Page 284 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes However, the objective of the IRDA’s regulations on Investments is only the protection of
policyholders’ funds. IRDA has stipulated that every insurer shall constitute an Investment
Committee and shall draw up an annual Investment Policy which shall be placed before the
Board for approval after being vetted by the Investment Committee. The Investment Policy, as
approved by the Board shall also be filed with the IRDA. Schedule B of Regulation 3 of the IRDA
(Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations,
detailing the accounting principles for preparation of financial statements provided for the
procedure for valuation of investments, provisioning and impairment norms, recognition of
income, disclosures forming part of financial statements etc. which reflect the intention of the
Regulators to bring in more transparency in presentation. Audit of investments will have to be
a very detailed one and critical areas like ‘investment in unapproved investments’ (within the
permissive limits), ‘disinvestments’ and ‘selling the traded securities’ etc. will have to be brought
under careful scrutiny.
Reinsurance is a highly technical area and unless the auditors get very well versed in verification
of Bordereaux (a spreadsheet kind statement detailing risks ceded/accepted, commission’s claims
etc.), checking of quarterly statements of individual treaty reinsurers, profit commission
statements etc. it may not at all be possible to do justice in this area. The one important thing that
needs to be borne in mind by the auditors is that reinsurance transactions operate between
companies at the international level based on a very high level of trust (concept of utmost good
faith fortified) and the reinsurers place heavy reliance on the quality of the auditors who attest
the financials of the Indian companies, which fact only increases the responsibility of the auditors.

Audit Empanelment Requirements
Prior to the private sector entry, the appointments of auditors for the four PSU companies were
made by the CAG. In the current scenario where private insurers have begun operating, the
appointment of auditors appears to have come within the ambit of functions of the IRDA, in
terms of the regulations on preparation of financial statements and auditor’s report under the
IRDA Act. Here, the IRDA Act does not make any distinction between Public Sector and Private
Sector Insurance Companies. (However, to what extent the said Regulations notified under the
sanction given under Sec. 114 A of the Insurance Act, which in itself does not specifically state
anything on auditors’ appointment, can overrule the provisions of Companies Act is not clear.)
Accordingly, IRDA has started compiling a panel of Chartered Accountants and for the purpose, has
also prescribed certain exacting parameters for such empanelment. Of course, in such parameters,
the longevity, size etc. of a firm seems to be only given importance rather than the specialized
qualifications in the field or the domain expertise of the partners. This is rather sad. An industry that
is so unique and important cannot be ‘audited’ casually and generally, when specialization is the
order of the day. Realizing the importance of the need to create and develop ‘domain expertise’ in
this industry that is all set to take a giant leap in the years to come, our Institute has newly introduced
a specialized post qualification course on insurance and risk management.

Providing assurance services to the people who are themselves in the business of assuring
others is a serious affair and the responsibility of the members of our profession to provide
comfort (by doing ‘an informed audit’) to the stakeholders, regulator, reinsurers, tax authorities
can hardly be overemphasized.

Self Assessment

Fill in the blanks:
8. Co-operative Society shall not make a loan to any person other than a......................
9. ................. main role is preparation of financial statements and auditor’s report of insurance
companies.

278 LOVELY PROFESSIONAL UNIVERSITY