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This Audit and Accounting Guide provides the latest information on accounting and auditing issues affecting the property and liability insurance industry. Updated with conforming changes as of May 1, 2008, it includes guidance in planning and performing audits under the risk assessment standards (SAS Nos. 104-111). This edition of the guide has also been conformed to reflect the Defining Professional Requirements standards (SAS No. 102 and SSAE No. 13). Furthermore, it provides additional guidance on the auditor's responsibilities as set forth in SAS Nos. 112-114, including identifying and reporting internal control deficiencies, understanding the link between the auditor's consideration of fraud and the auditor's assessment of risk, dating of the management representation letter, and the auditor's communications with those charged with governance.
The guide summarizes applicable requirements and practices, and delivers "how-to" advice for handling audit and accounting issues common to the property and liability insurance industry. It includes accounting requirements for the National Association of Insurance Commissioners (NAIC) Statements of Statutory Accounting Principles (SSAP) and a discussion of the relevant financial statement considerations for the property and liability insurance industry. The guide covers the following new pronouncements:
For a topical listing of subject matter by chapter, click on the Table of Contents tab.
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This AICPA Audit and Accounting Guide has been prepared by the AICPA Property and Liability Insurance Companies Task Force to assist preparers and auditors of financial statements. The guide assists practitioners in preparing financial statements in conformity with generally accepted accounting principles (GAAP) and assists auditors in auditing and reporting on such financial statements in accordance with generally accepted auditing standards or Public Company Accounting Oversight Board auditing standards.
Descriptions of accounting principles and financial reporting practices in Audit and Accounting Guides are approved by the affirmative vote of at least two-thirds of the members of the Accounting Standards Executive Committee (AcSEC), which is the senior technical body of the AICPA authorized to speak for the AICPA in the areas of financial accounting and reporting. AU section 411, The Meaning of Present Fairly in ConformityWith Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1), identifies AICPA Audit and Accounting Guides that have been cleared by the Financial Accounting Standards Board (FASB) as sources of accounting principles in category b of the hierarchy of GAAP that it establishes. This Audit and Accounting Guide has been cleared by FASB. AICPA members should consider the accounting principles described in this Audit and Accounting Guide if the accounting treatment of a transaction or event is not specified by a pronouncement covered by Rule 203, Accounting Principles (AICPA, Professional Standards, vol. 2, ET sec. 203), of the AICPA Code of Professional Conduct. AICPA members should be prepared to justify departures from the accounting guidance in this guide, as discussed in paragraph .07 of AU section 411.*
AcSEC has found this guide to be consistent with existing standards and principles covered by Rule 202, Compliance With Standards (AICPA, Professional Standards, vol. 1, ET sec. 202), and Rule 203 of the AICPA Code of Professional Conduct. AICPA members should be prepared to justify departures from the accounting guidance in this guide.
Auditing guidance included in an AICPA Audit and Accounting Guide is an interpretive publication pursuant to AU section 150, Generally Accepted Auditing Standards (AICPA, Professional Standards, vol. 1). Interpretive publications are recommendations on the application of Statements on Auditing Standards (SASs) in specific circumstances, including engagements for entities in specialized industries. An interpretive publication is issued under the authority of the Auditing Standards Board (ASB) after all ASB members have been provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent with the SASs. The members of the ASB have found this guide to be consistent with existing SASs.
The auditor should be aware of and consider interpretive publications applicable to his or her audit. If an auditor does not apply the auditing guidance included in an applicable interpretive publication, the auditor should be prepared to explain how he or she complied with the SAS provisions addressed by such auditing guidance.
