Question

You are the auditor in-charge of the annual audit of Muscat Insurance Company (or MIC) for the
year ended December 31, 2019. MIC is the leading insurance company in Oman and enjoys a good
reputation in the business community. As this is the first time your audit firm will be auditing the
company, you communicated with the previous auditor as part of understanding the business. Your
communication with previous auditors revealed something that you didn’t expect to discover. The
previous auditors revealed that the company has an unpaid tax amounting to OMR 3 million. Though
it was disclosed in the books as tax in arrears, there is no indication that the company has attempted
to pay it. You have also found out in your initial review that MIC has recently purchased a new
software that will enable the customers to access their insurance accounts through the internet.
Because the directors are eager to use the software to attract more customers, the software has been
rolled out already for use by the customers even though it was not tested by the company’s
information technology (IT) department yet for security purposes. As surprise discoveries seem not
to stop, you have also heard from your friends, who were customers of MIC, that there were
insurance claims from customers which have not been paid by the company. Some of the claims
were as old as five years ago. The management expects to receive a report on the weaknesses on the
design and implementation of internal controls and some business consultative advice on top of the
usual audit of financial statements.
Required: Discuss matters that you would consider in developing the audit strategy for Muscat
Insurance Company.

Answer 1

The Insurance auditors shall examine policy and liability procedures, risk valuation, tax documents, and various other financial records of insurance. It is to ensure that proper insurance rates and premiums are implemented and regulators laws are being followed by insurance companies. Claims and commissions are also the core areas to verify during the course of insurance audits. In addition to these responsibilities, insurance auditors might be expected to maintain quality control between insurance companies and policyholders.

Based on the discussion with the previous auditor and his friends information, the auditor should consider the following specific areas in detail:
I) VERIFICATION OF CLAIMS:

a) that in case of co-insurance arrangements, claims paid have been booked only in respect of company’s share
and the balance has been debited to other insurance companies.

b) that in case of claims paid on the basis of advices from other insurance companies (where the company
is not the leader in co-insurance arrangements), whether share of premium was also received by the
company. Such claims which have been communicated after the year-end for losses which occurred
prior to the year end must be accounted for in the year of audit.

c) that the claims payments have been duly sanctioned by the authority concerned and the payments of the
amounts are duly acknowledged by the claimants.

d) that the salvage recovered has been duly accounted for in accordance with the procedure applicable
to the company and a letter of subrogation has been obtained in accordance with the laid down procedure

e) that the amounts of the nature of pure advances/deposits with Courts, etc., in matters under
litigation/arbitration have not been treated as claims paid but are held as assets till final disposal of such
claims. In such cases, full provision should be made for outstanding claims.

f) that payment made against claims partially settled have been duly vouched. In such cases, the sanctioning
authority should be the same as the one which has powers in respect of the total claimed amount.

g) that in case of final settlement of claims, the claimant has given an unqualified discharge note, not involving
the company in any further liability in respect of the claim; and

h) that the figures of claims, wherever communicated for the year by the Division to the Head Office for
purposes of reinsurance claims, have been reconciled with the trial balance-figure.

II) TAX EVASION:

Auditor should check that all the statutory dues are paid by the company in time to avoid receiving any intimations from the Income Tax Authorities.

III) INTERNAL CONTROLS:

Internal controls to be made stronger for every process applied in the organisation.

a) Auditor should check that all the works are gone through a Standard Operating Procedure (SOP) that is drafted by the higher authority.

b) Due care should be taken before any process is applied.

c) The new processes should be tested in the intiation and also with the regular intervals to avoid data leakage to the outsiders.

In addition to the above, the auditor should also consider:

Four Important Audit Points in Insurance Company Profit & Loss Account

1. VERIFICATION OF PREMIUM

Verification of premium is of utmost importance to an auditor because Insurance premium is collected upon issuing policies. It is the consideration for bearing the risk by the insurance company. The auditor should apply the following procedures:

a) 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.

b) The auditor should check whether Premium Registers have been maintained chronologically, giving full particulars on a day -to-day basis.

c) The auditor should verify whether the figures of premium mentioned in the register tally with those in General Ledger.

d) 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.

2. VERIFICATION OF CLAIMS

Discussed above in details (Auditor to verify specific area part).

3. VERIFICATION OF COMMISSION

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 and is debited to Commission on Direct Business Account. An insurance business is solicited by insurance agents. The auditor should verify:

a) Voucher disbursement entries with reference to the disbursement vouchers with copies of commission bills and commission statements.

b) whether the vouchers are authorized by the officers- in –charge as per rules and income tax is deducted at source, as applicable.

c) Test check correctness of amounts of commission allowed.

d) whether commission outgo for the period under audit been duly accounted or not.

4. VERIFICATION OF OPERATING EXPENSES

Auditor should check whether expenses not directly relating to insurance business should be shown separately for example, expenses relating to investment department, bank charges etc.

Three Important Audit Points in Insurance Company Balance Sheet

1. INVESTMENTS

The auditor should consider the rules imposed by CMA (Capital Market Authority) on how much insurance companies can invest in different asset classes, which some players describe as challenging. These include a 30% cap on the proportion of investments made up by government bonds and a 40% limit on equity and mutual fund investments. The difficulty of finding opportunities to invest funds is due to the domestic corporate bond market. While insurance firms are at present able to invest in foreign assets, these are limited to 25% of total investments, and there are further restrictions for investments abroad such as minimum credit rating requirements.

2. CASH AND BANK BALANCES

a) Bank reconciliation statements shall be prepared.

b) The auditor should obtain confirmation of Bank Balances for all operative and inoperative accounts.

c) The auditor should physically verify Term Deposit Receipts issued by bankers. Generally all cash at year end deposited as term deposit with the bank.

d) The auditor should verify the deposits and withdrawals transactions at random and check whether the Account is operated by authorized persons only.

e) In case of funds, in -transit, he should verify that the same are properly reflected in a reconciliation statement.

3. 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 year end 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.