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Need to know the important issues affecting the insurance industry and how the current economic crisis affects this industry? This Audit Risk Alert focuses on emerging practice issues and current accounting and auditing developments. This alert also provides you with regulatory updates for statutory accounting.
Auditing in this challenging economic environment requires continually evaluating the importance of long-standing auditing standards directed at areas such as auditing fair value measurements, auditing accounting estimates, using the work of a specialist, going concern, and fraud—all of which get a fresh look in this alert. The current economic woes are stress testing the standards applicable to those areas and the critical thinking required to successfully apply them during the engagement.
The targeted discussions of recent economic, industry, technical, regulatory, and professional developments that may affect your audits will invigorate the audit team's brainstorming sessions required under AU sections 314 and 316 within the GAAS standards. Auditors, financial statement preparers, and management will find these same discussions helpful in identifying the significant risks that may result in the material misstatement of financial statements.
New accounting and auditing guidance and exposure drafts that are particularly significant to this alert and covered in just the right amount of detail include:
This alert also includes information on emerging issues such as:
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How This Alert Helps You
.01 This Audit Risk Alert (alert) helps you plan and perform your insurance industry audits. This alert can also be used by an entity's internal management to address areas of audit concern. This alert provides information to assist you in achieving a more robust understanding of the business, economic, and regulatory environments in which your clients operate. This alert is an important tool in helping you identify the significant risks that may result in the material misstatement of financial statements. Moreover, this alert delivers information about emerging practice issues and current accounting, auditing, and regulatory developments.
.02 This alert is intended to be used in conjunction with the Comprehensive Audit Risk Alert—2008 (product no. 022339kk). This alert can be obtained by calling the AICPA at (888) 777-7077 or visiting www.cpa2biz.com. You should refer to the full text of accounting and auditing pronouncements as well as the full text of any rules or publications that are discussed in this alert.
Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
.03 An auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. An auditor's understanding of the entity and its environment consists of an understanding of the following aspects:
.04 The insurance industry may be subject to specific risks of material misstatement arising from the nature of the business, the degree of regulation, or other external forces (for example, political, economic, social, technical, and competitive forces).
.05 The auditor should obtain an understanding of the entity's objectives and strategies and the related business risks that may result in material misstatement of the financial statements. Business risks result from significant conditions, events, circumstances, actions, or inactions that could adversely affect the entity's ability to achieve its objectives and execute its strategies, or through the setting of inappropriate objectives and strategies. Just as the external environment changes, the conduct of the entity's business is also dynamic, and the entity's strategies and objectives change over time. An understanding of business risks increases the likelihood of identifying risks of material misstatement. However, the auditor does not have a responsibility to identify or assess all business risks. Most business risks will eventually have financial consequences and, therefore, an effect on the financial statements. However, not all business risks give rise to risks of material misstatement.
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