SAMPLE LETTERS COMMUNICATIONS BETWEEN THE ACTUARY AND THE AUDITOR

Transcription

1 SAMPLE LETTERS COMMUNICATIONS BETWEEN THE ACTUARY AND THE AUDITOR DECEMBER 1994 Canadian Institute of Actuaries The Canadian 1 Institute of Chartered Accountants

2 This booklet was commissioned by the Studies & Standards Department of The Canadian Institute of Chartered Accountants and the Council of the Canadian Institute of Actuaries. The contents of this booklet have not been adopted, endorsed, approved, disapproved or otherwise acted upon by the Auditing Standards Board of the CICA or the Council of the CIA. 2

3 Foreword These sample letters and reports are intended to help actuaries and auditors in their formal communications with each other. They will be updated from time to time to reflect new professional standards or any other developments of mutual concern to actuaries and auditors. Any comments would be appreciated, and should be sent to: David Moore, CA Research Studies Director The Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto, Ontario M5V 3H2 OR Rick Neugebauer Executive Director Canadian Institute of Actuaries #820, 360 Albert Street Ottawa, Ontario K1R 7X7 3

4 Acknowledgements Thanks are expressed to the following individuals for their participation in the preparation of this booklet: P.D. Arthur, CA, Ernst & Young, Toronto M.J.K. Brown, FIA, FCIA, The Wyatt Co., Toronto A.C. Muirhead-Gould, FCIA, Commercial Union Life Assurance Co., Scarborough D.J. Oakden, FCAS, FCIA, Tillinghast, Toronto J.D. Thorndycraft, FCA, KPMG Peat Marwick Thorne, Toronto E.R. Turner, CA, Office of the Superintendent of Financial Institutions Canada, Toronto L.D. Woodruff, CA, Price Waterhouse, Toronto G.P. Shields, CA, Senior Manager, Auditing Standards, CICA 4

5 TABLE OF CONTENTS INTRODUCTION Need for communication... 6 OVERVIEW OF THE COMMUNICATION PROCESS Purpose and form of communications between actuaries and auditors... 7 Timing of communications... 7 Confidentiality... 7 MAJOR ISSUES Applying the concept of materiality... 9 Performance of specified auditing procedures by the auditor Matters to be reported Management s assumptions - pension plan valuations Contingencies and subsequent events Evolving professional standards MATTERS ADDRESSED BY AUDIT PROCEDURES Examples of matters relevant to actuarial valuations that may be addressed by audit procedures SAMPLE LETTERS AND REPORTS Financial statements of an insurance enterprise A Letter from auditor to actuary - intent to use the work of the actuary B Report from actuary to auditor C Letter from actuary to auditor - intent to use specified auditing procedures performed by the auditor D Report from auditor to actuary on results of applying specified auditing procedures Financial statements of the sponsor of a defined benefit pension plan E Letter from auditor to actuary - intent to use the work of the actuary F Letter from auditor to actuary - intent to use the work of the actuary (extrapolation) G Report from actuary to auditor H Report from actuary to auditor (extrapolation) I Letter from actuary to auditor - intent to use specified auditing procedures performed by the auditor J Report from auditor to actuary on the results of applying specified auditing procedures Financial statements of a defined benefit pension plan K Letter from auditor to actuary - intent to use the work of an actuary L Letter from auditor to actuary - intent to use the work of an actuary (extrapolation) M Report from actuary to auditor N Report from actuary to auditor (extrapolation) [Note: For sample letter from actuary to auditor on intent to use specified auditing procedures performed by the auditor and the related report from the auditor see samples I and J] Explanatory notes to sample letters and reports

6 Need for communication INTRODUCTION The Joint Policy Statement issued by the Canadian Institute of Actuaries (CIA) and The Canadian Institute of Chartered Accountants (CICA) notes the need to establish communications between the actuary and auditor. Such communications are vital since the role and responsibilities of each professional regarding financial statements significantly affect the work of the other. This booklet provides: (a) (b) (c) an overview of the communication process between actuaries and auditors; a brief discussion of some major issues about which actuaries and auditors should have a mutual understanding; and sample letters and reports which may be useful in providing some consistency in written communications between actuaries and auditors. The sample letters and reports are intended to serve only as guidelines to both professions. They should be tailored to best meet the circumstances of each engagement. 6

