Specialized Industries in Accounting

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Questions and Answers

What characterizes a specialized industry?

A market that is always rare or unusual.

A market with unique accounting standards or policies. (correct)

A market that has no specific standards involved.

A market that follows general financial reporting standards.

Which standard requires audit firms to assess their competence for engagements?

ISA 240

ISQC 1 (correct)

ISA 330

IFRS 1

What is a primary concern for smaller audit firms when taking on clients in specialized industries?

The availability of auditing technology.

Their competence and prior experience in that industry. (correct)

The ability to obtain new clients.

The cost of undertaking such audits.

What should an audit firm ensure regarding competence?

Competence considerations are well-documented. Signup and view all the answers

Which of the following is NOT a specialized industry mentioned in the overview?

Retail management Signup and view all the answers

Which factor does NOT enhance an audit firm's competence?

Avoiding documentation practices. Signup and view all the answers

What is one of the first steps in audit planning for specialized industries?

Identifying the risks of material misstatement. Signup and view all the answers

How can audit firms improve their competence in specialized industries?

Through appropriate staff training. Signup and view all the answers

What is the minimum paid-up capital requirement for new players in the insurance industry under Republic Act No. 10607?

P1 billion Signup and view all the answers

As of December 31, 2019, what is the minimum net worth requirement that existing insurers must meet?

P900 million Signup and view all the answers

What document cannot be used to engage an external auditor for insurance companies?

Accreditation certificate Signup and view all the answers

Which of the following statements about the auditor's understanding of the IT environment is true?

It is essential for grasping transaction workflows. Signup and view all the answers

What is NOT a required component of the financial statements according to the Insurance Code?

Statement of Fund Allocation Signup and view all the answers

What occurs if an external auditor's accreditation is suspended?

The auditor cannot engage in any auditing activities. Signup and view all the answers

When should the net worth of existing insurers reach P1.3 billion according to the regulations?

By December 31, 2022 Signup and view all the answers

Which statement about the auditor's selection of transactions in an IT environment is accurate?

Few transactions of each type may be selected for tracking. Signup and view all the answers

What is the primary purpose of reinsurance for an insurer?

To transfer part of the risk to another insurer Signup and view all the answers

What role does an auditor play regarding policy lapse and revival?

Monitoring the due dates and marking policies as lapsed when necessary Signup and view all the answers

What is required for a life insurance policy to remain 'in force'?

Timely payments of premiums by the policyholder Signup and view all the answers

In the context of premium collection, what is recognized as income for the insurer?

Both new business premium and renewal premium Signup and view all the answers

What must an auditor confirm regarding reinsurance premium calculation?

It is in accordance with the agreement with the reinsurer Signup and view all the answers

What is a key responsibility of the auditor regarding policy surrender?

Confirming that surrender amounts are paid only to policyholders as per policy terms Signup and view all the answers

What initiates the process of policy surrender?

A request from the policyholder Signup and view all the answers

What action should be taken if a policy does not receive premium renewal payments?

The auditor should mark the policy as lapsed after due dates Signup and view all the answers

What is treated as 'unallocated premium'?

Premium received not identifiable against any policy. Signup and view all the answers

What should an auditor check regarding the collection of premiums?

If there is a daily reconciliation process in place. Signup and view all the answers

Which statement about the recognition of income is correct?

Premium is recognized based on issued policies only. Signup and view all the answers

What is a key aspect to check regarding advance premiums?

The system must identify regular and advance premiums. Signup and view all the answers

What should be reviewed as part of the investment management audit?

The investment policy and committee meeting minutes. Signup and view all the answers

Which expense is associated with the operations of an insurance business?

Interest and bank charges. Signup and view all the answers

What is the primary objective of auditing claims at an insurer?

To check the accuracy of claims processing and accounting. Signup and view all the answers

Which statement accurately describes a bank?

A bank is recognized by BSP and involved in deposits and lending. Signup and view all the answers

What is the relationship between control risk and the extent of substantive testing (ST)?

Higher control risk leads to more extensive ST Signup and view all the answers

Who is ultimately responsible for the system of internal control within a bank?

Those charged with governance Signup and view all the answers

What is NOT a key objective of internal controls in the accounting system?

Assets remain unrecorded to minimize paperwork Signup and view all the answers

Which function is typically involved in a structured system of delegation of authority?

Lending Signup and view all the answers

Which statement accurately reflects the role of authorization controls?

They help ensure that no transactions exceed established limits Signup and view all the answers

What is a critical aspect to be evaluated during the substantive testing in relation to authorization controls?

Adherence to limits for levels of exposures Signup and view all the answers

Which of the following statements regarding management's authorization of transactions is true?

