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"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.

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:
i) clients
ii) creditors.
b) What conditions need to exist for a negligence action to be upheld?

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 CLERP 9. What impacts do you feel these changes will have on the practice of auditing?

1. Business Risk and Inherent Risk Assessments

a. It is apparent that the business danger of HIH is interrelated to the worldwide, neighborhood and the control ecological variables. The risk could be revealed on the comprehension of the protection business in and in addition, the way HIH can fit itself under the hazard appraisal parameters.

Evaluating the probability and the structure- One of the best approaches for surveying the business danger of HIH is surveying the gainfulness and the structure of the business under which it works. This will help in surveying the aggressive condition of the business in regards to the ascent in rivalry with the expansion in value go. On account of hazard evaluation, treatment of protection in Australian industry turns out to be generally less demanding who are new to the modern directions (Glover et al., 2016). The protection and the superannuation commission of is the administrative assortment of Australia holding the Australian Prudential Regulatory Authority.

Deciding the insolvency risk- There are measures to decide the indebtedness where the parts of surveying the hazard depend on the appraisal of inspecting dangers. There are general understandings, which have been to hold the limit with a specific end goal to meet the obligations of the organization under which it falls. With the assistance of productivity structure and bankruptcy chance, there is a need to put concentration on the business, which will have couple of clients to dispatch the business (Griffiths, 2012). The conceptual framework is identified with the limit of meeting the obligations of the organization. Hence, there is a need to decide the dissolvability of the organization which eventually evaluating the monetary and the non-money related contemplations.

b. The risk, which HIH can deal with, is worried with the inspecting hazard calculates as this helps issuing an unfit review in light of the specific money related proclamations. These are typically in light of holding the system and arranging as per the risk, for example, characteristic risk, control risk and recognition chance.

Inherent risk: The innate hazard is characterized as the hazard, which is worried, with the danger of the money related articulation where the HIH insurance agency incorporates the support of the dissolvability edges, charging adequate premiums and the liquidity component of the associations (Kogan et al., 2014). This comprises of reinsuring the specific diverse arrangements and giving the document of marine protection rehearses which to a great extent from the callings of protection.

Control risk: The control chance comprise of the material mistake which is not been identified by the interior control frameworks. For HIH, it has been comprehended that the culmination and exactness of the general record for compromise of the record and the ledger that has not been performed by the associations (Griffiths, 2012). The execution of the associations depends on the differential substantive process, which puts a more noteworthy dependence on outer documentation system. The incorporation of the record accounts and the diverse ledgers aids the valuation of unmistakable resources of the associations.

2. Legal Liability

Detection risk: The idea of hazard identification is worried with the diverse reviewing methods, which depends on the execution, which does not effortlessly distinguish the material blunders or any declarations (Shin et al., 2014). This expresses the HIH needs to deal with the convenient arranging and adequately lessen the conditions of not distinguishing the material misquote. It is watched that HIH inward reports can't lead the proper substantive methods, as this will adapt up to the better execution with respect to the deficient arranging and goodwill for future tax breaks.

a. This identifies with the issue of unfit audit method concerning the review chance, which is not overseen by the association. The auditors have restricted comprehension of the inherent risk, which stays unrecognized from the changes made in the earlier year by HIH. The real emphasis is advanced on the auditing report, which demonstrates the auditing practices embraced by the HIH (Abbas and Iqbal, 2012). The reviewer does not totally explore the inspecting rehearses, which it can inform to the diverse practices. The issues are generally identified with the deficient auditor independence as per the execution of the non-auditing work and realizing the HIH operations of HIH for expanded business risks. The cases are identified with the adequate evaluating techniques and practices with arranged auditing risk.

i. For customers:The concentration has been put on the execution of the companies representing the improper arranging of goodwill also for the conceded procurement cost and the income tax benefits. It is understood that if customers contract previous auditors then this will have the significant effect on the autonomy of the external auditing. It is gathered that the previous inspectors have been holding a high association with the examining group. This comprises of holding up higher impact on the present auditors relying on the authority (Schmidt et al., 2016). It is essential to mean that there is cozy connection between previous auditors and the current auditors as they can recognize and handle the issues related with the gatherings, which they affect and hold.

