Audit Content of Insurance Enterprise Financial Statements

Insurance business is regulated by each country and insurance enterprises are allowed to invest this capital, but during the operation, insurance enterprises must maintain the contributed charter capital, not lower than the prescribed minimum capital. In addition, insurance enterprises must also establish a mandatory reserve fund. Therefore, during the audit, auditors need to consider the legal compliance of insurance enterprises in the use and management of equity and mandatory reserve funds.

Fourth, while in other business sectors, product prices are determined based on actual costs incurred, in the insurance sector, the price of insurance products, also known as insurance premiums, is determined based on past statistics and future estimates of the frequency and scale of losses. Therefore, insurance companies must have an independent or outsourced professional insurance pricing department. Thus, this is a field beyond the capabilities of accountants and therefore the use of expert work is essential.

Fifth, the insurance company does not record revenue at the time the service results are completed, but must record it immediately at the time the insurance contract takes effect. At the end of the fiscal year, for insurance contracts that are valid until the following fiscal year, the insurance company will set aside a reserve for unearned premiums so that revenue is recorded in the period according to the completed service results at the date of the financial statement. During the period when the insurance contract is in effect, the insurance buyer may change some terms in the contract such as the benefit period, beneficiaries, insurance amount, etc. Therefore, during the audit process, the auditor needs to combine the audit of the recognition of insurance business revenue with the recognition of insurance premium refunds, insurance premium reductions, and insurance commissions.

Sixth, unlike other businesses, the direct operating costs of insurance companies are compensation costs, loss assessment costs, risk assessment costs, third party claims costs, compensation handling costs, loss prevention and mitigation costs, operational reserves, commission costs, and other expenses. These expenses are all random, depending on the value of each signed contract and the level of risk. Therefore, the direct operating costs of insurance cannot be determined in advance and the increase or decrease in costs during the period is unstable. Accordingly, this item is also considered to be prone to SSTY and needs to be paid attention to by auditors.

1.2. Contents of auditing financial statements of insurance companies

1.2.1. Objectives and subjects of auditing financial statements of insurance enterprises

Basically, the overall objective of auditing the financial statements of an insurance company is similar to the objective of auditing financial statements in general recognized under ISA 200, which is to increase the reliability of users of financial statements through the auditor's opinion on whether the financial statements are truthful.

Is the financial statements prepared on material aspects, in accordance with the framework for preparing and presenting the financial statements applied? In addition to determining the above overall objectives, the auditor must also determine the detailed objectives associated with the databases used by the insurance enterprise's managers to account for, reflect, present and publish the indicators and parts on the financial statements. These databases include: existence, completeness, accuracy, timeliness, rights and obligations, classification, presentation and publication and are divided into 3 groups: Database group for transactions and operations arising during the period; Database group for account balances; Database group for information presented and explained. Specifically, the detailed audit objectives of the financial statements of the insurance enterprise are shown in Table 1.1.

Table 1.1: Detailed audit objectives of DNBH financial statements

Database

Goals for the transaction, business	Goals for account balance	Goals for the information presented and explained
Presence	The transactions and operations recorded by DNBH in the accounting books are real.	Assets, liabilities, and equity of the insurance company are real at the time of preparing the table. Technical Community.	The information explained by the insurance company on the financial statements actually happened.
Integrity	Transactions and operations that have occurred are fully reflected in the accounting books of the DNBH. maths.	Assets, liabilities, and equity have been fully reflected by the insurance company on the balance sheet.	The information that needs to be explained has been fully explained by the insurance company on the financial statements.
Calculate Exactly	Transactions and The business is accurately calculated by DNBH		The information is The explanation of the insurance company on the financial statements is reasonable.
Correct period	Transactions and operations are recorded by DNBH in the correct fiscal year. accountant
Rights and obligations service		DNBH has rights to assets owned by the unit. position and obligation to	The value of assets is explained by the insurer on the financial statements. owned

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accounts payable

of the unit

Classification and evaluation

Transactions and operations are recorded by DNBH into the correct account.

