Ind AS 117 measures groups of insurance contracts using fulfilment cash flows — the present value of future cash flows plus a risk adjustment for non-financial risk — plus a contractual service margin representing unearned future profit, under one of three models: the general measurement model, the variable fee approach for contracts with direct participation features, or the premium allocation approach as a simplification for short-duration contracts. The audit's first task is confirming the entity applied the correct model to each group of contracts, since VFA eligibility and PAA eligibility both have specific, testable criteria rather than being a free policy choice.
Audit procedures by component
- 01Test the contract grouping into onerous, no-significant-risk-of-becoming-onerous, and remaining groupsInd AS 117 requires this grouping at initial recognition, within annual cohorts — confirm contracts were not grouped in a way that offsets an onerous contract's loss against profitable contracts elsewhere in the portfolio.
- 02Independently assess the fulfilment cash flow assumptionsMortality, lapse, expense and discount rate assumptions should be current best estimates, consistent with observable market data where available — treat this the same as any other actuarial estimate reliance, tracing policy data back to source records.
- 03Recompute the contractual service margin roll-forwardThe CSM is released to profit as coverage is provided over the coverage period and absorbs favourable or unfavourable changes in estimates of future cash flows (but not changes that create or increase a loss, which hit P&L immediately) — test the mechanics of this roll-forward, not just the closing balance.
- 04Confirm onerous contracts were identified and the loss recognised immediatelyA group of contracts expected to be loss-making at initial recognition, or that becomes so later, must have that loss recognised in profit or loss immediately — it cannot sit inside a CSM, which cannot go negative.
Common practice, not a requirement
The premium allocation approach is only a permitted simplification where the coverage period of each contract in the group is one year or less, or where it is a reasonable approximation of the general model — confirm management actually tested the approximation, rather than defaulting to PAA because the contracts happen to be short-duration.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
- Audit documentationInd AS 37: provisions, contingent liabilities and contingent assets — the three-way splitThree categories, three completely different treatments — recognise it, disclose it, or say nothing. Getting the category wrong is the whole misstatement.
- Revenue, receivables & cut-offInd AS 109: financial instruments and the expected credit loss modelThe old model waited for a loss to be incurred before providing for it. ECL is built the opposite way — provide for the loss you expect, before it happens.
- Technology, data & AI in auditSA 520: analytical procedures, and why an unexplained fluctuation isn't a conclusionAn analytical procedure is only as good as the expectation it's measured against. Set the expectation after seeing the result, and the procedure proves nothing.
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- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
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- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.