Accounting management assignment on : HIH Insurance Limited

Q.1.) Did the auditor’s of HIH Insurance Limited fail in their obligation to provide a duty of care to all relevant parties?It is very clear that Arthur Anderson evaluated the HIH riskiness and considered it the highest risk client because of its aggressive practices of accounting and the complexity faced in past with concern to solving issues with management of HIH. Auditors had drawn to wrong conclusions and annual report of the HIH for year 2000 was sign off by the Arthur Anderson describing that it was the going concern with assets of approximately $939 million (Ramsay, 2001). It is viewed that Anderson used reports of HIH management but did not get the adequate proof to make the conclusion as HIH did. The liquidator was not able to search the documentation explaining the factors for making HIH as the going concern. This reveals that the Anderson failed to give sufficient papers which showed that the audit took place at the HIH Insurance Limited. It can be said that the inadequate independence among the auditors and directors board revealed that the better interest of HIH might not have been the priority (Fogarty & Lansley, 2002). Anderson’s clear failure to give adequate papers and to collect adequate evidence for supporting their findings and raise concerns about the excellence of audit Anderson conducted. It is noted that the Anderson offered both non-audit and audit services to the HIH (CLERP, 2002). Offering both non-audit and audit services to the clients are permitted under the certain situations. The misstatements and management Anderson created led a charge towards the corporate collapse and role of Arthur Anderson in it seemed to be huge. It is very clear that auditors at the HIH failed to show in appearance or independence of the mind with concern to their greatest client of the Australia HIH Insurance Limited (Weil & Tannebaum, 2001). It is examined that the apparent inadequate independence among the auditors and company’s board revealed that the excellent interest of the HIH might not have been the priority. It can be concluded that the auditors of HIH Insurance Limited failed in their commitment to offer the duty of the care to all applicable parties for e.g. The Arthur Anderson was failed to produce the adequate working papers and to collect adequate evidence for supporting their findings and raise the concerns in regard to the quality of audit Anderson conducted. Because of inadequate working papers, liquidators were not able to search the documentation explaining the factors for forming HIH Insurance Limited as the Going concern. It has been analysed that Anderson found HIH as greatest risk client, but after that there was no any risk plan had been made by the audit team and hence not reviewed by the management team at the Arthur Anderson. As the portion of the process of the audit, the risk assessment is taken out usually by auditors for finding out the plan and structure of audit. At last, it might be said that auditors at the HIH Limited were not able to fulfil their obligations to offer the duty of care to all applicable parties. Q.2.) From an audit perspective, what is the link (if any) between testing a client’s internal control system and the level of substantive testing that is performed?

It is very clear that test of control tests client’s internal control mechanisms and check whether the mechanisms are operating efficiently or not. The client may take out monthly bank reconciliation to make sure that cash account is operated accurately or not. The auditor would test this by choosing 2 months on spot and verifying that appropriate bank reconciliation is carried out. The auditor could depend on the internal control for offering reasonable assurance that year-end balance of the cash is free from any kind of material misstatement. On the other side, substantive test views at the amount in financial statements and ask how that the amount would be verified directly neglecting the survival of controls. For the cash balance, the substantive test could be viewing at the certificate of the bank and matching this with the figure of the balance sheet (Fogarty & Lansley, 2002). There could be on-going control over accuracy and the valuation of the receivable recording throughout the year. It has been analyzed that the auditors execute test of control when their evaluation of risk of the material misstatement at assertion stage comprises the expectation that the controls are working effectively (Frankel, Johnson & Nelson, 2002). This shows that the auditors use test of control when the system survives and when the system has control. The efficiency of the test of control is to form whether control in the system is actually working effectively so that auditors may find out whether they can depend on the control or not. On the other side substantive test considered as the procedure designed for testing the dollars irregularities and errors and affecting the accuracy of the balances of the financial statement. Auditors use substantive test in the audit for detecting the material misstatement at assertion stage. At last, it can be said that there is the relation among testing the clients system of internal control and level of the substantive testing which is performed. In general, auditors use test of control when their valuation of uncertainty of material misstatement at the assertion stage comprises the belief that the controls are working efficiently. The auditors rely on the internal control for providing assurance to the clients that their year-end cash balance is not affected by any type of the material misstatement (Tomasic, Bottomley & McQueen,   2002). On the other side, auditors use substantive testing during the process of the audit for detection of material misstatement at the assertion stage. At last it can be said that both test of control and substantive test detect any kind of material misstatement from the financial statements at the assertion stage.

Q.3.) What must the auditee be able to prove in order to successfully bring an action against an auditor?It has been analysed that the auditee is accountable for maintaining the cooperation with the auditors throughout the audit. The auditee designates the point of the contact for entire follow-up and coordination (Bottomley, 2003). In general, the auditee offers the records and data asked by auditors throughout the specified time as determined with auditors. In fact auditee also prepares the corrective plan for addressing of any non-compliance matters and understands that the CO assignment would be rejected until the specific dispute is solved. In general, auditee must make the corrective plan for addressing of each auditing analysis and finding comprised in the recent year auditor report and must offer the name and address of contact person accountable for the corrective action. On the other side, if auditee thinks that corrective actions are not needed, then in that case corrective plan must comprise the specific reasons and explanation. It has been examined that being an auditee, there are some points which the auditee must keep in the mind like recognize the objective of audit, must be capable to verify the points as mentioned in documents for audit, should document the things properly and if any NC has given by auditor then in that case auditee must capable to defend its stance and must be willing to face the NC within short period of time. It is very clear that the auditors must try to associate to auditee and this lead to the smoother working of the process of the auditing. During the audit, the auditee must inform to workers about the scope and objectives of audit and hire responsible workers to meet up with auditors and offer all resources required for audit team to make sure the efficient and effective audit process (Beeler & Hunton, 2000). The auditee should access to evidential material and facilities as asked by auditors and maintain cooperation with auditors for allowing the purposes to be accomplished. The auditee must find out and take corrective measures based upon the report of audit. It is significant for the auditee that he should view the exercise of the audit as the learning exercise towards the excellence and the quality. The auditee must make the corrective plan accurately so that the auditee becomes capable to bring the action against the auditor successfully. In general, if any NC has given by the auditor then in that case, the auditee must be able to defend its stance and willing to face the NC within the short period of time. At last it can be said the auditee must be able to successfully bring the action against the auditor only with the help of correction plan with corrective actions and measures.

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