CHAPTER 1

INTRODUCTION

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 1.1. INTRODUCTION

Insurance is a financial service. It is pooling of risks. In a contract of insurance, the

insurer undertakes in consideration of a sum of money to make good the loss suffered by
the insured against a specified risk or any other contingency. There are two parties to an
insurance contract, insurance company and the insured party. The document laying down
the term of the contract is called insurance policy. The property, which is insured, is the
subject matter of insurance. It may be insured against loss arising from uncertain events
in the form of destruction or damage to the property or death or disablement of a person.
The interest, which the insured has in the subject matter of insurance, is known as
insurable interest. Depending upon the subject matter, the type of insurance are life
insurance and general insurance. In case of life insurance a specified amount becomes
payable on the death of the insured or upon the expiry of a specified period. General
insurance covers losses causes by fire, accident and marine adventure.

Until 1999, insurance services were provided in India by two monopolistic public sector
organizations namely, life insurance corporation of India and general insurance
corporation of India. In order to provided better insurance cover to citizens and also to
ensure the flow of long-term sources of financing infrastructure the government opened
up the insurance sector and also set up a statutory insurance regulatory and development
authority in 1999.

Any class of insurance business I India can be carried out only by:

a) A public limited company;

b) A cooperative society;
c) An insurance cooperative society;

Thus, only Indian insurance companies are permitted to carry out any class of insurance
business after the commencement of IRDA act, 1999. An Indian company formed
/register under the companies act.

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 1.2. DEFINITIONS

According to John Merge, “Insurance is a plan by themselves which

large number of people associate and transfer to the shoulders of all risk that
attach to individuals.”

According to Riegal and Miller, “Insurance is a social device whereby

the uncertain risk of individuals may agree to combine in a group and thus
make certain small periodic contributions by the individuals, providing fund
out of which those who suffer losses may be reimbursed.”

“Insurance is a financial arrangement that redistributes the cost of

unexpected losses.”

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 1.3. HISTORY OF INSURANCE

This chapter deals with the history of insurance. It explains the origin
and growth of insurance business in the Indian context. The concept of
insurance has been prevalent in India since ancient times amongst Hindus.
The law relating to insurance has gradually developed, undergoing several
phases from nationalization of the insurance industry to the recent reforms
permitting entry of private players and foreign investment in the insurance
industry.

History of India's Insurance Business:

In "Rigiveda" we find the term "Yogakshema Bahamayam" which is

more or less akin to the well being and security of people. This makes it
clear that the traces of sharing the future losses were available even in
ancient India.

Life insurance was first set up in India through a British company called
the Oriental Life Insurance company in 1818 followed by the Bombay
Assurance company in 1823, the Madras Equitable Life Insurance Society in
1829, the Bombay Mutual Life Assurance Society 1871 and the Oriental
Life Assurance Company in 1874. All of these companies operated in India
but did not insure the lives of Indians. They were insuring the lives of
Europeans living in India.

The first General Insurance Company viz., Triton Insurance Co. Ltd.,
was established in Calcutta in 1850 whose shares were held mainly by the
Britishers2. Insurance business was conducted in India without any specific
regulation for the insurance business. They were subject to Indian companies
Act l866. After the start of the "Be Indian Buy Indian Movement" (called
Swadeshi Movement) in 1905, indigenous enterprises sprang up in many
industries.

In 1912, two sets of legislation were passed:

1) The Indian Life Assurance Companies Act and 2) The Provident
Insurance Societies Act.

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The features of the legislation:

(a) They were the first legislations in India that particularly targeted the
insurance sector.

(b) They left general insurance business out of it. The Government did not
feel the necessity to regulate general insurance.

(c) They restricted activities of the Indian insurers even though the model
used was the British Act of 1909.

In 1937, the Government of India set up a consultative committee.

Mr. Sushil C. Sen, a well known solicitor of Calcutta, was appointed the
chair of the committee. He consulted a wide range of interested parties
including the industry. It was debated in the Legislative Assembly. Finally,
in 1938, the Insurance Act was passed. This piece of legislation was the first
comprehensive one in India. It covered both life and general insurance
companies.

Reforms were initiated with the passage of Insurance Regulatory and

Development Authority (IRDA) Bill in 1999. IRDA was set up as an
independent regulatory authority, which has put in place regulations in line
with global norms. IRDA has been framing regulations and registering the
private sector insurance companies. It launched of the IRDA online service
for issue and renewal of licenses to agents. Anyone income of the Insurance
Regulatory and Development Authority established under the relevant Act
1999 is fully exempt from the A. Y.2001-2002 .

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 1.4. TYPES OF INSURANCE

Insurance business consist of spreading risk over time and sharing them
between persons and organizations. In case of life insurance, the claim is
fixed and certain, whereas general insurance business, the claim is uncertain.
The following are the different types of insurance:

TYPES

NON-LIFE
LIFE INSURANCE
INSURANCE

MARINE MOTOR HEALTH CROP CATTLE BURGLARY

FIRE VEHICAL

A) Life insurance:-
Life insurance is a contract whereby the insurer in consideration of a
premium paid either in a lump sum or in periodical installments undertakes
to pay an annuity or certain sum of money, either on the insured or on the
expiry of a certain period whichever in earlier.

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B) Non-life insurance:-
Non-life insurance classified into general insurance and miscellaneous
insurance. General insurance include fire insurance, marine insurance, motor
insurance and motor insurance. Other than these her insurance are called
miscellaneous insurance.

1) Marine insurance:-
Marine insurance is contract of insurance under which the insurer
undertakes to a indemnify the insured against losses incidental to marine
adventure. It may cover loss or damage to the ship, cargo, freight, vessels or
any other subject of a marine insurance.

