Auditing Theory and Practice Global and the Local Level

Question: Describe about the Auditing Theory and Practice for Global and the Local Level. Answer: 1a: The factors which was mainly related to the business risk of the HIH insurance was mainly at the global and the local level. The business risks of the company was mainly attributable its identification which the company could not do. However, the business risk of HIH Insurance can be assessed form the structure and the profitability of the company. The insurance industry is regarded as highly competitive and the completion in the industry has increased mainly in terms of the price. The insurance industry in Australia is not regulated and there has been a fluctuation in the regulation of the insurance industry. However, such assessment of risk is mainly based on the core understanding of the insurance sectors. It also depends on the ability of the HIH limited so that it is able to align itself within the risk evaluation parameters (Damiani et al., 2015). Structure and the profitability In order to assess the business risk of HIH insurance, the best way would be to assess the structure and profitability of the industry or the sectors in which HIH is operating. The companies that is fresh to the regulations, the risk evaluation of such companies turns out to be relatively simpler. Superannuation commission and the instance is sued to serve by the regulatory body of Australia. Such an assessment would help in analyzing the competitive environment of the company, which is related to the price range and the increasing competition (French et al., 2015). Insolvency risks assessment: The risk associated with the auditing of the company that is close to the insolvency is higher. The company is regarded as solvent when it is able to fulfill all its obligations under the contracts. The insolvency risk is assessed on the basis of the assessment of the auditing risks. One of the components of the audit risks is that the risk of company being insolvent which is to be taken in to account by the auditors. A group enterprise perspective was adopted by HIH when it as attesting to a solvency position. The insurance subsidiary of the company was treated as the single group and the liabilities and assets of the company was netted off which led to the auditors not identifying that these subsidiaries were potentially insolvent (Adams, 2014). 1b: Inherent risk is one of the components of the audit risks. When the financial statements of the company contain the material omission before the effectiveness of the internal control system, such risk is regarded as the inherent risks. The inherent risks of HIH were similar to the other companies in the insurance industries. Several inherent risk of the HIH insurance Limited can be listed down as: Maintenance of the sufficient solvency margins Premiums charged by the company has to be adequate Riskiness of the policies needs to be calculated The inherent risk is to be determined by the auditors and consideration should be made by them that the HIH limited was reinsuring the policies, which were ordinary, and they were providing the marine and film insurance practices which was significantly different from the companies within the insurance sectors (Gorge, 2015). Control risk is another element of the risk assessment and such risk arise from the inability of the internal control system to detect the material omission or errors. The controls could not be relied and there were number of instances from the HIH Limited. The company did not perform the comprehensive reconciliations of the banks and ledger accounts and as a result, the accuracy and the completeness of the ledger accounts could not be determined. The budgeting process used by the company lacked the controls and the company used budgeted figures to value the tangibles and goodwill when making the financial reports. As a result, substantive procedures have to be performed by the auditors during the audit and the external documentation needs to be placed the greater reliance. The auditor needs to make their own valuation of the tangibles and the bank and ledger accounts needs to be reconciled (Kuan, 2014). 2a: It is evident that the audit procedure performed by Anderson lacks sufficient planning and this was mainly related to the benefits of the after income tax, goodwill, deferred acquisition costs. The risk of conducting the audit was evident as the audit opinion issued by the auditors was unqualified and he issued this opinion just eight months prior to the collapse. Anderson has limited knowledge about the operating environment of the company and they were not able to recognize that the inherent risk has observed a change over the last or previous years. The practice of the HIH was undertaken seriously by the auditors as indicate by the express of matter depicted in the audit report. The flaw was mainly related to the investigation and the auditor did not notify the relevant parties. In order to successfully manage, the audit risk, the company needs to plan the adequate audit procedures and there needs to be sufficient undertakings (Le Mire Gilligan, 2013). For clients- When it comes to the clients, the organizational performance is of great importance and this would illustrates the benefits of tax, deferred acquisition costs and inefficient planning of goodwill. The interdependence of the external auditing would be greatly impacted if the client hires former or previous auditors. These previous auditors have auditing team as their partners and this consists of influencing the current auditors in authority. The current auditors and the previous auditors are able to handle and indentifies the issues related to the parties, which is mainly influenced, and hold by these auditors. From, this it can be concluded that the current and previous auditors have close relationships (Merkin Steele, 2013). For creditors- for creditors, the minimum insolvency requirement is of focus and this would indicate that at the time of declaration of the directors, the company would stay insolvent. The financial and operational conduct is mainly linked with the liquidity position and therefore, the liquidity position need to be given much emphasis for the organization. The risks were mainly attributable to the outstanding claims and the pricing capability and this has to comply with the reservation policy of HIH for working and the handling of the investment decisions. Handling of provision forms the basis of such representation, where there is a need of prudential margins (Betta, 2016). 