Auditing & Assurance of Risk for Companies

1. a)

There are several risks for the companies, which are involving with the insurance business and the company ‘HIH Insurance Limited’, which case has been taken to study the business risks and inherent risk is also facing few of the important business risks that become the cause of the failure of the company (Gates and Leuschner, 2007). The property as well as causality insurance companies use to face several different types of business risks, which are recognized as exposures. The exposures are present for the entire different types of insurance policies offered by particular type of insurance firm. The most general form of risks comprises making payment for automobile accidents along with the damages due to the storm to a house or property (Labbi, 2005). The insurance firms can handle the risks, which are insured by exclusive of assured types of coverage from a policy. In the undertaken case study, it is observed that HIH insurance company entered into the high-risk zone like marine companies, aviation projects, natural disasters as well as film financing insurance, which are true risks prone zone. All these insurance policies offered by the company HIH Insurance Company had greater risks possibilities. Because these are an accident, prove zone, and the company had to face a significant risk of financial damages in case of any accidents occurs. Marine and aviation industry is a lucrative industry but at the same time, there is a significant amount of risks because of the possibilities of accidents. Film financing is also the same kind of risk; the film will be succeeded or not anybody knows (Nersesian, 2004). Besides this, greatly elevated compensation of the insurance workers in the market of California is also an important risk. Owing to this, the company HIH had experienced a reasonable amount of losses as the company’s exposure to the high-risk zone.

b)

The inherent risk is referred to the possibilities of incorrect or else misleading information within an accounting statement outcome from something other than unsuccessful of management in the study of managerial accounting or the study of financial accounting.  For the examples, where inherent risks are most common, it is perceived that the accountants have to utilize a larger than usual amount of judgment as well as an approximation or when critical financial tools are involved (Shirreff, 2004). To understand the inherent risk, the background of audit risk it must be analyzed. It is one of the vital types of audit risk. Inherent risk is most common in the financial service segment, because of complexity along with dynamism to regulate the financial institutions. In the given case study of HIH Insurance Company, it is perceived that company’s shares prices had dropped sharply because of poor financial outcome as well as important asset sales to improve the position of the balance sheet of the company and claim for the fund insurance (Walker, 2012). Throughout the year of 2000 HIH had paid $1.7 million to auditors for the services and it failed to provide future claim.    

2. a)

In the given case study, the financial performance of HIH Insurance Limited falls due to mismanagement by the senior managers of the company. The shares of the company halted, and the ASIC investigated about the fall in the performance of HIH insurance. The share price of HIH Insurance Limited fallen sharply imposes a vital impact on the returns for the shareholders. The auditor, Anderson was mainly responsible for the fall of the company. The auditor shows poor financial results and significant of sales of assets of the company which was done to improve the position of the balance sheet as well as the fund insurance claims (Holton, 2012). In 2000, HIH insurance company remunerated a huge quantity of $ 1.7 million to the auditors for the auditing services. The company also paid $1.631 million for the provision consulting and other services. The auditor was mainly responsible for showing the negative performance of the company by misrepresenting the values in the balance sheet.  The premiums gained by the insurance organizations are invested on long terms with the expectation for future alleges, and traditionally companies preserve a prudential fringe out of the funds. Some organizations have margins to cover 80-90 claims. Therefore, the auditor misrepresented all these values and showing poor performance of the company (Kieso, Weygandt and Warfield, 2007). It affected the most inert of the creditors and clients. The creditors faced huge losses as because they were not able to recover all their dues from the company. The negative performance of the company shows huge loss which means that the company would not be able to pay off its debts. Therefore, as per the rules and regulations auditor is responsible for showing poor performance of the company. It is the responsibility of the court to recover all the amounts of creditors and paying all their dues. The company and the auditor are responsible to pay all the debts to the clients and creditors (Spiceland, Sepe and Nelson, 2011).                          

b)

The condition that exists, in this case, depicts the acts of the negligence which are described in this case. The acts of the negligence depict the breaching of the duty of care, with harming the person that is present on duty, conducting the causes of harm with the actual measuring of the harms (Botica Redmayne, 2011). These elements help in the providing the acts of the negligence that are undertaken in this case with the consideration of the discussions. The duty of care shows the care towards the plaintiff with the consideration of the injury and thereby the duty seemed to be avoided or breached with conducting injury to the plaintiff. In this case of HIH, the facts and the findings that are discussed provide the ways of the harm that had taken place in this case (Imoniana and Perera, 2016). The solicitor Bruce Dennis fought the case against Andersen. This shows that the solicitor is providing justice to the HIH creditors and the clients with showing the wrong deeds that the Andersen had created against them. The plaintiff showed that the defendant is providing the wrong judgments with the wrong information and thereby the breaching of the law of duty is taking place. For this reason, the plaintiff showed that the breaching of the duty caused injury for which the plaintiff is still suing (Botica Redmayne, 2012). This provides the clear justification for the provision of the care and thereby the justice is made for the breaching of the contract of duty. The breaching also shows the injury which must be recovered with the violation of the acts that are performed and thereby the case provides the appropriate ways of the justice with mentioning the justifications of the case. Negligence of the damages should not be overlooked with the provision of the plaintiff position in this case.