7 Purpose and form of communications between actuaries and auditors OVERVIEW OF THE COMMUNICATION PROCESS Communications between actuaries and auditors normally focus on: the appointment and statutory responsibilities of each professional; the planned nature, timing and extent of the work to be done by each professional; the standards which will be applied by each professional; how each professional intends to use the work of the other; the results of the work performed by each professional which is being used by the other professional; and other matters of mutual interest. It is appropriate for much of the communications between actuaries and auditors to be oral. Both professionals will, however, find it useful to formally communicate certain matters in writing for the following reasons: (a) (b) written confirmation of certain matters will reduce the number of misunderstandings about how each professional will interact with the other; and confirmations and reports assist both actuaries and auditors in meeting the documentation standards of their respective professions. The identification of matters which should be communicated in writing is a matter of professional judgment. The example letters and reports in this booklet suggest certain matters that should be documented in writing. Timing of communications Timely communication is vital. Discussions should be held as early as possible in the planning stages of each engagement to reach an understanding of how each professional will interact with the other and to help coordinate work in areas of mutual concern. Also, as work is being carried out, matters of significance to both professionals should be discussed as soon as possible so that appropriate action can be taken on a timely basis. Confidentiality To promote fair financial reporting, the auditor and actuary should have the ability to meet when necessary and to discuss and to disclose to each other, in confidence, information believed by one professional to be relevant to the work of the other. Both auditors and actuaries are required to keep information obtained in the course of carrying out their duties confidential. For work related to federally regulated insurance enterprises, legislation gives both the appointed actuary and the auditor right of access to an enterprise s records and other information they consider necessary to perform their duties. However, the respective rights of actuaries and auditors specified by statute or regulation for pension plans or provincial insurance enterprises will vary among jurisdictions. It may be practicable for the auditor and actuary early in each fiscal year to jointly request from management and any other party involved written permission to exchange confidential information. 7

8 If, however, each professional seeks such permission separately and it cannot be obtained, the other professional should be informed that permission to reveal confidential information (which would, of course, not be described) has been withheld. 8

9 MAJOR ISSUES The following are some major issues which likely should be discussed by auditors and actuaries. Applying the concept of materiality Materiality is a concept common to both professions. It is important that the actuary and auditor discuss the application of this concept to: (a) (b) obtain an understanding of how and when each professional uses materiality guidelines; and reach agreement on materiality guidelines which are compatible with the work of both professionals. The application of the concept of materiality by both professionals is complex, and a detailed discussion of this matter is beyond the scope of this booklet. The following points are, however, relevant to discussions between actuaries and auditors on this matter. Judgment about materiality pervades virtually all work done by the actuary. The auditor applies the concept of materiality in all phases of the audit. Both professions view a misstatement to be material if a decision of a user of the financial statements, who has a reasonable knowledge of business and economic activities, would be changed or influenced by such misstatement or the aggregate of all misstatements. Because it is extremely difficult to predict who the financial statement users will be, or to determine the specific needs of known users, materiality becomes a matter of professional judgment for both the actuary and the auditor. The determination of materiality involves qualitative as well as quantitative considerations. It is not a fine line where one dollar less is not material or one dollar more is material. The materiality level (or levels) applied on an engagement represents a grey area between what is very likely not material and what is very likely material. The auditor s objective is to obtain sufficient appropriate evidence to provide reasonable assurance that the actuary s estimate of actuarial liabilities is reasonable within the context of the financial statements taken as a whole. Accordingly, if the auditor were to be engaged to express a separate opinion on, for example, actuarial liabilities or on the fairness of the data underlying the actuarial valuation, then the materiality levels would be determined in relation to that item only and not the financial statements taken as a whole (that is, more rigorous materiality guidelines normally would be applied). The auditor obtains evidence to support the opinion on the fair presentation of actuarial liabilities. A major component of this evidence is the knowledge the auditor obtains about the actuary s source data, assumptions and methods. The auditor normally considers, based on the available evidence, a point estimate or zone of reasonableness at or within which the actuary s estimate will be accepted as being reasonable within the context of the financial statements taken as a whole. The amount by which the actuary s estimate differs from the point estimate or falls outside the zone of reasonableness would be considered by the auditor to be a misstatement. The auditor would also consider whether there is a cumulative effect of bias in the estimate. This might be important if, for example, the actuary s estimate were to consistently fall at one boundary of the zone of reasonableness or move from one boundary to the other in successive periods. In these circumstances, the auditor might conclude that a misstatement has occurred. A significant part of the auditor s examination of the financial statements of an enterprise or pension plan often will be directed at assessing control risk. The assessment normally requires 9

