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|Test checking
Given a large number and complexity of business transactions, the auditor of an
insurance company cannot be expected to carry out a detailed checking thereof.
Under the circumstances, he has to rely on test-checking, but he must first ascertain
the efficacy of the internal control system operated by the company.
›
|nnual accounts
He should ascertain whether the annual accounts have been prepared in accordance
with the legal provisions.

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He should vouch the premium income by reference to policy register and ensure
that outstanding premia on lapsed policies have not been taken credit of. He should
also check the counterfoils or copies of the receipts issued to policyholders.
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Yremium income derived from branches and agents should be verified by reference
to the accounts submitted by them as also copies of the money receipts issued by
them.
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He should ascertain whether separate accounts are being maintained for separate
insurance business.
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?utstanding premia should be verified with the policy register and particular
attention should be given to ascertain whether these are recoverable.
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nother major source of income in the case of an insurance company is by way of
interest, dividends and rents arising from its investments. The auditor should check
these carefully and see that the income which has fallen due is not left unrealized.
The total income should be vouched with the schedule of investments.
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He should see that premia received in advance are not taken credit of in the current
yearǯs revenue accounts. These should instead be carried forward, to be attributed
to the periods to which they relate.
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Vommission and allowances paid to the agents should be verified with agreements
entered into with them and the returns submitted by them from time to time. It
should be ascertained whether the payment is in conformity with the legal
provisions and all outstanding payments have been duly taken into accounts.
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He should vouch the amount of Dzclaims paiddz with the claims register, cancelled
policies and other related documentary evidence, such as, cash book, counterfoils of
the cheques issued, and money receipts obtained from the claimants. The amount of
claims outstanding should be vouched with the claims filed, claims register and
related policies. The amount of claims to be debited to the revenue accounts should
include both-claims paid as well as outstanding less salvage.
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ll outstanding payments, whether on accounts of claims or commission and
allowances to agents, should be shown in the balance sheet on the liabilities side.
› 
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The amount of bonus should be vouched with the cash bonus register.
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regal expenses incurred in respect of settlement of claims should be debited to the
claims account.
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Yayments in respect of annuities should be vouched by reference to the
respective agreements, counterfoils of cheques and money receipts. Special care
should be taken to see that annuities due but not paid, are taken into account.

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The premium income normally consists of premium in respect of business exclusively

transacted by the company itself and its share of premiums in respect of business
transaction under company insurance arrangements. In order to verify premiums, the
auditor should take the following steps.

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The efficiency of internal control procedures regarding premiums should be
evaluated. He should particularly examine whether proper cover notes are issued
for all risks assured and whether the system ensures that no cover note/policy can
be omitted from being accounted for.
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The premiums received during the tear should be test checked with reference to
counterfoils of the receipts issued, agentǯs premium accounts, premium register,
inward premium statements from coinsurers.
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Special attention should be paid to accounts due but not collected including those
arising due to dishonor of cheques.
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In case of premiums relating to co-insurance business wherein the insurance
company under audit is a leader, it should be verified whether only the companyǯs
own share of premium is shown as income
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The auditor should obtain written confirmations from the divisional managers to
the effect that no risk is being carried in respects of any amounts lying in the deposit
premium ccount, premium received in advance account, agentǯs premium or
inspectorǯs deposit accounts.
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The auditor should look into the infringements of section 64›
of the insurance
ct, and the rules framed there under regarding the assumption of risks only on
receipts of premium except in certain specified cases.

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He should verify all reinsurance accounts, reinsurance premium, and reinsurance
claims. Reserve deposits held on account of reinsurance should also be carefully
checked.
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He should check the cash balances and the securities relating to the companyǯs loan
and investments. It should be seen that the legal requirements as regards loans and
investments have been duly complied with.
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?utstanding branch and agency accounts should be carefully examined to see that
they are recoverable.
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?ther assets of the company should be verified with proper regard to adequacy of
depreciation and valuations as per the accepted accounting principles.
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He should see that due provision has been made for all unexpired risks.
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The government of India enacted the insurance regulatory and development authority
›IRD
ct in the year . Yursuant to this act an independent authority, IRD was
formed in the year  to protect the interest of insurance policies, to regulate, promote
and ensure orderly growth of the insurance industry within the framework of the IRD ct.

The auditor of these institutions should be fully acquainted with the relevant provisions of
these enactments.

