Auditing Essay: Assessing Business Risks In Enterprises.

Describe about the Auditing of Business Enterprise for Concern.

1 (a) Business Risk of HIH Insurance Limited

As rightly put forward by Leung et al. (2015), it is imperative to assess the business risk related to the operations of HIH Insurance Limited. Business risk refers to different factors that can act as a hindrance in the process of achievement of the organizational goals as well as objectives. Again, the business organizations face the risks owing to different reasons. The present study primarily concentrates on the different risks that can affect the operations of the business enterprise for going concern issues. However, there are certain contributing factors that increase the risk proposition of the business for the subsequent financial year. Again, the loss of the consumers, huge financial risk, decline in the profitability and excessive trading of different business activities and less number of products are the important business risks that the management of a corporation faces Arens et al. (2009). The primary reason behind the business risks are high level of competition and different lawsuit among many others.

The present study primarily concentrates on the case study based on the operations of HIH Insurance Limited. Furthermore, the current study also refers to the evaluation of the business risk that in turn can facilitate the process of proper analysis required for conducting the business for future analysis (Gay and Simnett 2009). Based on the evaluation of the business risk, the management can identify the challenges that an organization face and usage of expensive stratagem in the upcoming financial year.

The primary objective of the present study is to analyse different state of affairs of the corporate governance of the company HIH prior to the period of the collapse. The analysis of the corporate governance reflects different warning signs indicated by the supervisory authority in the process of determination of different actions that are facing different challenges. The primary concentration remains on the amount of investments provided by the shareholders of the organization, finances of the policyholders for the process of detection and supervision of different asset risks concerns (Messier Jr 2016). The investment stratagem of HIH Insurance Limited takes into consideration the assessed risk ensuing from underwriting performance. The risk mainly occurs from different reinsurance strategies that occur due to the asset risk (Messier Jr 2016). This also helps in ensuring that there remains a neutral influence of different outcomes of investment acquired from the entire risk profile known as “HIH Board”. The characteristics and nature of the risk are appropriately indicated in different investment guidelines declared by the company HIH Insurance Limited. The company also has an investment committee that intends to formulate different suggestions for asset allocation. However, the present rules and regulations comprises of different boundaries as well as exclusions on identified asset categories (Arens et al. 2011). Furthermore, the investment committee also attends meetings in each quarter for examining different process of allocation of asset. Therefore, the primary intention of the study is to highlight the level of risk tolerance of board as indicated in the invested portfolio. A thorough assessment of the operations of the organization reveals the fact that the company faces the risk of compliance (Elder et al. 2011). As indicated in the current case study on HIH Insurance Limited, the company faced different types of challenges as regards the pricing strategies and at the same time inadequate reserve. The management of the company decided to offer insurance at a lower rate at a very low rate of premium. The strategy of diminishing the premium for the insurances decreased the stream of revenue of the corporation leading to the failure of the corporation in maintaining the required fixed assets for providing coverage against the liabilities of the corporation (Arens et al. 2012). Moreover, the policy of decreasing the overall rate of premiums for the insurances also affected the process of capital formation of the company (Eilifsen et al. 2013). Again, the administration of HIH has committed material misstatements in the financial announcements that refer to the inadequacy of reliability, clearness and ethical conduct of the corporation (William et al. 2016). This again leads to the loss of reputation and reflects the reputation risk. The study also indicates different risks that the corporation might face because of the intimidating expansive strategies of the company. The policy of entering into a new market increased the business risk as the company has inadequate knowledge regarding the business environment the new emerging market.