Specific procedures must be followed for granting authorizations Signup and view all the answers

What is typically required in the lending function before funds are disbursed?

Appropriate credit assessment procedures Signup and view all the answers

How can auditors establish the reasonableness of reported interest income and interest expense?

By examining the variation from amounts calculated based on average balances and stated rates. Signup and view all the answers

What should an auditor assess to ensure the accurate processing of high transaction volumes in a bank?

The internal controls and related transaction ratios and trends. Signup and view all the answers

What might indicate a potential issue with the going concern assumption for a bank?

Undue concentration of risk in certain industries or geographic areas. Signup and view all the answers

What is a key element that auditors consider during their financial statement reporting for banks?

Conformity with GAAP in the Philippines for foreign branches. Signup and view all the answers

Which types of information can auditors utilize to conduct an analytical review of banks?

A wide range of statistical and regulatory information. Signup and view all the answers

What is the primary purpose of an auditor examining reported income and expense of a bank?

To evaluate the bank's ability to generate interest income appropriately. Signup and view all the answers

During an audit, what aspect is NOT typically influenced by legal and regulatory requirements for banks?

The internal marketing strategies of the bank. Signup and view all the answers

Which of the following is a method for auditors to evaluate financial trends in banks?

Comparing with budget and results of similar entities. Signup and view all the answers

Study Notes

Specialized Industries Overview

Specialized industries have unique accounting and reporting procedures.
They may have specific financial standards or distinct accounting policies.
Examples include banking, insurance, public utilities, agriculture, oil extraction, and airlines.

Audit Considerations

Competence: Audit firms must assess their competence to handle engagements, considering relevant industry knowledge, experience with regulations, and access to experts.
Audit Planning: Risk assessment is crucial; deeper understanding of the business, its environment, and sector-specific standards (e.g. IFRS for banking) is necessary.
Expert Reliance: If the audit firm lacks specific industry expertise, external experts can be used.

Specialized Industry: Banking

Bank audits assess business activities, information systems, and controls.
Key areas include offered services, fraud risk, system complexity, and regulatory compliance.
Audit concerns include procedures to protect consumers and regulatory violations.
Specific considerations include business risks, scale of operations, reliance on computerized systems, regulations in operating jurisdictions, and evolving banking products.

Specialized Industry: Insurance

Insurance contracts involve transferring risk.
Auditors verify policy and liability procedures, risk valuation, tax documents, and financial records.
Audits ensure proper insurance rate/premium implementation and compliance with regulations (e.g. BIR, IC).
Important areas to verify are claims and commissions during audits.

IFRS for Banks and Financial Institutions

Financial instruments (IFRS 9/IAS 39, IAS 32) require impairment, classification, and measurement, differentiating liability from equity.

Audit of Companies (Insurance)

Insurance contracts involve risk transference for a premium.
Audits ensure insurance companies are compliant with regulations and uphold proper financial procedures.
Important audit points include verification of premiums, claims, commissions, and operating expenses.

Audit of Insurance Companies

Introduction: An insurance contract involves a transfer of risk.
Life Insurance: Term (fixed or variable), general (fixed).
Legal Framework: Familiarization with insurance sector laws, rules.
General Information: Various types of insurance products, insurance costs and payouts. Audit considerations for all types.
Audit Procedures (overview): Review of related documents, recording of insurance policies, premium collections.

Audit of Bank Accounts

Introduction: Banks are significant financial institutions with particular roles.
Characteristics: Custody of assets, dependence on computerized systems, regulatory impact, high transaction volumes.
Banking Risks: Country risk, credit risk, currency risk, liquidity risk, modeling risk, and operational risk.
Audit Objectives and principles: The objective is to evaluate whether the financial statements are correctly reflected and follow standards.
Audit Objectives (Detail): Evaluate financial statements prepared appropriately per accounting standards.

Audit Procedures

Inspection: Assessing tangible assets, agreements, documents.
Observation: Evaluating internal controls, methods & procedures.
Inquiry: Gaining information from relevant parties.
Confirmation: Verifying information through external sources.
Computation: Checking arithmetic accuracy, balances, ratios.
Analytical procedures: Evaluating trends, ratios, and relationships, inconsistencies.

Shared Services

Outsourcing: Engaging a third-party service provider for business functions.
Shared Services: A central business unit delivering services to multiple internal departments improves efficiency by standardization.
Key factors: Cost reduction, standardization, efficiency improvements, and scalability.
Key Processes shared: Billing, accounts receivable/payable, fixed assets, payroll, and cash management.

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Description

This quiz covers the unique accounting practices and audit considerations specific to specialized industries like banking, insurance, and agriculture. It highlights the importance of industry knowledge and risk assessment in audit planning. Test your understanding of the financial standards and reporting procedures that apply to these sectors.