Running head: AUDITING AND ASSURANCE SERVICE

Auditing and Assurance Service

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AUDITING AND ASSURANCE SERVICE

Auditing and Assurance Service: The Case of HIH Insurance Limited

Background
When it comes to insurance, there is seen hardly any case which brings bad news to the industry.
One demise occurred with the HIH Insurance Limited (HIH), which was a bad news for
policyholders and a surprise to spectators. In 2001, the company received an approval from NSW
Supreme Court to put the company into provisional liquidation. The provisional liquidator is the
company was Tony McGrath of KPMG. Provisional liquidation is a temporary administration
that gives time to the company for reviewing its operations and assess its financial performance.
Now HIH is in run-off which suggests that its outstanding claims are managing and it is not
writing any new business which can take a decade.
Question 1 Part a.
The risks being faced by HIH pertains to local, global as well as the control environment factors.
It might be due to the basis of comprehending the insurance industry along with how well the
company is able to apt with the SWOT analysis. The best approach is the structure of the
industry as well as the profitability which will aid the company in handling insurance industry
that has become more competitive than ever before due to increased competitive prices.
Consequently, the regulation of insurance industry in Australia yields which is relatively newer
based upon the levels of regulation. The Superannuation and Insurance commission is the body
from Australia that hold the Authority of Australian Prudential Regulator. Whenever a company
seems to be near the insolvency, then the risks relating to auditing also arise. In past, some
methods have determined insolvency when there is any auditing relating risk. In general
agreements, the capacity to fulfill debts within which the company belongs occur. With the

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structure and the profitability, another crucial factor is the need to emphasize on the organization
that have little customers for starting their business. This decreases the overall profitability of the
industry. Thus, the solvency concept is pertaining to the capability of meeting debt. It is needed
to identify the solvency which is primarily based on non-financial and financial conditions,
which demonstrates whether or not the company is able to pay its debts.
Part - b.
The biggest risk is the ability of the company of regulating risk factors that assist in issuing a
qualified or unqualified report based on specific financial instruments. The basis of these are the
planning and procedure according to the risks which include control risk, inherent risk, as well as
detection risk. The inherent risk is that risk where the company involves the maintenance of the
margins of solvency, charging ample premiums as well as the liquidity factor. These comprise the
reinsuring of varying policies as well as the file having practices of marine insurance which
greatly differ with the profession of insurance. The control risk is the one which incorporates
material error which is usually not detected by the system of internal control. In HIH, accuracy
and completeness has been observed in the general ledger that does not perform reconciliations
of the bank accounts with the ledger. Different substantive procedures lead to the performance
and they are able to offer greater reliance for the process of documentation externally. The
involvement of the ledger account and varying bank accounts assist in the valuation of the
intangibles. The risk of detention occurs mainly for different procedures of auditing depending
upon the performance that do not detect the assertions of material errors easily. It is required to
work on it effectively and in a timely manner for minimizing the chances of not determining the
material misstatement. At HIH, the documents of internal audit are not able to perform the

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procedures of appropriate substantive which further assist in making the performance better with
ample planning and with the goodwill, income tax benefits for future.
Question 2- Part a.
It relates to the concern of unqualified audit opinion which links with the auditing risks that has
not been regulated. Auditors usually have little knowledge that is not recognized through
inherent risks as changed from the last year. The primary emphasis is on the audit report which
indicates the auditing concerns over the practices of HIH. They do not explore regarding fully
notifying for varying entities. The concerns are usually related to the inadequate independence of
auditors with the performance of international HIH operations and the non-auditing work for the
increased risks. The cases are linked with the appropriate auditing procedures along with the
managed and planned auditing risks.
i.

For clients, the emphasis is on the performance to reveal inadequate planning that relates
to the goodwill with the cost of deferred acquisition as well as the income tax benefits. If
the former auditors have been hired by the clients, then this will certainly have immense
impact on the external auditing independence. The former auditors will have a superior
partnership with the team of audit. This leads to holding a higher impact on the present
auditors because of authority in which they are. Close relationship will be formed with
the existing and the former auditors as they will be in a position to handle problems with
parties.

ii.

