S14 Q24

The examiners report didn't accept a % of net income as a potential materiality standard because the intended users of the SAO are focused with solvency. But investors can be an intended user and that standard could influence their decision making. Was this not accepted because this is an older exam?

Comments

  • edited October 2020

    It's interesting that the examiner's report mentioned nobody got full credit on this question. I think that pretty clearly indicates the graders had unreasonable expectations. It sometimes happens that the guidance changes but in this case I don't think it did.

    Strictly speaking the graders were correct but I believe they invoked information that was not specifically on the Exam 6-US syllabus. I know from outside experience that % of net income might be more appropriate for an actuary performing an appraisal of a company that is being bought or sold, or for investors, but I couldn't find that information anywhere in the official syllabus.

    Chapter 16 in Odomirok says:

    • The intended purpose of Smith’s opinion was to satisfy the requirements of the NAIC. The intended users were the company’s management, the directors of its board and state regulatory officials.

    But that was specifically for the example SAO in Odomirok. The exam question didn't specify a purpose or user. The graders assumed the purpose was as stated for the Smith example.

    But let's assume the intended users are as in the Smith example. ASOP 36 says:

    • The actuary should understand which financial values are usually important to the intended users of the statement of actuarial opinion and how those financial values are likely to be affected by changes in the reserves and future payments for losses and loss adjustment expenses. For example, for a statement of actuarial opinion for an insurance company to be used for financial reporting to insurance regulators, materiality might be evaluated in terms of the company’s reported reserves or statutory surplus.

    It doesn't say anything about % of net income not being acceptable. It's good to think through this but don't stress too much about it. There are always a couple of questions or parts of questions on the exam that few or none get correct. If you are well-prepared, you will be able to answer almost all of the other questions.

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