1

AuditSpecialized
of insurance
Industries
industry including
hmo
Group 8
Leader: De Vera,
Kyle C
Members: Evangelista,
Cristalyn B.
Gabriel,
Rosemarie C.
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Learning
Outcomes
At the end of the lesson, the students are expected to:
1. Understand the definitions, distinctions, and types of insurance.
2. Be able to define insurance audit.
3. Determine the different audit procedure in Profit or Loss Account and
in Balance Sheet of insurance companies.
4. Determine the steps taken by the auditor in auditing an insurance
company.
5. Obtain information about the contents of an auditor’s report aside
from the normal contents prescribed for ‘Limited Companies’
6. Distinguish the difference between PhilHealth, Private Health
Insurance, and HMO.
7. Understand the examination cycle in auditing HMO businesses.
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What is insurance?

Insurance is a contract between two parties whereby one party

agrees to undertake the risk of another in exchange for
consideration known as premium and promises to pay a fixed sum
of money to the other party on happening of an uncertain event
(death) or after the expiry of a certain period (in case of life
insurance) or to indemnify the other party on happening of an
uncertain event (in case of general insurance). The party bearing
the risk is known as the 'insurer or 'assurer and the party whose risk
is covered is known as the 'insured' or 'assured'.
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Distinction of
Insurance
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Types of Life
A. Life Insurance Insurance
Life insurance promises specific • Term/Protection Insurance
financial compensation to the • Endowment/Pure
beneficiary in case of the demise Endowment
of the insured person. To avail • Money Back Plan
the insurance benefits, the • Whole Life Insurance
policyholder is liable to pay the Product
premium amounts regularly and • Unit Linked Insurance Plan
timely, as per the policies of the • Pension or Retirement Plans
chosen plan. • Annuities
• Group Insurance
• Others
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Types of General
B. General Insurance Insurance
General insurance is a general term used • Health Insurance
for all the insurance plans that safeguard • Motor Insurance
things other than life, such as your • Home Insurance
health and valuables against theft, • Travel Insurance
natural disasters, accidents, etc. Timely
premiums are to be paid for the value of
protection chosen by you. The insurance
company is then liable to pay you the
assured sum if any damage or theft
happens to the insured entity.
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INSURANCE AUDIT

An insurance audit is the carrier’s way of determining how much

risk they actually insured over the past year. The company could’ve
undergone a drastic change over that whole year your policy was in
effect.
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Roles of INSURANCE AUDITOR in an

INSURANCE AUDIT
• The Central and Branch Auditors of an insurance company are
appointed at the Annual General Meeting of the Company.
• Before making the appointment an appointment from the
Comptroller and Auditor General must be received.
• The insurers as per the guidelines of the Insurance Act, 1938,
and the Companies Act, 2013 must comply with the provisions
with regard to the appointment of auditors.
• As per the recommendation of the Audit Committee, the board
appoints the statutory auditors, subject to the shareholder's
approval at the general meeting of the Insurance Company.
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Roles of INSURANCE AUDITOR in an

INSURANCE AUDIT
• The appointment of branch auditors is made to conduct the audit of the
divisions having the same rights and obligations as per the statute. The
branch auditors submit their report to the statutory auditors.
• The insurer does not have the power to remove the statutory auditor
without taking the approval of the authority.
• An audit firm cannot audit more than three insurers (Life insurance or
Health Insurance or Reinsurer or Non-Life Insurance) at a time.
• an appointment made can be canceled if it is found that the appointment of
auditors by the insurers is not as per the proposed guidelines.
What is Checked during
Insurance Audit in the
Company Balance Sheet?
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Essential Points Checked during insurance

audit in the balance sheet
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1. Investments
a. An insurance company can invest only in approved securities. However, it can
also invest in securities other than approved securities if the following conditions
are satisfied:
♡ The investment made must not exceed 25% of the total investments made.
♡ The investment must be made with the consent of the board of directors.
b. An insurer must not invest in shares or debentures of an insurance or investment
company over least of the following:
♡ 10% of its own total calculated assets
♡ 2% of the subscribed share capital or debentures of the investee.
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c. An insurance company must not invest in the share or debentures of a company

