The Role of the Actuarial Function in the Financial Statement Audit

An insurer’s reported profit often depends on assumptions about future claims, premium collection, reinsurance recoveries and the timing of cash flows. The actuarial function develops and challenges those assumptions, but responsibility for the financial statements remains with management. External auditors then assess whether the resulting estimates, disclosures and supporting controls provide a sound basis for fair reporting.

This work requires more than receiving a final actuarial valuation. Auditors need to understand how judgements were formed, which data influenced them, how uncertainty was assessed and who was accountable for key decisions. The audit trail therefore connects actuarial models with finance records, risk management, governance and the evidence retained for later review.

That connection is particularly relevant to Australian insurers navigating IFRS 17, APRA reporting obligations and increasing scrutiny of accounting estimates. At IASA Conference, finance executives, actuaries, auditors and operations leaders can compare practical approaches to turning actuarial work into reliable audit evidence while strengthening the relationship between technical teams and financial reporting functions.

Why actuarial judgement drives audit risk

Insurance liabilities are measured using models that combine historical experience with assumptions about future events. Changes in claims inflation, discounting, lapse rates, expenses or catastrophe exposure can materially affect reported results. For auditors, the central question is not whether every assumption will prove correct, but whether the method used to select and apply them is reasonable, internally consistent and properly supported.

The actuarial function is therefore central to the assessment of significant accounting estimates. It explains the basis for actuarial judgements, quantifies their sensitivity and identifies where management judgement may override model outputs. This explanation allows the audit team to distinguish between ordinary estimation uncertainty and a potential misstatement that requires correction.

A clear division of responsibility also supports effective challenge. The Chief Actuary may lead valuation work, while finance teams control the general ledger and disclosures. Auditors provide independent scrutiny, and the audit committee reviews the most consequential judgements. When those responsibilities are understood, questions become more focused, evidence requests are better targeted and the audit does not become a second, duplicative actuarial valuation.

Australia’s reporting and prudential context

Australian reporting adds several layers that actuarial and finance teams need to navigate together. AASB 17, which mirrors IFRS 17, became effective for annual reporting periods beginning on or after 1 January 2023. Its emphasis on liability for remaining coverage and incurred claims has increased the importance of assumptions, contractual service margins and transition decisions. AASB 9 also affects reinsurance contracts held, making asset and liability judgements interdependent.

APRA’s financial reporting requirements create a second lens for many insurers. A technically sound actuarial result must still support applicable prudential returns and capital reporting, while differences in definitions, timing or consolidation can require reconciliation. ASIC also influences corporate reporting, audit requirements and market expectations. Listed insurers additionally report under Australian Standards on Auditing, including ASA 540 on accounting estimates and ASA 620 on key audit matters.

Australia’s insurance market spans general insurers, life insurers, health funds, captives and friendly societies, with substantial activity concentrated in Sydney, Melbourne and Brisbane. Audit and actuarial work may also involve claims centres and administration teams in regional areas. The local conversational shorthand is similarly direct: the numbers must “add up”, the conclusions must “stand up”, and nobody wants to “cut corners”. A fair dinkum reconciliation and a documented challenge process remain highly valued in Australian boardrooms.

Building evidence that can withstand scrutiny

Audit evidence begins with a reconciled foundation. Auditors need to trace actuarial results into the general ledger, identify material movements and connect them to claims triangles, premium data, reinsurance settlements, expense allocations and discount curves. A valuation report is stronger when its figures can be reconciled without unexplained differences or manual adjustments that exist only in spreadsheets outside the main model.

The evidence should show how assumptions were challenged rather than merely approved. Useful support includes experience studies, sensitivity testing, benchmark comparisons, retrospective reviews and analysis of management overrides. For material judgements, the actuarial team should record the alternatives considered, the reason for selecting the preferred basis and the effect of uncertainty. This is particularly important when professional expertise or specialist judgement forms part of the audit conclusion.

Management representations remain relevant, but they cannot replace underlying evidence. Representation letters should confirm that key actuarial judgements and supporting information have been disclosed to the audit team, while the audit file should show how those statements align with the work performed. Consistent documentation reduces the risk that important reasoning is lost between model production, financial reporting and the final audit review.

Controls, data and the audit trail

Effective financial statement audits depend on controls surrounding actuarial processes as well as the models themselves. Important controls may cover source-data completeness, approval of assumptions, validation of calculations, maintenance of methodologies and authorisation of manual adjustments. The audit team needs to understand both the designed control and its operation: a documented control that is not performed consistently provides limited comfort.

Data governance is another critical area. Version control, access rights, change logs and clear ownership of spreadsheets or third-party platforms help establish which information supported the reported result. Service providers and software vendors may contribute to data, calculations or reporting, so contractual responsibilities and assurance reports should form part of the evidence map. Auditors may also ask how interfaces, data extracts and system changes affect the completeness of actuarial inputs.

The audit trail should make governance visible. Material changes, significant judgement calls and unresolved control deficiencies need an agreed route to finance leadership, the audit committee and external audit. Communication is most effective when it is timely. A short explanation of a changed assumption or model exception can prevent an isolated issue from becoming a late reconciliation problem or an unnecessarily broad audit adjustment.

Audit readiness priorities for Australian teams

Preparation works best when the actuarial function and finance function define responsibilities before fieldwork begins. The following priorities help teams identify gaps while there is still time to correct them.

Actuarial priorities

Finance and audit priorities

These priorities do not place every actuarial task within the external audit scope. They help teams determine what the auditor must test, what can be provided through management controls and where deeper assurance may be justified. Clear scoping reduces duplication while ensuring that significant judgements receive appropriate attention.

The most productive conversations often occur before the formal audit begins. A finance lead and Chief Actuary can jointly review high-risk balances, outstanding reconciliations and reporting changes, then agree how each issue will be evidenced. This collaborative approach also improves the audit committee’s understanding of where uncertainty is concentrated and which assumptions carry the greatest financial consequence.

Turning audit insight into professional action

IASA Conference brings together the people responsible for these connected processes: insurance executives, finance and accounting professionals, actuaries, operations teams, risk specialists and emerging leaders. Sessions on accounting, technology, risk management and governance can help participants see audit expectations from different perspectives and identify practical controls that work within real operating environments.

Technology providers and consultants in the exhibit hall can add further value by showing how actuarial data, modelling workflows, reconciliation tools and reporting systems support stronger evidence. Delegates who want to identify relevant partners can explore Vendor Connect online before the event and arrange focused conversations with exhibitors rather than relying on broad, untargeted demonstrations.

The strongest audit relationship is built before an issue becomes material, then maintained through clear evidence, open challenge and disciplined governance. Plan to join IASA Conference, bring a live actuarial or audit issue to a session or exhibitor conversation, and turn the day’s insights into a clearer actuarial-to-audit trail for the next reporting cycle.