Describe about the Audit and Assurance for Value Measurements and Complex Estimates.
1 - Business Risk and Inherent Risk Assessment: a
It is evident that the business risk of HIH is interrelated to the global, local and the control environmental factors. The risk is based on the understanding of the insurance sector along with the operational functionality of HIH so that it can fit itself under the “risk evaluation parameters”
Assessing the profitability and the structure: One of the best approach for assessing the business risk of HIH is assessing the profitability and the structure of the industry under which it operates. This will help in assessing the competitive environment of the industry regarding the rise in competition with the increase in price range. Because of risk assessment, handling of insurance in Australian industry becomes relatively easier who are new to the industrial regulations (Glover et al., 2016). The insurance and the superannuation commission of is the regulatory body of Australia holding the Australian Prudential Regulatory Authority.
Determining the insolvency risk: There are numerous procedures to decide the insolvency in terms of evaluating the roles of the risk assessment, which are based on the measurement of auditing risks. There are universal conformities, which are designed to clutch the ability so that it can meet the amount overdue of the company. By taking the help of profitability structure and liquidation risk, there is a much necessary need to emphasis the focus on the business corporation, which will have small numbers of customers to commence the industry (Griffiths, 2012). The conceptual framework is related to the capacity of meeting the debts of the company. Thus, there is a need to determine the solvency of the company which ultimately assessing the financial and the non-financial considerations.
The risk, which HIH currently has the ability to handle, is related to the auditing risk elements since it enables the issue of unqualified audit having its base on the certain class of financial reports. These are usually based on holding the procedure and planning in accordance with the risk such as, inherent risk, control risk and detection risk.
Inherent risk: The risk is concerned, with the risk of the financial statement where the HIH insurance company includes the preservation of the “solvency margins, charging sufficient premiums and the liquidity factor” of the organizations (Kogan et al., 2014). This consists of reinsuring the certain different policies as well as providing the file of marine insurance practices which largely from the professions of insurance.
Control risk: The control risk contains the material inaccuracy which the internal control system fails to identify. For HIH, it has been understood that the completeness and accuracy of the general ledger for reconciliation of the ledger and the bank account that has not been performed by the organizations (Griffiths, 2012). The financial position of the organizations is based on the degree of difference amid substantive process, which emphasizes a greater degree of reliance on external procedure of documentation. The addition of the ledger accounts and the different bank accounts helps in the valuation of physical assets of the organizations.
Detection of risk: The conceptual framework of risk detection is concerned with the different procedures of performing audit, which is based on the financial performance, that do not detect the errors in material or any assertions (Shin et al., 2014). This shows that the HIH must work on the timely planning and effectively reduce the circumstances of failure to identify the material misstatement. It is observed that HIH internal documents are unable to conduct the appropriate substantive procedures, as this will help to deal with better performance of insufficient planning and goodwill for future tax benefits.
2 Legal Liability: a.
This relates to the issue of unqualified audit procedure concerning the audit risk, which is not managed by the organization. The auditors have limited understanding of the inherent risk, which remains unrecognized from the alterations made in the previous year by HIH. The major weight that is brought forward on the auditing report, reflects the auditing practices followed by the HIH (Abbas & Iqbal, 2012). The auditor does not completely investigate the auditing practices, which it can notify to the different practices. The issues are usually related to the inadequate auditor’s independence, which is related with the presentation of the non-auditing work and understanding the HIH business operations due to high business risk.
For clients: The focus is based on the financial position of the organizations presenting the inadequate planning of goodwill as well for the deferred acquisition cost and the income tax benefits. It is reflected that if customers employ former auditors then this will create a major effect on the liberty of the external auditing. The study highlights that the former auditors have been holding a good collaboration with the auditing team. This consists of holding up higher influence on the current auditors depending upon the authority (Schmidt et al., 2016). It is noteworthy to denote that there is a presence of good relations between former auditors and the existing auditors as they have the ability to identify and handle the problems with the related customers, which they hold.
For creditors: The creditors need to stress on the smallest amount of solvency requirement, under which the organization can remain solvent at the time of announcement of director. The reports are interrelated with the determination of management based on going concern. It is noteworthy to denote that HIH must put their focus on the liquidity position of the organization where the liquidity position is mainly concerned with the operational and financial activities of HIH (Schmidt et al., 2016). The risk was primarily concerned with the pricing ability and outstanding claims of the organizations in compliance with the reservation policy of HIH for handling and working on the investments decisions. The representations is based on the proper treatment of the provisions where there is a need for prudential margins.
The conditions, which have paved the way for negligence actions of HIH insurance is primarily concerned with the accelerations of the alterations, made in the legislations. It is evident from the study that combinations of inferior risk pricing ability, reckless investments and under-reserving the policies led to exhaustion of financial resources of group.