10 tests of controls. The extent of testing of controls cannot be easily related to materiality, because it is difficult to establish a correlation between deviations from controls and the amount of any monetary misstatement that might result. Performance of specified auditing procedures by the auditor As part of the financial statement audit, the auditor will obtain reasonable assurance that the data provided by management to the actuary are complete and accurate. The auditor s procedures regarding data are, however, performed in the context of the audit of the financial statements taken as a whole. The auditor is not performing a separate audit of the data, and therefore, the nature, timing and extent of such procedures may, or may not, meet the needs of the actuary. As early as possible, the actuary and auditor should discuss the procedures regarding data planned by the auditor for the purposes of the financial statement audit. The auditor can use these discussions to decide whether it is necessary to consider amending the nature, timing or extent of any planned procedure. The actuary can use input from the auditor to assist in determining whether there are any other procedures the actuary would like the auditor to perform in addition to those which the auditor deems necessary for financial statement audit purposes. The auditor can provide the actuary with a report listing the procedures performed and the factual results of those procedures, following the reporting standards described in CICA Handbook Section The report will not express an opinion on the data, since the nature and extent of the procedures performed by the auditor normally would not constitute a separate audit of the data. Further, it is unlikely management or the actuary would engage the auditor to perform a separate audit of the data because, for example, the actuary often will use the work of the auditor only to supplement the actuary s own procedures to assess the reasonableness of the data. Matters to be reported There may be matters which arise during the course of the audit that may be relevant to the actuary. Such matters are called derivative since they are identified during the normal course of the financial statement audit and not as a result of other procedures performed by the auditor. The auditor and actuary should discuss and agree on the types of matters about which the auditor should make the actuary aware, either orally or in writing. In the case of federally regulated insurance companies, the auditor is required by law to report in writing to the chief executive officer and chief financial officer of the enterprise, with a copy to the appointed actuary, transactions or conditions that have come to the auditor s attention affecting the well-being of the company that in the auditor s opinion are not satisfactory and require rectification. The nature of these transactions or conditions is described in the CICA Auditing Guideline Transactions or Conditions Reportable Under the Well-Being Reporting Requirement in Federal Financial Institutions Legislation. They include the following: (a) (b) (c) transactions or conditions that necessitate a change in the accounting basis, or require note disclosure, because of doubts about the validity of the going concern assumption; other transactions or conditions giving rise to significant risks or exposure that have the potential to jeopardize the financial institution s ability to continue as a going concern; transactions or conditions indicating that the financial institution has significant weaknesses in internal control which render it vulnerable to significant risks or exposures that have the potential to jeopardize the financial institution s ability to continue as a going concern; 10

11 (d) (e) (f) (g) transactions or conditions necessitating a reservation in the auditor s opinion; transactions or conditions contradicting the assumption of management s good faith; transactions or conditions contravening legislated capital adequacy or liquidity requirements; and transactions or conditions specifically identified in the legislation as reportable. The appointed actuary of a federally regulated insurance company also has reporting responsibilities specified by legislation. These include a requirement to report in writing to the chief executive officer and chief financial officer of the company any matters that have come to the actuary s attention in the course of carrying out his or her duties that in the actuary s opinion have material adverse effects on the financial condition of the company and require rectification. The appointed actuary also is required to meet at least once a year with the company s directors (or its audit committee) and report, in accordance with generally accepted actuarial practice, on the company s financial position and, if directed by the Superintendent of Financial Institutions, on the company s expected future financial condition. Copies of these reports are available to the auditor. Management s assumptions - pension plan valuations Generally accepted accounting principles require that pension costs and obligations determined for accounting purposes be based on actuarial valuations which use management s best estimate assumptions. The auditor should be aware that under the CIA s Standard of Practice for the Valuation of Pension Plans, the actuary may, or may not, express an opinion on management s assumptions. If the actuary is expressing no opinion on management s assumptions, the actuary s opinion will contain a statement to this effect. If the actuary is expressing an opinion on the assumptions, the opinion also will contain a statement specifying the nature and extent of the actuary s involvement in the development of the assumptions. Contingencies and subsequent events Auditors and actuaries should be aware that their respective professional standards may take different approaches to defining matters such as contingencies and subsequent events. The auditor and actuary should annually discuss their respective approaches to these matters and determine how differences in interpretation may affect their work. Also, the auditor should note that the actuary is not responsible for identifying subsequent events after the date of the actuary s report to the auditor, which in some cases will precede the date of the auditor s report. The information provided by the actuary to the auditor regarding subsequent events would include a description of the manner in which such events have been treated in the actuarial valuation, which is a matter of professional judgment for the actuary. Evolving professional standards Both actuaries and auditors should be aware that the standards of each profession continue to evolve. New standards and other guidance issued by the CICA or CIA could affect the nature, timing and extent of matters to be communicated between the two professionals. 11

12 MATTERS ADDRESSED BY AUDIT PROCEDURES EXAMPLES OF MATTERS RELEVANT TO ACTUARIAL VALUATIONS THAT MAY BE ADDRESSED BY AUDIT PROCEDURES The following are examples of matters relevant to actuarial valuations that may be addressed by audit procedures. Note that the exact nature, timing and extent of the procedures to be performed would need to be agreed upon by the actuary and the auditor. Data Life Insurance Enterprises Have all relevant financial data (e.g., in-force amounts; premiums) and non-financial data (e.g., age; sex; health of insureds; smoking status) been captured in in-force master files, actuarial valuations files (or any other summary files prepared for the valuation) and other pertinent accounting records? Do the data reflect actual insurance contracts of the enterprise? Have the data been recorded properly and allocated to the proper period? Investments Do the enterprise s investment s exist? Have all investments been recorded? Are the recorded investments owned by the enterprise? Are the investments recorded at an appropriate carrying value? Are other features of the investments, such as market value, volume, maturity dates, yield rates, quality rating, call features and prepayment provisions, accurately described? Has all investment income been recorded in the proper amount and allocated to the proper period? Claims, benefit payments, payments to managers and agents, dividend payments and annuity Do recorded payments relating to claims, benefits, manager s and agent s fees and commissions, dividends and annuities reflect transactions that have taken place and that pertain to the enterprise? Have all payments been recorded in the proper amount and allocated to the proper period? Do recorded unpaid claims and other liabilities exist, pertain to the enterprise and have they been recorded at an appropriate carrying value? Have all such liabilities been recorded? 12