Assets, liabilities and equity are classified by the insurance company on the balance sheet in accordance with the provisions of law.

current.

Financial information is presented and explained clearly, easily understood and reasonably explained by DNBH.

Source: Author's synthesis

In addition, to improve audit quality or meet the requirements of insurance companies, the audit objective may be to provide advice to help insurance companies further improve risk management, accounting and effective internal control.

In accordance with the above audit objectives, the direct subject of the audit of the financial statements of the insurance company is the financial statement system with indicators on the balance sheet, the income statement, the cash flow statement, the notes to the financial statements and other documents and information provided by the insurance company's accountant. In case the insurance company is an economic group, the scope of the audit subject is expanded to the financial statements of the parent company, the financial statements of the subsidiary and the consolidated financial statements of the group.

1.2.2. Auditing techniques for financial statements of insurance companies

At the end of the audit process, the auditor must give a conclusion on the financial statements of the insurance company. To have complete, correct and objective conclusions, the auditor must prove it with complete and appropriate audit reports. To have convincing audit reports, during the audit process, the auditor must use a combination and flexibility of audit techniques. Specifically:

Physical inspection: According to the laws of each country, the financial statements of insurance companies are required to be independently audited. Therefore, every year before the end of the accounting year, insurance companies often proactively contact the accounting department. And therefore, if they accept the audit, the accounting department also proactively arranges for auditors to participate in the inventory of assets with the unit at the end of the year. In other words, when auditing insurance companies, physical inspection techniques are often performed on the exact date of the end of the year with the participation of auditors from the accounting department to witness the inventory.

Document inspection: This technique is applied to all audits of financial statements of insurance companies because the documents are often available, the cost to collect is also less than other documents and more importantly, the documents of insurance companies are difficult to understand, containing many legal factors, operating principles, responsibilities, and provisions that require auditors to carefully review and understand these documents. Auditors use document inspection techniques for accounting books.

Payment and documents specific to insurance companies such as insurance contracts, insurance applications, insurance certificates, value-added invoices, insurance payment slips, daily original insurance premium payment statements, daily insurance payment statements, statements of compensation for reinsurance business revenues and expenses, and customer records.

Confirmation: The practice of insurance business activities gives rise to many payment relationships: payment relationships between insurance companies and insurance buyers, payment relationships with the State budget, relationships with credit institutions, with investors or within the enterprise. Therefore, confirmation techniques are also used in auditing financial statements of insurance companies. However, with such a large scale and wide relationship, sending letters must be conducted on a sample basis. In terms of form, auditors can send negative letters, only asking the confirmer to send them back if there is a difference in the data to be compared, or send a confirmation letter, regardless of whether there is a difference in the data to be compared, the confirmer must still send them back.

Calculation: Insurance companies use many accounting estimates. Therefore, when auditing insurance companies, this technique is also widely used by auditors to recalculate insurance premiums, set up insurance business reserves, set up bad debt reserves, set up financial investment reserves, set up compensation funds, commission costs, salary costs and salary deductions, and fixed asset depreciation.

Interview: Interview is the process of auditors collecting information in writing or orally through questioning people related to the issues that auditors are interested in. Accordingly, this technique is also used in auditing the financial statements of insurance companies with the purpose of assessing the integrity of the Board of Directors and the accounting department, assessing the effectiveness of internal control, assessing the risk of SSTY and supplementing and supporting other techniques in collecting audit evidence.

Observation: Although the observation technique does not ensure the collection of full audit evidence, this technique is quite simple to implement, mainly based on the auditor's senses to evaluate the actions and attitudes of the observed subjects. Therefore, when auditing the financial statements of insurance companies, this technique is also used by auditors in combination with other techniques.