2) Fire insurance:-
Fire insurance is a contract of agreement between the insurer and the insured
whereby the insurer undertakes to indemnify the insured for destruction of or
damage to property causes by fire or other specified perils during an agreed
period of time, in return for payment of a premium in lump sum or by
installment.

3) Motor vehicle insurance:-

Motor vehicle insurance falls under general insurance. In motor insurance
the owners liability to compensate people who were killed or injured through
the negligence of the motorist or drivers is passes on to the insurance
company.

4) Health/personal accident insurance:-

Personal accident insurance is a contract of insurance. It provides an

absolute protection against death or disability arising solely and directly
from accident caused by violent external and visible means.

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5) Crop insurance:-
A contract of crop insurance is a contract to provide a measure of financial
support to farmers in the event of a crop failure due to drought or flood. This
insurance covers all risks of loss or damage relating to production of rice,
wheat, oilseeds and pulses etc. insurance of all crops, all risks of loss or
damage has not yet found a beginning In our country.

6) Cash in transit insurance:-

This form of insurance covers to the insured against any loss in the event of
money or cash being stolen from his business premises or while it is being
carried from or to the bank.

7) Cattle insurance:-
A contract of cattle insurance is a contract whereby a sum of money is
secured to the assured in the event of death or animal like bulls, buffaloes,
cows and heifers. It is a contract against death resulting from accident,
diseases, parturitions or pregnant condition as the case may be.

8) Burglary insurance:-
In the case of a burglary policy, the loss or damages of household goods and
properties and personal effects due to theft, larceny, house-breaking and acts
of such nature are covered. The actual loss is compensated.

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 1.5. PRINCIPLES OF INSURANCE

The important principle of insurance are as follows:

The main motive of insurance is cooperation. Insurance is defined as the
equitable transfer of risk of loss from one entity to another, in exchange for a
premium.

Nature of
contract

Utmost
Cause
Good Faith
Proxima

PRINCIPALS Insurable
Double
interest
Insurance

Subrogation Indemnity

1. Nature of contract:
Nature of contract is a fundamental principle of insurance contract. An
insurance contract comes into existence when one party makes an offer or
proposal of a contract and the other party accepts the proposal. A contract
should be simple to be a valid contract. The person entering into a contract
should enter with his free consent.

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2. Principal of utmost good faith:
Under this insurance contract both the parties should have faith over each
other. As a client it is the duty of the insured to disclose all the facts to the
insurance company. Any fraud or misrepresentation of facts can result into
cancellation of the contract.

3. Principle of Insurable interest:

Under this principle of insurance, the insured must have interest in the
subject matter of the insurance. Absence of insurance makes the contract
null and void. If there is no insurable interest, an insurance company will not
issue a policy.

An insurable interest must exist at the time of the purchase of the insurance.
For example, a creditor has an insurable interest in the life of a debtor, A
person is considered to have an unlimited interest in the life of their spouse
etc.

4. Principle of indemnity:
Indemnity means security or compensation against loss or damage. The
principle of indemnity is such principle of insurance stating that an insured
may not be compensated by the insurance company in an amount exceeding
the insured’s economic loss. This is a regulatory principal. This principle is
observed more strictly in property insurance than in life insurance.The
purpose of this principle is to set back the insured to the same financial
position that existed before the loss or damage occurred.

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5. Principal of subrogation:
The principle of subrogation enables the insured to claim the amount from
the third party responsible for the loss. It allows the insurer to pursue legal
methods to recover the amount of loss, For example, if you get injured in a
road accident, due to reckless driving of a third party, the insurance
company will compensate your loss and will also sue the third party to
recover the money paid as claim.

6. Double insurance:
Double insurance denotes insurance of same subject matter with two
different companies or with the same company under two different policies.
Insurance is possible in case of indemnity contract like fire, marine and
property insurance.

7. Principle of proximate cause:

Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This
principle is applicable when the loss is the result of two or more causes. The
proximate cause means; the most dominant and most effective cause of loss
is considered. This principle is applicable when there are series of causes of
damage or loss.

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 1.6. FEATURES OF INSURANCE

The insurance has the following characteristics which are, generally,

observed in case of life, marine, fire and general insurances.

1) Sharing of Risk:
Insurance is a device to share the financial losses which might befall on an
individual or his family on the happening of a specified event. e.g., theft in
burglary insurance, accident in motor insurance, etc. The loss arising nom
these events if insured are shared by all the insured in the form of premium.

2) Co-operative Device:
The most important feature of every insurance plan is the co-operation of
large number of persons who, in effect, agree to share the financial loss
arising due to a particular risk which is insured. Such a group of persons
may be brought together voluntarily or through publicity or through
solicitation of the agents.
An insurer would be unable to compensate all the losses from his own
capital. So, by insuring or underwriting a large number of persons, he is able
to pay the amount of loss. Like all cooperative devices, there is no
compulsion here on anybody to purchase the insurance policy.

3) Value of Risk:
The risk is evaluated before insuring to charge the amount of share of an
insured, herein called, consideration or premium. There are several methods
of evaluation of risks. If there is expectation of more loss, higher premium
may be charged. So, the probability of loss is calculated at the time of
insurance.

4) Payment at Contingency:
The payment is made at a certain contingency insured. If the contingency
occurs, payment is made. Since the life insurance contract is a contract of
certainty, because the contingency, the death or the expiry of term, will
certainly occur, the payment is certain. In other insurance contracts, the
contingency is the fire or the marine perils etc., may or may not occur. So, if

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the contingency occurs, payment is made, otherwise no amount is given to
the policy-holder.

5) Amount of Payment:
The amount of payment depends upon the value of loss occurred due to the
particular insured risk provided insurance is there up to that amount. In life
insurance, the purpose is not to make good the financial loss suffered. The
insurer promises to pay a fixed sum on the happening of an event.

