Page 231 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes Investments should not normally be held by any other person (as laid down in the City Equitable
Fire Insurance Co. case). If any investments are so held, proper enquiry should be made to
ensure that there is some justification for it, e.g., shares may be held by brokers for the purpose
of transfer or splitting-up, etc. Shares may also be lodged with the companies concerned for
transfer etc. When investments are held by any other person on behalf of the insurance company,
the auditor should obtain a certificate from him. The certificate should state the reason for
holding the investment (e.g., in safe custody or as security).

In respect of scripless dealings in investments through the OTC Exchange of India, the auditor
should verify the interim and other acknowledgements issued by dealers as well as the year-end
confirmation certificates of the depository organisation. The auditor should also examine whether
securities lodged for transfer are received back within a reasonable period. Similarly, he should
examine whether share certificates, etc. are received within a reasonable period, of the lodging
of the allotment advice. In case there is an unusual delay in registration of transfers, etc., the
auditor should see that adequate follow-up action has been taken. He may, in appropriate cases,
also enquire from the issuers, or their registrars, about the delays. In cases where the issuer/
registrar has refused to register the transfer of securities in the name of the insurance company,
the auditor should verify the validity of the title of the insurance company over such securities.
The auditor should examine whether the portfolio of the insurance company consists of any
securities whose maturity dates have already expired. It is possible that income on such
investments may also not have been received. In case the amount of such investments or the
income accrued thereon is material, the auditor should seek an explanation from the management
on this aspect. He should also consider whether any provision for loss on this account is required.
Similarly, where income on any security is long overdue, the auditor should consider whether
provision is required in respect of such income accrued earlier. Investments in securities now-a-
days constitute a substantial part of total assets of many insurance companies. Method of valuation
of investments followed by an insurance company may, therefore, have a significant effect on its
Balance Sheet and Profit and Loss Account. The auditor should examine whether the method of
accounting followed by the insurance company in respect of investments, including their year-
end valuation, is appropriate.

The auditor should examine the manner of accounting for investments in the context of the
guidelines of the Insurance Regulatory and Development Authority and the accounting policy
followed by the insurance company in respect of’ investments. The auditor should examine the
appropriateness of accounting policies followed by the insurance company. In case any of the
accounting policies is not appropriate, the auditor should consider the effect of adoption of such
policy on the financial statements and, consequently, on his audit report. A change in the method
of valuation of investments constitutes a change in accounting policy and adequate disclosure
regarding the fact of the change along with its financial effect should be made in the balance
sheet. The auditor should examine whether income from investments is properly accounted for.
This aspect assumes special importance in cases where the insurance company has opted for
receipt of income through the Electronic Clearing Service. There may be cases where the
certificates of tax deduction at source (TDS) received along with the interest on investments are
found missing. This increases the incidence of tax on the insurance company. The auditor should
see that there is a proper system for recording and maintenance of TDS certificates received by
the insurance company.

Task How audit procedure for banks is different from insurance company?

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