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The Auditor’s Response to the Risks of Material Misstatement arising from estimates made in applying IFRS 17 Insurance Contracts

Published on: Aug 12, 2021

This paper issued by the Global Public Policy Committee (GPPC) is designed to provide guidance primarily to those charged with governance on their oversight role of the external auditors and in assessing the effectiveness of the external auditor’s response. More specifically the paper focuses on the auditor’s approach to auditing estimates and associated judgements made in the application of IFRS 17, taking into account the requirements set forth by the relevant International Standards on Auditing (ISA’s).

In May 2017, the International Accounting Standards Board (IASB) issued IFRS 17 Insurance Contracts (IFRS 17) which has been amended in June 2020, to become effective for reporting periods beginning on or after January 1, 2023. IFRS 17 will introduce a new accounting and financial reporting framework for insurers, reinsurers and financial institutions with insurance and/or reinsurance operations. Its principle-based requirements aim to improve transparency and comparability of the measurement and presentation of insurance contracts across entities reporting in jurisdictions applying International Financial Reporting Standards (IFRS).

The GPPC has published in February 2020 two papers related to the implementation of IFRS 17. The first paper, Implementation of IFRS 17 ‘Insurance Contracts’: Considerations for those charged with governance, concentrates on helping those charged with governance to evaluate management’s progress towards implementation and assess their external auditors’ general readiness to audit in the context of IFRS 17. The second paper3, Implementation of IFRS 17 ‘Insurance Contracts’: Companion document on key judgements and accounting policy choices, focuses on key judgements and accounting policy choices faced by insurers related to the adoption of IFRS 17.

This new GPPC paper is designed to provide guidance primarily to those charged with governance on their oversight role of the external auditors and in assessing the effectiveness of the external auditor’s response. More specifically the paper focuses on the auditor’s approach to auditing estimates and associated judgements made in the application of IFRS 17, taking into account the requirements set forth by the relevant International Standards on Auditing (ISA’s).

IFRS 17 introduces new estimates necessary to incorporate market variables, when observable, and to align all other non-market variables to the best sources of current information that an insurance company can reasonably obtain at the reporting date of its financial statements. The drive of IFRS 17 to a current measurement model is combined with a far greater granularity of the reported numbers and audited reconciliation of these estimates to cash, balance sheet and reported revenue and expenses. These requirements aim to benefit users in their understanding of the sources of profit in a business that issues insurance contracts. At the same time they increase complexity and subjectivity in some of those estimates, this may lead for many insurance companies to increased risks of material misstatements arising from those estimates.

The paper discusses how the auditor may assess these risks of material misstatement arising from IFRS 17 and the auditor’s responses to these identified risks of material misstatements (see section 2 and 3 for further detailed content). Due to their particular importance in this context, additional emphasis is placed on the role of data, information systems, processes and internal controls (see section 4 for further detailed content).

Furthermore, the paper addresses the enhanced disclosure principles introduced by IFRS 17 and the implications for the auditor (see section 5 for further detailed content). The financial reporting disclosures will be a key source of information for users of the financial statements to understand the key decisions made by management on accounting estimates and its impact on the financial position, financial performance and cash flows.

Due to the increased complexity of IFRS 17, the auditor will need to consider a potential increase in the risk of management bias and the application of professional skepticism to IFRS 17 estimates. Additionally, the auditor will need to assess the need for (additional) specialized skills or knowledge within the audit team. These other considerations for the auditor are further detailed in section 6 of the paper.

Francesco Nagari
Global lead for IFRS 17
frnagari@deloitte.com.hk

Jérôme Lemierre
EMEA co-lead for IFRS 17
Deloitte representative at the IWG - GPPC
jlemierre@deloitte.fr

 

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