6) Large Number of Insured Persons:

To spread the loss immediately, smoothly and cheaply, large number of
persons should be insured. The co-operation of a small number of persons
may also be insurance but it will be limited to smaller area. The cost of
insurance to each member may be higher. So, it may be unmarketable.
Therefore, to make the insurance cheaper, it is essential to insure large
number of persons or property because the lesser would be cost of insurance
and so, the lower would be premium.

7) Insurance is not a gambling:

The insurance serves indirectly to increase the productivity of the
community by eliminating worry and increasing initiative. The uncertainty is
changed into certainty by insuring property and life because the insurer
promises to pay a definite sum at damage or death.
In absence of life insurance, saving requires time; but death may occur at
any time and the property, and family may remain unprotected. Thus, the
family is protected against losses on death and damage with the help of
insurance. Failure of insurance amounts gambling because the uncertainty of
loss is always looming.

8) Insurance is not Charity:

Charity is given without consideration but insurance is not possible without
premium. It provides security and safety to an individual and to the society
although it is a kind of business because in consideration of premium it
guarantees the payment of loss. It is a profession because it provides
adequate sources at the time of disasters only by charging a nominal
premium for the service.

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 1.7. ADVANTAGES OF INSURANCE

The contributions of insurance to business community and human life are

the significant. Importance of insurance can be understand by the following
facts.

1) Reasonable profit:

The businessmen can earn a reasonable profit for their businesses. The
insurance can help them to earn the same rate of profit if their business fails
to generate income.

2) Sense of security:

There are many chances of losses in a business. But due to insurance, the
risk of losses is transferred to insurance company and it gives the sense of
security to businessman.

3) Employment increase:

The insurance companies provided the jobs to thousands of people. In this

way the problem of unemployment is reduced.

4) Protection of property:

Due to insurance the personal and business property is protected from

natural losses such as accident, fire, etc.

5) Solve the social problem:

Insurance is useful device for solving the social problems. In cash of death
provides finance to his family compensation is available to overcome the
industrial injuries and road accident.

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6) Favourable balance of payment:

The insurance of business is an invisible export and it provides sufficient

contribution toward the balance of payment.

7) Equitable premium:

The large policy holders provide large funds and small policy holders pay
less money in common funds. In the way the amount of premium becomes
equitable.

8) Research facilities:

The insurance companies can conduct research about the rate of accidents,
death and losses faced by business units.

9) Low price:

The risk of loss is covered by the insurance policy. In the way insurance
companies help the business to sell their products as low prices.

10) Spread of risk:

A large number of persons get marine, fire, life insurance policies and pay
premiums to the insurance companies whenever a loss occurs, it is
compensated out of the funds of the insurers. The loss is spread among a
large number of policy holders.

11) Promotes economic growth:

Insurance contributes to the efficiency of the business and promotes

economic growth and development.

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12) Gives sense of security:

At every moment there is a chance of loss in business. Due to insurance risk

is a transferred to the insurance company and gives the sense of security to
businessman.

13) Promotes business competition:

Insurance also protects the small industrial units and also provides credit
facility. So competition with the big firms increase which is very useful the
customer.

14) Promotes international trade:

Insurance companies are playing very effective role in promoting the growth
of international trade. Today one exporter can send his goods to other
country without a fear of damage or loss. Because he shifts his risk to
insurance company by paying the premium, If ship damage, insurance
company will compensate the loss.

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 CHAPTER 2
REVIEW OF LITERATURE

Wood and Wilkinson (1985) analyzed the disclosure practices of general

insurance companies of U.K. Findings show that the financial statements of
general insurance companies are heavily dependent on estimates. There were
inconsistencies in the accounting of different companies. They suggested
that there is an urgent need for a recognized standard of general insurance
company’s accounting. They pointed to a Statement of Recommended
Practice (SORP) developed by experts within the industry, which will focus
on the methods of accounting for different aspects of general insurance
business. A SORP is by definition only in the nature of a recommendation,
but pressure from the stock exchanges could be influential in bringing about
its unspread adoption. They also suggested that financial statements of
insurance companies should be prepared according to the consistent
accounting policies, failing this; sufficient information should be given to
enable to know on what basis the statements have been prepared.

Joshi (2004) stated that though the basic accounting principles are same for
accounting of general insurance business, there are certain intricacies in
accounting of various general insurance transactions. The study is focused
on legal norms with regard to accounts and audit. Study revealed that every
insurer carrying on general insurance business has to comply with the
requirements of schedule B - which is divided into five parts. Study also

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discussed about organization structure, accounting of commission, claim
accounting, expenses of management, co-insurance and consolidation of the
accounts of an insurance company having number of offices in India and
abroad.

Prakash (2004) explained that the accounting function of life insurance

companies is quite different from that of other companies and involves a lot
of complexities. Under the reasons for the same – concept of policyholders
fund and shareholders fund, ascertainment of liability in respect of insurance
policies issued by the company, the unit linked business and segment
reporting were important. He further explained that the financial statements
of insurance companies included—revenue account, profit and loss account,
balance sheet, receipts and payments account and the segmental reports
relating to the funds. All these statements were prepared in conformity with
the accounting standards issued by ICAI. The author concluded this article
by saying that there are a lot of opportunities to the community of chartered
accountants in this sector. As per the IRDA regulations the life insurance
companies should have joint auditors and IRDA maintains panel of auditors
for the insurance companies.

Riaz et al (2006) analyzed the annual reports of 10 insurance companies

and 10 banking companies listed on the Dhaka Stock Exchange (DSE),
selected on random basis for 2001 and 2004. Findings of the study showed
that banking and insurance companies do not comply with all the mandatory
requirements in the annual reports. Also they did not disclose adequate
voluntary disclosure in their annual reports. There was improvement in the
reporting practices over time because of increasing awareness of corporate
governance. Insurance companies lag behind the banking companies in
compliance with disclosure due to lack of proper regulations in this sector.