Inherent risk factors that can affect the financial reporting of HIH Insurance Limited

 As rightly indicated by Arens (2016), the inherent risk indicates to different risks faced by a business entity that occurs in absence of any kind of actions that might take into account the likelihood as well as influence of the risk. The management of the business can analyse as well as interpret the overall process of assessment of risk. A detailed evaluation of the current case study on HIH Insurance Limited can assist in comprehending different inherent risks that in turn can be associated to the business operations of the corporation HIH Insurance Limited. The detected inherent components of the risk for the company HIH Insurance comprises of the exaggeration of the cash balance that subsequently can replicate augmented working capital (Arenns 2016). Furthermore, the inherent risk factors also comprises of underestimation and at the same time understatement of creditors that lead to inappropriate representation of the total working capital of the corporation. Again, the inherent risk can also generate out of the exaggerated representation of the debtors of the corporation that again can lead to the augmentation of the working capital of the corporation HIH Insurance Limited. Therefore, it can be hereby ascertained that the material misstatement can also lead to different types of inherent risks. Moreover, as per the case study, it can be hereby established that evaluation of the risk of the corporation HIH Insurance has helped in the process of replication of the poor condition of the financial health of the corporation. This in turn has forced the administration of the corporation to blow up the data on the sales revenue (William et al. 2016). Again, as per the case study, it can be hereby ascertained that HIH presented concocted report and made false declaration regarding the achievement of the revenue targets and at the same time profitability, solvency and operational efficiency.

Clients:

The particular company HIH Insurance limited mainly focuses on the operational activities of the Royal Commission regarding the finding out of the accounting factors (Comino 2015). It has been found that in the year 1971, the audit firm Arthur Anderson had completed its external auditing that began from the year of collapse that is 2001. Therefore, the clients mainly prefer to take assistance about the many audit risks that might occur regarding the subject with the common laws and cases.  

Creditors:

The auditors mainly play a vital role regarding involvement of the effective control over the avoidance of the associated errors and the mistakes. It has been found that in case of Pacific Acceptance Corporation Limited Vs Forsyth, the auditors believe that the opinion of the auditors depends on the financial reports of the firm in compliance with the matters that govern the required standards and the accounting laws in an accurate manner (Gamertsfelder 2016). The function of an auditor is to look over the points that are associated with the performances of the duty in the due course of time. This is mainly associated with the company Kingston cotton mill that indulges in the utmost care intelligence for the purpose of the future analysis (Drinnan and Campbell 2015). The auditors require the essential skills along with their expertise in order to carry out their activities regarding auditing. The auditors take the investors and the creditors into consideration for any type of assistance for use of the financial statements.

Facts and Results Regarding the Case of Andersen

It is a vital factor to uphold all the elements related to the negligent actions and this should be proven. There are mainly four elements that are found within the negligent case and these include – breach of duty, proximate damage and cause, duty and cause in fact.

The first situation is the determination or the identification of the fact that whether the auditor of the firm had any type of duty towards the plaintiff (Zadek et al. 2013). Therefore, for this factor, the relationship between the plaintiff and the auditor is counted. Therefore, the particular duty can be considered as the established duty.

The second situation is the identification of the fact that whether the auditor has failed to act any duty which he should perform. The liability for the negligence should arise when the individual fails to act its duty with due care.

The third situation is that the claimant of the case should prove that particular action of the auditor has resulted into real injury. It can also be said that whether the auditor has not performed the particular action then the claimant might not suffer from the injury.

The fourth situation is that the auditor of an organization is only liable for the particular damages which it might have foreseen (Furnham and Gunter 2015).

The fifth situation is that the claimant should prove the negligence of the actions of the auditor that have resulted into a real damage.

It has been noted that an organization should hire an external audit team as there are various reasons for that. The main causes for hiring an external audit team are as follows:

The management of the firm generally has to work with the firm’s auditors most of the time. Thus it can be said that the management team and the auditors of the firm are much close due to their work. Therefore, a good relationship might occur between the auditor and the management department of the organization.

It has been found that the external auditor is familiarized to the general functioning, laws, policies, rules and regulations of the organization.

In addition to these, the management of an organization commonly work closely with the firm’s auditors such that the management might form a good relationship with the auditor.

The advantages for the engagement of the external auditor to the consulting services are as follows:

It has been found that the auditor is mainly related to the business of the customer. Therefore, both the effort and the time consumption for knowing the particular entity will be saved.

It has been noted that the auditor has substantial knowledge regarding the business of the customer such that it can serve both effective and efficient consulting (Samkin and Deegan 2012).