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Section of the insurance ct,  , required every insurer to prepare at the expiration of
each financial year in respect of all insurance business transacted by it:

›
|Its balance sheet as per the requirements of the first schedule to the ct:
›
|ITS profit and loss account as per the requirement of the second schedule of the act,
if it carries on more than one class of insurance business: and
›V
|Its revenue account for each class or sub-class of insurance business for which
separate accounts of receipts and payments are to be maintained under section ,
as per the requirement of the third schedule to the ct.


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The auditor should look into internal controls and compliance thereof as laid down
for collection and recording of the premium.
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He should ascertain that all the cover notes relating to the risks assured have been
serially numbered for each class of business.
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He should also verify that there is an adequate internal check on issue of stationary
comprise of cover notes, policy documents, stamps, etc.
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He should also ensure that the premium in respect of risks incepting during the
relevant accounting year has been accounted as premium income of that year on the
basis of premium revenue recognition policy.
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He should examine whether the re-insurance company is not under a rash in respect
of amount lying at credit and outstanding at the year and.
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erify whether premium registers have been maintained chronologically.
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erify the collection remitted by the agents immediately after the cut-off date to
verify the risk assumed during the year under audit on those collections.

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Under section
of the insurance ct,  the audited accounts and statements are
required to be printed and four copies thereof furnished to the chairman, insurance
regulatory and development authority, within six months from the end of the period to
which they relate.

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Section ›
of the insurance ct,  , provides that no insurer carrying on general
insurance can invest or keep invested any part of his assets, otherwise than in any of the
approved investments or in other investment which are certain condition or in certain
prescribed assets which are deemed to be approved investments for the purpose of this
section.

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 general insurance company is required to disclose in the balance sheet the estimated
liability in respect of outstanding claims whether due or intimated. In order to verify
claims, the auditor has to take the following steps:

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The internal control system should be studied to determine whether it ensures
verification of facts before a claim is recorded in the claims register and whether
proper claim file or docket is maintained containing the claim form, survey reports,
sanction of the appropriate authority etc.
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The estimated liability provided for in respect of claims due and intimated should be
carefully scrutinized with reference to various documents in the claim files to
examine whether provisions have been made for all unsettles claims as at the year
end.
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The auditor has to verify that only those claims are paid or provided for in respect of
which the company is legally liable major claims can be test-checked to see whether
the risk was covered by the policy and the claim was actually due.
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Vo-insurance arrangements should examine to verify that only that part of the
claims is provided for in respect of which the company is legally liable.
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The auditor should also reconcile the figure of claims intimated by the division tp
the head office with the figures shown in the revenue account.

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ppropriate claim processing and payment procedures are established.
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ll payments for losses and loss adjustment expenses are approved by a responsible
officer.
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In case of large claims and claim payments an additional review is performed by a
superior officer.
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In case of material expenses between expected claim and actual claim the same are
properly investigated.
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ll settled cases are dually recovered as closed in a timely manner.
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t the time of claims processing re-insurance taken is adequately considered.

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The auditor should examine with reference to the receipts or the acknowledgements of the
agents, the commission p[aid or payable on the direct business of the insurance company.
He should also scrutinize the monthly commission have been paid after deducting income
tax at source.

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Voinsurance is an arrangement where insurance is offered jointly with other insurance

company, the premium income normally comprises premiums in respect of business
exclusively transacted by the company itself and its share of premiums in respect of
business transacted under the insurance company under audit is the leader, it should be
verified whether only the companyǯs own share of premium is shown as income.
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The IRD has prescribed the matters to be dealt with by the auditorǯs report vide
regulation  under schedule V of IRD regulation, .

The report of the auditors on the financial statements of every insurer shall deal with
specified herein:

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That they have obtained all the information and explanations which to the best of
their knowledge and belief were necessary for the purposes of their audit and
whether they have found them satisfactory.
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‰hether proper books of accounts have been maintained by the insurer so far as
appears from an examination of those books.
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‰hether proper returns, audited or unaudited, from branches and other have been
received and whether they were adequate for the purpose of their audit.

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‰hether the balance sheet gives a true & fair view of the insurerǯs affairs as at the
end of financial period.
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The financial statements stated at ›
above are prepared in accordance with the
requirements of the insurance ct,  : the IRD ct  and the Indian
companies ct, 
6.
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Investments have been valued in accordance with the provisions of the ct and the
regulations there under.

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They have reviewed the management report and that there is no apparent or
material inconsistencies with the financial statements.
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They have verified the cash balances and the securities relating to the insurerǯs
loans, reversions and life interests and investments.
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The extent, if any, to which they have verified the investments and transactions
relating to any trusts undertaken by the insurer as trustee.

Missu.queen 6@gemail.com
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