Insurance Principles and Practices Quiz

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Questions and Answers

What is a written instrument that details the conditions of an insurance contract?

Insurance policy (correct)

Reinsurance contract

Financial report

Ceding agreement

Which term describes a company that seeks to protect itself from potential losses by transferring risk to a third party?

Reinsurer

Policyholder

Ceding Company (correct)

Broker

What type of insurance focuses specifically on human lives and associated risks?

Commission income insurance

Reinsurance

Non-life insurance

Life insurance (correct)

When is commission income recognized by an insurance broker or agent?

When services have been rendered (A) Signup and view all the answers

What does the term 'premiums' refer to within the context of insurance?

Payments made by the policyholder to the insurer (C) Signup and view all the answers

Which of the following defines a framework used for preparing financial reports in compliance with regulations?

Financial reporting framework (A) Signup and view all the answers

Which of these is a type of insurance that is NOT considered life insurance?

Property insurance (B) Signup and view all the answers

What is the role of a reinsurer in an insurance context?

To insure the original insurer against losses (B) Signup and view all the answers

What is a primary purpose of understanding an entity's environment and internal control during audit planning?

To identify events, transactions, and practices that may significantly impact the financial statements. (C) Signup and view all the answers

Which of the following is NOT a typical source of information for an auditor when gaining an understanding of an entity and its environment?

Discussions with the entity's competitors. (C) Signup and view all the answers

Why is the 'Test of Beginning Balance' crucial in initial audit engagements?

To confirm that the prior year's ending balances have been correctly brought forward and that accounting policies have been consistently applied. (C) Signup and view all the answers

According to the provided context, what is one way that auditors ensure the work is completed expeditiously?

Through proper planning and assignment of work. (B) Signup and view all the answers

Besides understanding the entity, what is the other critical aspect auditors should focus on during the audit planning stage?

Understanding the accounting and internal control system. (B) Signup and view all the answers

What is meant by ensuring the audit is conducted 'effectively'?

The audit provides adequate insights into the true state of the financial statements. (B) Signup and view all the answers

What is one thing the auditor should ensure with the prior year's ending balances during an initial audit?

The prior year's ending balances have been correctly brought forward to the beginning of the current year. (B) Signup and view all the answers

What is the primary reason for an auditor to have sufficient understanding of the accounting and internal control systems?

To plan the audit and develop an effective audit approach. (A) Signup and view all the answers

What is the primary focus of the competency principle for accountants?

Representing only an expertise that is genuinely possessed by the accountant. (A) Signup and view all the answers

Which area is NOT a key focus for an audit team to demonstrate competence in the insurance industry?

Mastery with local tax filing procedures for all industries. (A) Signup and view all the answers

Which of the following is a financial ratio used to assess a company's ability to meet its debt obligations?

Interest rate coverage ratio (D) Signup and view all the answers

What is the primary purpose of an independence checklist for an audit team?

To identify potential threats that could compromise the team's objectivity. (C) Signup and view all the answers

What is a key consideration when evaluating the aggregate of passed adjustments after substantive procedures?

Whether they exceed the overall materiality set for the financial statements (C) Signup and view all the answers

Before an audit partner can provide an opinion regarding the financial statements of an insurance company, who must they be accredited with?

The Insurance Commission (IC). (B) Signup and view all the answers

What is the primary reason it is essential for audit managers and senior associates to possess experience with insurance clients?

To quickly identify specific audit risk areas within the industry. (D) Signup and view all the answers

In the context of an audit, what is an essential responsibility of management?

To provide unrestricted access to company records and documentation (B) Signup and view all the answers

Which is a key aspect of supervising less experienced insurance audit team members?

Providing patience and guidance to correctly execute auditing procedures. (D) Signup and view all the answers

What is a typical arrangement related to the engagement of experts in specific industries?

Companies may engage qualified independent appraisers or actuaries for valuation or computation services (D) Signup and view all the answers

Which is NOT a primary aspect of ensuring competence on an audit team?

Having deep knowledge of client's personal investment portfolios. (C) Signup and view all the answers

Why might an insurance company revalue its fixed assets?

To realize a revaluation surplus which increase the minimum net worth (C) Signup and view all the answers

What is a key document the auditor expects to receive from management during the audit?

A representation letter and a management letter (A) Signup and view all the answers

What is the significance of attending seminars and training on updated Insurance Commission circulars?

To stay informed with the most recent regulatory and accounting changes impacting insurance. (D) Signup and view all the answers

Which statement best describes the relationship between a substantive procedure and a materiality threshold?

Substantive procedures can be adjusted based on the predetermined overall materiality. (A) Signup and view all the answers

What is the primary purpose of planning an audit?

To ensure appropriate attention is given to important areas and to perform the work effectively and efficiently (A) Signup and view all the answers

What is the primary purpose of setting materiality at the planning stage of an audit?

To determine the specific audit procedures that need to be applied. (C) Signup and view all the answers

For a profit-oriented client, which benchmark is most appropriate to be used when setting up materiality?

Pre-tax Net Income (B) Signup and view all the answers

What does 'tolerable misstatement' refer to in the context of setting materiality?

