Audit Committee (mandatory)

• Every Insurer shall constitute an Audit Committee as per Section 177 of the Companies
Act, 2013.
• The committee should oversee the financial statements, financial reporting,
statement of cash flow and disclosure processes both on an annual and quarterly
basis.
• The Chairperson of the Audit Committee should be an Independent Director of the Board
with an accounting/finance/audit experience and may be a Chartered Accountant or a
person with a strong financial analysis background. The association of the CEO in the Audit
Committee should be limited to occasions where the Audit Committee requires eliciting any
specific information concerning audit findings. As required under Section 177 of the
Companies Act, 2013, the Audit Committee shall comprise of a minimum of three directors,
majority of whom shall be Independent Directors.
• The Audit Committee will oversee the efficient functioning of the internal audit
department and review its reports. The Committee will additionally monitor the progress
made in rectification of irregularities and changes in processes wherever deficiencies have
come to notice.
• The Audit Committee shall have the oversight on the procedures and processes established
to look after the issues relating to maintenance of books of account, administration
procedures, transactions and other matters having a bearing on the financial position of the
insurer, whether raised by the auditors or by any other person.
• The Audit Committee shall discuss with the statutory auditors before the audit commences,
about the nature and scope of audit as well as have post-audit discussions to address areas
of concern.
Appointment of Statutory Auditors by
Insurers
The provisions of the companies’ act would apply for the appointment of an
auditor. The auditor of an insurance company is appointed at the annual general
meeting of the company and the approval of the authority is required before the
appointment is made. With the latest amendment to the Insurance Act, 1938
and the Companies Act, 2013, Authority (IRDAI) has issued the revised guidelines
as under:

 Insurers shall comply with the provisions relating to appointment of Auditors as

contained in the Companies Act, 2013. Additionally, insurers shall also comply
with the provisions contained in these guidelines.

 On recommendation of the Audit Committee, the Board shall appoint the

statutory auditors, subject to the shareholders’ approval at the general meeting of
an Indian insurance company. The remuneration of the auditors shall also be
approved by the shareholders in the general meeting.
The eligibility, qualifications and other
requirements of the auditors
 1. The Auditor of an insurer shall be a firm, including a Limited Liability Firm,
constituted under the LLP Act, 2008.
 2. The Firm should have been established and in continuous practice for at least
15 years.
 3. The auditor should have:
a) a minimum of 5 full-time partners, of whom,
(i) at least 2 should have been in full-time practice as partners exclusively
associated with the firm for a continuous period of minimum of 10 years, and
(ii)at least 2 other partners should have been in continuous association with the
audit firm either as partner or as employee for a minimum period of 5 years, and
(iii)one partner in full-time practice with the firm as a partner for a minimum
period of 1 year, and
(iv)out of the total partners of the firm, at least two should be FCA and be in
practice for a minimum period of 5 years as FCA.
 OR (Alternatively),
 a minimum of 7 Chartered Accountants,
 (i) of which not less than 2 are partners in full-time practice exclusively
associated with the firm for a continuous period of a minimum of 10
years, and
 (ii) at least 3 other Chartered Accountants in continuous association with
the audit firm as partner or employee for a minimum period of 5 years,
and
 (iii) at least 2 Chartered Accountants should be FCA and be in practice for
a minimum period of 5 years as FCA.
 4. At least one partner or employee of the audit firm should possess the
DISA/ Certified Information Systems Auditor (CISA)* or equivalent
qualification as may be recognized by the IRDAI from time to time and
such partner or employee must be involved in the audit of the insurer.
 5. The Audit firm should have a minimum experience of 5 years in audit
of entities in the financial sector. At least one of the joint statutory
auditors of an insurer must have experience in insurance company audits
of at least two years.
* Information system of audit and control association (ISACA),
 Conti….

 6. Insurers are also advised to file a Return on an annual basis as per the
enclosed (Format A3) giving details of Chartered Accountant firms
engaged in various capacities like Statutory Auditors, Internal Auditors,
Concurrent Auditors, Tax Auditors etc.

 If it comes to the notice of the Authority that the appointment of auditors

by insurers is not in line with these guidelines, the appointment can be
cancelled and it shall be open for the Authority to consider such further
action as may be deemed necessary in this regard.

 An insurer shall not remove its statutory auditor without the prior
approval of the Authority.

 The maximum Number of Statutory Audits of Insurers that can be

accepted by an audit firm at a time is as follows:
An Audit firm shall be entitled to carry out Statutory Audits of
not more than three Insurers (Life/Nonlife/Health /Reinsurer) at a time.
 Rotation of Joint
Auditors
 Each insurer shall have a minimum of two auditors as
joint auditors.