ii. For creditors:The creditors need to put accentuation on the minimum insolvency requirement, which is trusted that the association can stay dissolvable amid the season of presentation of director. The reports are connected with the assurance of administration in light of going concern. It is imperative to signify that HIH must put their attention on the liquidity position of the association where the liquidity position is fundamentally worried with the operational and money related exercises of HIH (Schmidt et al., 2016). The hazard was fundamentally concerned with estimating capacity and exceptional cases of the companies in consistence with the reservation strategy of HIH for taking care of and dealing with the ventures choices. The portrayals are generally in view of the treatment of the arrangements where there is a requirement for prudential edges.

3. Ethics

b. The conditions, which have made ready for carelessness activities of HIH protection is principally concerned with the increasing velocities of the modifications, made in the enactments. It is clear from the research that combination of inferior risk valuing capacity, careless investments and under-holding the strategies prompted depletion of money related assets of a group.

In light of the study, it is contended that more profound purposes behind companies insolvency to a great extent involves the agency cost issue emerging from the agency conflict in the midst of the proprietors, directors and the account holders inside the company. A noteworthy piece of the issues was identified with the progressions, which are politically strengthened with direct obligation example of the legislature. The initiation of the authoritative changes is connected with general society liabilities and insufficient hazard administration assumes the part for in fitting administration. Confirm gives that deficient hazard administration is because of the disappointment in forming the administration approaches and practices (Pitt, 2014). The executives have been careless to break down the system for speculation with valuation for risk, which is identified with the diverse data sources.

From the previously specified data, it is comprehended that freedom of the non-official executives is qualified to be addressed and unquestionably, it is not as perfect as it seems, by all accounts, to be. Among the five official chiefs, two executives are past accomplice of Arthur Anderson secretarial firm. It was seen that HIH had paid an aggregate of $1.7 million to Anderson for "examining administrations" alongside this a whole of $1.631 million for the "arrangement of non-evaluating administrations" (Bagshaw, 2013). As it is comprehended that, evaluating administrations is perceived as primary wellspring of degradations from the autonomous evaluator and other related executives. Either specifically or in a roundabout way, the acts of corporate administration of HIH are in charge of carelessness activities, which unmistakably characterizes that the directing standard or course of action because of independent evaluation of management.

It is across the board clear that the bookkeeping framework assumes a huge part in the elements of business matchless quality frameworks. For an association like HIH, it is not practicable for the non-official chiefs to assemble and prepare the data fundamental for them to execute the obligations of their executives (Pitt, 2014). Along these lines, the non-official executives; duties must be traded off as because there are no options however to stay subject to the bookkeeping frameworks arranged and coordinated by the administration. Undeniably, this symbolizes natural risks of the business frameworks.

Answers

a. The emphasis has been on the inadequate confirmation before the arrival of the audit report with the progressions that has been made in the distinctive records. The arrangement of cozy associations with the non-inspecting administrations has prompt the refusal on the expansion in the paid evaluating administrations (Bagshaw, 2013). HIH needed to enlist before the individuals from its outer review group are because of taking after reasons;

  1. To auditors were acclimated to the organization
  2. The auditors are accepted to have the viable involvement with the distinctive financial and fiscal matters
  3. The administration depends on the holding up the work of audit to build up a solid association with the external auditors. The auditor needs to believe the customer is official to such a degree, to the point that it is not affecting the independence of the auditors.

The auditors need to save the professional suspicion, which executes the administrative exercises of the organizations, as the administration and the auditors cannot deal with the financial statement.

b. The auditing organizations ought to give the non-reviewing administrations with the administration consultancy prompting on the matters identified with tax. This will empower the organization to give examining and non-evaluating administration to the customers. The objectivity depends on the taking care of the reliance where the data of the customers depends on the sources of income.