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 CHAPTER 3
FIELD STUDY

NAME OF INSURANCE COMPANY: LIFE INSURANCE

COMPANY
BRANCH: NERAL
CITY: NERAL
TOPIC: AUDIT OF INSURANCE
PERSON VISITED: SANTOSH VIBHUTE
PURPOSE: HOW TO MAKE AUDIT

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 HISTORY OF LIFE INSURANCE

In 1818 saw the advent of life insurance business in India with the
establishment of the Oriental Life Insurance Company in Calcutta. This
Company however failed in 1834. In 1829, the Madras Equitable had begun
transacting life insurance business in the Madras Presidency. 1870 saw the
enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire
of India (1897) were started in the Bombay Residency. This era, however,
was dominated by foreign insurance offices which did good business in
India, namely Albert Life Assurance, Royal Insurance, Liverpool and
London Globe Insurance and the Indian offices were up for hard competition
from the foreign companies.

In 1914, the Government of India started publishing returns of Insurance

Companies in India. The Indian Life Assurance Companies Act, 1912 was
the first statutory measure to regulate life business. In 1928, the Indian
Insurance Companies Act was enacted to enable the Government to collect
statistical information about both life and non-life business transacted in
India by Indian and foreign insurers including provident insurance societies.
In 1938, with a view to protecting the interest of the Insurance public, the
earlier legislation was consolidated and amended by the Insurance Act, 1938
with comprehensive provisions for effective control over the activities of
insurers.
Life Insurance Corporation Of India Birth
An Ordinance was issued on 19th January, 1956 nationalizing the Life
Insurance sector and Life Insurance Corporation came into existence in the
same year.

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QUESTIONAIR:
1) Is auditing compulsory for all insurance company?

Ans: YES, auditing is mandatory for all insurance companies.

2) Whether you go for a internal audit?

Ans: YES, we do, because it is a catalyst for improving an organization’s

governance, risk management and management controls.

3) How many auditors work in your company?

Ans: one statutory auditor, internal auditor not specific figure.

4) Whether your insurance company faced any problem during the audit
procedure?

Ans: YES, there might be few critical issues but we can not called it as a
problem.

5) Which items are considered for preparing audit report?

Ans: Total turnover, sales, profit, expenditure, claim settlement, reserve

fund, commission, investment ect.

6) Do you relay on audit to what extent?

Ans: YES, we relay on audit for large extent because it is serves an

important role for companies in fraud prevention.

7) Whether your auditor is well qualified?

Ans: YES, it is C.A. qualification compulsory.

8) Is procedure for life and general insurance different for doing audit?

Ans: YES, may be for few extent.

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9) Are there any differences in life and general insurance companies rules
and regulations?

Ans: YES

10) Why the audit is important?

Ans: Audit is important because it plays an important role for fraud

prevention. Recurring analysis of a company’s operations and maintaining
system.

11) Are there any guidelines by IRDA for audit?

And: YES, there are specific guidelines for audit of insurance company
which is set by IRDA.

12) Do you publish your audit report?

Ans: YES

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 CHAPTER 4
FINDING AND ANALYSIS

4.1. INTRODUCTION

Auditing refers to critical and systematic examination and

verification of books of accounts and other business documents so
as to ensure that:
a) They are correct and are prepared as per the requirements of
law.
b) Financial statements i.e. profit and loss account and balance
sheet show true and fair view of the profitability and state of
affairs of the organization.
In simple language, auditing means verification of accounting
records by auditor so as to determine their correctness and
genuineness. Audit helps the auditor to report to the shareholders
and other interested parties regarding true and fair position of the
profitability and financial position of the enterprise.

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 DEFINITION OF AUDITING

According to Mautz “seeAuditing is concerned with the verification of

accounting data, with determining the accuracy and reliability of accounting
statements and reports.”

According to Prof. L. R. Dicksee “Audting is an examination of accounting

records undertaken with a view to establish whether they correctly reflect the
transactions to which they relate.”

PRINCIPALS OF AUDITING

1) Integrity objectivity and Independence:

Auditor should be objective in his work and should perform his duties with
full independence i.e. he should not get influenced with the vested interests
of management or any other person i.e. he should not allow any bias to
override his objectivity.

2) Confidentiality:
Auditor may come across lot of confidential information regarding client
business during the course of his work. He should not disclose such
confidential information to the competitor.

3) Skill and competence:

a) Audit should be performed by the person having adequate skill,
qualification, training and experience.

b) Auditor should always remain competitive i.e. he should be aware of

resent developments, ICAI pronouncements, accounting standards,
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developments at international level ect. this would help him to complete his
work effectively.

4) Working paper:
Auditor should prepare and preserve audit working papers to prove that audit
work was performed with due care and according to the basic principals.

5) Audit evidence:
Reporting should be based on the basis of audit evidence obtained during the
course of audit. Evidence can be obtained by the way of vouching of
transactions, verification of assets and liabilities, ect.

6) Evaluation of accounting system an internal control:

a) Auditor should properly evaluate the accounting system and various
internal control adopted by the client.

b) It would enable the auditor to have a better understanding of accounting

practices followed by the client and would enable him to accordingly plan
his audit work.

7) Opinion and reporting:

Auditor should form an opinion and report on the basis of the audit evidence
obtained by him. He should form an opinion and report on various aspects
like:

a) Whether accounting policies and accounting standards have been properly

followed.

b) Whether proper disclosures of all material facts have been made in the
financial statements.

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4.2. WHO IS A AUDITOR?
An auditor is an accountant who officially examines the accounts of
organization.

