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Part $1$

Distinguish between the evaluation of the adequacy of insurance coverage and the verification of prepaid insurance. Explain which is more important in a typical audit.

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Part $1$

A$.$

The evaluation of the adequacy of insurance is to inspect each insurance coverage to ensure its$$ existence; however, the verification of prepaid insurance is performed to verify if the client made the payments in the account. The evaluation of the adequacy of insurance coverage is more important because the insurance coverage is usually a large dollar amount that could materially affect the financials if overstated.

B$.$

The evaluation of the adequacy of insurance is to verify the insurance contracts have the coverage the client$$ lists; however, the verification of prepaid insurance is to verify that the coverage will cover the loss of the existing assets. The verification of prepaid insurance is more important because it is more important to verify that the insurance will cover the assets than it is to verify the accuracy of the coverage amount.

C$.$

The evaluation of the adequacy of insurance is a test of reasonable protection against the loss of existing$$ assets; however, the verification of the prepaid insurance is performed to determine whether the balances represent proper charges against future operations. The evaluation of adequacy of insurance coverage is more important because of the potential loss due to$$ under$-$insurance.

D$.$

The evaluation of the adequacy of insurance is a way for auditors to avoid doing substantive tests by looking at the reasonableness of the$$ coverage; however the verification of the prepaid insurance is done when the control risk is set to the maximum and the auditors cannot feel comfortable with the reasonableness of that coverage. The verification of the prepaid insurance is more important because it requires the auditor to perform substantive tests of details on the accounts and insurance coverage.