FASB Accounting Standards Codification™
On January 15, 2008, FASB launched the 1-year verification phase of the FASB Accounting Standards Codification™ (FASB ASC). After the verification period, during which constituents are encouraged to provide feedback on whether FASB ASC content accurately reflects existing U.S. GAAP for nongovernmental entities, FASB is expected to formally approve FASB ASC as the single source of authoritative U.S. GAAP, other than guidance issued by the Securities and Exchange Commission (SEC). FASB ASC includes all accounting standards issued by a standard-setter within levels A-D of the current U.S. GAAP hierarchy, including FASB, the AICPA, Emerging Issues Task Force (EITF), and related literature. FASB ASC does not change GAAP; instead it reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. The SEC guidance will follow a similar topical structure in separate SEC sections.
This edition of the guide has not been conformed to the new FASB ASC. AICPA Audit and Accounting Guides, as well as other AICPA literature, will be conformed to reflect FASB ASC after the verification phase and upon formal approval by FASB.
Defining Professional Requirements
AU section 120, Defining Professional Requirements in Statements on Auditing Standards, and AT section 20, Defining Professional Requirements in Statements on Standards for Attestation Engagements (AICPA, Professional Standards, vol. 1), which were issued in December 2005, set forth the meaning of certain terms used in SASs and Statements on Standards for Attestation Engagements (SSAEs), respectively, issued by the ASB in describing the professional requirements imposed on auditors and practitioners. The specific terms used to define professional requirements in these sections are not intended to apply to interpretive publications issued under the authority of the ASB because interpretive publications are not auditing or attestation standards. It is the ASB's intention to make conforming changes to the interpretive publications over the next several years to remove any language that would imply a professional requirement where none exists.
In December 2007, the Accounting and Review Services Committee (ARSC) also issued AR section 20, Defining Professional Requirements in Statements on Standards for Accounting and Review Services (AICPA, Professional Standards, vol. 2), which sets forth the meaning of certain terms used in Statements on Standards for Accounting and Review Services (SSARS) issued by ARSC in describing the professional requirements imposed on accountants performing a compilation or review of a nonissuer. The specific terms used to define professional requirements in this section are not intended to apply to interpretive publications issued under the authority of ARSC because interpretive publications are not SSARSs. It is ARSC's intention to make conforming changes to the interpretive publications to remove any language that would imply a professional requirement where none exists.
AU section 120, AT section 20, and AR section 20, which were effective upon issuance, define the terminology that the ASB and ARSC will use going forward to describe the degree of responsibility that the requirements impose on the auditor, practitioner, or accountant in engagements performed for nonissuers. SASs, SSAEs, and SSARSs will use the words must or is required to indicate an unconditional requirement, with which the auditor, practitioner, or accountant is required to comply. SASs, SSAEs, and SSARSs will use the word should to indicate a presumptively mandatory requirement. The auditor, practitioner, or accountant is required to comply with a presumptively mandatory requirement in all cases in which the circumstances exist to which the presumptively mandatory requirement applies; however, in rare circumstances, the auditor, practitioner, or accountant may depart from a presumptively mandatory requirement provided he or she documents the justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the objectives of the presumptively mandatory requirement. If a SAS, SSAE, or SSARS provides that a procedure or action is one that the auditor, practitioner, and accountant "should consider," the consideration of the procedure or action is presumptively required, whereas carrying out the procedure or action is not.
This guide has been updated as applicable for AU section 120, AT section 20, and AR section 20. Refer to the schedule of changes (appendix BB) for additional information.
Recognition
| Benjamin S. Neuhausen, Chair Accounting Standards Executive Committee | Harold L. Monk, Jr., Chair Auditing Standards Board |
Insurance Companies Committee (1988-1989)
| Patrick W. Kenny, Chair John T. Baily William J. Bawden Peter S. Burgess Susan K. Evers Ronald P. Freres Wayne Kauth R. Scott Malmgren |
Bruce K. Michelson Ruben D. Nava David D. Real Gary Roubinek Harold R. Simmons Howard I. Smith Mark H. Weston |
2008 Conforming Changes Task Force
The AICPA staff gratefully acknowledges the significant contributions made by the following individuals in updating the May 1, 2008, edition of this guide.
Tom Fekete
(Deloitte)
Margaret Spencer
(RSM McGladrey, Inc.)