MEANING OF AUDITOR
The person conducting audit is known as an auditor. He makes a report to
the person appointing him after due examination of the accounting record
and the accounting statement in the form of an opinion the financial
statements. The opinion that he is called upon to express is whether the
financial statement reflect a true and fair view. Auditing especially of
companies and for public purposes has become the preserve of persons
having recognized professional training and qualification. In India, under the
authority of the companies Act 1956,only chartered accountants are
professionally qualified for the audit of the accounts of companies.
Chartered Accountants are in a position to undertake auditing of almost any
accounting aspect, unlike cost accountants whose sphere has been restricted
to audit of the cost accounting records and statements. It is C.A. or a firm
whose all partners are chartered accountants who act as auditors in India.

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RIGHTS OF AUDITOR

1) Right to have access to books of accounts:

Auditor has the right to examine the books of accounts, documents, and
agreements ect. relating to accounts. Management cannot prevent the auditor
to examine the books of accounts maintained by the company.

2) Right to receive notice of general meeting and to attend the

same:
Auditor has the right to receive notice of general meetings and to attend the
same. Also auditor has the right to make statement and give explanations at
the general meeting in connection with the accounts.

3) Right to seek expert’s opinion:

Auditor can seek opinion from different experts on technical matters like
determining the remaining useful life of the asset for the purpose of
calculating depreciation.

4) Right to receive remuneration:

It is the right of auditor to receive remuneration from the company provided
he has completed the work undertaken by him.

5) Right of lien:
A lien is the right one person to satisfy a claim against another by holding
others property as security. Statutory auditor has a right of lien on the
working papers.

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6) Right to sign audit report:
Auditor has the right to sign audit report, balance sheet and profit/loss
account including all documents attached to or annexed therewith. The
above is a right as well as duty of auditor.

4.3. AUDIT OF INSURANCE

In a society based on market economy, investors need independent
insurances on financial information and on the results of companies’
performance indicators. By the nature of professional training, financial
auditors and certified public accountants offer some kind of insurance with
regard to the information of companies’ financial statements, even by
carrying out audits of historical financial statements. Due to their
independence and specialised technical knowledge, accounting professionals
are valued for the support they can provide to companies, for the assessment
of the internal controls and operations’ analysis, correcting the financial
statements. The recommendations auditors make contribute to the increase
of companies’ profitability as a result of reducing costs, improving
operational efficiency and decreasing the number of identified errors and
frauds.The certification service is a type of insurance by means of which an
accountancy/auditing firm issues a written handout expressing a conclusion
on the reliability of statements written by a third party. In the practice of
certification services there have been distinguished three categories, namely:

 the audit of historical financial statements;

 the review of financial statements;
 other certification services.

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4.4. LEGAL FRAMEWORK
The Insurance Sector in India is governed under two important acts i.e.
Insurance Act, 1938 and The Insurance Regulatory And Development
Authority Act 1999. But there are some other Acts also that have to be taken
into consideration. They are:

1) The Insurance Regulatory And Development Authority Regulations

framed under the IRDA Act, 1999.

2) The Companies Act, 2013.

3) The General Insurance Business (Nationalization) Act,1972.

4.5. IMPORTANT PROVISIONS OF INSURANCE

ACT 1938
1) Forms of final accounts:
Every insurer carrying on Life Insurance Business must prepare the Revenue
Account in form A-RA, Profit and Loss account in form A-PL, and the
Balance Sheet in form A-BS. Every insurer carrying on General Insurance
Business must prepare the Revenue Account in form B-RA, Profit and Loss
Account in form B-PL, the Balance Sheet in form B-BS.

2) Register of policies:
Every insurer must maintain a register of policy in respect of policies issued.
It should contain details if every policy like names and addresses of policy
holder’s date of issue of policy and record of any transfer, assignment or
nomination of policy.

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3) Register of claim:
The insurer must also maintain a register of claim. It should record date of
the claim, the name and address of the claimant, date of discharge of claim
ect. in case of rejected claims it should mention date of rejection and reasons
for the same.

4) Audit:
Every company carrying on Insurance Business should get its audited as per
requirements of Companies Act,2013.

5) Approved investments:
A company carrying on General Insurance business must invest its funds
only in approved securities.

6) Payments of commission to authorities agents:

The act prohibits payment of commission to any person other than an
authorized agent, subject to a maximum of 15% of the premium.

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4.6. IMPORTANT AMENDMENT MADE BY IRDA
ACT, 1999
1) It is mandatory for every insurer to prepare a Balance Sheet, a Profit and
Loss account, a Separate Receipt and Payment Account and Revenue
Account in respect of shareholder’s fund.

2) The account are to be prepared for every financial year instead of calendar
year.

3) Every insurer must keep separet accounts relating to fund of shareholders

and policyholder.

4) Insurers are prohibited from investing either directly or indirectly their

funds outside India.

5) The amendment raises commission on fire and marine policies from

previous 10% to 15%.

6) Insurer are required to keep a solvency margin. The margin refers to

excess of assets over liabilities.

7) Every insurer must submit a prescribed return of maintenance of such

margin to IRDA. This return has to be certified by an accuracy in case of life
insurance business and by an auditor in case of general insurance business.

8) Every insurer carrying on general insurance business should create a

“catastrophe reserve” to meet future potential liability against insurance
policies in force. This reserve is not created for any specific or known
purpose.

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4.7. REGISTRATION
Section 3 of Insurance Act, 1938 requires every Insurer to obtain a
Certificate of Registration before commencement of business of General
Insurance. The registration has to done under IRDA (Registration of Indian
Insurance Companies) Regulations, 2000.

Procedure of Registration:

1) Insurer intending to obtain a certificate of registration should give

requisition for registration to IRDA.

