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Managerial Accounting Case Studies: Incremental Analysis and Decision Making

Question 1 —Business Risk and Inherent Risk Assessments "It is difficult for an insurance company to go broke in the space of a year, let alone a few months" Sydney Morning Herald, May 19–20, 2001. Required: a) How would you assess the business risk of HIH Insurance Limited? b) List several inherent risk factors effecting HIH at the financial report level and whether they would have contributed to an increase or decrease in the inherent risk assessment. Question 2— Legal Liability Sydney solicitor Bruce Dennis will be coordinating a class action for some 600 HIH shareholders against the auditors — Andersens (as the firm is now known). In addition, HIH's liquidator, Tony McGrath of KPMG Peat Marwick is also likely to seek to recover funds for HIH creditors. Required: a) Discuss the facts and findings of relevant court cases that Andersens should refer to in determining the likelihood of the partnership being held liable to: 1) clients 2) creditors. b) What conditions need to exist for a negligence action to be upheld? Question 3 — Ethics The HIH board of directors includes three former partners of the audit firm Arthur Andersen. In the past decade, Andersens has earned more than $8 million from auditing HIH books and $7 million for other services. Required: a) Why would HIH have wanted to hire prior members of its external audit team? b) What are the advantages of having the same firm provide both the auditing and consulting services? c) Indicate whether these circumstances represent a violation of ethical standards and give reasons for your answer. d) Outline the primary recommendations for audit reform proposed by the Ramsay Report and

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