Presenter: Altaf Noor Ali Chartered Accountant

1. Training SessionAudit Service TriangleUser - Auditor Framework Part-IICase Study: State Life Insurance Corporation of PakistanSession I Presenter: Altaf Noor Ali Chartered Accountant

2. Session 9.30 – 4 pm Audit of Insurance Service Provider • Session Objective • Covering letter prescribing signing conditions to audit report • Auditors’ Report to the Member of SLICP: what it says, what it means • Audit Service Triangle: Auditor, Auditee & User • Audit Assignment Framework: Input, Process, Output • Audit Input Triangle: Aim, Situation, Knowledge. • Audit Process Triangle: Test, Evaluation, Assessment. • Audit Output Triangle: Record, Review, Report. • Conclusion.

3. Session Objectives • Discuss and understand: • the contents of conditions for signing of audit report • what auditors’ report says and means • Understand the financial statements of SLICP for the year 2005 as a user and auditor. • Learn how financial statements of insurance companies differ from other entities • Learn about the rules that govern their preparation • Link the figures appearing in the financial statements • Learn about the risks involved for an auditor

4. COVERING LETTER PRESCRIBING CONDITIONS FOR SIGNING OF AUDIT REPORT 2005

5. CONDITIONS FOR SIGNING> • Who has written the letter? • Date of the letter? • To whom is it addressed? • 2005 Financial Statements • Responsibility of the Auditors and the Management

6. >CONDITIONS FOR SIGNING • Unreconciled subsidiary record • Internal audit function • Information technology • Tangible fixed assets coding and physical verification • Amount due to other classes of business • Investment in subsidiary company • Corporation occupied properties • Outstanding confirmations • Qualification in last audit report • Detailed management letter

7. As an auditor, would you have qualified your report on any of the areas mentioned rather than putting them in this letter?

8. AUDITORS’ REPORT TO THE MEMBER OF SLICP

9. Para 1 We have audited the annexed financial statements comprising of: • Balance sheet • Profit and loss account • Statement of changes in equity • Cashflow statement • Revenue account • Statement of premium • Statement of claims • Statement of expenses; and • Statement of investment income

10. Para 2: Key Terms • Framework • Approved accounting standards as applicable in Pakistan • Insurance Ordinance 2000 • Companies Ordinance 1984 • ‘These statements constitute consolidation of all accounting statements on the corporation basis and Statement of International Business Operations in UAE (other currencies) audited by M/s. Sajjad Haider & Co.’

11. Next Page : Key Sentence • As more fully explained in notes 4.2.2.3 and 4.2.2.4 to the financial statements, the liabilities for compensated absences and post retirement medical benefits amounting to Rs. 467 million [2004: Rs. 450 m] and Rs. 599 m [2004: Rs. 450 m] respectively have not been provided in these financial statements. Is this a proper disclosure of an audit qualification?

12. Key points of Discussion With specific reference to Audit Service Delivery Triangle

13. Audit Service Delivery Triangle • The auditor: The natural person [or firm] designated to perform audit. • The auditee: The natural or artificial person responsible for transaction[s] being audit. • The user: The prime beneficiary or beneficiaries of audit.

14. Audit Service Triangle:Three Relationships • User-auditee The outcome of this relationship is the appointment of auditor. • Auditor-user The performance of this relationship is the report. • Auditor-auditee

15. Type of Users Society Directors Management Investor Customer Lender Employee Role of User Legislate and regulate Appoint management and auditor Set oversight mechanism Monitor progress Participate in corporate affairs User: Responsibility

16. Responsibility to User Code of Ethics Apply updated technical standards Obtain ‘reasonable assurance’ Report findings Responsibility to Auditee Constructively Interact Conduct an audit effectively and efficiently Auditor: Responsibility

17. Responsibility to User Conduct business responsibly Be accountable for resources Devote resources for accountability Select appropriate accounting policies Prepare financial statements Responsibility to auditor Consult and interact Make available all information Auditee: Responsibility

18. How about looking at financial statements as a user? [before we do so as an auditor] Would it add any value to our ‘audit assignment framework’ or to any of its stages?

19. Corporate Accountability: Key Limitation of Financial Statements • The financial statement do not explain the reasons for change from one year to the other. It simply discloses figures without any explanations. • The information is incomplete as it does not helps users in drawing conclusions. • Audit and accounting are connected but distinct compartments of accountability.

20. Why a technically perfect audit without adequate disclosures is not good enough for user? • Audit may be divided into two major components. • The first one relates to the field work, the purpose of which is to gain audit evidence and reach to proper conclusions about validity of financial information produced by the underlying record. • The second part relates to its disclosure in the financial statements. • The first is hidden from user, the second is not.

21. Visible part of audit • Financial statements are the most visible and tangible part of the accounting and audit process

22. How about looking at financial statements as a user? [before we do so as an auditor] Would it add any value to our ‘audit assignment framework’ or to any of its stages? The answer is YES Lets recap ipo now . We will focus on financial disclosures in the second session

23. Audit Assignment FrameworkRecap

24. A framework for understanding AuditIPO • Input: The ‘inputs’ that have to be in place to conduct an audit. We will call it Audit Input Triangle • Process: The ‘process’ that needs to conduct a PCA. We will call it Audit Process Triangle. • Output: The ‘output’ or ‘conclusion’ of the process. We will call it Audit Output Triangle.