2) After requisition is approved by IRDA, application for grant of Certificate

of Registration has to be made along with the prescribed fees.

3) IRDA after conducting enquiries as it may consider necessary for the

grant of certificate, may grant certificate of registration.

4) If application is rejected by irda the same applicant can apply after 2 years
for different class of general insurance business like fire, marine ect.

5) Certificate granted to the insurer should be renewed annually.

Suspension of Certificate of Registration:

 Irda has power to suspend a class or classes of general insurance

business of an insurer for such period as may be prescribed.

 Insurer ceases to operate from the date of suspension or cancellation

of certificate of registration.

 A due opportunities of presenting his case should be give to the

insurer before canceling the certificate.

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4.8. AUDIT OF ACCOUNTS
1) Section 12 of Insurance Act, 1938 states that Financial Statements of
Company Carrying General Insurance Business are required to be audited
annually by an Qualified Auditor.

2) Section 2(4) requires that a person qualified under Chartered Accountant

Act, 1949 to act as an auditor can be appointed as an auditor.

3) The auditor will have the same powers, duties, liabilities and penalties as
a company auditor appointed under Companies Act, 2013.

4) The new sub-section (1A) of section 11 of the Insurance Act requires

every insurer, in respect of insurance business transacted by him and in
respect of shareholders’ fund to prepare:

 Balance Sheet

 Profit and Loss a/c

 A separate Receipts and Payments a/c

 A Revenue a/c

5) Auditors’ duties: Auditor has to check whether

 Receipts and payments a/c is in conformity with the Books of

Accounts.

 Receipts and payments a/c has been prepared in accordance with

provisions of relevant statutes.

 Receipts and payments a/c give True and Fair View of receipts and
payments of the insurer for the period under audit. Thus, in addition to
the Balance Sheet, Profit And Loss A/C And Revenue Accounts the
Receipts and Payments account also needs to be audited.

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4.9. APPOINTMENT OF AUDITOR
 The Insurance Act, 1938 is silent as far as the procedure for
appointment of auditors of insurance companies is concerned.

 Therefore the provisions of Companies Act, 2013 relating to

appointment of auditor are applicable.

 IRDA recommends a panel of auditors as proposed auditor of the

company.

 From this panel the auditor is appointed at the Annual General

Meeting of the shareholder.

 IRDA formulates detailed norms for preparation of the panel.

 One of the committees of IRDA has recommended that each insurer

should have at least two joint auditors for each financial year and no
one audit firm should continue as joint auditor for more than five year.

 The appointment of statutory auditors of General Insurance

Corporation (GIC) and its subsidiaries and the divisions is made by
the Comptroller and Auditor General of India.

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4.10. INTERNAL CONTROLS IN INSURANCE
COMPANIES

The internal controls should be mainly followed in case of following

transactions:

1) Underwriting:
It involves examination and evaluation of applications for insurance, the
rating of risks and deciding the premium. The internal control system over
underwriting should ensure adherence to guidelines for acceptance of
insurance, proper recording of insurance risk and its evaluation.

2) Premium:
The internal control system over premium should ensure that

a) correct premium is calculated and collected before acceptance of risk

b) premium is accounted for in an appropriate manner

c) premium is collected only in respect of such risks assumed by the

company.

3) Commission:
The internal control system over commission should ensure that is paid as
per rules and regulations of the company and as per agreements with the
agents.

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4) Reinsurance:
The internal control system over Reinsurance should ensure calculations of
correct amounts for reinsurance ceded, proper valuation of assets and
liabilities arising out of reinsurance transactions and adherence to legal
provisions, regulations and reinsurance agreements.

5) Claims:
The internal control system over claims should ensure that only legally liable
claims are paid by the company. It should also check that cost of claims is
properly recorded and disclosed in financial statements.

4.12. AUDIT PROCEDURE

Preliminary Work

Audit of Income

Audit of Expenses

Audit of Reinsurance

Miscellaneous Items

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1) Preliminary Work:
 The Auditors have to get acquainted with various applicable laws,
nature of business and accounting policies adopted by the
insurance company.
 Depending on the volume of transaction, auditors have to plan
their audit program.
 They have to resort to test checking in such a case . They have
to decide the number of transaction to be checked in test
checking.
 They even have to rely on the internal control system.

2) Audit of Incomes:
 The main sours of income for an insurance company is the
premium on policies. Auditor has to verify premium income with
reference to counterfoils of receipts issued on payment of
premiums
 Premium received from branches and agents can be verified
with reference to returns and accounts submitted by them and
counterfoil of the receipts
 Auditor should check whether separate Revenue accounts are
maintained for each class of general insurance business
 Auditor should ensure that premium received in advance is not
credited in current years revenue account.

3) Audit of Expenses:
 Commissions and allowances paid to the agents can be verified with
reference to agreements with as well as return submitted by them of
the policies sold by them.
 Claims paid can be verified with reference to claims register, cash
book, counterfoils of cheques issued etc.
 Outstanding claims can be verified with reference to claims register
and related policies.

37
  Auditor has to check whether legal expenses incurred in settelement
of claims are debited to claims a/c.
 Payment on annuity should be verified with reference to agreements
and counterfoils of cheques.

4) Audit of Reinsurance:
In case of reinsurance accepted auditor has to check premium received on
reinsurance and the amount of claims paid.

5) Miscellaneous Items:
 Auditor should check the cash balances and the securities relating to
the company’s loans and investments. He should see to it that legal
requirements in this regard are complied with.
 Outstanding branch and agency accounts should be checked carefully.
He should see that the are recoverable.
 He should check the adequacy of depreciation provided on assets of
the company.
 He should see that adequate provision is created for unexpired risk

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4.13. CHALLENGES FACE BY INSURANCE
COMPANY
It implies presentation of accounts more favorably than what they
actually are. Window dressing means showing a wrong picture. The fraud
through manipulation of accounts is also known as window dressing
because accounts are manipulated to show a wrong picture of the profit or
loss of the business and its financial state of affairs.