other than an insurance or investment company above at least the following:
♡ 10% of its own total calculated assets.
♡ 10% of the subscribed share capital or debentures of the investee.
d. An insurance company is not allowed to invest in the shares and debentures of a
private company.
e. The insurance companies are not permitted to invest in funds of their
policyholders outside the country.
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2. Cash and Bank Balances

a. The auditor shall during insurance audit prepare Bank reconciliation statements.
b. The auditor must obtain the confirmation of Bank Balances for all the operative
and inoperative accounts.
c. The auditor shall physically verify the Term Deposit Receipts that is issued by
the bankers.
d. The auditor shall verify the deposits and withdrawal transactions and also check
of the account is operated by authorized persons only.
e. In case of funds that is in transit, the auditor must verify that same amount is
appropriately reflected in a reconciliation statement.
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3. Outstanding Premium and Agents’ Balance

a. Verify whether the agent’s balances as well as outstanding balances in the
outstanding premium accounts have been listed, analyzed, and reconciled for the
purpose of audit.
b. Verify whether the recoveries of large and outstanding deposits have been made
during post-audit period.
c. Check if there are any old outstanding debts or credit balances at the year-end
which need adjustments.
d. Check the agent’s balances that do not include employee’s balances as well as
balances of other insurance companies.
e. Verify that there is no credit of commission is given to agents for businesses.
Essential Points checked in Profit & Loss 16

account during
insurance audit
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1. Verification of Premium
♡ Insurance Premium is the amount paid to the insurance company for payment of
the insurance contract obtained.
Audit Procedure:
a. Auditor must look into the internal control and compliance which is laid down
for the collection and recording of premium.
b. The cover notes must be numbered serially.
c. The auditor needs to check if the premium registers are maintained
chronologically.
d. The auditor verifies if the premium register is equal to the amount shown in the
General Ledger.
e. Lastly, the auditor also verifies if the installments due on or before the balance
sheet date has been received or not and if it has been accounted as premium
income under the year which the financial statement is audited.
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2. Verification of Claims
♡ Insurance Claims is a formal request by a policyholder to an insurance
company for coverage or compensation for a covered loss or policy event.
Audit Procedure:
a. The auditor shall verify and check for the unsettled claims.
b. Auditor must also check if the provision made with the company for the
claims is legally liable.
c. Then, check if the provision made is not more than the insured amount.
d. Lastly, check the co-insurance arrangement which contains the company’s
provision with respect to its own share of anticipated liability.
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3. Verification of Commission
♡ Insurance Commission is a certain percentage of premium produced that
is retained as compensation by insurance agents and brokers.
Audit Procedure:
a. The auditor shall verify the voucher disbursement entries with regards to
the disbursement voucher with the copies of commission bills and
statement.
b. The auditor also checks if the vouchers are authorized by the officers-in-
charge and also if the income tax is deducted.
c. Then, check the amount of commission allowed.
d. Lastly, check the accounting period of commission.
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4. Verification of Operating Expenses

Audit Procedure:
a. The auditor must check the operating expenses that are more than
500,000 or 1% of the net premium, whichever is higher, that should be
shown separately.
b. The auditor must also check the expenses that are not directly related to
the insurance business and must be shown separately.
 Steps to be taken in auditing the accounts of 21

Insurance Company

Internal Check Inspect the Claim Examine the

Inspection Register Final Accounts
1 3 5

2 4 6

Verify the Cash Balances Verify the

Premium Payable
Commission
Steps to be taken in auditing the accounts of 22

Insurance Company
Examine
Examine the Insurance
Investment Checking of Bonus Policies
7 9 11

8 12
10

Insurance Act Provision of Accrued Interest

1938 Depreciation Checking
Application
Steps to be taken in auditing the accounts of 23

Insurance Company

Balances of
Expenses Allocation Agency
14 16

15
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Allocation of Deposits in State Loans

