November 16, 2023
Practical Methods for Management to Evaluate Actuarial Loss Reserves
The American Institute of Certified Public Accountants (AICPA) released Statements on Auditing Standards (SAS) updates applicable to audits of financial statements for periods ending on or after December 15, 2023, including but not limited to:
- SAS 143 – Auditing Accounting Estimates and Related Disclosures Prescribes a risk assessment process over accounting estimates and testing approaches in response to the assessed risk, including consideration of when the auditor might need to use the work of a specialist.
- SAS 144 – Amendments to AU-C Sections 501, 540, and 620 Related to the Use of Specialists and the Use of Pricing Information Obtained from External Information Sources Provides clarification on the use of a specialist, whether it is management’s specialist or the auditor’s specialist. Specifically, SAS 143 enhances the language around estimates to convey that, even when management uses a specialist, it is management’s responsibility to: (a) determine the methods, assumptions and data sources needed for the estimate, and when changes are needed to these items, (b) understand the degree of estimation uncertainty, including by considering the range of possible outcomes, and (c) address estimation uncertainty, including selecting a point estimate and related financial statement disclosures.
This white paper, co-authored by Johnson Lambert and Pinnacle Actuarial Resources, may be used as a guide for management to understand the actuarial estimates and what methods and assumptions cause greater variability in the reserving process, and as such are more likely to be subject to further evaluation by auditors.