Flawed corporate governance practices of HIH:
Based on the study, it is argued that deeper reasons for corporations bankruptcy largely comprises of the agency cost problem arising from the agency conflict amid the proprietors, managers and the debtors within the organizations. A large area of the problems was related to the alterations, which are politically reinforced with direct liability pattern of the government. The commencement of the legislative changes is related with the public liabilities and inadequate risk management plays the role for in appropriate management. Evidence provides that inadequate risk management is due to the failure in shaping the management policies and practices (Pitt, 2014). The directors have been careless to evaluate the strategy for investment with appreciation of risk, which is concerned with different sources of information.
Lack of independence for non-executive director:
From the previously mentioned information, it is understood that liberty of the non-executive directors is worthy to be questioned and most certainly, it is not as ideal as it appears to be. Among the five executive directors, two directors are past partner of Arthur Anderson secretarial firm. It was seen that HIH had paid a sum of $1.7 million to Anderson for “auditing services” along with this a sum of $1.631 million for the “provision of non-auditing services” (Bagshaw, 2013). As it is understood that, auditing services is recognized as main source of detractions from the independent auditor and other related directors. Either directly or indirectly, the practices of corporate governance of HIH are responsible for negligence actions, which clearly defines that the guiding principle or course of action due to lack independent analysis of the management.
Lack of independence information resources:
It is widespread evident that the accounting systems plays a significant role in the functions of commercial supremacy systems. For an organization like HIH, it is not practicable for the non-executive directors to gather and process the information essential for them to execute the responsibilities of their directors (Pitt, 2014). Therefore, the non-executive directors responsibilities has to be compromised as because there is no alternatives but to remain dependent on the accounting systems prepared and directed by the management. Unquestionably, this symbolizes inherent risks of the business systems.
3- Ethics: a
The focus has been on the inadequate evidence before the releasing the audit report with the changes that has been made concerning different accounts. On the introduction of close relationships with the non-auditing services has lead to the refusal of paid auditing services (Bagshaw, 2013). HIH wanted to hire the members for its external audit team are due to following reasons;
To auditors were familiar to the company
The auditors are thought to have the efficient experience with the different financial and pecuniary matters
The management is based on the holding up the work of audit in order to develop a strong relationship with the external auditors. The auditors need to have faith on the executives of clients to such an extent that it is not restricting the freedom of the external auditors.
The auditors need to preserve the professional skepticism, which executes the managerial activities of the companies, as the management and the auditors are unable to manage the financial statement.
The auditing companies should provide the non-auditing services with the management consultancy providing advice on the subjects which is related to tax. This will enable the company to provide auditing as well as non-auditing service to the clients. The purpose should be based on the handling the reliance where the information of the clients is centrally related with the sources of income.
On the other hand, conflict of interest is set to provide the auditing and the consulting services a set of discrepancies amid the management and the executives. The auditors hold the reports regarding the financial situations with the objectives of profit maximization of the organizations. The advantage of having the same firm provides the both auditing and consulting services as they are based on handling the audit activities of the business. Such facilities help in holding up the change for different impaired reports (Messier, 2016). The reports are based on identifying the errors of the company as it facilitates the auditors and the consultant to manage the information of clients. Such measures help in covering up the mistakes and provide compilation of the management reports. The regulatory measures is best solution to determine the accuracy of the financial reports where offering such services are beneficial for several accounting firms.
It was observed that the members of the organizations were not honest in discharge of their duties as they used to provide false and misleading information. Several of its members were involved in unethical practices where they fail act honestly in discharge of their duties. Arthur Andersen deteriorated the situations with the subsequent collapse of the Enron. The organization also found him guilty of obstructing the justice for the destructions of the work papers (Rikhardsson & Dull, 2016). Such circumstances represent a violation of the ethical standard of the organization, which is beyond the ethical limit for any corporate firms. The employees should commit themselves in discharge of their ethical duties while dealing with their customers. The statement is based on the conducting the rules and regulations with appropriate codes and corporate standards. This consists of disclosure of information for appropriate accounting practices.
The report recommends the policies regarding the governance and the financial reporting under the CLERP 9 amendments, which are as follows;
Lead engagement partner and review the rotation of partner after five years which should extend to key senior audit personnel as well;
The waiting period for audit partners to join a company board or any top management should be extended from two years to four years, which should also include the senior personnel of the audit firms involved in the auditing activities.
Generally, the above stated recommendations are aimed at recognizing and addressing the issues for the corporate groups. The recommendations are aimed at improving the financial reporting and audit functions in order to disclose the mattes, which affects the audit independence and disclosure of additional financial information’s. The recommendations are aimed to recognize the responsibility by spreading the long chain of managerial functions necessarily to be performed by the employees.
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