1) When, invoices, cheques, contracts are missing etc

2) When control account does not agree with subsidiary books.

3) When the difference in trial balance is difficult to locate.

4) When there is difference between the balance and the confirmation

of the balance by the parties.

5) When there is difference between the stock as per records and the
stock physically counted.

6) When the explanation given by the client is not satisfactory.

7) When there is a contradiction in the explanation given by different

parties.

PROCEDURE TO BE FOLLOWED TO DETECT ERRORS.

Following procedures may be adopted by the auditor to detect the errors.

1) Check the opening balances from the balance sheet of the last year.

2) Check the posting into respective ledger accounts.

3) Check the total of the subsidiary books.

39
4) Make sure that all accounts from the ledger are taken into accounts.

5) Verify the total of the trial balance.

6) Compare the various items from the trial balance with that of the
previous year.

7) Find out the amount of difference and see whether an item of half or
such amount is entered wrongly.

9) Check differences involving round figures as Rs. 1,000; Rs. 100 etc .

10) See where there is misplacement or transposition of figures that is 45

for 54; or 81 for 18 etc.

11) Ultimately careful scrutiny is the only remedy for detection of errors.

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4.14. OBJECTIVES OF CONDUCTING AUDIT
 Establishment the current level of effectiveness,

 Suggest improvement and

 Lay down standard for future performance

 To formulate the goal of an organization

 To help all the members of management to make effective discharge

of their duties

 To help in the improvement of profits.

SIGNIFICANT AUDIT AREAS / FINANCIAL

STATEMENT AREAS
 Premium and Reinsurance
 Commission
 Benefits Paid
 Investments
 Actuarial Liability
 Payroll

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4.15. UNIQUE FEATURES OF INSURANCE
COMPANIES
1) Concept of Mandatory appointment of Joint auditors and cooling period

2) Role of Appointed Actuary - Product design, Actuarial Liabilities, etc.

3) Contents of Auditors reports has been prescribed

4) Income tax calculation under section 44 (Section 28 to 43B is not

applicable), First Schedule and Section 115 B of the Income tax Act, 1961.

DATA ANALYTICS – ILLUSTRATIVE

1) Whether policy is still under In-force status though the premium is not
received within due date including grace period

2) Whether policy is still under ULIP Lapse status after completion of its
revival period

3) Whether Policy gets under Matured status after Risk Cessation date

4) Whether all in force policies of a Policyholder has been appropriately

dealt post receipt of intimation of death against one policy

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4.16. KEY CONSIDERATION FOR AUDIT OF LIFE
INSURANCE COMPANY – GENERAL
1) Audit approach is principally very similar to those of other Sectors such
as Banks, Mutual Funds, Manufacturing, etc.

2) Risk Based Audit Approach: Volume and size requires auditors to use a
Risk based approach. This approach emphasizes on coverage of ‘all major
areas of risk’ based on objective assessment of risk factors, their
significance, and materiality.

3) Use of In-house experts for comfort on Information Technology Systems,

Tax positions, etc taken by the Company.

4) Business and product understanding and their accounting

5) Understand issues existing in the Insurance Industry – Accounting,

Taxation, etc.

6) Monitoring of website for circulars/orders issued to Company and Peer

Companies.

7) Coordination /Discussion among the Joint Auditors

 All the critical matters/observation/issues should be discussed
between the auditors and there should be consensus on the
issues/observations
 Allocation of items of Trial balance between the Joint Auditors
 Rotation of areas among auditors – May be 2 years

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4.17. ACTUARIAL VALUATION OF LIABILITIES
1)All Insurance Companies are required to have an appointed actuary who is
responsible for ascertaining the actuarial provisions towards policies in force
and under discontinuance stage

2) Insurance Reserves certified by the Appointed Actuary (also known as

actuarial reserve) form a significant item of Liability in the Financial
Statements of Insurance Company.

3) An auditor is required to state that reliance has been placed on Appointed

Actuary for actuarial valuation of liabilities in their Auditors’ Report

ACTUARIAL VALUATION OF LIABILITIES –

AUDIT/ACCOUNTING ISSUES
1) Can an auditor step in the shoes of Actuaries and verify the actuarial
reserves? Para A34 to Para A48 of Standard on Auditing 500 - “Audit
Evidence” requires an auditor to document the reliability of information
produced by management’s expert. Accordingly, Auditors should follow the
below procedures:
 Auditors must review the assumptions used by Actuaries &
benchmark the assumptions used by Peer Companies
 Validate the inputs received from various systems for calculation of
actuarial liability
 Obtain the list of policies which are not considered for actuaria

2) Whether the effect has been given in the actuarial liabilities towards
provision has been made for Premium will not be received in the grace
period based on persistent ratio. (Please also assess the related effect on
Commission and Reinsurance)?

3) Free Look In Cancellation of Policies and Cheques dishonor for first year
& renewal policies after the reporting date but before the singing of the
financials?

4) Whether the Actuarial Liabilities needs to be presented net of reinsurance

reserves or gross?

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4.18. FRAUD IN INSURANCE COMPANY

The Institute of Internal Auditor’s International Professional Practices

Framework (IPPF) defines fraud as : “… any illegal act characterized by
deceit, concealment, or violation of trust. These acts are not dependent upon
the threat of violence or physical force. Frauds are perpetrated by parties and
organizations to obtain money, property, or services; to avoid payment or
loss of services; or to secure personal or business advantage.”