Analysis: Due to the time and cost savings in collecting financial statements, analytical techniques are used throughout the audit process. During the audit planning stage, analytical techniques are used by auditors to analyze the risks of the audited entity, thereby making risk assessments that have implications for the financial statements. During the audit implementation stage, this technique is used independently or in combination with

detailed testing to address assessed risks. At the end of the audit, the auditor performs this technique to reach an overall conclusion about whether the financial statements are consistent with the auditor's understanding of the audited entity.

1.2.3. Auditing process of insurance company financial statements according to risk approach

In fact, there are many approaches when performing financial statement audits. Prinsloo (2008) has summarized previous studies on audit approaches and pointed out that up to now there are 4 basic audit approaches (1) the approach based on basic procedures (before 1904);

(2) the balance sheet approach (from 1904 to 1940); (3) the systems approach (after 1940 to 1972) and (4) the risk approach (after 1972). According to the substantive procedures approach, auditors conduct detailed examinations of a large number of transactions on assets, liabilities and revenues on the trial balance with the aim of detecting and reporting errors in accounting data (Dicksee, 1904 cited in Prinsloo, 2008). According to the balance sheet approach, audit procedures are performed mainly for accounts with balances on the balance sheet because, according to the views of many authors at that time, accounts on the income statement have a corresponding relationship with accounts on the balance sheet, so if all items on the balance sheet are checked and verified for truthfulness and accuracy, it is possible to infer the items on the income statement (Lancaster, 1935; Hanson, 1942 cited by Prinsloo, 2008). Because the goal of detecting and reporting errors is the main focus, in the first two approaches, detailed transaction and balance checking procedures account for the majority of the auditor's workload, the audit planning stage as well as determining the content and scope of what Essner needs to perform to collect convincing audit evidence are not considered important. But since 1940, this limitation has been overcome by the system approach. According to this method, in the audit planning stage, the auditor must spend time to learn about the characteristics of the client, especially the internal control system. This understanding will help the auditor recognize the strengths and weaknesses in each control stage. If any control stage is assessed to be effective, the auditor will mainly implement TNCB and reduce TNCB, on the contrary, if any control stage is absent or exists but is not operated effectively, the auditor will increase TNCB. However, from the bankruptcy of many large companies and corporations in the world, society pays more attention to business risks, fraud risks and the system-based auditing method is no longer.

appropriate to identify and address these risks instead of a risk-based audit approach. According to ISA 315 and ISA 330, this approach involves three specific steps as follows:

Step 1: Identify and assess the risk of SSTY on the financial statements . The focus of identifying and assessing the risk of SSTY on the financial statements is the RRTT and RRKS that the audited entity is facing through understanding the characteristics of the business environment, business risks and control environment. The important issue that is decisive when performing this step is the experience and professional judgment of the auditor. There is no specific guidance for assessing risks for all types of enterprises, so the auditor needs to have professional judgment skills and a certain understanding of the audit entity to be able to identify the types of risks and their potential impact on the recording, reflection, presentation and publication of the financial statements or the assessment, completeness, reality, accuracy, rights and obligations at the database level.

Step 2: Handling assessed risks . In this step, the risks identified in step 1 will be handled through the design and implementation of appropriate audit procedures. The audit procedures performed in this step are TNKS and TNCB. Normally, for risks with SSTY at the database level, the auditor only performs TNKS for regular transactions or if only performing TNCB, it cannot provide sufficient appropriate audit evidence. The auditor is required to design and perform TNCB for each group of important employees, users and trading centers. In particular, increase TNCB for non-regular transactions, accounting estimates and management assessments. The auditor's assessment of SSTY risks may change from the original if, during the implementation of audit procedures, the auditor collects audit evidence from new information that is inconsistent with the initial audit evidence on which the auditor based his risk assessment. At this time, the auditor must review the previous assessments and revise the proposed subsequent audit procedures. Step 3: Conclusion on risks. The auditor will base on the results of the audit procedures in the above step to draw conclusions on the risks of SSTY on the financial statements. When collecting sufficient appropriate audit evidence, the auditor will draw conclusions on the total risks of SSTY in the overall financial statements. If it is not possible to collect evidence

In the audit, the auditor will give an opinion that is not an unqualified opinion.