Then again, irreconcilable situation is set to give the evaluating and the counseling administrations an arrangement of disparities in the midst of the administration and the officials. The auditors hold the reports in regards to the budgetary circumstances with the targets of benefit expansion of the companies. The benefit of having a similar firm gives the both evaluating and counseling administrations as they depend on dealing with the review exercises of the business. Such offices help in holding up the change for various hindered reports (Messier, 2016). The reports depend on recognizing the errors of the organization as it encourages the auditors and the expert to deal with the data of customers. Such measures help in concealing the mistakes and give arrangement of the administration reports. The administrative measures is best answer for deciding the accuracy of the monetary reports where offering such administrations are useful for a few bookkeeping firms.

c. It was watched that the individuals from the associations were not legit in release of their obligations as they used to give false and misdirecting data. A few of its individuals were included in untrustworthy practices where they unethical practices genuinely in release of their obligations. Arthur Andersen disintegrated the circumstances with the consequent crumple of the Enron. The association additionally discovered him liable of discouraging the equity for the demolitions of the work papers (Rikhardsson and Dull, 2016). Such conditions speak to an infringement of the moral standard of the association, which is past as far as possible for any corporate firms. The representatives ought to confer themselves in release of their moral obligations while managing their clients. The announcement depends on the directing the tenets and controls with proper codes and corporate models. This comprises of divulgence of data for fitting bookkeeping rehearses.

d. The report suggests the arrangements with respect to the administration and the money related detailing under the CLERP 9 revisions, which are as per the following;

  1. Lead engagement accomplice and survey the turn of accomplice following five years, which ought to stretch out to major senior, audit work force also;
  2. The waiting period for review accomplices to join an organization board or any top administration ought to be reached out from two years to four years, which ought to likewise incorporate the senior work force of the review firms required in the auditing activities.

For the most part, the above expressed proposals are gone for perceiving and tending to the issues for the corporate gatherings. The suggestions are gone for enhancing the money related detailing and review works with a specific end goal to unveil the mattes, which influences the review autonomy and divulgence of extra budgetary information's. The proposals are meant to perceive the obligation by spreading the long chain of administrative capacities essentially to be performed by the representatives.

Reference list:

Abbas, Q., & Iqbal, J. (2012). Internal Control System: Analyzing Theoretical Perspective and Practices. Middle-East Journal of Scientific Research,12(4), 530-538.

Bagshaw, K. (2013). Audit and Assurance Essentials: For Professional Accountancy Exams. John Wiley & Sons.

Bebbington, J., Unerman, J., & O'Dwyer, B. (2014). Sustainability accounting and accountability. Routledge.

Glover, S. M., Taylor, M. H., & Wu, Y. J. (2016). Current Practices and Challenges in Auditing Fair Value Measurements and Complex Estimates: Implications for Auditing Standards and the Academy. Auditing: A Journal of Practice and Theory.

Griffiths, M. P. (2012). Risk-based auditing. Gower Publishing, Ltd..

Kogan, A., Alles, M. G., Vasarhelyi, M. A., & Wu, J. (2014). Design and evaluation of a continuous data level auditing system. Auditing: A Journal of Practice & Theory, 33(4), 221-245.

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

Pitt, S. A. (2014). Internal audit quality.

Rikhardsson, P., & Dull, R. (2016). An exploratory study of the adoption, application and impacts of continuous auditing technologies in small businesses. International Journal of Accounting Information Systems, 20, 26-37.

Schmidt, P. J., Wood, J. T., & Grabski, S. V. (2016). Business in the Cloud: Research Questions on Governance, Audit and Assurance. Journal of Information Systems.

Shin, I. H., Lee, M. G., & Park, W. (2013). Implementation of the continuous auditing system in the ERP-based environment. Managerial Auditing Journal,28(7), 592-627.

Gaber, M., & Lusk, E. J. (2015). Account Screening: Rationalizing The Extendedprocedures Decision in The Audit Context. EXCEL International Journal of Multidisciplinary Management Studies, 5(9), 1-20.

Christensen, B. E., Glover, S. M., & Wood, D. A. (2012). Extreme estimation uncertainty in fair value estimates: Implications for audit assurance.Auditing: A Journal of Practice & Theory, 31(1), 127-146.

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

Christensen, B. E., Glover, S. M., & Wood, D. A. (2013). Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), P36-P42.

Ricchiute, D. N. (2012). Auditing and assurance services. South Western Educational Publishing.

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