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 fewmonths"Sydney Morning Herald, May 19-20, 2001.

Required:

a) How would you assessthe business risk of HIH Insurance Limited?

b) List several inherent risk factors effecting HIH at the financial report leveland whether they would have contributed to anincrease or decreasein theinherent risk assessment.

Question 2-Legal Liability

Sydney solicitor Bruce Dennis will be coordinating a class action for some 600 HIHshareholders against the auditors-Andersens (as the firm is now known). 

In addition, HIH's liquidator, Tony McGrath of KPMG Peat Marwick is also likely toseek to recover funds for HIH creditors.

Required:

a)Discuss the facts and findings of relevant court cases that Andersens should referto in determining the likelihood of the partnership being held liable to:

1)clients

2)creditors.

b)What conditions need to exist for anegligence action to be upheld?

Question 3-Ethics

The HIH board of directors includes three former partners of the audit firm ArthurAndersen. In the past decade, Andersens has earned more than $8million fromauditing HIH books and $7million 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 andconsulting services?

c)Indicate whether these circumstances represent a violation of ethical standardsand 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 thepractice of auditing?