Additionally, the auditor along with his experiences with the particular customer might offer a unique solution to every issue.

Lastly, there is also savings in accordance to the costs, only if the auditor is allocated as the consultant of the particular organization.

It has been found that as per the case study of HIH insurance limited, there are some ethical issues that include the audit profession which has contributed to the collapse of the firm. It has been noted that within the firm HIH insurance limited, there were some ethical dilemmas that might exist when the firm faces the particular situation. This situation occurs when the tradeoffs is needed between the interests and the ideals. Therefore, the auditor should act accordingly with the ethical standard and for the shareholders’ interest. Thus, auditor is needed to fulfil with all the five ethical standards that is confidentiality, objectivity, integrity, professional behaviour and professional competence (Arens et al. 2015). As per the case study, it has been found that the audit firm has obtained huge amount of fees from HIH insurance limited for both the services – audit and non-audit. Therefore, it should be counted that if it was ethical or not to serve such non-audit fees for the interest of the shareholders. The audit fees were not raised by the HIH insurance limited’s management; the Andersen declined the work amount on the audit of HIH insurance limited. Furthermore, this also used the relationship with the company’s management in order to consider the non-audit services and also to hike its fees. The close relationship between the audit firm Andersen and HIH insurance limited has allowed HIH to follow the accounting policies. The agreement of Andersen is unethical as the auditor is in a pressurized way.       

The statements provided by Ramsay as well as the CLEWRP 9 indicate different suggestions for augmentation of diverse auditing operations. However, the main recommendations for the purpose of improvement of auditing tasks refer to different facts that a particular person need not determinedly suggest that the auditor is independent. In addition to this, it is imperative to have appropriate disclosures in the annual statements (Arens 2012). In addition to this, the company also needs to have declarations as regards the contentment of the committee with the non-audit operative services. The documents on the judgement of the committee provide different recommendations that can affect the overall auditing operations effectually. In addition to this, different independent audit professionals need to execute the performance requirements concerning the assessment of financial announcements.

References

Arens, A. A., Elder, R. J., Beasley, M. S., and Jones, J. 2015. Auditing: The Art and Science of Assurance Engagements. Pearson Canada.

Arens, A.A., 2016. Auditing and Assurance Services: Student Value Edition. Prentice Hall.

Arens, A.A., Best, P., Shailer, G., Fiedler, B., Elder, R.J. and Beasley, M., 2011. Auditing and assurance services in Australia: an integrated approach. Pearson Education Australia.

Arens, A.A., Elder, R.J. and Beasley, M.S., 2012. Auditing and assurance services: an integrated approach. Prentice Hall.

Comino, V., 2015. Australia's' Company Law Watchdog': ASIC and Corporate Regulation. V Comino, Company Law Watchdog-ASIC and Corporate Regulation (Thomson Reuters, Australia 2015).

Drinnan, R. and Campbell, J., 2015. Class action risk: Now and in the future.Governance Directions, 67(9), p.537.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson Higher Ed.

Furnham, A., and Gunter, B. 2015. Corporate Assessment (Routledge Revivals): Auditing a Company's Personality. Routledge.

Gamertsfelder, L., 2016. Disclosure laws and class actions: An irresistible relationship. Governance Directions, 68(5), p.276.

Leung, P., Coram, P., Cooper, B. and Richardson, P., 2015. Modern Auditing and Assurance Services, 6th edition, John Wiley and Sons. 

Arens, A., Bets, P., Shailer, G. and Fiedler, B. 2009. Auditing  and Assurance Services in Australia: An Integrated Approach, 7th edition, Pearson. 
Gay, G. and Simnett, R. 2009. Auditing and Assurance Services, McGraw-Hill. 

Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher Education

Samkin, G., and Deegan, C. 2012. New Zealand financial accounting. McGraw-Hill Education Australia.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and Assurance Services: A Systematic Approach. Auditing and Assurance Services: A Systematic Approach.

Zadek, S., Evans, R., and Pruzan, P. 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.