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?

<p>Competence considerations are well-documented. (C)</p> Signup and view all the answers

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

<p>Retail management (B)</p> Signup and view all the answers

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

<p>Avoiding documentation practices. (C)</p> Signup and view all the answers

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

<p>Identifying the risks of material misstatement. (C)</p> Signup and view all the answers

How can audit firms improve their competence in specialized industries?

<p>Through appropriate staff training. (A)</p> 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?

<p>P1 billion (B)</p> Signup and view all the answers

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

<p>P900 million (A)</p> Signup and view all the answers

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

<p>Accreditation certificate (A)</p> Signup and view all the answers

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

<p>It is essential for grasping transaction workflows. (B)</p> Signup and view all the answers

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

<p>Statement of Fund Allocation (A)</p> Signup and view all the answers

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

<p>The auditor cannot engage in any auditing activities. (B)</p> Signup and view all the answers

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

<p>By December 31, 2022 (C)</p> Signup and view all the answers

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

<p>Few transactions of each type may be selected for tracking. (B)</p> Signup and view all the answers

What is the primary purpose of reinsurance for an insurer?

<p>To transfer part of the risk to another insurer (B)</p> Signup and view all the answers

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

<p>Monitoring the due dates and marking policies as lapsed when necessary (A)</p> Signup and view all the answers

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

<p>Timely payments of premiums by the policyholder (C)</p> Signup and view all the answers

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

<p>Both new business premium and renewal premium (C)</p> Signup and view all the answers

What must an auditor confirm regarding reinsurance premium calculation?

<p>It is in accordance with the agreement with the reinsurer (C)</p> Signup and view all the answers

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

<p>Confirming that surrender amounts are paid only to policyholders as per policy terms (D)</p> Signup and view all the answers

What initiates the process of policy surrender?

<p>A request from the policyholder (C)</p> Signup and view all the answers

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

<p>The auditor should mark the policy as lapsed after due dates (D)</p> Signup and view all the answers

What is treated as 'unallocated premium'?

<p>Premium received not identifiable against any policy. (A)</p> Signup and view all the answers

What should an auditor check regarding the collection of premiums?

<p>If there is a daily reconciliation process in place. (C)</p> Signup and view all the answers

Which statement about the recognition of income is correct?

<p>Premium is recognized based on issued policies only. (A)</p> Signup and view all the answers

What is a key aspect to check regarding advance premiums?

<p>The system must identify regular and advance premiums. (C)</p> Signup and view all the answers

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

<p>The investment policy and committee meeting minutes. (B)</p> Signup and view all the answers

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

<p>Interest and bank charges. (B)</p> Signup and view all the answers

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

<p>To check the accuracy of claims processing and accounting. (B)</p> Signup and view all the answers

Which statement accurately describes a bank?

<p>A bank is recognized by BSP and involved in deposits and lending. (B)</p> Signup and view all the answers

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

<p>Higher control risk leads to more extensive ST (B)</p> Signup and view all the answers

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

<p>Those charged with governance (C)</p> Signup and view all the answers

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

<p>Assets remain unrecorded to minimize paperwork (D)</p> Signup and view all the answers

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

<p>Lending (D)</p> Signup and view all the answers

Which statement accurately reflects the role of authorization controls?

<p>They help ensure that no transactions exceed established limits (B)</p> Signup and view all the answers

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

<p>Adherence to limits for levels of exposures (B)</p> Signup and view all the answers

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

<p>Specific procedures must be followed for granting authorizations (A)</p> Signup and view all the answers

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

<p>Appropriate credit assessment procedures (D)</p> Signup and view all the answers

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

<p>By examining the variation from amounts calculated based on average balances and stated rates. (A)</p> Signup and view all the answers

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

<p>The internal controls and related transaction ratios and trends. (B)</p> Signup and view all the answers

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

<p>Undue concentration of risk in certain industries or geographic areas. (A)</p> Signup and view all the answers

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

<p>Conformity with GAAP in the Philippines for foreign branches. (B)</p> Signup and view all the answers

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

<p>A wide range of statistical and regulatory information. (C)</p> Signup and view all the answers

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

<p>To evaluate the bank's ability to generate interest income appropriately. (B)</p> Signup and view all the answers

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

<p>The internal marketing strategies of the bank. (B)</p> Signup and view all the answers

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

<p>Comparing with budget and results of similar entities. (D)</p> Signup and view all the answers

Flashcards

Specialized Industries

Distinct markets with unique accounting methods for transactions and financial reporting.

Audit Firm Competence

Audit firms must ensure they have the knowledge, skills, and resources to audit a specific industry.

Larger Audit Firms

Possess inherent competence for various industries.

Smaller Audit Firms

Might need to analyze competence for new specialized industries.

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Audit Planning in Specialized Industries

Similar risk assessment as general audits, but requires industry-specific knowledge.