 An audit firm which completes the tenure of five years at the

first instance in respect of an insurer may be reappointed as
statutory auditors of that Insurer for another term of five years.

 Thus, an audit firm may be appointed as statutory auditors by an

insurer for a continuous period of up to ten years.
 Audit of accounts
 Under section 12 of the Insurance Act, 1938, the financial
statements of every insurer are required to be audited annually
by an auditor.

 IRDA Act, 1999, every insurer, in respect of insurance business

transacted by him and in respect of his shareholders‘ funds,
should prepare, a Balance Sheet, a Profit and Loss Account, a
separate Account of Receipts and Payments and a Revenue
Account in accordance with the regulations made by the IRDA at
the end of each financial year .
 AUDIT PROCEDURE

A. RELATING TO PROFIT AND LOSS ACCOUNT

B. RELATING TO BALANCE SHEET
 1. PREMIUM
Insurance premium is collected upon issuing
policies. It is the consideration for bearing the
risk by the insurance company. The premium
collections are credited to a separate bank
account and no withdrawals are normally
permitted from that account for meeting the
general expenditure. As per the policy of the
insurance company, the collections are
transferred to the Regional Office or Head
Office. No Risk shall be assumed by the insurer
without receipt of premium according to section
64VB of the Insurance Act, 1938.
 VERIFICATION OF PREMIUM
Verification of premium is of utmost importance to an auditor. The
auditor should apply the following procedures:
•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.
•Cover notes should be serially numbered
•The auditor should check whether Premium Registers have been
maintained chronologically, giving full particulars including service
tax charged as per acceptance advice on a day -to-day basis.
• The auditor should verify whether the figures of premium
mentioned in the register tally with those in General Ledger.
•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.
 CLAIMS
Claims under policies comprise the claims paid for
losses incurred, and those estimated or anticipated
claims pending settlements under the policies.
Settlement cost of claims includes surveyor fee, legal
expenses, etc. The Claim Account is debited with all
the payments including repair charges, fire fighting
expenses, police report fees, survey fees, amount
decreed by the Courts, travel expenses, photograph
charges, etc.
 VERIFICATION OF CLAIMS
The auditor should obtain from the divisions/branches, the information for each
class of business. The auditor should determine the total number of documents
to be checked giving due importance to claim provisions of higher value.
After that auditor should look after the following views-
•Check whether provision has been made for all unsettled claims.
•Check whether provision has been made for only such claims for which the
company is legally liable.
•Check whether provision made is normally not in excess of the amount insured.
•To check in case of co-insurance arrangements, the company has made
provisions only in respect of its own share of anticipated liability.
• To check claimed paid should be duly sanctioned by the authority
concerned
 3.COMMISSION

An insurance business is solicited by insurance agents.

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 through the and is debited to Commission on
Direct Business Account.
 VERIFICATION OF COMMISSION
The auditor can do the verification of commission in
the following way-
•Voucher disbursement entries with reference to the
disbursement vouchers with copies of commission bills
and commission
statements.
•Check whether the vouchers are authorized by the
officers- in –charge
as per rules and income tax is deducted at source, as
applicable.
•Test check correctness of amounts of commission allowed.
•To check whether commission outgo for the period
under audit been duly accounted or not.
 4.OPERATING EXPENSES RELATED TO
INSURANCE BUSINESS

All the administrative expenses in an insurance company are

broadly classified under 13 heads as mentioned in
Schedule IV.
The auditor should check whether the required are as per Insurance
Act:
•Expenses in excess of Rs.5 Lakhs or 1% of net premium, whichever
is higher,
should be shown separately; and
•Expenses not directly relating to insurance business should be
shown separately for example, expenses relating to investment
department, bank charges etc.
 INVESTMENTS
The auditor should keep in mind the following provisions of the Insurance Act, 1938 while
examining the investments-of an insurance company.
Provisions related to Investments
a. An insurance company can only invest in approved securities. However, it can invest otherwise
than in approved securities if the following conditions are satisfied.
• Such investments should not exceed 25% of the total investments; and
• Such investments are made with the consent of board of directors.
b. An insurer should not invest in shares or debentures of insurance or Investment Company
in excess of least of the following:
• 10% of its own total assets;
• 2% of the investee’s subscribed share capital or debentures.

c. An insurer company should not invest in shares or debentures of a company other than
insurance or investment company in excess of least of the following
• 10% of its own total assets;
• 10% of investee’s subscribed share capital or debentures.
d. An insurance company cannot invest in shares and debentures of a private company.
e. The insurance companies cannot invest the funds of its policy holders outside India.
 VALUATION OF INVESTMENT

AS 13 i.e. “Accounting for investments”, do not apply to insurance companies.