13 Premiums Do recorded premiums reflect transactions that have taken place that pertain to the enterprise and are they recorded in the proper amount and allocated to the proper period? Have all premiums been recorded? Do recorded unearned premiums exist, pertain to the enterprise and have they been recorded at an appropriate carrying value? Have all unearned premiums been recorded? Reinsurance Have the effects of reinsurance contracts (re assumed and/or ceded business) been recorded in the proper amount and allocated to the proper period? Are the accounts relating to reinsurance contracts complete? 13

14 Data PROPERTY AND CASUALTY INSURANCE ENTERPRISES Have all relevant financial data (e.g., in-force amounts; premiums; historical paid and unpaid claims; claims adjustment expenses (compiled by accident year or quarter, and by lines of business)) and non-financial data (e.g., policy counts; ratings) been captured in in-force master files, actuarial valuations files (or any other summary files prepared for the valuation) and other pertinent accounting records? Do the data reflect actual insurance contracts of the enterprise? Have the data been recorded properly and allocated to the proper period? Investments Do the enterprise s investments exist? Have all investments been recorded? Are all recorded investments owned by the enterprise? Are the investments recorded at an appropriate carrying value? Are other features of the investments, such as market value, volume, maturity dates, yield rates, quality rating, call features and prepayment provisions, accurately described? Has all investment income been recorded in the proper amount and allocated to the proper period? Claims, benefit payments, payments to managers and agents, dividend payments and annuity Do recorded payments relating to claims, benefits, manager s and agent s fees and commissions, dividends and annuities reflect transactions that have taken place and that pertain to the enterprise? Have all payments been recorded in the proper amount and allocated to the proper period? Do recorded unpaid claims and other liabilities exist, pertain to the enterprise and have they been recorded at an appropriate carrying value? Have all such liabilities been recorded? Premiums Do recorded premiums reflect transactions that have taken place that pertain to the enterprise and are they recorded in the proper amount and allocated to the proper period? Have all premiums been recorded? Do recorded unearned premiums exist, pertain to the enterprise and have they been recorded at an appropriate carrying value? Have all unearned premiums been recorded? Reserves Have reserve changes and payments been applied to the same accident year as the initial reserves? 14

15 Reinsurance Have the effects of reinsurance contracts (re assumed and/or ceded business) been recorded in the proper amount and allocated to the proper period? Are the accounts relating to reinsurance contracts complete? 15

16 Data Defined Benefit Pension Plans Have all relevant financial data (e.g., current and past salary/wage levels) and non-financial data (e.g., age; staff classification; date of start of employment; date of start of plan membership; data of termination of employment/retirement) been captured in the employee files? Do the data relate to actual plan members? Have the data been recorded properly and allocated to the proper period? Has there been a reconciliation of the total number of participants included in the participation data population of the pension plan with the total of eligible employees shown in the sponsor s payroll records? Investments Do the pension plan s investments exist? Have all investments been recorded? Are all recorded investments owned by the pension plan? Are the investments recorded at an appropriate carrying value? Are other features of the investments, such as market value, volume, maturity dates, yield rates, quality rating, call features and prepayment provisions, accurately described? Has all investment income been recorded in the proper amount and allocated to the proper period? Does the plan s investment mix comply with regulatory requirements? Benefits and expenses Do recorded payments relating to benefits and expenses (e.g., administrative fees, fees for investment managers and professional advisors) reflect transactions that have taken place and that pertain to the enterprise? Have all payments been recorded in the proper amount and allocated to the proper period? Do unpaid liabilities for unpaid benefits and expenses exist, pertain to the pension plan and have they been recorded at an appropriate carrying value? Have all such liabilities been recorded? Contributions Do recorded contributions reflect transactions that have taken place and that pertain to the pension plan? Have all contributions been recorded in the proper amount and allocated to the proper period? Do contributions receivable exist, pertain to the pension plan and have they been recorded at an appropriate carrying value? Have all contributions receivable been recorded? 16