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Industry-Specific Resources

Useful internal guidance and expertise may be available for specialized industries.

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Documentation of Competence

Essential to show how industry competence is assessed and enhanced.

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Material Misstatement Risk

Risk of a financial statement being significantly incorrect, like in any audit.

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Audit Procedures

The actions taken by an auditor to gather evidence and assess the risks in an audit

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Insurance Code Requirements

Rules and regulations in the Philippines governing the insurance industry.

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External Auditor Accreditation

The process of obtaining official permission to perform audits for insurance companies in the Philippines.

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Minimum Capital Investment

The required amount of money needed for new and existing insurance companies in the Philippines.

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IT Environment in Audits

The use of information technology in insurance companies affects how auditors conduct their audits.

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Audit Trail

The sequence of steps in a financial transaction, important for verifying the validity of the transaction and following the flow of money or assets

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Financial Statements

Formal records of the financial activities of an insurance company. Required documents for audits

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Audit Scope

The extent of the review performed by an auditor to assess a company's operations

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Unallocated Premium

Premium received by an insurance company but not yet linked to a specific policy.

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Daily Reconciliation

The process of comparing records of premium amounts collected, entered into the system, and deposited into the bank.

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Advance Premium

Premium paid for a policy in advance of the actual premium due date.

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Investment Committee

A group responsible for overseeing the investment of an insurance company's funds.

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Claims Processing Accuracy

Ensuring that claims submitted to an insurer are processed and accounted for correctly.

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Operating Expenses of Management

Costs associated with running an insurance business, including legal, employee, and interest expenses.

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Bank

A financial institution that accepts deposits, lends money, and invests funds, recognized by the BSP.

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BSP Recognition

The requirement for a bank to be recognized as a bank by the Bangko Sentral ng Pilipinas.

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What is reinsurance?

A risk-sharing tool where one insurer transfers part of its risk to another insurer. It's like having a backup plan in case of a huge claim.

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Auditor's role in reinsurance

Auditors confirm that the reinsurance premium calculations and payments align with the reinsurance agreement. They also check for proper accounting of outstanding premiums.

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What is policy lapse?

When a policy becomes inactive because the policyholder fails to pay premiums on time.

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Auditor's role in policy lapse

Auditors ensure that insurers properly monitor premium due dates and mark policies as 'lapsed' when payments are missed.

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What is policy surrender?

The policyholder voluntarily ends the insurance contract before it expires.

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Auditor's role in policy surrender

Auditors verify that surrender requests are genuine and that proper procedures are followed when processing surrender requests.

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Premium collection: new vs. renewal

New business premium is for the first policy year, while renewal premium is for subsequent years.

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Auditor's role in premium collection

Auditors ensure that premiums are properly accounted for as income, whether for new business or renewals.

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Control Risk & Substantive Testing

The extent of substantive testing varies depending on the assessed control risk. When control risk is low, less extensive testing is needed. Conversely, a high control risk requires more extensive testing.

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Transactions - General Authorization

Internal controls ensure transactions are executed according to management's broad guidelines.

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Transactions - Specific Authorization

Internal controls ensure that specific types of transactions need individual approval based on specific circumstances, such as exceeding a certain amount.

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Recording Transactions - Timely & Accurate

Transactions are recorded promptly, at the correct amount, in the appropriate accounts, and in the correct period.

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Asset Access - Authorization

Internal controls ensure that access to assets is restricted, only permitted with appropriate authorization.

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Asset Reconciliation - Regular Comparisons

Internal controls require regular comparisons between recorded assets and actual assets to identify and address any discrepancies.

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Authorization Controls - Auditor's Focus

The auditor examines whether authorization controls are in place and whether they are followed, ensuring transactions are executed in accordance with the bank's policies.

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Authorization for Lending

The auditor examines whether loans are subject to appropriate credit assessments before funds are disbursed.

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Interest Income & Expense

Key components of a bank's earnings, directly linked to interest-bearing assets and liabilities.

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Auditing Interest Income & Expense

Auditors examine if the reported income and expense align with average balances and stated interest rates for a period.

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High Transaction Volume

Auditors assess the accuracy of a bank's transactions, comparing current data to past periods, budgets, and industry benchmarks.

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Going Concern Assumption

Auditors analyze if a bank can continue operating as a business based on risks, industry concentration, and interest rate mismatches.

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Analytical Procedures for Banks

Powerful tools used to assess financial trends, compare to peers, and identify potential issues like mismatched interest rates.

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Bank Reporting Requirements

Banks must adhere to specific formats, terminology & GAAP rules while reporting their financial statements.

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Audit Scope in Banking

Includes evaluating internal controls, reviewing financial information, and ensuring adherence to legal and regulatory requirements.

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Financial Statements - Bank Specific

Banks' financial statements are influenced by laws, regulations, and accounting policies that are unique to the industry.

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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.

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