CH10P02-AUDIT OF INSURANCE COMPANIES

MCQ--IC.1

An Indian insurance company in the name of Trust Life Limited was carrying on life insurance business with paid-up capital of ` 250 crores. The Company appointed Mr. Vineet, as its statutory auditor for the year 2018-19. The auditor verified the investments of the company in terms of title, acquisition or disposal, safeguard etc. In the financial statements of the company the investments were classified in terms of portfolio maintained with central, state or any other notified investment. The auditor mentioned in the report that the company has complied with the guidelines of the IRDAI. The shareholders raised an objection that the audit report is incomplete as the financial statements don’t give the classification of investments as percentage of total investments in Housing Projects or Infrastructural Projects as per IRDA (Investment) Regulations. Is it necessary for the auditor to verify and give the details in audit report for investments made in Housing or Infrastructural Projects?

• a) As per IRDA (Investment) Regulations if the auditor has classified the investments made by the company on the basis of investments with central, state or any other notified investment, there is no need to verify in terms of Housing or Infrastructural Projects.

• b) The auditor has to verify only the valuation of investments and appropriateness of the method of accounting policy followed

• c) The auditor is required to give classification of investments on the basis of investments in Housing Projects or Infrastructural Projects as, according to IRDAI guidelines the insurance company carrying on life insurance business shall invest a minimum of 5% of investment Assets in Housing Project.

• d) The auditor is required to ensure compliance with the guidelines of IRDAI and accounting policy followed for valuation of investments. As the auditor mentioned in the report that the company has complied with the guidelines of the IRDAI it is complete and no other disclosure is required from the auditor.

MCQ--IC.2

Bajaj Allianz General Insurance Ltd. agreed to insure a large commercial client. Due to the size of this client's operations, there is the potential that it could suffer a substantial loss. It would be financially difficult for Bajaj Allianz to pay the entire claim itself. To spread this risk, Bajaj Allianz contacted Bharti AXA General Insurance to request that it cover a portion of the risk. Bharti AXA General Insurance agreed, but only on the condition that it receive a portion of the premium the client has paid to Bajaj Allianz General Insurance Ltd. The term that best describes this scenario is

(CNO-GIC.040)

• a) retention.

• b) reinsurance.

• c) loadings.

• d) casualty insurance.

MCQ--IC.3

BIC Ltd is an insurance company looking to expand their operations in the Northern India. The company’s operations have been considerable in the Southern India and its head office is also based at Chennai. The company had strong processes and controls from its starting days and have appointed consultants over the years to ensure their operative effectiveness at various points of time. Shivam Ltd exercises significant influence over BIC Ltd and the financial statements of Shivam Ltd are prepared as per Ind AS (Indian Accounting Standards) and audited by Shubham & Associates. Advil & Associates are the statutory auditors of BIC Ltd. For the financial year ended 31 March 2021, BIC Ltd also requested Advik & Associates to certify the Investment Risk Management Systems and Processes of BIC Ltd as per discussions with Shivam Ltd. Advik& Associates completed this task and also submitted the required certificate which the management has submitted to the required authorities. After submission, BIC Ltd received notice from the Insurance Regulatory and Development Authority of India (IRDAI) that the company has not complied the provisions in respect of submission of certificate. The company discussed this matter with Shivam Ltd and would also like to have your views on this.

(CNO-Unique)

• a) BIC Ltd, being an associate of a company and because of the fact that Ind AS is applicable on Shivam Ltd, should have appointed another firm of Chartered Accountants along with Advik & Associates for this certification work.

• b) BIC Ltd should have got this certification work done from their internal auditors as per the required provisions of IRDAI.

• c) BIC Ltd should not have got this certification work done from their statutory auditors.

• d) The certification work should have been done by Shubham & Associates.

MCQ--IC.4

KIC Ltd is a company engaged in the business of general insurance and has been in existence for over 15 years. The company has a subsidiary company, PIC Ltd, which is also engaged in the business of insurance other than general insurance. The previous statutory auditors of PIC Ltd have completed their tenure as an auditor and accordingly have resigned and the management of PIC Ltd is looking for new statutory auditors. KB & Associates, a firm of Chartered Accountants, have vast experience of audit of insurance companies and would like to get appointed as auditor of PIC Ltd. KB & Associates is a large firm and have also employed experts – engineers, valuers, lawyers for various client services. The firm is evaluating as to what should be the criteria for get appointed as auditors of PIC Ltd because in the past they have audited only the holding companies and considering a subsidiary company for the first time. In this context, please help the firm by answering which of the following options would be correct?

(CNO-Unique)

• a) KB & Associates, a firm of Chartered Accountants, should be appointed by the Board of Directors of PIC Ltd and should ensure that they don’t take up audit of more than 2 insurance companies.

