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Accountants – Which is more important: the audit of prepaid insurance or the adequacy of insurance?
For my Auditing class, I have to answer this question and I want your opinion. The question:
"You are auditing a medium-size manufacturing company. Discuss which is usually more important: the audit of prepaid insurance or the determination of the adequacy of insurance."
MY ANSWER:
While both objectives are important, it is more important to audit the adequacy of insurance coverage than the prepaid insurance balance. The adequacy of insurance coverage would ensure that the client company would be a going concern if a catastrophe were to occur. An unqualified opinion on a client with inadequate business continuity, product liability, or general liability insurance coverage could lead to considerable liability on the auditor, if the client was forced out of business. Prepaid insurance is an asset created due to timing differences between insurance policy coverage dates and the date of the financial statements, and prepaid insurance is not usually a significant part of the balance sheet.
What do you think?
The question does not mention whether you are performing an audit of the company’s financial statements or of operations.
As an auditor of the financial statements (probably an external audit), you are responsible for the accurate presentation of the financials, so pre-paid insurance would be more important.
As an auditor of operations (as an external audit or internal audit), you are responsible for the effectiveness and efficiency of operations, as well as compliance. Adequacy of insurance would be more important because of its impact to operations. In addition, Company contracts/agreements/leases may require specific levels of insurance.
This all ties back to the general COSO objectives of: Reporting, Operations, & Compliance.
Comments
As an Auditor, it is not your responsibilty to determine the adequacy of insurance. How would you know what is adequate for the business without knowing the construction of the business itself. The adequacy of insurance is the domain of Management. If you were making management decisions you would also not be objective in your Audit. Auditing pre-paid insurance is as far as you can go objectively.
References :
The question does not mention whether you are performing an audit of the company’s financial statements or of operations.
As an auditor of the financial statements (probably an external audit), you are responsible for the accurate presentation of the financials, so pre-paid insurance would be more important.
As an auditor of operations (as an external audit or internal audit), you are responsible for the effectiveness and efficiency of operations, as well as compliance. Adequacy of insurance would be more important because of its impact to operations. In addition, Company contracts/agreements/leases may require specific levels of insurance.
This all ties back to the general COSO objectives of: Reporting, Operations, & Compliance.
References :
COSO
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