Prudential Supervision of a Life company

Under the Life Insurance Act 1995 (Life Act), APRA is responsible for the prudential supervision and monitoring of prudential matters relating to all life companies, a specified class of life companies or one or more specified life companies in order to protect the interests of policy holders or prospective policy holders of the life companies concerned.

APRA formulates, promulgates and enforces prudential policy and practice through life company Prudential Standards (LPSs) and Crossindustry Prudential Standards (CPSs). In addition, APRA may also issue nonenforceable life company Prudential Practice Guides (LPGs), letters, publications, circulars and other guidelines, to assist life companies in complying with the requirements in its Prudential Standards and, more generally, to outline prudent practices in relation to certain elements of a life company’s operations.^[2]

Under the Life Act, a life company is required to appoint an auditor. LPS 310 provides eligibility criteria for auditors. The auditor of a life company has an important role to play in the prudential supervision process. Requirements for auditors of life companies to provide reports on prudential matters to APRA are intended to assist APRA in assessing the reliability of information supplied to it by a life company.

The use by life companies and APRA of assurance reports prepared by auditors is to be evaluated in the context of the inherent limitations of an audit or review (refer paragraphs 111–115) and the subject matter of the audit or review (refer paragraphs 47-53 of this Guidance Statement).

LPS 310 warns that all persons involved in the provision of information (which includes the auditor) are to note that it is an offence under subsection 137.1 and 137.2 of the Criminal Code 1995 to provide, whether directly or indirectly, false or misleading documents or information to a Commonwealth entity (such as APRA).

Scope of this Guidance Statement

LPS 310 provides for two types of engagements to be conducted by the auditor of a life company, namely:

1. annual prudential reporting engagements (see paragraphs 30-136); and
2. special purpose engagements (see paragraphs 137-147).

The audit or review of financial reports required under the Corporations Act 2001 (the Act) (where required) is directed towards obtaining sufficient appropriate evidence to form an opinion or conclusion, as applicable, on whether the financial report is presented fairly in accordance with the required financial reporting framework. The financial report audit or review is not designed to enable the auditor to conclude in relation to the matters specified in LPS 310.

The LPS 310 prudential reporting requirements, imposed on the auditor via the terms of engagement with a life company, are in addition to the audit or review of financial reports required under the Act.

Responsibilities of the Auditor

The responsibilities and reporting requirements of the auditor of a life company are contained in:

1. applicable AUASB Standards;
2. LPS 310;
3. other applicable APRA Prudential Requirements^[3], including the Life Act, the Financial Sector (Collection of Data) Act 2001 (FSCODA), and APRA Prudential and Reporting Standards; and
4. relevant ethical and professional standards.

APRA places reliance on accounting and auditing standards to the extent that they do not conflict with Prudential Requirements applicable to life companies. LPS 310 requires auditors in meeting their role and responsibilities, to comply with the Australian Auditing Standards and consider Guidance Statements issued by the AUASB, except where:

1. they are inconsistent with the requirements of LPS 310, in which case LPS 310 prevails; or
2. APRA otherwise specifies, in writing, to the life company that alternative standards and guidance are to be used by the auditor. In the case of an eligible foreign life insurance company (EFLIC), APRA requires compliance with Australian Accounting Standards in the completion of APRA annual returns under LPS 310.

The following AUASB Standards are applicable to the engagement:

1. Australian Auditing Standards – where reasonable assurance on historical financial information is required; and
2. Standard on Assurance Engagements ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information (ASAE 3000) – where reasonable and limited assurance is required in relation to information other than historical financial information, including internal controls. ASAE 3000 has been written for general application to assurance engagements other than audits or reviews of historical financial information covered by Auditing Standards or Standards on Review Engagements. Where topic specific ASAEs exist, for example ASAE 3100 Compliance Engagements, the auditor applies the relevant topic specific ASAEs, as well as ASAE 3000.

The auditor accepts the prudential reporting engagement only when the auditor has no reason to believe that the auditor and the engagement team (if applicable) will not satisfy the relevant ethical requirements relating to audit and assurance engagements^[4].

The concept of independence is important to the auditor’s compliance with the fundamental ethical principles of integrity and objectivity. The auditor is required to meet the independence requirements set out in:

1. APRA’s life company Prudential Standard CPS 510 Governance (CPS 510); and
2. ASA 102 Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements (ASA 102).