• b) KB & Associates can take up the audit if the firm is appointed by the Comptroller and Auditor General of India and should ensure that they don’t take up audit of more than 3 insurance companies.

• c) KB & Associates cannot take audit of PIC Ltd because they have employed experts which is not permitted by the IRDAI Guidelines.

• d) KB & Associates can take up audit of PIC Ltd by ensuring that they are eligible to be appointed as per the criteria laid down in the Companies Act 2013 for audit of subsidiary companies and they would need to submit a certificate in this respect to the ICAI.

MCQ--IC.5

KJLIC Ltd is a life insurance company. The company is based at Nagpur and has offices across Western India. KJ & Associates are the statutory auditors of this company. At the time of audit of this company, areas like cash and bank, receipts and payment and fixed assets where the internal controls of the management are similar to the ones adopted by other companies are dealt by the auditors as per the publications on the Internal Control Questionnaire, published by the Institute of Chartered Accountants of India (ICAI). Since various operational cycles are interlinked, the internal controls operating within the systems of such cycles are reviewed simultaneously by the auditors. The company avails services of an actuary for computing various liabilities and provisions which are certified by the actuary. During the audit of the financial statements for the financial year ended 31 March 2019, the auditors of the company would like to have a discussion with the actuary who has given actuarial certificate on the basis of which certain liabilities have been recorded in the financial statements, however, the actuary and the management of the company are not comfortable with this and they have asked the auditor to complete their work on the basis of certificate. Further the management also provides management representation letter in respect of all of these points. Please suggest if you were the auditors of this company, how would you have handled this matter?

(CNO-LIC.080)

• a) The management is correct and as an auditor getting certificate would be a good audit evidence

• b) The management is not correct, and the auditor may have discussions with the actuary.

• c) The auditor is not correct because the IRDAI Guidelines require the actuary to maintain confidentiality and by having such discussion it would be a non-compliance. Auditors should be aware of such legal requirements.

• d) The auditor is not correct because such requirements require approval of the Insurance Regulatory and Development Authority of India (IRDA) and that would unnecessarily delay the completion of audit.

MCQ--IC.6

NIC Pvt Ltd is a large private company engaged in the business of insurance for the last 9 years. The company has expanded its business considerably over the years and have set up various divisions across India. The accounting and the operational systems of the company are centralized wherein the accounts of all the divisions, trial balances and their balance sheets are prepared by the Head Office. AJ & Co, a firm of Chartered Accountants, are the statutory auditors of this company and audit all the divisions and the head office. The auditors have completed the audit of the financial statements of the company for the year ended 31 March 2021 and the company’s financial statements are approved. Before the annual general meeting of the company, the company received a notice from the Insurance Regulatory and Development Authority of India (IRDAI) which has asked the company to respond within 7 days as to why this company breached the requirement of IRDAI guidelines by having a single auditor for all the divisions and head office. The management of the company has been doing this over the years and were never aware of this requirement. To respond to this, the management has consulted many legal experts and also the auditors. They would also like to understand your views as to how to respond to IRDAI in this critical situation. Please advise carefully.

(CNO-Unique)

• a) There has been no breach of IRDAI guidelines and accordingly the management should respond.

• b) The management should request IRDAI to consider relaxation in respect of this provision for the company for the current year as the audit is completed and it would be practically very difficult to complete the entire process within the required timelines.

• c) The management should respond to IRDAI that this provision is applicable to a company only after 15 years of its existence and hence there is no breach of IRDAI guidelines.

• d) The management should respond to IRDAI that this provision should have been ensured by the auditors and hence they should be held liable for this breach of provision of the IRDAI guidelines.

MCQ--IC.7

Anant & Co. is the auditor of ST Insurance Company. The insurance company is also involved in re insurance business and necessary provision for re-insurance premium has been made in the books of accounts. The insurance company is into a re -insurance whereby their contract relates to one particular risk and is expressed in the re-insurance policy. Each transaction is negotiated individually, and each party has a free choice i.e. for the insurance company to offer and the re insurer to accept. What kind of a re-insurance business is the insurance company into?

(CNO-GIC.040)

• a) Facultative Re-insurance.

• b) Stop loss treaty re-insurance.

• c) Auto-fac re-insurance.

• d) Proportional treaty re-insurance.

MCQ--IC.8

The Splendid General Insurance Company has entered into reinsurance contract with Adi Reinsurance Co. Ltd. against the risk of fire only. Adi Reinsurance Co. Ltd. is one of the largest reinsurers in India.Identify the type of reinsurance contract between Splendid General Insurance Company and Adi Reinsurance Co. Ltd

(CNO-GIC.040)

• a) Treaty Reinsurance.

• b) Proportional Treaty Reinsurance.

• c) Non-Proportional Treaty Reinsurance.

• d) Facultative Reinsurance.