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CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA
Auditing Guideline 43 Audit of Policy Liabilities of Insurance Enterprises
Jim Christie, FCIA
Session PC-5 June 30, 2006
tSlide 2
General Audit Approach
• For actuarial liabilities, the audit must – Assess and test controls– Review assumptions for reasonableness– Perform some tests of calculations & models– Review results for reasonableness
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tSlide 3
Overview of Auditing Guideline 43
• Provides guidance to external auditors when applying GAAS to
policy liabilities of insurance enterprises
• Scope
– Life insurers (replaces AuG 15)
– P&C (new)
– Workers Comp (new)
– Reinsurers (new)
– Excludes Pensions and Employee Benefits
• Effective for audits of fiscal years on or after January 1, 2006
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tSlide 4
Major Impacts on Audit Process
• External Auditor can no longer rely on the work
of the Appointed Actuary (§ 53)
• External Auditor may continue to use the work of
the Appointed Actuary (§ 53)
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tSlide 5
Major Impacts on Audit Process
• Strong presumption that External Auditor will have Actuarial Specialist on engagement team (§ 8)
• Independence considerations mean the Appointed Actuary cannot be the Actuarial Specialist (§ 53)
• Requires corroborative evidence as the principal evidence for the auditor’s use of the AA’s work (§ 53)
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tSlide 6
Paragraph 4
• The auditor's objective is to obtain sufficient appropriate evidence to provide reasonable assurance that the policy liabilities are reasonable within the context of the financial statements as a whole.
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tSlide 7
Paragraph 4 - continued
• In addition to performing appropriate procedures to test the calculation of the policy liabilities, the auditor also considers such factors as:
• the complexity and subjectivity involved in
preparing the policy liabilities, • the availability and reliability of data, • the nature and extent of assumptions
required and • the degree of uncertainty of future events.
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tSlide 8
Paragraph 4 - continued
• Policy Liabilities are a point estimate rather than
an estimated range
• Different actuaries are likely to arrive at different
point estimates due to the inherent uncertainties
and judgments required in making such
estimates
• Estimates normally still within a reasonable
range.
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tSlide 9
Paragraph 4 - continued
• Differences between such estimates are not
necessarily indicative of error, where the
estimates are within a reasonable range
• The auditor will need to consider a zone of
reasonableness within which to accept the policy
liabilities as being reasonable within the context
of the financial statements as a whole
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tSlide 10
Determination of a Reasonable Range
• Implies that the actuarial specialist will need to recalculate some policy liabilities
• Extent of recalculation will depend – on nature of policy liabilities– internal control processes (such as SOX 404 or
CPAB 52 -109)• Shifts some responsibility from the AA to the
External Auditor, in consultation with the Actuarial Specialist, that the actuarial liabilities are materially correct in the financial statements
• Auditor determines extent of recalculation needed
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tSlide 11
Implications
• Actuarial specialist has to have access to
company’s actuarial database simultaneously
with AA
• Actuarial specialist has to provide audit team
with reasonable range of estimates
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tSlide 12
Issues
• Changes to Joint Policy Statement
• Duplication of effort between the audit and OSFI
External Review processes
• CIA Practice Certificates for Actuarial Specialist
may be require experienced FCIA
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tSlide 13
Issues
• Potential CIA Guidance to Actuarial Specialists
• Availability of sufficient number of independent
actuaries
• Impact of additional actuarial review on the audit
fees
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tSlide 14
Possible Company Initiatives
• What can company do to reduce actuarial efforts needed? – Strong internal controls have potential to
mitigating impact – Better documentation of internal actuarial
processes– Complete financial statements using actuarial
support based on Q3 (or even Q2) data• Additional internal actuarial effort
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