Surplus Bank Against
Policy
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Content of
Apart from normal Auditor’s Report
contents of Auditors report, as prescribed for
'Limited Companies' IRDA has prescribed the certain matters to be
dealt with by the Auditors' in their Report vide Regulation 3 under
Schedule C of IRDA (Preparation of Financial Statements and
Auditor's Report of Insurance Companies) Regulations, 2002. The
Schedule C is reproduced below –
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"The report of the auditors on the financial statements of every insurer s

hall deal with the specified herein- “

(a) That they have obtained all the (d) Whether the Balance Sheet, Revenue
information and explanations which, to the Accounts and Profit and Loss Account
best of their knowledge and belief, were dealt with by the report and the Receipts
necessary for the purposes of their audit and and Payments Account are in agreement
whether they have found them satisfactory; with the books of account and returns;
(b) Whether proper books of account have and
been maintained by the insurer so far as (e) Whether the actuarial valuation of
appears from an examination of those books; liabilities is duly certified by the
(c) Whether proper returns, audited or appointed actuary, including to the effect
unaudited, from branches and other offices that the assumptions for such valuation
have been received and whether they were are in accordance with the guidelines and
adequate for the purpose of their audit; norms, if any, issued by the authority
and/or the Actuarial Society of India in
concurrence with the Authority.
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B. The auditors shall express their(b) The financial statements stated at (a) above
opinion on: are prepared in accordance with the requirements
of the Insurance Act, 1938 (4 of 1938), the
(a) (i) Whether the Balance Sheet gives a Insurance Regulatory and Development Authority
true and fair view of the insurers affairs as Act,1999 (41 of 1999) and the Companies Act,
at the end of the financial year/period; 1956 (1 of 1956) [now Companies Act, 2013), to
(ii) Whether the Revenue Account the extent applicable and in the manner so
gives a true and fair view of the surplus or required.
the deficit for the financial year/period; (c) Investments have been valued in accordance
(iii) Whether the Profit and Loss with the provisions of the Act and the
Account gives a true and fair view of the Regulations.
profit or loss for the financial year/period; (d) The accounting policies selected by the
(iv) Whether the Receipts and insurer are appropriate and are in compliance with
Payments Account gives a true and fair the applicable Accounting Standards and with the
view of the receipts and payments for the accounting principles, as prescribed in these
financial year/period. Regulations or any order or direction issued by
the Authority in this behalf
 auditors (which is in addition to
C. The auditors shall any other certificate or report
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further certify that: which is required by law to be

(a) they have reviewed the management
report and that there is no apparent
given with respect to the balance
mistake or material inconsistencies sheet) certifying that:
with the financial statements; and
(b) the insurer has complied with the (a) they have verified the cash balances and the
terms and conditions of the securities relating to the insurer's loans, reversions
registration stipulated by the and life interests (in the case of life insurers) and
Authority. investments;
(b) the extent, if any, to which they have verified the
investments and transactions relating to any trusts
undertaken by the insurer as trustee; and
(c) no part of the assets of the policyholders' funds has
been directly or indirectly applied in contravention of
the provisions of the Insurance Act 1938 (4 of 1938)
relating to the application and investments of the
policyholders' funds.
Signatures and Reports to
be attached with the
Accounts and Statements
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Hmo
companies
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Health Insurance
Health insurance is a form of financial service that provides financial
security in the midst of an illness or when health calls for it. It is a
form of insurance that covers medical and surgical costs, either by
preventive or corrective means. In most cases, individuals who have
health insurance literally pay nothing after a procedure is done. In
order to enjoy such benefits, the insured pays a premium. While
health insurance is mandatory in the country through PhilHealth, its
coverage leaves a lot to be desired.
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Difference between PhilHealth, Private Health

Insurance, and HMO

PhilHealth
The Philippine Health Insurance Corporation or PhilHealth
is a government-run insurance provider. Compared to
private providers, this type of insurance is more affordable.

PhilHealth has an established insurance program that

provides financial assistance to Filipino citizens who are
employed or otherwise, and in need of medical attention or
surgery.
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Difference between PhilHealth, Private Health

Insurance, and HMO

Private Health Insurance

Unlike HMOs that offer access to a limited network of healthcare
providers, private health insurance companies offer access to a more
extensive network.

Private health insurance premiums can be a little pricey. They are fully
paid for by individuals voluntarily if they want to be insured. If you want
your family members to be covered, that would be at an additional cost.
Note that this only applies to immediate family members.

The most well-known private health insurance providers in the country

include Manulife, PRU Life U.K.,and Sun Life.
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Difference between PhilHealth, Private Health

Insurance, and HMO
HMO
HMO or Health Maintenance Organizations are private organizations providing
healthcare insurance to members.

Their difference from private health insurance is that they have a network of
doctors and healthcare providers.

