AUDITING AND ASSURANCE SERVICES

Given the Case:
HIH Insurance Limited:
Business risk and Inherent Risk Assessment, Legal Liability, Ethics
Company History

Read the Case and answer the following questions:

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.

Business risk
• Global, local and control environment
• Understanding the insurance industry
• How HIH fits into the industry
• SWOT analysis
• Insurance industry is particularly competitive
• There has been significant increase in price competition in the insurance market
• Regulation of the insurance industry in Australia is relatively new
• Significant fluctuation in the level of regulation around the world.
• The industry is heavily influenced by natural disasters and economic events.
• There is no formal structure for the maintenance of Prudential Margins
• Many of the transactions in the insurance industry are complex
• Require high levels of judgment.

Inherent risk assessments
• Integrity of management
• Management experience
• Unusual pressure on management
• Nature of the entity`s business
• Factors affecting the industry in which the entity operates.

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?.

Legal liability
• Understanding who the clients and third parties associated with HIH are.
• Analyse each of the cases in the text as to why it may be relevant for HIH rather then listing all legal cases.
• Apply the concept of Negligence.

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

Attached is the Case Study:

Attachment:- Case- Business risk and Inherent Risk Assessment, Legal Liability, Ethics.rar