Dear Member of the Audit Committee:

The Global Public Policy Committee (GPPC) has a public interest objective to enhance quality in auditing and financial reporting. In a paper published at the beginning of 2020, we addressed the implementation of IFRS 17 Insurance Contracts and suggested a number of questions for those charged with governance of insurance entities to pose to management and their auditors about implementation plans, progress and accounting policy decisions.

As a member of an Audit Committee of an insurance entity your role is essential in ensuring the quality of financial reporting. This paper is designed to help you in one element of that role - oversight of your auditors; specifically, your auditor’s approach to auditing estimates and associated judgements made in the application of IFRS 17.

We believe this paper will also be helpful to auditors because their audits of estimates and associated judgements are expected to follow the approach set out in this paper, and the examples and suggested procedures may guide their approach. Your auditor will likely also have a more granular audit programme, and many more pages of guidance for applying their procedures, but if this paper facilitates your interaction with your auditor and your oversight of their approach to auditing estimates, it will have accomplished its objective.

As we discussed in previously published papers on implementation, IFRS 17 will impact many stakeholders, will have significant impacts for insurers across many areas, and will introduce new areas of estimates and associated judgements.

In addition, since the standards for auditing accounting estimates and related disclosures were recently enhanced, we believe that publishing this paper now, in advance of the IFRS 17 effective date, may help to achieve high quality financial reporting.

For many insurance entities, there may be an increased risk of material misstatement arising from estimates made under IFRS 17, owing in part to the extent of change in the accounting and financial reporting for some entities. For many Audit Committee members, even those with many years of experience in reading the financial statements of the entity which you serve, the ability to leverage that historical knowledge and intuition to understand the results under IFRS 17 will be challenged in the early years of adoption. This makes it more critical for management, Audit Committees, and auditors to refresh their understanding of the risks of material misstatement. Among other changes, IFRS 17 introduces new estimates necessary for the new financial reporting model and increases complexity and subjectivity in some of those estimates. Of course, the level of changes for the auditors will undoubtfully be different from one country to another depending on the level of changes between the current local standard and IFRS 17.

In this paper, through examples, discussion, and insights, we highlight how the enhanced audit requirements may impact the auditor’s effort to identify and assess the risks of material misstatement and consequently plan their audit response to the identified risks, including the degree to which they plan to evaluate and rely on controls as part of their testing strategy.

While there are many estimates and associated judgments in IFRS 17, we focus on the following in this paper:

• future cash flows,
• the discount rate,
• the risk adjustment, and
• the contractual service margin (CSM).

To respond to the risk of material misstatement, the auditor must design and perform tests to obtain sufficient appropriate audit evidence. The higher the assessed risk of material misstatement, the more persuasive the evidence needs to be. We emphasise the implications of this to the audit approach and, in section 3, summarise the two most frequently used approaches in auditing estimates:

• testing how management made the accounting estimate; and 
• developing an auditor`s point estimate or range.

This section also emphasises the key elements of any estimate:

• methods and the related models used to apply them;
• assumptions; and
• data.

The auditor’s approach to these areas will likely differ - even within the audit of the same entity - as the approach depends on many factors including the type of business, contractual terns of products offered, risk and experience. We include examples of testing management’s determination of the CSM, highlight the situations in which an auditor may develop their own point estimate, and detail some common audit procedures to address methods and models, assumptions and data.

In Section 4 we include additional emphasis on the controls over processes and information systems. We emphasise this because IFRS 17, as discussed in prior papers, will require substantial redesign of controls, processes and information systems. Since there are high volumes of transactions and large amounts of data in most insurance businesses, having a robust system of control is usually very important. We provide suggested procedures and highlight, including through examples, how the auditor’s approach may be impacted by effective manual or automated controls.

In Section 5 we address the enhanced disclosure requirements related to estimates. IFRS 17 includes disclosures to enable users of financial statements to assess the impact on financial position, financial performance and cash flows. This enhanced emphasis on financial statement disclosures related to accounting estimates and estimation uncertainty makes it important to understand how the auditor’s approach and the timing and extent of their testing of those disclosures are impacted.

Finally, in section 6 of this paper we emphasise the need for specialised skills, knowledge and resources in auditing IFRS 17. We also provide thoughts on how auditors may assess the presence of management bias in estimates and provide some examples of how auditors may exercise their professional scepticism.

We hope that this paper complements the guidance that other international organisations and the audit firms themselves have produced, or will produce, to enhance quality in financial reporting. We appreciate the opportunity to assist you in your oversight of your auditor’s approach to auditing estimates and associated judgements in IFRS 17.