17 EXAMPLE A SAMPLE LETTERS AND REPORTS FINANCIAL STATEMENTS OF AN INSURANCE ENTERPRISE SAMPLE LETTER FROM AUDITOR TO ACTUARY -Intent to Use the Work of the Actuary [Note: This letter is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 14 of this booklet.] Dear Actuary: The purpose of this letter is to confirm certain matters that we recently discussed regarding my intention to use, as audit evidence, your work as the appointed actuary of (name of insurance enterprise) as part of my audit of the enterprise s financial statements as at (date of financial statements) and for the year then ended. Audit objective and professional standards The purpose of my audit is to express an opinion whether the financial statements present fairly, in all material respects, the financial position of the enterprise as at (date of financial statements) and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. [Note 1] I will perform my audit in accordance with generally accepted auditing standards which require me to obtain sufficient appropriate audit evidence to support the content of my report. I plan to use certain elements of your work as audit evidence, based on my understanding of matters described below. Report on the results of your work You will provide me with a report on the results of your work containing the following: (a) (b) (c) (d) confirmation that your actuarial valuation conducted for the purpose of preparing the enterprise s (insert fiscal year) financial statements has been performed in accordance with accepted actuarial practice; [Note 1] a summary of the results of your valuation of (list those policy liabilities for which the auditor intends to use the work of the appointed actuary); [Note 2] information on subsequent events significant to your valuation or the financial statements or a statement that you are not aware of any such events; and (describe here any other specific matters regarding the appointed actuary s work about which the auditor requires information andwhich the actuary has agreed to provide). [Note 3] This report will be available for my review prior to the date of my auditor s report, which I anticipate will be (specify date). 17

18 Statutory reports and correspondence with regulators You will provide me with a copy of any reports to the enterprise s officers, directors, audit committee members or other officials designated by the directors which you have prepared to comply with statutory requirements. [Note 4] Alternatively, you will advise me if no such reports have been made. You will provide me with copies of any correspondence between you and regulatory authorities regarding matters which have, or which in your professional judgment could potentially have, a significant effect on your valuation or the enterprise s financial statements, or advise me that there has been no such correspondence. If you agree that the matters noted above are accurately described, please sign the duplicate of this letter in the space provided and return it to me. Yours truly, Engagement partner Name of appointed public accounting firm City & Date (On the duplicate of this letter, which should be signed by the auditor in the same manner as the original, type the following.) I agree that the matters noted above are accurately described. Appointed Actuary Enterprise Name Date 18

19 EXAMPLE B FINANCIAL STATEMENTS OF AN INSURANCE ENTERPRISE SAMPLE REPORT FROM ACTUARY TO AUDITOR [Note: This report is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 14 of this booklet.] Dear Auditor: I have made a valuation of the enterprise s policy liabilities as at (date of financial statements). These policy liabilities include (specify elements of the policy liabilities for which the auditor intends to use the work of the actuary). [Note 2] The results of my valuation of (specify elements of the policy liabilities for which the auditor intends to use the work of the actuary), together with the comparative figures for the year ended (date), are described in the attached Appendix. The following statements are made in response to your letter of (date) regarding your use of my work as audit evidence to support your opinion on the enterprise s financial statements for the year ended (date of financial statements). Applicable standards My valuation has been made in accordance with accepted actuarial practice. Nothing has come to my attention that would lead me to believe that (specify elements of the policy liabilities for which the auditor intends to use the work of the actuary) and changes therein resulting from my valuation have not been prepared in accordance with generally accepted accounting principles. [Note 1] Subsequent events My valuation took into account subsequent events from (date of financial statements) up to the date of my report. Attached is a schedule which sets out the subsequent events significant to my valuation or the enterprise s financial statements which have come to my attention and the manner in which these events have been treated in my valuation. OR My valuation took into account subsequent events from (date of financial statements) up to the date of my report. I advise you that I am not aware of any such events that could have a significant effect on my valuation or the enterprise s financial statements. Statutory reports I have provided you with copies of all my reports to the enterprise s officers, directors, audit committee members, or other officials designated by the directors that I have prepared to comply with statutory requirements. [Note 4] OR Since your last audit, I have not issued any report to the enterprise s officers, directors, audit committee members, or other officials designated by the directors in order to comply with statutory requirements. 19

20 Correspondence with regulatory authorities I have provided you with copies of any correspondence between me and regulatory authorities regarding matters which have, or in my professional judgment, could potentially have, a significant effect on my valuation or on the enterprise s financial statements. OR There has been no correspondence between me and regulatory authorities regarding matters which have, or which in my professional judgment could potentially have, a significant effect on my valuation or the enterprise s financial statements. Other matters (This section of the report would describe other matters, if any, which the appointed actuary and auditor agreed would be reported by the appointed actuary), [Note 3] (list) This report is intended solely for your use in connection with your audit referred to above. Should you have any questions regarding my valuation, I would be pleased to discuss them with you. Yours truly, Appointed actuary City & Date 20

