Insurance claims can have a significant impact on a company’s financial statements, and therefore, it is important that they are audited effectively. The International Financial Reporting Standards (IFRS) provides the basis for the recognition, measurement, and disclosure of insurance claims.
In this article, we will discuss the accounting under IFRS for insurance claims and the audit procedures to ensure the accuracy of these claims.
Accounting Under IFRS
IFRS 17 is the standard that provides guidance on accounting for insurance contracts. According to IFRS 17, insurance claims are recognized when they are probable, the amount of the claim can be estimated, and the settlement of the claim is probable.
The recognition of insurance claims can have a significant impact on a company’s financial statements. For example, if an insurance claim is recognized too early, the company may have to make an adjustment in a future period, and if a claim is recognized too late, the company may have to recognize a loss that could have been avoided.
Measurement of insurance claims under IFRS is based on the amount of the claim that is estimated to be paid. This estimate should take into account the amount of the claim that is expected to be recovered from reinsurers, if applicable, and should be consistent with the company’s overall actuarial and accounting policies.
Disclosure of insurance claims under IFRS is also important. The company should provide information about the nature of its insurance contracts, including the types of claims and the amount of claims that are expected to be paid in the future.
The company should also provide information about its reinsurance arrangements, including the amounts recoverable from reinsurers and the amounts expected to be paid by the company.
Audit risks in insurance claims are areas where a misstatement in the financial statements could occur due to fraud, human error, or oversights in the underlying processes. There are several specific risks that auditors need to consider when auditing insurance claims. Here are 10 common audit risks to be aware of:
- Misclassification of claims: Claims may be improperly classified as lost or not lost, which can result in over or understated insurance liabilities.
- Misestimation of liabilities: Claims estimates may be overstated or understated, which can result in incorrect financial statements.
- Unsupported reserves: Reserves for claims may not be adequately supported by appropriate documentation and may be subject to fraud or misstatement.
- Timeliness of claims reporting: Claims may not be reported in a timely manner, leading to incorrect financial statements.
- Reinsurance recoveries: Reinsurance recoveries may not be properly accounted for and may result in misstated financial statements.
- Data reliability: The reliability of data used to support insurance claims may be questionable, leading to incorrect financial statements.
- Fraud: Insurance fraud can occur in the processing of claims, which can lead to incorrect financial statements.
- Inadequate internal controls: Internal controls may not be adequately designed or implemented, leading to incorrect financial statements.
- Inadequate claims review processes: Claims review processes may not be adequate, leading to incorrect financial statements.
- Insurance contracts: The terms and conditions of insurance contracts may not be properly accounted for, leading to incorrect financial statements.
These are just some of the risks that auditors must consider when auditing insurance claims. Auditors should design and perform audit procedures that address these risks and ensure that insurance claims are recorded and disclosed accurately in the financial statements.
Audit assertions refer to the representations made by the management in the financial statements about the insurance claims and the underlying transactions, activities and events. When performing an audit of insurance claims, the following audit assertions should be considered:
- Valuation Assertion: The insurance claims are accurately recorded at the correct amounts and are properly supported by the underlying documentation. This assertion relates to the fair presentation of the claims, which should be based on the terms of the insurance policy and the relevant legal and regulatory requirements.
- Rights and Obligations Assertion: The company has the rights to the insurance claims and the obligations to provide the coverage as stated in the insurance policy. This assertion should consider the terms of the policy, the status of the claims, and the company’s right to receive payment.
- Existence Assertion: The insurance claims actually exist and are properly recorded. This assertion should consider the documentation supporting the existence of the claims and the supporting data, such as the insurance policy, the related contracts, and the relevant supporting documentation.
- Completeness Assertion: All insurance claims that should be recorded have been recorded. This assertion should consider the scope of the audit and the nature of the insurance claims, as well as the company’s record-keeping processes and controls.
- Accuracy Assertion: The amounts and other details of the insurance claims are accurate and complete. This assertion should consider the accuracy of the claims calculation, the completeness of the supporting documentation, and the reliability of the underlying data.
- Cut-off Assertion: The insurance claims have been recorded in the correct period and accurately reflect the underlying transactions and events. This assertion should consider the date of the insurance policy, the date of the claim, and the company’s record-keeping processes.
- Classification and Presentation Assertion: The insurance claims have been properly classified and presented in the financial statements. This assertion should consider the requirements of the accounting standards, the company’s accounting policies, and the nature of the insurance claims.
- Disclosure Assertion: The financial statements include all necessary disclosures related to the insurance claims. This assertion should consider the requirements of the accounting standards, the company’s accounting policies, and the nature of the insurance claims.
- Validity Assertion: The claims are supported by valid insurance policies and the policies are consistent with the terms and conditions stated in the insurance contracts.
