You are the audit manager on audit of Saveme Limited, the insurance company which sells various insurance products to the customers. You are responsible for the audit of this company for the year ending 31 March 20X8. The audit team is currently involved in planning of the audit, and you are responsible to ensure that the documentation about planning is in order. One of the key points that you highlighted to the audit team is detailed documentation of procedures in relation to third party experts engaged by the audit client and also the involvement of internal specialist in the audit work. Due to the nature of insurance business, the third party experts will be highly involved in this audit and it is important that the audit team properly understands the purpose and extent of their involvement. Saveme Limited has a significant amount of actuarial reserves on its balance sheet. Actuarial reserve is an estimated liability of the insurance company in relation to future insurance claims. To estimate this reserve Saveme Limited employed independent actuarial company Actuary Limited, which is well-known on the insurance market, has significant experience in this field and is used by the majority of insurance companies in the country as the third party expert. Reliable estimation of actuarial reserve requires significant judgement, high-level expertise and significant experience in this field. Due to significance and estimation uncertainty, the audit team has to ensure that the reserve is not materially misstated. Being the material and significant balance on the balance sheet, actuarial reserve is a significant area of audit focus and it was decided that the audit team would be expanded to include actuarial specialist to assist the audit team to assess the accuracy of the actuarial report prepared by the third party. Actuarial specialist will be part of the audit team on Saveme Limited, and she will be directly dealing with the third party actuary and Saveme Limited management. As actuary specialist engaged by the audit team is internally related to another department, her work will be supervised by her manager from her department, and the completion memorandum will be issued to the audit team at the end of the engagements with the results of work done, and description of all procedures performed.

(a) Explain what procedures the audit team should perform in order to rely on the work of third parties: both Actuary Limited and actuarial specialist engaged by the audit team. (10 marks)

(b) Assume that instead of Actuary Limited, Saveme Limited asked its audit firm to provide actuarial services. There is an actuary department in the audit firm, which has a good reputation in providing this type of services to the clients. The audit firm agreed to provide this service, and you will need to re-assess the independence of the audit firm.

Identify TWO independence threats that can be triggered if the actuary service is provided to the audit client, and provide safeguards that can be put in place. (10 marks)