QUESTION 1: OPERATIONAL AUDIT OPPORTUNITIES (AREAS)
1. Auditing the legal Expenses to attorneys representing policy holders.
This should include the comparison between legal fees incurred by Allstate staff attorneys and outside attorneys representing clients and scrutiny of time cards and bills
2. Audit of Allstate policyholder contracts. To find out about the terms of reference between Allstate and policy holders, and address questions of whether the legal services offered by lawyers are in accordance with the terms specified in the contracts and To what extent do contract terms cover the policy holders
3. Audit of legal Services to Policy holders; to addressthe following questions:Is the office receiving appropriate value for the dollars spent?, are policy holders satisfied with the legal services offered by the company?, are the legal services offered in conformity with applicable laws and standards?
4. Audit of Allstate Human Resource" To find out the level of skills and experience of both staff and outside attorneys and ascertain if the attorneys are competent enough to provide quality legal defence counsel to the policyholders?
Question 2:THE AUDIT PROGRAM FOR ALLSTATE INSURANCE
A. Area of Audit: Legal Expenses
Audit Objectives:
1. To determine why legal expenses were high and who was responsible
2. To ascertain which category of attorneys, staff or outside attorneys spent excessive time defending personal property and casualty suits
Audit Procedures:
1. Obtain and review a sample of bills and other relevant documents such as the billing activity statements from outside attorneys and the daily time logs of the staff attorneys
2. Compare the time spent by Allstate staff attorneys and outside attorneys
3. compare the legal fees incurred by Allstate staff attorneys and outside attorneys then check for the one with high expenses
4. Billing errors: Check for duplicate entries or double charges. Look for entries with identical wording on the same day or consecutive days.
5. Delayed billing: Look for delayed charges or "recaptured time," i.e. time billed in a later month than the work was performed.
6. Excessive rate increases: Check for billing rate increases or fluctuations.
7. Mystery entries: Question an entry or a portion of an entry that does not seem to fit. Make sure that you are not being billed for some other client work.
B. Area of Audit: Policyholder Contracts
Audit Objectives:
1. To determine if signed contracts are in place and policy holders have a copy
2. To verify whether legal services offered by attorneys are in line with the terms specified in the contracts
3. To establish whether contents of the contracts are clearly documented and can be easily understood by policy holders
Audit Procedure
1. Determine if Contracts are in place and establish whether these contracts are duly signed by both parties
2. Obtain and review policyholder contract documents from management, find out to what extent the terms of reference in the contract cover the policy holders
3. Confirm if terms of reference are properly and clearly indicated on the documents
4. Interview policy holders to verify if they understand the terms of reference in the contract documents
5. verify whether legal services offered by attorneys are in line with the terms specified in the contracts
6. Find out if both parties have signed the contract documents and the policy holders have been given a copy
7. establish if the legal services offered by lawyers in line with the terms specified in the contracts
C. Area of Audit: Legal Services
Audit Objective
1. To establish whether the office is receiving appropriate value for the dollars spent and that the policyholders are satisfied with legal services they receive from the company
2. To ascertain whether legal services are offered in conformity with applicable laws and standards
Audit Procedures
1. Examine thedaily time logs andthe billing activity statements for both attorneys and compare the hours to the actual cases they represent to ascertain if all the hours being claimed are genuine.
2. Interview policy holders and confirm if they are satisfied with the legal services offered to them by the attorneys
3. Obtain and review documents on laws and standards governing the conduct and quality of work by the attorneys
4. Attend a court session and verify whether the legal services offered by the attorneys are in conformity with the applicable laws and standards
D. Area of Audit : Allstate Human Resource
Audit Objective
To establish if the human resources (attorneys) are competent enough to provide quality legal aid services to Allstate policyholders
Audit Procedures:
1. Obtain and review records on individual files of all attorneys (staff and outside)
2. Check if there are signed contracts between attorneys and Allstate Insurance
3. Find out if there are policies and procedures put in place by the company to guide the conduct of these attorneys in the performance of their duties
4. Check the qualifications, competence, skills and experience of these attorneys. Are they competent enough to provide legal defence counsel to the policyholders
5. Compare the level of skill and experience between the two to ascertain whether the discrepancy could be the cause of high cost for outside attorneys
QUESTION 3: THE ASSERTIONS TO BE TESTED AND WHETHER THEY CAN BE AUDITED EFFECTIVELY AND EFFICIENTLY.
The assertions that can be tested include the following:
1. Existence (Validity): Only valid or authorized transactions are processed (i.e., no invalid transactions)
This assertion can easily be audited effectively and efficiently, for example we could test whether daily time logs records by individual staff attorneys were duly authorised by their supervisors. Those that are not would be considered invalid meaning processing such records for payment would be an audit query.
2. Occurrence (Cutoff): Transactions occurred during the correct period or were processed timely.
This assertion may not be audited effectively and efficiently as it is not very easy to establish that indeed the matter was committed by a policy holder and not a third party. It will require a high degree of skill and investigation to audit this area.
3. Completeness: All transactions are processed that should be (i.e., no omissions)
This can be audited effectively and efficiently because of the availability of time spent by attorneys to represent policy holders whose audit evidence is well documented. We could test whether all hours spend by Allstate staff attorneys and outsiders are well documented when calculating the salaries or expenses.
4. Valuation: Transactions are calculated using an appropriate methodology or are computationally accurate.
Auditors can effectively and efficiently test this assertion by performing recalculations to check whether correct rates were used when calculating legal fees for the attorneys.
5. Rights & Obligations: Assets represent the rights of the company, and liabilities its obligations, as of a given date.
This assertion can be audited effectively and efficiently. An example would be to test for ownership of liabilities (legal fees to attorneys) by reviewing the cases they represent if they are for Allstate policy holders or they are for others customers who are not Allstate policyholders.
6. Presentation & Disclosure (Classification): Components of financial statements (or other reporting) are properly classified (by type or account) and described.
This assertion cannot be audited effectively and efficiently for this type of audit as it relates to financial statements. It can only be well audited under financial statement audit
7. Reasonableness-transactions or results appear reasonable relative to other data or trends.
This assertion can be audited effectively and efficiently using analytical procedures. Test procedures would be to compare legal fees data of previous years of the same company or other companies in the same fields.
QUESTION 4: THE POLICIES AND PROCEDURES IN ALLSTATE INSURANCE
An analysis of the case study has I have seen that there are no policies and procedures in place by management. However, in accordance with the corporate-wide focus on continuous process improvement, Allstate managers and auditors alike were well aware of the fact that "time is money," especially in the case of high-priced professionals such as attorneys.
QUESTION 5:CONTROLS AND WEAKNESSES IN ALLSTATE NSURANCE
Controls in Allstate Insurance
1. One of the controls identified in the case study is that time and expense required defending personal property and casualty suits had been measured and recorded by both staff attorneys and outside attorneys.
2. The basis for quantitative comparison and assessment did exist which made it easy for time spent by staff attorneys defending property and casualty suits filed against Allstate policyholders to be compared with the time spent by outside attorneys
Weaknesses in Allstate Insurance
1. No established standard specified the amount of time attorneys should spend defending personal property and casualty suits filed against Allstate policyholders
2. No operational control procedures were in place to prevent wasted time, or to detect it on a timely basis even though management knew that time is money
3. Management had never critically examined the time spent defending legal suits, and a detailed audit of the legal defence process had never been performed.
4. Neither the auditors nor management had directly compared the performance of staff attorneys with the performance of outside attorneys.