21 Appendix - LIFE INSURANCE ENTERPRISE [Note: A separate schedule should be prepared for each type of policy liability for which the auditor is using the work of the actuary.] (Enterprise Name) 19X2 19X1 $ $ Actuarial valuation results Policy liabilities at beginning of year Normal increase (decrease) in policy liabilities during the year Unusual increase (decrease) in policy liabilities during the year Policy liabilities at end of year Surplus appropriation for negative reserves and cash values in excess of policy liabilities at end of year Other surplus appropriation (describe) Other matters [Note 3] 21

22 Appendix - PROPERTY-CASUALTY INSURANCE ENTERPRISE (Enterprise s Name) 19X2 19X1 $ $ Actuarial valuation results Outstanding net claims at year end Unallocated loss adjustment expenses included in outstanding direct claims at year end Premium deficiency provision at year end Expected loss ratio on unearned premiums Expected maintenance or servicing costs on unearned premiums (by major category) Unearned net premiums at year end Other matters [Note 3] 22

23 EXAMPLE C FINANCIAL STATEMENTS OF AN INSURANCE ENTERPRISE SAMPLE LETTER FROM ACTUARY TO AUDITOR -Intent to Use Specified Auditing Procedures Performed by the Auditor [Note: This letter is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 14 of this booklet.] Dear Auditor: The purpose of this letter is to confirm certain matters that we recently discussed regarding my intention to use the results of specified auditing procedures to be performed by you in connection with my actuarial valuation of the policy liabilities to be contained in the financial statements (name of insurance enterprise) for the year ending (date of financial statements). Actuarial valuation objectives and professional standards My actuarial valuation will be performed in accordance with accepted actuarial practice and regulatory requirements. These standards require me to arrange access to the records, accounts, and documents necessary to provide me with an understanding of the enterprise s obligations and resources expected to be available to meet those obligations. My use of the results of specified auditing procedures to be performed by you, is based on my understanding of matters described below. Information on the results of specified auditing procedures I anticipate that my valuation will be completed on (specify date of report of actuary). On or before (specify date in advance of actuary s report date considered appropriate to both professionals), you will provide me with a report on the results of applying the following auditing procedures: (Specify auditing procedures discussed and jointly developed by the actuary and the auditor) Your work will be carried out in accordance with those generally accepted auditing standards that apply to an engagement to report on the results of applying specified auditing procedures to financial information other than financial statements. I understand that you will not be performing an audit with the objective of expressing a separate opinion regarding the data used in my actuarial valuation. Statutory reports and correspondence with regulators You will provide me with a copy of any reports to the enterprise s officers, directors, audit committee members or other officials designated by the directors which you have prepared to comply with statutory requirements. [Note 4] Alternatively, you will advise me if no such reports have been made. You will provide me with copies of any correspondence between you and regulatory authorities regarding matters which have, or which in your professional judgment could potentially have, a significant effect on my valuation or advise me that there has been no such correspondence. 23

24 If you agree that the matters noted above are accurately described, please sign the duplicate of this letter in the space provided and return it to me. Yours truly, Appointed Actuary City & Date (On the duplicate of this letter, which should be signed by the actuary in the same manner as the original, type the following:) I agree that the matters noted above are accurately described. Engagement partner Name of appointed public accounting firm Date 24

25 EXAMPLE D FINANCIAL STATEMENTS OF AN INSURANCE ENTERPRISE SAMPLE REPORT FROM AUDITOR TO ACTUARY ON RESULTS OF APPLYING SPECIFIED AUDITING PROCEDURES [Note: This report is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 14 of this booklet.] To Actuary: I am reporting to you in response to your letter of (specify date) in which you indicated your intention to use the results of certain auditing procedures performed by me in connection with your actuarial valuation of policy liabilities for inclusion in the financial statements of (name of insurance enterprise) as at (specify date) and for the year then ended. Results of applying specified auditing procedures I have performed the following procedures which were specified in your letter referred to above: (List specific auditing procedures performed, including their nature, timing, and extent) As a result of applying the above procedures, I found the following: (State factually the results of applying the procedures) I performed the procedures described above in accordance with those generally accepted auditing standards that apply to an engagement to report on the results of applying specified auditing procedures to financial information other than financial statements. However, I have not performed an audit with the objective of expressing a separate opinion regarding the data used in your actuarial valuation and accordingly I do not express an opinion on these data. Correspondence with regulatory authorities I have provided you with copies of any correspondence between me and regulatory authorities regarding matters which have, or in my professional judgment, could potentially have, a significant effect on your valuation. OR There has been no correspondence between me and regulatory authorities regarding matters which have, or which in my professional judgment could potentially have, a significant effect on your valuation. Statutory reports I have provided you with copies of all reports to the enterprise s officers, directors, audit committee members, or other officials designated by the directors that I have prepared to comply with statutory requirements. [Note 4] OR 25