25. Audit Input Triangle = ASK • Aim: The ‘objective’ of performing an audit. This is defined by legal framework. • Situation: What is to be done? • Knowledge: The level of knowledge, experience and expertise available with the auditor.

26. Audit Process Triangle = TEA • Tests: This involves translating knowledge and expertise to decide about the audit approach in terms of tests to be conducted. • Examine & Evaluate: Gain data. Position to conduct and perform tests. • Assess: Reach to an initial assessment.

27. Audit Output Triangle = RRR • Record: Document and record. Recording may involve electronic means. • Review: Current information. Past information. • Report: Reach to a final conclusion.

28. Conclusion • ‘An auditor performs for the user. He must be utmost conscious of the requirements of the user, not that of legal and technical framework only’. • ‘Reviewing the financial statements as a user provides valuable insights to the auditor to interact with auditee for improving disclosures. It helps in understanding of business environment and its operations. It is the raw material for identifying audit risk factors and defining audit strategy’.

29. Financial Statements of SLICP

30. Financial Statements of SLICP • Balance sheet • Profit and loss account • Statement of changes in equity • Cashflow statement • Revenue account • Statement of premium • Statement of claims • Statement of expenses; and • Statement of investment income

31. What the column means: Share Holder’s Fund Statutory Funds Pakistan Life Fund Overseas Life Fund Pension Fund Share capital and reserves Deferred liabilities Creditors and accruals Other liabilities Total liabilities Commitment Total equity and liabilities Is there anything missing from above list? Balance Sheet at 31-12-05Key Terms

32. Where are the contingencies?

33. Balance Sheet at 31-12-05Key Terms • Cash and bank deposits • Loans secured against life insurance policies • Loans secured against other assets • Unsecured loans • Investments • Investment property • Other assets • Fixed assets – tangible • Total assets

34. What does the balance sheet indicates us about the business model of slicp?

35. Profit and Loss Account for the year ended 31-12-05 • Investment income not attributable to statutory funds • Return on government securities • Interest income on loans and advances to employees/ agents • Interest income on bank deposits • Net investment income • Expenses not attributable to statutory funds • Surplus appropriated to statutory funds • Profit before tax • Tax expense • Profit after tax

36. Statement of Cashflowfor the year ended 31-12-05 • Operating cash flows • Under writing activities • Other operating activities • Investment activities

37. Statement of Cashflowfor the year ended 31-12-05 • Review and analyse the figures above, draw conclusions • Let us also refer to note 14 to the accounts. Would it be better if this was reproduced below these figures? Why do figures differ from balance sheet ‘cash and deposits’? • Let us refer to next page SOCE. It shows dividend payment, why is it not appearing in the cashflow statement? • Now lets trace figures for the ‘reconciliation to the profit and loss account’? CNG RNG

38. Statement of Changes in Equity for the year ended 31-12-05 • Any comments?

39. Notes to the Accounts for the year ended 30-6-06 p.17-32 • Status and Nature of Business • Summary of Significant Accounting Policies • Property, plant and equipment • Long-term deposits • Stores, spares and loose tools • Stock-in-trade • Trade debts considered good

40. Revenue accountfor the year ended 31-12-05 • Income • Claims and expenditure • Excess of income over claims and expenditure • Policy holders liabilities • Surplus before tax • Tax chargeable to statutory funds • Surplus after tax • Movement in policy holders liabilities • Balance of statutory fund

41. Statement of Premiumfor the year ended 31-12-06 • What it means? • Trace figures.

42. Statement of Claimsfor the year ended 31-12-06 • What it means? • Trace figures.

43. Statement of Investment Income of Statutory Fundsfor the year ended 31-12-06 • What it means? • Trace figures.

44. Statement of Expensesfor the year ended 31-12-06 • What it means? • Trace figures.

45. After reviewing all these statements…..Are we anymore clear about the business model of slicp?

46. Time now to review the notes to the financial statements in some detail…

47. Notes to the Accountsfor the year ended 31-12-05 • Status and nature of business • Basis of presentation and statement of compliance • Basis of measurement • Summary of significant accounting policies Any suggestions for avoiding the clutter like 4.1 and 4.1.1, 4.1.2, 4.1.3, 4.1.4 etc.?

48. >Statement of Accounting Policies for the year ended 31-12-05 • Funds • Staff retirement benefits • Loans secured against insurance policies • Investment properties • Investments • Fixed assets – tangible • Other assets

49. >Statement of Accounting Policies for the year ended 31-12-05 • Revenue recognition • Reinsurance • Claims • Acquisition costs • Expenses for management • Taxation • Bad and doubtful debts • Foreign currency translation

50. Notes to the Accounts>>for the year ended 31-12-05 • Issued, subscribed and paid-up capital • Other liabilities • Commitment • Cash and bank deposits • Loans secured against life insurance policies • Investments • Investment properties • Fixed assets – tangible