According to the survey, claim/surrender, premium and employee-related

frauds.
There are different types of insurance frauds, which occur in all areas of
insurance. Insurance crimes also range in severity, from marginally
exaggerated claims to ones that deliberately cause accidents or damage.
Insurance companies have five key areas of risk exposure.
These are related to –
• Claims or surrender
• Premiums
• Applications
• Employee-related fraud
• Vendor-related third party fraud

Fraud risk exposure faced by insurance companies

17.4% 27.3%

20.5% 21.2%

13.6%

Employee related Application vendors related, third party fruad

Claims/surrender
Application Premium

45
Around 21% of the respondents feel that the insurance companies. felt that
employee-related frauds are the other face significant risk exposure in the
area of premiums.
In life insurance, as well as in general insurance, commission rebating brings
greater competition to the insurance marketplace and enables consumers to
reap significant savings. This is the most fraudulent area of premium-related
fraud. The findings of the survey are supported by increasing reports
of fraud in the media.

Some examples of employee related fraud are:

 The CBI registered a case against the Divisional Manager of the
company for allegedly collecting money from customers and issuing
cover notes to them, but neither the money nor the cover note was
deposited with the Insurance company.
 A former employee of one of the biggest private life insurance
companies allegedly cheated the company’s customers by issuing fake
receipts.

Areas that need more stringent anti-fraud regulations

23% 50%

27%

Claim

Application

premium

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4.19. AUDITORS’ REPORT
1) IRDA prescribes matters to be dealt in the Auditors report vide IRDA
(Preparation of Financial Statements and Auditors Reports of Insurance
Companies) Regulation 2002
 Reliance placed on Actuary for Actuarial Valuation of Liabilities
 Compliance with IRDA guidelines specifically in respect of
investment valuation
 Review of management report for inconsistencies with the Financial
Statements
 Compliance with the terms and conditions of the registration
 Verification of cash balances and investment
 Compliance with the application of assets of policyholders’ funds

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 CHAPTER 5
SUGGETIONS

1) Only public sector companies are presenting their annual reports in both
languages i.e. English and Hindi, but none of the company in private sector
has presented their report in Hindi or vernacular language. To reach the
untapped rural market, private companies should also present their annual
reports in both the languages.

2) To have a quick and easy understanding of important information about

company, the graphs, charts and pictures use these innovative methods to
present the information in their annual reports.

3) It is mandatory for all insurance companies to meet their rural and social
sector obligations and to disclose this information in their annual reports.

4) Private sector life insurance companies have very less disclosure on

voluntary items. More information on voluntary items should be included in
the annual reports of companies which will help the investors to take various
decisions.

5) Annual reports of the insurance companies must be posted on their

websites as it helps the users to have instant access to required information
at convenient times, increase the reader inclusiveness and help in
international reach of data.

6) Insurance companies do not follow a proper sequence of items to be

disclosed in their annual reports. It creates difficulty for users to find
relevant information quickly. All the insurance companies must follow a
proper sequence of items in the reports.

7) Insurance companies which are subsidiary of other companies should

prepare their separate annual report for the convenience of various users.

8) To get at par with the listed companies, insurance companies should give
quarterly disclosure about their results on the internet and to publish their
quarterly results in at least one English newspaper. IRDA has also issued

48
guidelines in January 2010 regarding periodic disclosure of insurance
companies.

9) IRDA regulations relating to financial reporting should be made more

precise and strict, so that companies follow it in letter and spirit.

10) Companies should disclose information regarding community

development projects i.e. health, education, sanitation activities, safe
drinking water, control on environment pollution etc. disclosing such type
of information in their annual reports.

11) The rural market offers tremendous growth opportunities for insurance
companies and insurers should develop viable and cost- effective
distribution channels, build consumers awareness and confidence.

49
 CONCLUSION

The fact that audit is compulsory by law, in certain cases by itself there must
be some positive utility in it. The chief utility of audit lies in reliable
financial statements on the basis of which the state of affairs may be easy to
understand. The auditor has to look in to the facts behind figures and he
must certify their accuracy. Auditing is to ascertain the balance sheet and
profit and loss account that they show a true and fair view of the financial
state of affairs of a concern. The institute of chartered accountants of India
has issued a number of statements of standard auditing practices and
accounting standard for guidance of auditors of India.
The audit of insurance company is a special used task. It require a thorough
knowledge of various enactments affecting insurance company,
understanding the operations of insurance company, the accounting system
and above all appreciation of audit aims if insurance company audit.
Besides those enactment, IRDA has power to regulate the functioning of all
insurance company. They should be in conversion with legal and financial
implications of the nature if business carried on the insurance company. it is
a matter of insurance policy one wants to buy if from public sector
insurance company after being paid a high premium as compare to the
private insurance company. Auditing is most important for all insurance
company because of audit report indicate the over all financial transactions,
profit, loss ect. audit report give the idea about insurance company.

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 ANNEXTURE

QUETIONAIRE
1. Is auditing compulsory for all insurance company?

2. Whether you go internal audit?

3. How many auditors work in your company?

4. Whether your insurance company faced any problem during the audit
procedure?

5. Do you relay on audit to what extent?

6. Which items are considered for preparing Audit report?

7. Do you publish your audit report?

8. Whether your auditor is well qualified?

9. Is procedure for life & general insurance different for doing audit?

10.Are there any differences in life & general insurance companies rules
& regulation?

11.Are there any guidelines provided by IRDA for audit?

12.What are the punishments for it any fraud in auditing is audit report?

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 BIBLIOGRAPHY

The data is modified by the following way:

 Primary research

Interview of LIC agent

 Secondary research

 Reference from book

 Auditing in banking and insurance is third year: fifth semester, by

author sachin bhandarkar, sandeep gupta in june, 2014.

Websites:

 www.ey.com

 www.shodhganga.com

 www.investopedia.com

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