26 Since my last audit, I have not issued any report to the enterprise s officers, directors, audit committee members, or other officials designated by the directors in order to comply with statutory requirements. This report is intended solely for your use in connection with your valuation of policy liabilities referred to in your letter dated (specify date). Yours truly, Chartered Accountant City & Date 26

27 EXAMPLE E FINANCIAL STATEMENTS OF THE SPONSOR OF A DEFINED BENEFIT PENSION PLAN SAMPLE LETTER FROM AUDITOR TO ACTUARY -Intent to Use the Work of the Actuary [Note: This letter is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 10 and 15 to 16 of this booklet.] Dear Actuary: The purpose of this letter is to confirm certain matters that we recently discussed regarding my intention to use, as audit evidence, your work as the valuation actuary of (name of plan) sponsored by (name of pension plan sponsor) as part of my audit of the company s financial statements as at (date of financial statements) and for the year then ended. Audit objective and professional standards The purpose of my audit is to express an opinion whether the financial statements present fairly, in all material respects, the financial position of the company as at (date of financial statements) and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. I will perform my audit in accordance with generally accepted auditing standards which require me to obtain sufficient appropriate audit evidence to support the content of my report. I plan to use certain elements of your work as audit evidence, based on my understanding of matters described below. Report on the results of your work You will provide me with a report containing the following: (a) (b) (c) (d) a summary of the results of your valuation; information on subsequent events significant to your valuation or to the financial statements or a statement that you are not aware of any such events; (describe here any other information that the auditor requires and which the actuary has agreed to provide) confirmation of the following matters: the pension plan is a defined benefit plan as defined by PENSION COSTS AND OBLIGATIONS, Section 3460 of the CICA Handbook; you have confirmed with the plan administrator that the plan s provisions are up to date as at the date of your report on the results of your valuation; your valuation has been performed in accordance with the standards of the Canadian Institute of Actuaries; the amounts derived from your valuation are in accordance with generally accepted accounting principles as described in Section 3460 of the CICA Handbook (or alternatively, an explanation of how the amounts represent a departure from generally accepted accounting principles); [Note 6] and 27

28 (e) a statement that, in performing your valuation, you have used best estimate assumptions developed by management and that you are expressing no opinion on such assumptions. OR (e) a statement that, in performing your valuation, you have used best estimate assumptions developed by management, a description of the nature and extent of your involvement in the development of the assumptions and your opinion on such assumptions. This report will be available for my review prior to the date of my auditor s report, which I anticipate will be (specify date). If you agree that the matters noted above are accurately described, please sign the duplicate of this letter in the space provided and return it to me. Yours truly, Chartered Accountant City & Date (On the duplicate of this letter, which should be signed by the auditor in the same manner as the original, type the following.) I agree that the matters noted above are accurately described. Valuation Actuary Date 28

29 EXAMPLE F FINANCIAL STATEMENTS OF THE SPONSOR OF A DEFINED BENEFIT PENSION PLAN SAMPLE LETTER FROM AUDITOR TO ACTUARY -Intent to Use the Work of the Actuary (extrapolation) [Note: This letter is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 10 and 15 to 16 of this booklet.] Dear Actuary: The purpose of this letter is to confirm certain matters that we recently discussed regarding my intention to use, as audit evidence, your work as the valuation actuary of (name of plan) sponsored by (name of pension plan sponsor) as part of my audit of the company s financial statements as at (date of financial statements) and for the year then ended. Audit objective and professional standards The purpose of my audit is to express an opinion whether the financial statements present fairly, in all material respects, the financial position of the company as at (date of financial statements) and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. I will perform my audit in accordance with generally accepted auditing standards which require me to obtain sufficient appropriate audit evidence to support the content of my report. I plan to use certain elements of your work as audit evidence, based on my understanding of matters described below. Report on the results of your work Your most recent valuation of the plan, for the purposes of determining the pension costs and obligations of the company, was performed as at (specify date). You will be performing an extrapolation of the results of this valuation as at (specify date). You will provide me with a report containing the following: (a) a summary of the results of your valuation and extrapolation thereof; [Note 5] (b) (c) (d) information on subsequent events significant to your valuation or to the financial statements or a statement that you are not aware of any such events; (describe here any other information that the auditor requires and which the actuary has agreed to provide); confirmation of the following matters: the pension plan is a defined benefit plan as defined by PENSION COSTS AND OBLIGATIONS, Section 3460 of the CICA Handbook; you have confirmed with the plan administrator that the plan s provisions are up to date as at the date of your report on the results of your valuation and extrapolation thereof; your valuation and extrapolation thereof have been performed in accordance with the standards of the Canadian Institute of Actuaries; 29

