures to gather valid audit evidence. This may include inspecting or auditing assets, obtaining certificates from third parties that conduct business with the company, or evaluating aspects of the financial statements and comparing them with relevant external information.

Key Points examined during the audit of Insurance Companies

The following are the points that are needed to be considered during the Audit of Insurance Companies:

Premium Verification: In a separate bank account, premium collections are credited. No withdrawals are usually allowed on that account for general expenses.

  • As stated in the insurance company policy, the collection is forwarded to the Regional Office or Head Office.
  • In terms of Section 64VB of the Insurance Act, 1938, the insurer will not take the risk without receiving a premium.
  • The auditor needs to confirm the premium because the insurance premium is collected when the policies are issued.
  • It is a consideration to bear the risk of the insurance company.

The Auditor-General will apply the following procedures:

  • Before initiating the payment of revenue, the auditor must consider internal controls and compliance rules, which are set for the collection and recording of premiums.
  • Cover notes should be numbered sequentially.
  • The auditor needs to check how the premium registers are maintained chronologically, providing full details including the GST charged in terms of daily admission advice.
  • The auditor must verify that he or she has received the amount stated in the register and those indicated in the general record.
  • The auditor shall also ensure that the installments payable on or before the date of receipt of the balance are calculated as revenue for the year under review.

Claims Verification: The auditor of each division or branch should have access to information for all categories of business. The Auditor-General shall determine the total number of documents to be inspected, giving due consideration to high-value claims.
The claim account is deducted from all payments including repair costs, survey fees, photographic costs, etc. The Auditor-General will:

  • Check the provision of non-adjustable claims.
  • Check whether the provision is made for those applications that the company is legally responsible for.
  • Check that the provision is not higher than the insured amount.
  • Check out Co-insurance programs; the company has made provisions in respect of its expected credit allocation.

Verification of Commission: The agent’s salary is determined by the commission. Remuneration is calculated using the percentage of the proceeds collected by the agent.
The commission is paid to the agents of the purchased business and is deducted from the commission in the Direct Business Account. Insurance agents usually ask for an insurance business. The Auditor-General will verify:

  • Vouchers’ entries in respect of payment vouchers and copies of commission bills and statements.
  • Check that vouchers are authorized by law enforcement officers and that income tax is deducted at the point of origin.
  • Check the amount of commission allowed.
  • Check commission calculation time.

Operating Cost verification: The auditor must assess the following operating costs:

  • Cost over Rs. 5 lakhs or 1% of the total amount payable, depending on the maximum. This should be shown separately.
  • Costs that are not directly related to the insurance business should be shown separately, for example, costs incurred by the investment department or bank charges, etc.

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Final words

An audit of a financial statement is a transaction made with an independent accountant, designed to show that the financial statements of an organization are prepared under generally accepted accounting principles (GAAP) or other recognized entities. While each audit is customized to meet the specific needs of each organization, the entire audit process is consistent, focusing on risk assessment, financial data analysis, and providing a final opinion. It is also important to note that when choosing a CPA company to conduct research, not all CPAs do research. Insurance agencies should seek to protect the company with its valuable audit experience and companies with a proven track record in the same industry and size range.

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CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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