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.
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.
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.
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:
b) What conditions need to exist for a negligence action to be upheld?
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.
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
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?