Not only recognized in auditing standards, research by many authors such as Bell & colleagues (1997), Salterio and Weirich (2002); Phil Griffiths (2005); Knechel (2007); Adam (2012)... also shows the effectiveness of the audit when implemented according to the risk approach and Prinsloo (2008) concluded:

“Risk-based audit approach is an inevitable trend in the audit development process to provide reasonable assurance to audited entities, ensure full compliance with professional regulations and narrow the gap in expectations of users of audit results”. In addition, the author summarizes the differences between audit approaches in Appendix 1.

From the above analysis, it can be seen that implementing the process of auditing financial statements of insurance companies according to the risk approach will adapt to the current development of auditing and is completely consistent with the characteristics of insurance companies. Accordingly, the content presented by the author below is the steps of work that auditors need to perform in the process of auditing financial statements of insurance companies according to the risk approach.



Inspection plan

maths



Assess the ability to accept / maintain the audit of financial statements of insurance companies Signing the audit contract Understanding the characteristics of insurance companies

Learn about DNBH's internal control system

Perform preliminary analytical procedures Determine materiality

Identify SSTY risks at the aggregate and database levels

Audit program design

Identify and assess the risk of error

materiality on financial statements

of DNBH

Perform check

maths



Managing risk at the holistic level

Risk Management at the Database Level



Implement TNKS

Implement TNCB

Risk management has been

Evaluate

End of check

maths



Summary of results

Prepare and issue post-audit control financial statements

Conclusion on risk

rated

Risk-Oriented Auditing Approach

Figure 1.2: Auditing process of financial statements of insurance companies

1.2.3.1. Audit planning

According to ISA 300, the objective of audit planning is to ensure that the audit

The audit is performed effectively. Therefore, planning is a mandatory requirement whether auditing the financial statements of a public company or any other enterprise. The specific tasks of this stage include:

a) Assess the ability to accept or maintain the audit of financial statements of insurance enterprises

To limit audit risks, when receiving an invitation to audit from an insurance company, the audit firm must assess the ability to accept the audit if the insurance company is a new client or maintain the audit if the insurance company is an old client. The content and procedures performed by the auditor when assessing the ability to accept/maintain the audit of the financial statements of the insurance company include: assessing the integrity of the board of directors of the insurance company, identifying the audit purpose, collecting preliminary information about the insurance company, assessing the ability and resources to perform the audit of the insurance company.

After reviewing the above contents, the auditor assesses the risk of accepting or maintaining the audit of the financial statements of the insurance company. The auditor should consider accepting or refusing to audit the financial statements of the insurance company if the following signs are found:

Table 1.2: Signs of risk of accepting/maintaining audit of financial statements of insurance companies

Risk signs

 The Board of Directors does not meet the standards of integrity [Abdullatif, 2013].

 The Board of Directors has conflicts and disagreements with the previous auditor [Abdullatif, 2013]

 Too concerned about audit fees

 Enterprises preparing to list or already listed but issuing additional shares

ballot [Abdullatif, 2013]

 The financial situation and business results of the enterprise are not optimistic.

last year and present

 Lack of qualified audit staff [Kieu Anh, 2016]

 Auditors are not able to collect financial statements of insurance companies with major business activities in

foreign [Kieu Anh, 2016]

Note:

 High risk, audit refusal

 Accept audit but risk assessment has SSTY

Source: Author's synthesis

If the audit is deemed acceptable for the insurer, the audit firm will discuss a number of issues with the insurer and proceed to sign an audit contract. The audit contract must be a written agreement between the audit firm and the insurer on the terms and conditions.

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