- Authorization Assertion: The insurance claims have been authorized by the appropriate individuals or entities and are in accordance with the company’s policies and procedures. This assertion should consider the company’s authorization processes and the related documentation.
In conclusion, these audit assertions form the basis of the audit procedures that auditors use to evaluate the insurance claims in financial statements. It is important for auditors to understand the assertions and to design audit procedures to test the underlying evidence supporting the assertions.
Walkthrough testing is a type of audit procedure used by auditors to verify the accuracy and completeness of a client’s financial statements and records.
The process involves tracing a transaction from its source documentation through to its eventual presentation in the financial statements. This allows auditors to see how transactions are recorded and processed, and to identify any potential errors or misstatements.
In the context of insurance claims, walkthrough testing may involve the following steps:
- Reviewing client policies and procedures related to insurance claims to gain an understanding of the processes involved.
- Examining the client’s records and systems used to manage and record insurance claims, including claims submissions, approvals, and payments.
- Observing and testing the processing of insurance claims transactions, such as the inputting of claim data, the calculation of benefits, and the recording of payments.
- Reviewing the accuracy and completeness of the client’s insurance claims data, including the calculation of benefits, the timing of payments, and the classification of transactions in the financial statements.
- Testing the accuracy and reliability of the client’s systems used to calculate and process insurance claims, such as software programs and manual spreadsheets.
- Reviewing the documentation supporting insurance claims, including claims submissions, approvals, and payments, to ensure that transactions are properly recorded and supported.
- Examining the client’s procedures for reconciling insurance claims data with the general ledger, to ensure that the financial statements accurately reflect the client’s insurance claims activities.
- Testing the client’s internal controls related to insurance claims, including the segregation of duties, authorization and approval processes, and management oversight.
- Evaluating the client’s insurance claims process for compliance with relevant accounting standards and regulatory requirements.
Walkthrough testing is a critical component of an auditor’s insurance claims audit. It allows auditors to gain a comprehensive understanding of the client’s insurance claims processes, and to identify and test key areas of risk.
This helps auditors to provide more accurate and reliable audit opinions, and to identify areas where improvements can be made to enhance the client’s internal control environment.
Test of Control
The purpose of the test of control is to evaluate the design and implementation of internal controls related to the insurance claims process. This evaluation is performed to determine the risk of material misstatement in the financial statements.
In the context of insurance claims, the following internal controls may be evaluated:
- Authorization of claims: The process of approving claims should be properly documented and approved by authorized personnel.
- Claim data processing: The data entered into the system for insurance claims should be accurate and complete. This includes the policy number, date of loss, and claim amount.
- Documentation of claims: All supporting documentation for insurance claims should be maintained and easily accessible. This includes documentation of the claim process, payment of claims, and supporting documentation for the payment of claims.
- Approval of claims: Claims should only be approved by authorized personnel.
- Segregation of duties: The functions of authorizing claims, processing claims, and paying claims should be performed by different personnel to minimize the risk of fraud or error.
- Physical control over claims: Insurance claims should be securely stored to prevent unauthorized access or alteration.
- Follow-up on unresolved claims: The company should have a process in place to follow-up on unresolved claims to ensure timely resolution and payment.
Substantive Audit Procedures
Substantive audit procedures are designed to detect material misstatements in the financial statements. In the context of insurance claims, the following substantive audit procedures may be performed:
- Review of insurance policies: The auditor should review the insurance policies to ensure that they are in compliance with accounting standards and to determine the policy limits, coverage, and deductibles.
- Inquiry of management: The auditor should inquire of management to gain an understanding of the process for authorizing, processing, and paying insurance claims.
- Review of claims data: The auditor should review the data entered into the system for insurance claims to ensure that it is accurate and complete.
- Review of supporting documentation: The auditor should review the supporting documentation for insurance claims to ensure that it is complete and accurate.
- Testing of authorization and approval: The auditor should test the authorization and approval of insurance claims to ensure that it is performed by authorized personnel.
- Testing of data processing: The auditor should test the data processing for insurance claims to ensure that it is accurate and complete.
- Testing of payment of claims: The auditor should test the payment of insurance claims to ensure that it is in compliance with the insurance policy and that the correct amount was paid.
- Review of follow-up on unresolved claims: The auditor should review the process for follow-up on unresolved insurance claims to ensure that it is adequate and that it results in timely resolution and payment.
- Review of claim reserves: The auditor should review the calculation of claim reserves to ensure that they are adequate and that they are in compliance with accounting standards.
- Comparison to prior periods: The auditor should compare the current period’s insurance claims to prior periods to identify any unusual or significant changes that may indicate a potential misstatement.