30 the amounts derived from your valuation and extrapolation thereof are in accordance with generally accepted accounting principles as described in Section 3460 of the CICA Handbook (or alternatively, an explanation of how the amounts represent a departure from generally accepted accounting principles); [Note 6] and (e) a statement that, in performing your valuation and extrapolation thereof, you have used best estimate assumptions developed by management and that you are expressing no opinion on such assumptions. OR (e) a statement that, in performing your valuation and extrapolation thereof, you have used best estimate assumptions developed by management, a description of the nature and extent of your involvement in the development of the assumptions and your opinion on such assumptions. This report will be available for my review prior to the date of my auditor s report, which I anticipate will be (specify date). If you agree that the matters noted above are accurately described, please sign the duplicate of this letter in the space provided and return it to me. Yours truly, Chartered Accountant City & Date (On the duplicate of this letter, which should be signed by the auditor in the same manner as the original, type the following.) I agree that the matters noted above are accurately described. Valuation Actuary Date 30

31 Example G FINANCIAL STATEMENTS OF THE SPONSOR OF A DEFINED BENEFIT PENSION PLAN SAMPLE REPORT FROM ACTUARY TO AUDITOR [Note: This report is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 10 and 15 to 16 of this booklet.] Dear Auditor: I have performed an actuarial valuation of (name of plan) sponsored by (name of enterprise) as at (date). A summary of the results of my actuarial valuation is attached. The following statements are made in response to your letter of (date) in connection with your use of my work as audit evidence to support your opinion on the financial statements of (name of plan sponsor) for the year ended (date of financial statements). Type of plan The plan is a defined benefit plan as defined by Section 3460 of the CICA Handbook. Applicable standards My valuation has been made in accordance with the standards of the Canadian Institute of Actuaries. The financial statement items resulting from my valuation have been prepared in accordance with generally accepted accounting principles. [Note 6] Pension plan provisions I have confirmed with the plan administrator that the plan s provisions are up to date as at the date of my report on the results of my valuation. Management s assumptions My valuation was performed using best-estimate assumptions developed by management and I do not express any opinion on such assumptions. OR My valuation was performed using best-estimate assumptions developed by management. My involvement in the development of these assumptions included the following activities: (specify the nature and extent of the actuary s involvement). In my opinion, (state opinion on the assumptions in accordance with CIA standards). Subsequent events My valuation took into account subsequent events from (date of financial statements) up to the date of my report on the results of this valuation. Attached is a schedule which sets out the subsequent events significant to my valuation or the company s financial statements which have come to my attention and the manner in which these events have been treated in my valuation. OR 31

32 My valuation took into account subsequent events from (date of financial statements) up to the date of my report. I advise you that I am not aware of any such events that could have a significant effect on my valuation or on the company s financial statements. Other matters (This section of the report would describe other matters, if any, which the valuation actuary and auditor agreed would be reported by the valuation actuary.) (list) This report is intended solely for your use in connection with your audit referred to above. Should you have any questions regarding my valuation, I would be pleased to discuss them with you. Yours truly, Valuation actuary City & Date 32

33 Example H FINANCIAL STATEMENTS OF THE SPONSOR OF A DEFINED BENEFIT PENSION PLAN SAMPLE REPORT FROM ACTUARY TO AUDITOR (EXTRAPOLATION) [Note: This report is an example only, and should be tailored to best meet the circumstances of each engagement, taking into account matters discussed in pages 1 to 10 and 15 to 16 of this booklet.] Dear Auditor: My most recent actuarial valuation of (name of plan) sponsored by (name of enterprise) was performed as at (date). I have performed an extrapolation of this valuation as at (specify date). A summary of the results of my actuarial valuation and my extrapolation thereof is attached. The following statements are made in response to your letter of (date) in connection with your use of my work as audit evidence to support your opinion on the financial statements of (name of plan sponsor) for the year ended (date of financial statements). Type of plan The plan is a defined benefit plan as defined by Section 3460 of the CICA Handbook. Applicable standards My valuation and extrapolation thereof have been made in accordance with the standards of the Canadian Institute of Actuaries. The financial statement items resulting from my valuation and extrapolation thereof have been prepared in accordance with generally accepted accounting principles. [Notes 5 and 6] Pension plan provisions I have confirmed with the plan administrator that the plan s provisions are up to date as at the date of my report on the results of my valuation and extrapolation thereof. Management s assumptions My valuation and extrapolation thereof were performed using best-estimate assumptions developed by management and I do not express any opinion on such assumptions. OR My valuation and extrapolation thereof were performed using best-estimate assumptions developed by management. My involvement in the development of these assumptions included the following activities: (specify the nature and extent of the actuary s involvement). In my opinion, (state opinion on the assumptions in accordance with CIA standards). Subsequent events My valuation and extrapolation thereof took into account subsequent events from (date of financial statements) up to the date of my report. Attached is a schedule which sets out the subsequent events significant to my valuation and extrapolation or the company s financial statements which have come to my attention and the manner in which these events have been treated in my valuation. 33