Report on Audit of Yearly Statutory Accounts by the Appointed Auditor
Section 49J of the Act, and GPS 310, include a requirement for the Appointed Auditor to audit the yearly statutory accounts of the insurer and to provide an auditor’s report to the insurer in relation to those accounts. GPS 310 requires the auditor’s report to include the auditor’s opinion on whether the yearly statutory accounts of the insurer present a true and fair view of the results of the insurer’s operations for the year and financial position at year end, in accordance with:
- the provisions of the Act and APRA Prudential Standards, the Collection of Data Act and APRA Reporting Standards; and
- to the extent that they do not contain any requirements that conflict with the aforementioned, Australian Accounting Standards and other mandatory professional reporting requirements in Australia; and
- where the Appointed Auditor is unable to provide an auditor’s opinion as above, the opinion must be modified and include details of the relevant matters.
Under GPS 310, the auditor’s report, addressed to those charged with governance of the insurer, must be prepared on an annual basis. Furthermore, it must be submitted to the insurer within such time as to enable the insurer to provide the report to APRA on or before the day that the insurer’s yearly statutory accounts are required to be submitted to APRA in accordance with Reporting Standard GRS 001 Reporting Requirements.
In preparing this auditor’s report, APRA requires the Appointed Auditor to have regard to relevant AUASB Standards and Guidance Statements, to the extent that these pronouncements are not inconsistent with the requirements of GPS 310.
Format of Reporting Requirements
An illustrative example of an auditor’s report on the yearly statutory accounts of an insurer can be found in Appendix 1.
Matters to Consider in Planning and Conducting the Audit
The Appointed Auditor considers materiality in providing the auditor’s report and in reporting exceptions. In considering materiality, the Appointed Auditor exercises professional judgement, having regard to the requirements and guidance provided in ASA 320 Materiality in Planning and Performing an Audit. Australian Accounting Standard AASB 1031 Materiality may provide further useful guidance. In the context of APRA’s reporting requirements, the insurer’s Prudential Capital Requirement (PCR) as prescribed in Prudential Standard GPS 110 Capital Adequacy, is an important consideration with respect to materiality. However, the Appointed Auditor may need to consider whether an alternative base (such as profit, assets or revenue) is more appropriate.
In accordance with ASA 315 Identifying and Assessing Risks of Material Misstatement through Understanding the Entity and its Environment, the Appointed Auditor performs risk assessment procedures and related activities to obtain an understanding of the insurer and its environment, including the entity’s internal control. The PCR of an insurer is intended to take account of the full range of risks to which an insurer is exposed. The PCR for an insurer is determined under GPS 110 Capital Adequacy and includes but is not limited to consideration of the following:
- the Insurance Risk Charge (IRC)
- the Insurance Concentration Risk Charge (ICRC)
- the Asset Risk Charge (ARC)
- the Asset Concentration Risk Charge (ACRC)
- the Operational Risk Charge (ORC)
In identifying and assessing the risks of material misstatement, the Appointed Auditor may need to consider the use of accounting estimates in the calculation of the insurer’s PCR under ASA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures and evaluate the degree of estimation uncertainty associated with any accounting estimates.
The degree of estimation uncertainty associated with an accounting estimate may be influenced by factors such as:
- The extent to which the accounting estimate depends on judgement.
- The sensitivity of the accounting estimate to changes in assumptions.
- The existence of recognised measurement techniques that may mitigate the estimation uncertainty (though the subjectivity of the assumptions used as inputs may nevertheless give rise to estimation uncertainty).
- The length of the forecast period, and the relevance of data drawn from past events to forecast future events.
- The availability of reliable data from external sources.
- The extent to which the accounting estimate is based on observable or unobservable inputs.
The degree of estimation uncertainty associated with an accounting estimate may influence the estimate’s susceptibility to bias.
Matters the Appointed Auditor considers in assessing the risks of material misstatement in an accounting estimate may also include:
- The actual or expected magnitude of an accounting estimate.
- The recorded amount of the accounting estimate (that is, management’s point estimate) in relation to the amount expected by the auditor to be recorded.
- Management’s documentation of the judgements involved in estimates, for example, assumptions, model risk and understanding and data quality.
- Outcomes of the sensitivity analysis performed on the assumptions by management.
- Adequacy and outcomes of the process adopted by the insurer in determining the PCR are appropriate as they relate to the insurer as a whole.
- Complexities and disclosures required for each component of risk under the insurer’s PCR calculation.
- Whether the models developed by management are using recognised measurement techniques and are independently reviewed and approved by appropriate personnel or an external expert.
- Reliance on and use of internally developed or externally sourced catastrophe models to estimate loss scenarios arising from different catastrophe events.
- Whether relevant and reliable controls are in place around the modelling process and the protection of model integrity.
- Whether management has used an expert in making the accounting estimate.
- Outcomes of the Appointed Actuary’s review and comment on the adequacy of the insurer’s ICRC calculation in its Financial Condition Report (FCR).
- Outcomes of the review of prior period accounting estimates.
The Appointed Auditor needs to consider the above factors and their impact on the audit approach and to use professional judgement in forming a view as to whether the accounting estimates are reliable.
In addressing the risks and accounting estimates associated with each of the areas in paragraph 46, the Appointed Auditor may need to consider performing further substantive procedures to respond to significant risks associated with estimation uncertainty.
The auditor uses professional judgement to assess whether there is sufficient evidence available to enable the auditor to form an opinion in relation to accounting estimates.
Modifying an auditor’s opinion is a matter for auditor judgement. However, GPS 310 lists the following examples of matters to be included: accounting records that have not been kept appropriately, transactions that appear irregular or that have not been recorded accurately or properly, requests for information and explanations that have not been met, or aspects of the accounts that do not represent a true and fair view of the transactions and financial position.
Refer GRS 001 for specific requirements in relation to reporting periods.