Their members can only avail of the benefits from those within that network.

The plans that are offered by HMOs are often customizable but there is usually a
limit to how much financial assistance you can get in a year. The higher the
premium you are paying, the bigger your annual allowance will be, too.

There are several HMO providers in the country but the most popular ones are
Maxicare and MediCard.
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Example audit
examination
cycle
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A. Administrative guidelines
"section 4d and f of the E.O. 192 provides that the Insurance
Commission (IC) shall have the authority to:
d. Regulate, supervise and f. Order the examination of
monitor the operations and documents, papers, files, tax
management of HMOs to ensure returns, books of accounts and
compliance with this Order, other records, in whatever form,
existing laws, rules and of any entity, person, or any
regulations and such other HMO under investigation,
directives and circulars issued by including persons, entities and/or
the Insurance Commission. corporations with related
interest.
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B. Submission and Verification of hmo’s

quarterly interim financial statements
Section 2.2 of CL 2016-41 requires all HMOs to submit reportorial
requirements on or before the 1Sth day of the month following the end
of each quarter starting 15 October 2016, to wit:
a. Interim Financial Statements
(IFS) Quarterly Ending (as Due Date
of)
b. Computation of Acid-Test
March 31 April 15
Ratio and Net Worth
June 30 July 15
c. Starting 2017, the submission September 30 October 15
for each quarter is due on or December 31 January 15
before the following dates:
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B. Submission and Verification of hmo’s

quarterly interim financial statements
Upon receipt of the above submission, verify and prepare the
schedule of Computation of Compliances with the following
requirements of CL 2016-41:
a. Section 1.2 Deposit Requirements
b. Section 1.3 Risk-Based Capitalization
c. Section 1.4 Net Worth Requirement
d. Section 1.4 Liquidity Requirement
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D. On-site
Examinatio
n

C. Annual filing of
Audited financial
statements

F. Off-site E.
Examination Concluding
(Verification) the
Examinatio
n
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Section 2.1
of CL 2016-
C. Annual filing 41 and CL
of Audited 2017-32
financial
statements
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Preparations
 First Day, examiners present
the designation letter to the
President of the HMO
company authorizing them to
conduct the said examination
D. On-site
Examinat  President – Chief Accountant –
ion Department Officers

 Examiners permanent area

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One week before terminating

examination
 supervisor should write a letter advising
the company of the conclusion of the
examination

Last day of examination

 the examiner with the supervisor will E.
Concluding
inform the company of the termination
the
of the examination and thank the
Examinatio
management for the help and
n
cooperation extended to them during the
examination

 A final report of the examination will be

prepared and transmitted to the HMO
company
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F. Off-site
 Insurance Specialist verifies and Examinatio
analyses the accounts in the n
Audited Financial Statements (Verificatio
n)
 Results of the verification are
reviewed by the Supervising
Insurance Specialist and passed
upon by Chief Insurance
Specialist

 Transmittal letter
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Minimum Verification
Procedures (for IC
examiners)
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Minimum Verification Procedures

a. Company Obligations Refer to the latest
 Check the figures in the b. Sister/Affiliated or Third- examination/verificatio
audited FS against the Party Obligations n report for
figures in the adjusted c. Significant Disclosures in requirements not
trial balance Company's Operation. complied.

1 3 5

2 4 6

 Read Auditor's Report for  Prepare a comparative Verify all the

possible audit exceptions balance sheet of current accounts together
which may affect the and previous years per with supporting
company's financial Audited FS, before documents
statements unaccounted assets
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Minimum Verification Procedures

Consolidate the results of
the verification and prepare
a transmittal letter to the
Prepare a worksheet for company.
Working Balance Sheet
7 9

8 10

Prepare the schedule of Computation of Arrange the verification folder together with the
Compliances with the following following:
requirements of CL201641: a. Copy of transmittal letter and other
a. Section 1.2 Deposit Requirements correspondence between IC and the company
b. Section 1.3 Risk-Based b. Working Balance Sheet, Summary of
Capitalization UANLL, Schedule of CC and Summary of
c. Section 1.4 Net Worth Requirement adjustments.
d. Section 1.4 Liquidity Requirement c. Supporting documents of Assets, Liabilities
and Net Worth
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Thank
You!