CMA Intermediate · Corporate Accounting and Auditing · Auditing of Different Types of Undertakings
An auditor of a general insurer is testing premium income. Which procedure gives the best evidence that premium has been recognised in the correct period?
Comparing policy risk commencement dates with the period of booking and testing the unearned premium reserve best proves correct period recognition, since premium is recognised from the start of risk cover and the unexpired part is deferred.
- ACompare risk commencement dates on policies with the period in which premium is booked, and test unearned premium reserveCorrect
- BConfirm only the closing bank balance
- CCheck the directors' remuneration register
- DVerify the fixed asset register
Explanation
Premium is recognised from the commencement of risk cover, with the unexpired portion carried as unearned premium reserve. Matching the risk start dates to booking period and recomputing the reserve tests cut-off. The other procedures do not address premium recognition.
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