The salient features of valuation guidelines laid down for insurance companies are
discussed as follows:
a.Real Estate Investment Property - Such investments should be valued at
historical cost less accumulated depreciation and impairment loss.
b.Debt Securities - Debt securities including Government Securities and
Redeemable Preference Shares are required to be considered as ‘held till
maturity’ securities and shall be measured at historical cost.
c.Equity securities and derivate instruments traded in active markets -
the equity securities and derivative instruments that are listed
are required to be measured at the fair value at the balance sheet date.
 CASH AND BANK BALANCE

The audit procedures for verification of claims:

•The auditor should check whether late collections of cash and cheques on the last
working day of the financial year, which could not be deposited into bank account on
the same day, have been identified and booked as Cash in Hand and Cheques in
Hand Account, respectively.
•The auditor may apply test check on the bank transactions.
• The auditor should also check Bank Reconciliation statement.
•The auditor should obtain confirmation of Bank Balances for all operative and
inoperative accounts.
•The auditor should physically verify Term Deposit Receipts issued by bankers.
•The auditor should verify the deposits and withdrawals transactions at random
and check whether the Account is operated by authorized persons only .
•In case of funds, in -transit, he should verify that the same are properly
reflected as part of bank balance.
 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 yearend 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.
 Internal Control System of an Insurance Company:-

 The Internal Control System for an insurance company is

designed with the intention to create an appropriate framework for
both insurance undertakings and supervisory authorities.

 The Internal Control System of an insurance company address the

following major requirements:-
• Governance Structure.
• Board of Directors.
• CEO.
• Key Management Functions.
• Role of appointed Actuaries.
• External audit – Appointment of Statutory Auditors.
• Disclosures .
• Relationship with stakeholders.
• Interaction with the Supervisor
• Whistle blower policy.
Objective of Internal Control System:
•Compliance with the law
•Structure, responsibilities and functions
•Sound and judicious principles
Components of Internal Control System

1. Control structure
2. Risk assessment
3. Control procedure
4. Information and
communication
5. Monitoring
 Applicability of Accounting Standards:-
• AS-3 (Cash Flow Basis)
• AS-4 (contingencies and events occurring after the
balance
sheet date)
• AS-9 ( Revenue Recognition)
Books and Registers to be maintained:-
Registers:- Books of Accounts
1. Register of Policies :-
2. Register of Claims 1.Cashbook.
2. Ledger.
3. Subsidiary Records.
4.Control Register.
Submission of Reports and Returns
U/s 18 of the Insurance Act 1938, every insurer is
required to furnish to the authority a certified copy of
every report on the affairs of the concern. The audited
accounts and statements shall be printed and four copies
thereof shall be furnished as returns to the Authority
within 6 months.
The matters to be dealt for the preparation
of Financial Statements and Auditor’s Report
of Insurance Companies have been
prescribed by the authority in Regulation 3
under Schedule C of IRDA
The report of the auditors on the
financial statements
1. That they have obtained all
the information and
explanations.
2. Examination of books of
accounts.
3. Audited or unaudited proper
returns from branches and other
offices.
4. Examination Revenue Accounts,
Profit and Loss Account and Balance
Sheet and Receipts & Payments
Account.
5. The duly certification of actuarial
 The auditors shall express
their opinion on
1. (i) a true and fair view of Balance Sheet
(ii)a true and fair view of Revenue Account
(iii)a true and fair view of Profit and
Loss Account
(iv)a true and fair view of Receipts
and Payments Account
2. In accordance with the requirements of the
Insurance Act, 1938, the Insurance Regulatory
and Development Authority Act, 1999 and
the Companies Act, 1956, to the extent
applicable and in the manner as so required.
3. Investments in accordance with the
provisions of the Act and the Regulations.
4. Appropriate Accounting policies and
applicable Accounting Standards.
The auditors shall further certify
that
1. Management report properly reviewed
2. The insurer has complied with all the
terms and conditions of the registration
specified by the Authority.
A certificate signed by the
auditors must certify
that
1. Verified the cash
balances and the
securities and life
interest
2. Extension can be done
in case of trusts.
3. No part of the assets
applied in contravention
of the provisions of the
Insurance Act, 1938.