The creditors must emphasize upon the minimum requirements of solvency which affirms
that the business can become solvent at the time director declaration. The reports will
determine whether the management follows going concern method or not. HIH should

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emphasize upon the cash position where the analysis is based on the financial and
operational activities. The risks were also relating to the ability of pricing and other
possibilities with outstanding claims and the policy of reserving to work and handle on
the decision of investment. These factors are crucial for the insurance to utilize the risk
with the ability of risk pricing. The foundation of representation is on the managing and
handling of provisions where there is a requirement of prudential margin.
Part b.
The action of negligence of HIH is related to the changes in the legislation. Serious crisis have
been observed due to insurance and prices availability. They are largely due to the negligence of
law. The major issue is politically reinforced with a pattern of direct liability on the government
as well as the reinsurer. The beginning of the changes in the legislation are related with the
escalation with medical negligence and public liabilities. Managing risk in an in appropriate
manner plays a vital role for the operations where there is risk investment as well as their
guideline. The primary facts are based on failures which offer evidences regarding the risk
management which have not been performed and shaped accordingly. The negligence of
directors should be analyzed and the strategy for investments as well as the risk appreciation
which relates to varying sources of information. The failure of risk management has been
regarded as the style of management for handling HIH. HIH collapsed because of increased
compensation payment with the community that it litigious and was able to extend the liability.
Question 3- Part a.
Before the audit report was released, the main focus of the management was on the insufficient
evidences along with the adjustments that were to be made in varying accounts. In order to

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refuse to increase the audit fees, the association with the non-auditing services was of high
importance. The company intended to work with the hiring of members in order to develop audit
team for different reasons including:
i.

The auditors had substantial knowledge of the company

ii.

The auditors had effective experience with the financial matters of the company

iii.

The management intends to hold on to the chances for working with adequate
development and auditing along with a potent relationship with them.

The auditors must trust the executives of the client to the extent that it is not influencing the
external auditors independence. Moreover, auditors are required to maintain skepticism which is
carried by the companys management.
Part b.
The audit firm need to offer non-accounting services with the consultancy service, advising of
the human resource and the tax. In this way, the firm will be in a position to provide auditing as
well as non-auditing services to the client. The objective revolves around handling the
dependency where the information of the client is relied upon the income source. Conflict of
interest also provide consulting and auditing services because of the discrepancy that arises
between the interests and the responsibilities. The auditors develop a report including the
financial situation along with enhancing the profits of the company. The biased audit reports are
based on regulating the business until they are capable of getting a specific audit. The error in
report for the consultant and the auditor occur primarily because they are to analyze the
information according the management of the client. By doing so, mistakes will be covered and
the compilation of the error reports will be provided inadvertently. The best solution is the

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regulatory dilemma which will result in financial report accuracy where services will benefits
varying accounting firms.
Part c.
In real world, auditors cannot trust the client executives. The auditors need to maintain a relation
where they question every loophole and provide auditing evidence for that. The auditor cannot
handle undisputed honesty or dishonest management. HIH emphasized on varying figures with
the incredible extent through which the account focus will be handled on the quantity. In
Australia, businesses are conducted with honesty and integrity through relevant regulations and
policies. The employees are obliged to follow highest level of ethical standards and behavior
while dealing with customers. The foundation of the statements is on undertaking the regulations
and laws with adequate corporate standards and codes. The contractors and the employees need
to maintain a behavior with highest level of ethical standards which is related to the revelation of
information in conflict of interest, accounting practices, and the dealings in the share of Fosters.
Part d.
The policy of the report recommends about the financial reporting and the governance with the
finalization under the amendments of CLERP 9. In the CLERP 9, the bills are set to include in
order to leading up to the predicted enactments. By this, the personal liabilities will be dealt for
the breach as well as the independence of the other auditor and the accounting standards. The
emphasis is primarily on managing the duties which bind the secretaries, directories and other
officers. Recommendation has been provided on the basis of officer class which is concerned by
the management. This happens under the performance for attracting legal duty in relevance to the
functions. The functions include the tasks which are not only utilized by the position to take

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advantage but also to work on the data and information in order to gain more advantage. The
system of financial reporting works on the basis of ASX to seek executive remuneration and
disclosure in the market by announcing regarding the contracts of employment along with the
varying crucial practices and responsibilities.
Conclusion
The HIH collapse had major consequences for the communities of Australia and negative impact
in the confidence of consumer in the insurance industry. Thousands of the companys employees
lost their jobs and shareholders were left with worthless equity. Such cases reveal that best
practices are necessary if one needs to survive in the corporate world in order to boost financial
performance and enhance shareholders value. The case of HIH demonstrates that corporate
governance is not only compliance with a set of guidelines but something more than that.
Mechanism including voluntary self-regulatory codes and CLERP 9 legislation provide detailed
guideline to ensure that the corporate governance remains effectives for companies as no
company has ever nurtured without taking these practices into account.

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References
Arens, A. A., Best, P., Shailer, G., Fiedler, B., Elder, R. J., & Beasley, M. (2007). Auditing and
assurance services in Australia: an integrated approach. Pearson Education Australia.
Gay, G. E., & Simnett, R. (2000). Auditing and assurance services in Australia. Mcgraw-hill.