3. a)

Three former partners of the audit firm Arthur Andersen were appointed as a part of the external audit team by HIH. For the previous ten years, the Andersens had made a lot of money, to be precise approximately $8 million through the process of auditing the books of HIH. Andersen had also made an amount of $7 million by providing other various kinds of services to HIH. Therefore it can be understood that the two entities of HIH and Arthur Andersen’s share quite a strong professional as well as personal relationship with each other. Having a strong personal relationship is evident from the fact that the two organizations have been able to work harmoniously for over a decade. The personal relationship shared between the two can be considered to be the main reason why HIH required taking on prior members for its peripheral audit team (Campbell and Houghton, 2005). The responsibility of the external audit team is to provide an impartial and actual report of the financial transactions, and this is the reason why the report given by the external auditors are strongly valued. Since Andersen’s have a strong bond with HIH, they are expected to give a good report, and this is the main reason behind HIH hiring the prior members as a part of its peripheral audit team.

b)

The job of an auditing organization is to offer an unbiased report of the financial transactions of a company, and a consultancy firm is expected to recommend different ways to the concerned company through which it can maximize its rate of profitability by circumventing or bypassing the payment of high taxes. Therefore though the jobs are quite closely linked, due to their nature, they are not often done by the same firm as it generates bias towards the company that it is providing its service to (Jeffrey, 2010). The benefits of holding the same organization do both auditing and consultancy for a company is that it can make the financial reports as per the need of the company by being biased towards it. Though it helps the company to maintain its image in the market it leads to erroneous reports.

c)

The circumstances that are presented in the case clearly indicate that the company is not sticking to the basic ethical practices that it is supposed to. It is in a way unethical to have a prior acquaintance be a part of the external auditing team. The main reason behind this is that an external auditing team needs to be unbiased towards the company to produce an impartial report about the financial transactions that have been taking place in the company. Hiring a firm with which the company has a professional relationship for over ten years is very unethical, and it proves that the company does not want to have the actual financial reports made (Jeffrey, 2011). Therefore the company can be said to be deliberately contributing to making a fraud auditing report of its financial transactions to avoid problems or hurdles in the future. The fundamental objective of providing an audit report gets hampered when a single firm does both the auditing and consultancy for a company. It is totally a violation of the ethical standards that demand an independent investigation of the financial transaction and position of a particular company (Jeffrey, 2013). 

d)

In the given case study, the main reason for the crumple of the HIH insurance limited was a breakdown to give appropriately for the future claims. The breakdown was due to the mismanagement and inadequate responses to emerging pressures in the international market of insurance (Moles, 2011). The main rationale of the Ramsay report was to evaluate the accessible requirements for the sovereignty of the auditors and to create proper suggestions for the alterations to those requisites. It is the responsibility of the auditors to show an appropriate performance of the company. The misrepresentation of values in the financial statements is considered as a crime, and it should be avoided by the audit firm. It is t his responsibility of the auditors to show the actual position of a company in the current market environment.

The impact of the changes that have been made by Ramsay Report and CLERP 9 provides the changes of auditing report as per the law of The Corporate Law, and Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9 ACT) was passed in June 2004, provides the rescheduling of the programs. It also provides the adding values to the financial report with the improvement of reliability and thereby, in turn, provides the lowering of the cost of the capital. It also helps in enhancing the value of the capital market with the consideration of the strengthening credibility of the financial statements (Krishnan, 2007). This provides the recognition of the acts that are seemed to be helpful for the consideration of the credibility and the reliability of Auditors report.

References

Holton, R. (2012). Global finance. Abingdon, Oxon: Routledge.

Kieso, D., Weygandt, J. and Warfield, T. (2007). Intermediate accounting. Hoboken, NJ: Wiley.

Moles, P. (2011). Corporate finance. Hoboken, N.J.: Wiley.

Spiceland, J., Sepe, J. and Nelson, M. (2011). Intermediate accounting. New York: McGraw-Hill Irwin.

Campbell, T. and Houghton, K. (2005). Ethics and auditing. Canberra: ANU E Press.

Jeffrey, C. (2010). Research on professional responsibility and ethics in accounting. Bingley, U.K.: Emerald.

Jeffrey, C. (2011). Research on professional responsibility and ethics in accounting. Bingley, UK: Emerald.

Jeffrey, C. (2013). Research on professional responsibility and ethics in accounting. Bingley, U.K.: Emerald.

Botica Redmayne, N. (2011). Auditing and Assurance Services and Ethics in Australia: An Integrated Approach20111Alvin A. Arens, Peter Best, Greg Shailer, and Brenton Fiedlerd. Auditing and Assurance Services and Ethics in Australia: An Integrated Approach . 2009. 8th ed. J Acc & Organizational Change, 7(4), pp.408-410.

Botica Redmayne, N. (2012). Essentials of Auditing, Assurance Services & Ethics in Australia: An Integrated Approach20121 Essentials of Auditing, Assurance Services & Ethics in Australia: An Integrated Approach . Massey: Massey University 1st ed. J Acc & Organizational Change, 8(1), pp.120-122.

Imoniana, J. and Perera, L. (2016). The role of IS Auditing in assurance services. MANAGEMENT CONTROL, (1), pp.17-33.

Krishnan, J. (2007). Book review: Auditing & Assurance Services International Edition. The International Journal of Accounting, 42(1), pp.119-121.

Gates, S. and Leuschner, K. (2007). In the name of entrepreneurship?. Santa Monica, CA: RAND.

Labbi, A. (2005). Handbook of integrated risk management for e-business. Boca Raton, Fla.: J. Ross Pub.

Nersesian, R. (2004). Corporate financial risk management. Westport, Conn.: Praeger.

Shirreff, D. (2004). Dealing with financial risk. London: Economist.

Walker, R. (2012). Winning with risk management. Singapore: World Scientific.

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