The importance of preparing for insurance audits
The importance of preparing for insurance audits
Introduction
There is a common misconception that auditors alone bear the responsibility for the proactive preparation, execution and delivery of audit services. Companies often blame the auditors for the tardiness of sign-offs, ignoring the issue. In reality, management is equally accountable for the successful and efficient execution of an audit. Management and auditors, as tag teams, share equal responsibilities for producing an effective audit delivery process. Effective preparation can significantly reduce stress and guarantee a smooth process in an insurance practice. It is imperative that the insurance company and the auditor have a collaborative approach in order to achieve a successful audit outcome.
Auditor's duties
Although auditors bear the primary responsibility for ensuring a smooth auditor process, they can further streamline the process by implementing the following measures:
Early risk assessment: This is a crucial step towards the timely execution of the risk assessment in the audit. Identification and prepared responses to prospective moderate, elevated and significant risks are essential for establishing the appropriate team composition and tune. The advantage in most Middle Eastern jurisdictions is that the local insurance regulator is required to carry out quarterly reviews. Essentially, this implies that by the time the half-yearly or third quarter reporting is complete, auditors have already conducted an adequate number of analytical procedures to facilitate the risk assessment for the year-end audit. In an ideal scenario, the auditor should be able to approve the risk assessment by the conclusion of the third quarter reporting.
Standards and requirements: Create a detailed list of the specific standards and requirements, such as internal policies, regulatory guidelines and accounting standards for the audit.
Comprehensive audit plan: Develop a comprehensive audit plan that delineates the resources, timing and scope necessary to complete the audit.
Allocation of resources: Ensure the audit's efficiency and effectiveness by allocating a sufficient number of resources, including experienced auditors.
Timeline: Determine a feasible audit timeline that recognises the insurer's operations' complexity and the audit's particular needs.
Client's duties
To ensure a seamless and efficient audit process, insurance companies should take the following steps proactively:
A dedicated resource should be assigned to coordinate with the auditor, promptly resolve their inquiries and provide the necessary documentation. This is an essential step in the direction of a seamless audit process. A benefit for the audit team is the presence of an individual who comprehends the auditor's language and can translate their inquiries and requirements into adequate and appropriate audit evidence. This facilitates the entire exchange of correspondence between the two parties.
Anticipation based on the current year's performance
Review the current year's performance to identify prospective areas of concern or risk. Management should anticipate the categories of questions and information requested based on the auditors' performance in the current year. For example:
- Why does the combined loss ratio fluctuate?
- Has a new product been released?
- Has due diligence been conducted on the loss ratios?
- Is local regulator’s authorisation required?
- If the new product lacks a loss history, how are IBNR and IBNER being evaluated ?
- Was the facility damaged as a result of flooding?
- How has impairment assessment been conducted?
- During the year, has there been any merger, acquisition, significant business disposal or asset acquisition?
The primary responsibility of management is to ensure that comprehensive internal controls are in place to safeguard assets, maintain accurate records and prevent fraud or error. It is mandatory for auditors to understand the internal control environment. For example, is management aware that an effective internal control environment and controls can help auditors reduce the scope of substantive testing procedures? Of course, this is accurate. Management can therefore assist the auditors by identifying pertinent controls, saving time in the planning, execution and reporting of the audit.
Quality of documentation - audit trail: Maintaining clear, accurate and comprehensive documentation - such as financial records, contracts and policy documents - is a critical favour that management can provide to the auditors in order to obtain the audit evidence. The comprehension and examination of a transaction from its inception to its recording and ultimately to its disclosure in the financial statements will attract an auditor. Ensuring that management has access to all relevant audit trails could accelerate the testing process.
Involving subject matter experts (SMEs): It is specifically the actuaries that primarily comprise the insurance company's financial statement. The timely involvement of SMEs such as actuaries to provide technical assistance and support during the audit is crucial. The auditor must have an adequate amount of time to assess the actuarial data. It is imperative that both management and auditors' experts engage in a timely manner to ensure the implementation of a high-quality audit.
Early engagement of auditors in significant unusual transactions: Proactively addressing potential issues by consulting with the auditor early on in the process regarding any significant or unusual transactions.
Conclusion
The auditors and management share responsibility for the audit. For the audit to be successful, it is essential that the client and the auditor collaborate and communicate openly. In this way, the audit process's advantages are optimised and interruptions are minimised through the implementation of robust internal controls, efficient planning and prompt communication.
How BDO can help
BDO’s expert audit teams apply the practical experience and knowledge gained from working with clients locally and worldwide.
Please reach out to the relevant partner in your local BDO firm for further information.
Author: Hasnain Ejaz
Director - Assurance Services, BDO UAE