2b: The acceleration of the alterations made by the legislation is the main reasons for the negligence on the part of the actions of HIH insurance. The reckless investment and the pricing ability were of inferior ability were the reason attributable for the financial group resources exhaustion and this was stated under the policies reserved. Risk management inadequacy- Risk management is of great significance in the operation of the insurance company. The risk management of the HIH limited was not well performed and shaped properly and this was evident from the failure of the investment made by the company. There has been negligence on the part of the directors when it comes to analyze the investment decision strategy and to appreciate the risk with the help of adequate information sources relating to the investment. The failure of the risk management was a part of the bizarre management style that led to the collapse of the company (Mennicken Power 2013). Inadequacy of the independent information sources- The corporate governance system of the company is governed by the accounting system of the company. The non-executive directors have to rely on the information provided by the management and this forms a part of the inherent risk in the system of corporate governance. The board does not include any non-finance directors and the chief director of the company mainly dominated the provision of the information. The independence of the directors forming the audit committee was suffering from the defect and these directors could not fulfill their responsibility with providing the independent sources of information. Defected practice of corporate governance- The bankruptcy of the corporation was mainly attributed to the failure of the corporate governance practices. There were agency problems and the conflict was arising between the debtors, proprietors and the management. The equilibrium between the debtors and the stockholders cannot be maintained, the interest of the stakeholders was damaged, and the value of the company went down drastically. 3a: The inadequate evidence provided by the audit report and the changes that had been made in the several accounts is the main area of concern. The paid auditing services cannot be enhanced and this was mainly because of the development of the relationship with the servicers of the non-auditors. The reasons which were responsible for HIH hiring the team of external audit: The various matters regarding the monetary and fiscal matters was having the better experiences from the prior auditors. The financial reports were much more aware with the auditors which were previously held in the company. The holding of the audit work were relied upon by the management and this is done to develop such relationship with the external auditors which are efficient. The auditors are required to and there is a need on their part to preserve the professional skepticism. This is done because the management and the auditors are not able to manage the financial statements of the company. 3b: The auditing organizations are required to offer the non-auditing services to the client apart from offering the services on the advice concerning the tax as well. Hiring the same client offering the auditing and consultancy services might lead to compromise the objectivity of the report of the client. The non-auditing services and the auditing services would be offered by the company. The information of the customers depends on the source of the income and there may arise conflict of interest between the management and the executives. The objectives of the organization are to maximize the profit of the company and using such auditors would have the objective of carrying the financial reports of the entity with the same objectives as that of the organization. The audit activities of the business is based on the firm providing the same consultancy and the auditing services and this would help in holding the change for the different reports which are impaired. The report presented by these firms offering dual services is done after the errors of the organization has been identified and this would provide the platform to facilitate the management of the informations of the clients. The client information management is enhanced by appointing such firms which would offer the auditing and the consulting services as the report would be prepared after all the errors of the company has been recognized. The management reports would be compiled and all the errors would be covered up. However, the accuracy of the financial reports is determined by deploying the regulatory measures as such, services would offer various benefits to the company (Clarke Dean, 2014). 3c: The circumstances generated by the use of the above measures offer various advantages to the company, which is mainly in their own interest. The company continuously provided misleads information to the people concerned. The deployment of the firm providing both the auditing and consulting services might give biased audits and there is a chance of producing the impaired reports if the audit and the consulting services are profitable. Several staffs of the company engaged themselves in the unethical conduct and there was failure on their part to perform their duties effectively. This is evident from the fact that the Anderson has provided the unqualified opinion while carrying out the audit and preparing the audit reports. The ethical standards of the organization have been violated and this is exceeding the organizations ethical limit. While dealing with the customers, the employees of the organization have to deal with them and discharge their duties in an ethical and moral way (Duf fy, 2014). 3d: The last governance proposal as provided by the report under the CLERP 9 legislation. The recommendation was made concerning the policies regarding the financial reporting and the governance. The various recommendations is listed down below: The reliability of the financial statements has to be improved, this would be done by adding value, and there is a more focus on the independent audit. The audit function of the company needs to comply with the disclosure obligations. All the issues concerning to the audit of the company are dealt in the draft bill. Several guidance are provided on the assessing the rotation of the partner and the partners engagement which has to be extended to the authority of senior management. The recommendations would have a greater impact of the auditing of the company and it would enable to provide the fair and true view of the company (Houghton et al., 2013). The recommendations provided by the Ramsay report recognize and addresses the issues concerning groups. The introduction of the standard provide for the requirement by the auditors to present the annual declaration to the directors of the company so that that are able to exercise their independence. The recommendation regarding the disclosure and independence of the financial information would help in the audit function and the financial reporting (Carey et al., 2014). Reference: Mak, K., Deo, H. N., Cooper, K. A. (2005). Australia's major corporate collapse: Health International Holdings (HIH) Insurance" May the force be with you". 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