Noeleen Doelger
(Veris Consulting, LLC)
AICPA Staff
| Willian S. Boyd Technical Manager Accounting and Auditing Publications Kim Kushmerick Technical Manager Accounting Standards |
Hiram Hasty Technical Manager Audit and Attest Standards Lori Pombo Technical Manager Accounting and Auditing Publications |
Guidance Considered in This Edition
This guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative pronouncements since the guide was originally issued. Relevant guidance contained in official pronouncements issued through May 1, 2008, has been considered in the development of this edition of the guide. This includes relevant guidance issued up to and including the following:
Users of this guide should consider pronouncements issued subsequent to those previously listed to determine their effect on entities covered by this guide. In determining the applicability of a pronouncement, its effective date should also be considered.
The changes made to this edition of the guide are identified in appendix BB. The changes do not include all those that might be considered necessary if the guide were subjected to a comprehensive review and revision.
Auditing Guidance Included in This Guide
Risk Assessment Standards
In March 2006, the ASB issued SAS Nos. 104-111 (the risk assessment standards). Collectively, the risk assessment standards establish standards and provide guidance concerning the auditor's assessment of the risks of material misstatement (whether caused by fraud or error) in a nonissuer financial statement audit; design and performance of tailored audit procedures to address assessed risks; audit risk and materiality; planning and supervision; and audit evidence. The most significant changes to existing practice that the auditor will be required to perform are as follows:
The statements are effective for audits of financial statements for periods beginning on or after December 15, 2006. Early adoption is permitted. See appendix AA in this guide for a more detailed comparison between the risk assessment standards and the existing standards. This guide has been conformed to the new risk assessment standards.
For additional guidance on the risk assessment standards, please refer to the AICPA Audit Guide Assessing and Responding to Risk in a Financial Statement Audit (product no. 012456) and the AICPA Audit Risk Alert Understanding the New Auditing Standards Related to Risk Assessment (product no. 022526).
Defining Professional Requirements
As previously stated, this guide has been conformed, as applicable, to the standards found in AU section 120, AT section 20, and AR section 20, which were effective upon issuance (December 2005, except for AR section 20, which was issued in December 2007). These new standards define the terminology that the ASB and ARSC will use going forward to describe the degree of responsibility that the requirements impose on the auditor, practitioner, or accountant in engagements performed for nonissuers. Refer to the schedule of changes, appendix BB, for additional information.* In May 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, the objectives of which include moving responsibility for the U.S. generally accepted accounting principles (GAAP hierarchy) for nongovernmental entities from the AICPA's AU section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1), to FASB literature. The FASB statement expands the sources of category a of the hierarchy of GAAP to include accounting principles that are issued after being subject to the FASB's due process (including, but not limited to, FASB Staff Positions and FASB Statement 133 Implementation Issues, which are currently not addressed in AU section 411).
Among other matters, the FASB statement did not carry forward the Rule 203, Accounting Principles (AICPA, Professional Standards, vol. 2, ET sec. 203), exception from paragraph .07 of AUsection 411. Accordingly, the FASB statement states that an enterprise shall not represent that its financial statements are presented in accordance with GAAP if its selection of accounting principles departs from the GAAP hierarchy set forth in this statement and that departure has a material impact on its financial statements.
In response to the original proposed FASB statement, in May 2005, the AICPA issued an exposure draft of a proposed Statement on Auditing Standards, Amendment to Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, for Nongovernmental Entities for Nongovernmental Entities, which deletes the GAAP hierarchy for nongovernmental entities from AU section 411. The Public Company Accounting Oversight Board (PCAOB) has already taken measures to remove the GAAP hierarchy from its interim auditing standards in a set of amendments which it adopted on January 29, 2008. The amendments, if approved by the Securities and Exchange (SEC), will become effective 60 days after SEC approval.
For more information please visit the FASB Web site at www.fasb.org and the PCAOB Web site at www.pcaob.org.
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