The materiality level at the account balance level. (B) Signup and view all the answers

If the overall materiality is set too high, what is a potential risk for the auditor?

The auditor may fail to detect material misstatements. (C) Signup and view all the answers

Which of the following best describes the 'clearly trivial threshold'?

The maximum misstatement that can be ignored for adjustments. (D) Signup and view all the answers

What is the equation for audit risk?

Audit risk = inherent risk * control risk * detection risk (D) Signup and view all the answers

What occurs to the extent of the designed audit procedures when planning materiality has been set to a high value?

The planned audit procedures become less extensive. (D) Signup and view all the answers

Which of the following is the correct representation of the relationship between planning materiality and planned audit procedures?

Low planning materiality correlates with more extensive planned audit procedures. (C) Signup and view all the answers

Which of the following is NOT considered a risk assessment procedure?

Review of internal control documentation (D) Signup and view all the answers

What is the first step in performing a preliminary analytical review?

Developing expectations regarding financial statements (D) Signup and view all the answers

During which stage of the audit are analytical procedures primarily used to obtain evidence to confirm individual account balances?

Substantive tests (D) Signup and view all the answers

What is the primary objective of performing analytical procedures during the overall review stage of an audit?

To identify unusual fluctuations not previously identified (C) Signup and view all the answers

Which document provides a broad overview of the expected scope and conduct of the audit?

Audit plan (D) Signup and view all the answers

Which of the following documents includes detailed audit procedures to address specific management assertions per account?

Audit program (D) Signup and view all the answers

What is the main purpose of a time budget in the context of an audit?

To estimate the time spent on audit procedures and estimate fees (C) Signup and view all the answers

What is a key difference between the audit plan and the audit program?

The audit plan provides an overview, while the audit program sets out detailed procedures (B) Signup and view all the answers

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Study Notes

Auditing Specialized Industries: Insurance

Contract of insurance: An agreement where one party indemnifies another against an unknown future event, for a fee.
Insurance Code: Republic Act No. 10607, a law that strengthens the insurance industry and amends Presidential Decree No. 612.
Insurance Commission (IC): The government body that regulates insurance operations in the Philippines.
Insurance Commissioner: Appointed by the President, serving a 6-year term. Reason for removal must be public.
Insurance agent: Represents insurance companies, selling policies for a commission.
Insurance broker: Represents clients, finding coverage from multiple companies for a commission.
Insurance broker bond: Every applicant must file a bond with the IC, at least PHP 500,000, ensuring financial accountability. Reinsurance brokers need a PHP 1,000,000 bond.
Errors and Omissions (E&O) policies: Insurance brokers need 2 separate E&O policies issued by different insurance companies in the Philippines.
Minimum net worth requirement (Insurance Broker): Varies based on the type of broker (new, existing). Figures in the document range from PHP 10,000,000 to 50,000,000.
Insurance company: Represents the entity that creates and issues insurance policies; companies, partnerships, associations and cooperatives are included.
Minimum paid-up capital (Insurance company): At least PHP 1 billion.
Minimum net worth (Insurance company): Varies by compliance date, ranging from PHP 250,000,000 to PHP 1,300,000,000.
Policyholder/insured: Person or entity that buys an insurance policy and pays premiums.
Insurance policy: A written document that details the insurance contract.
Contract of reinsurance: A contract where an initial insurer procures additional insurance from a third party (reinsurer).
Reinsurer: Third party that insures the original insurer against losses from original policies.
Ceding company: The original insurer that procures reinsurance.
Life insurance: Insurance on human lives and related issues.
Non-life insurance: Other types of insurance besides life insurance.
Commission income: Recognized when insurance brokerage/agency services are rendered.
Premiums: Payments made by the policyholder to the insurer.
Financial reporting framework: A set of standards for preparing financial statements, required by the insurance commission.

Key Audit Considerations

Pre-Audit Engagement: Assess client competence and independence, ensure qualified staff, and consider management integrity.
Engagement Letter: A written contract that outlines audit objectives, responsibilities, scope, and reporting types.
Risk Assessment Procedures: Use inquiries, analytical procedures, observations to identify risks.
Developing an Overall Audit Strategy: A risk-based approach for efficient and effective audits, with significant attention paid to areas with highest risk. Key risks include cash reconciliation, commission realizability, fixed asset acquisitions, investment income, revenue recognition, employee benefit expenses, and other contracts.
Materiality: The threshold of misstatements that would affect the financial statements.
Audit Planning: Outline the nature, timing, and extent of the audit procedures.
Audit Procedures: Detail the how the procedures will be carried out and documented in the audit program.
Documentation: Document all steps in the audit planning and execution, including the audit plan, audit program, and time budget.
Risk assessment procedures: This includes inquiries of management, analytical procedures, and observation. Substantive tests are used for getting evidence to confirm account balances.

How to set-up Materiality

Setting a benchmark for overall materiality, and tolerable misstatements.
Establishing a clear threshold for trivial misstatements.
Materiality is consideration of the overall effects of misstatements, and how the misstatements affect the overall picture.

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Description

Test your knowledge on key concepts in insurance, including written instruments, risk transfer, and types of insurance. This quiz covers essential terms like premiums, reinsurance, and the role of auditors in the insurance industry.