Specialised Areas: formula sheet

Key formulas

Net claims incurred

Claims paid + Closing outstanding claims − Opening outstanding claims (adjusted for reinsurance)

Use this to test whether the claims expense in the revenue account agrees with the movement in claims liability.

Net premium earned (general insurance, basic logic)

Premium written − Reinsurance ceded + Opening unearned premium reserve − Closing unearned premium reserve

Used for reasonableness testing of premium income. Treat it as an analytical check, not the statutory format.

Reliance on expert

Evaluate competence, capabilities and objectivity → understand the expert's work → evaluate appropriateness as audit evidence (SA 620)

The appointed actuary's valuation is used this way. Reliance does not reduce the auditor's responsibility for the opinion.

Audit answer structure

Risk → Regulation → Procedure → Conclusion

Use this order for any descriptive question on insurer audit.

Audit anchor rule

Governing document + applicable statute = criteria for every audit test

Always test a transaction against the objects clause, the powers of trustees or managing committee, and the law before testing its arithmetic.

Funds flow check

For each fund: Opening balance + Additions (donations, grants, transfers) − Utilisation = Closing balance

Apply it fund by fund, never to all funds pooled together. Corpus is normally retained and not utilised for revenue expenses, so its utilisation should be nil. Restricted funds are utilised only for their stated purpose. The general fund is the one that carries income and expenditure.

Receipts and payments to income and expenditure

Surplus or deficit = Income of the year − Expenditure of the year (accrual basis)

Adjust receipts and payments for opening and closing outstanding items and prepaid or advance items. Capital receipts and capital payments do not enter income and expenditure.

Capital versus revenue donation

Corpus or specific capital donation → credited to fund or balance sheet; general donation → income

Treatment follows the donor's direction and the entity's policy. Check the donor letter.

Reporting structure

Provision → Facts → Conclusion

Use this form in written answers: state the rule, apply it to the case facts, then conclude on the opinion or action.

Net asset value per unit

NAV = (Market or fair value of scheme investments + other assets − liabilities and accrued expenses) ÷ units outstanding

Computed scheme-wise. Valuation follows the SEBI valuation norms. Test the inputs: investment values, accruals and unit count.

Mutual fund auditor independence

Auditor of the mutual fund ≠ auditor of the AMC

The mutual fund's annual accounts must be audited by an auditor who is not the AMC's auditor. Use this rule in independence questions.

Client money cover test

Client money available ≥ amounts payable to clients (credit balances in client ledgers)

Available client money means client bank balances plus funds lying with the exchange or clearing corporation for those clients. A shortfall signals possible misuse of client funds.

Segregation rule for brokers

Client funds and securities ≠ broker's own funds and securities

Client money must not be used for the broker's own trading or for other clients, except as the regulations allow. Treat any such use as a serious non-compliance.

Quick revision

• For each entity, recall its regulator first: RBI for banks and NBFCs, IRDAI for insurers, SEBI for capital market entities, CAG for government audit.
• Bank audit centres on advances: income recognition, asset classification and provisioning.
• Branch auditors report to the central auditor, who remains responsible for the overall report.
• The central auditor relies on branch reports but must apply judgment to them.
• Insurance audit depends heavily on actuarial valuation, so apply the rules on using an expert.
• NBFC audit checks registration, prudential norms and compliance with the RBI directions applicable to its category.
• CAG audit adds propriety and performance themes beyond regular financial audit.
• In government companies, the CAG appoints the statutory auditor and may give directions and conduct a supplementary audit.
• Not-for-profit audit starts with the trust deed, rules or statute, then checks that funds were used for the stated objects.
• Co-operative audit depends on the applicable co-operative law, so state it as the governing source.
• Capital market entities carry client money and investor protection risks, so test segregation and compliance.
• In unfamiliar sectors, fall back on risk assessment: understand the entity, its regulation and its key risks.

Common mistakes

• Applying Schedule III formats to an insurer's financial statements. Fix: State that insurers follow the formats prescribed by IRDAI regulations, with the Companies Act applying only where the insurance laws are silent.
• Saying the auditor calculates policy liabilities independently. Fix: Write that the appointed actuary values the liabilities and the auditor relies on this as expert evidence after evaluating competence, data and assumptions.
• Auditing an NPO like a company and looking only for profit misstatement. Fix: Start with the objects and application of funds. The main risk is misuse and incomplete recording, not profit.
• Treating all donations as income. Fix: Read the donor's terms. Corpus and specific-purpose gifts are credited to the relevant fund, not income.
• Treating the AMC's auditor as eligible to audit the mutual fund's accounts. Fix: Remember the independence rule: the fund's auditor must be different from the AMC's auditor.
• Writing only about the financial statements and ignoring SEBI compliance. Fix: In these entities, add the regulatory compliance angle. Check each answer for the rule, the breach and the reporting effect.

Exam tips

• Begin every answer with the regulatory framework in one line, since IRDAI-specific points score marks that a general company audit answer misses.
• In case scenarios, find the one fact that signals the risk, such as missing IBNR, late cut-off or unreviewed actuary data, and build the answer around it.
• For reserves, always mention the actuary as an expert and the auditor's retained responsibility.
• Use the provision-facts-conclusion structure and finish with the reporting effect.
• MCQs have no negative marking, so attempt every one and eliminate options that treat the actuary's work as replacing the audit.
• Begin each answer by naming the entity type and its governing document. It shows the examiner you have the framework right.
• Use provision-facts-conclusion form for every written answer. Keep the conclusion to one sentence.
• In MCQ case scenarios, look for clues about corpus, restricted funds, bye-law breaches and unrecorded cash. These are the usual traps.