Question 1 – Business Risk and Inherent Risk Assessments
a) There are many factors that impose significant impact on the activities of the HIH insurance company. The misstatements in the financial statement of the company were the main reason for the failure of the organization. The inherent risks also affected the business activities of the organization. The financial statements depicted an increase in the debt level which means an increase in the risk for the company. Apart from the financial report representation, the internal and external factors also affect the operations of the company (Appannaiah, Reddy and Putty, 2010). The other factors which can be also considered as major risk are making payment customers for the damages to their assets. The risk factor for the insurance company is always high, and the management has to deal with the situations. The misstatement in the financial statement means an unfair representation of the total value of the company. The internal factors that affect the operation of the company are employees, technology, managers and work processes. The external factors that affect the operation of the company are political, social, legal and economic. The rules and regulations need to be followed by the accountants and auditors during the preparation of the financial statements.
B) The inherent risk that was associated with the HIH insurance organization was incorrect or misleading financial information in the financial statements. The financial report of the company provides wrong information to the stakeholders. The inherent risk is referred to the material misstatement in the financial report that arises due to omission or error. The accountants and auditors are mainly responsible for unfair presentation of financial statements in front of the stakeholders (Besley, 2016). The possibility of inherent risk increases when there are complexities in the accounting and auditing procedure. It becomes difficult in the fair value representation of the financial statements of the company. The prices of the share have also been decreased due to the unfair accounting practices conducted by the accountants and auditors. The financial report should disclose the appropriate value of the company. The report depicted high debt level which was not correct and presented in front of the stakeholders.
a) The main cause of the failure of the company was the failure or mismanagement of all the business operations by the senior managers. The performance of the company has been decreased, and the share prices have also been decreased due to the illegal practices conducted by the accountants and auditors. The unfair representation of the financial statements of the company imposed a significant impact on the clients associated with the company. The clients lost their faith in the company and also many of loses money that they had invested for the development of the organization (Britton and Waterston, 2013). Many customers also lose their money due to the failure of the company as per the information provided in the financial report. The company is held responsible for the loss incurred by many people. The management of the company should pay the losses and manage all the operations. The company is also helping responsible for the losses incurred by the creditors. The due amounts of the creditors should be paid by the company. The creditors give loan or supply required items to the company. The management did not manage the operations of the company, and the company is responsible for the losses incurred by the stakeholders. The interests of the clients and creditors are affected by the unfair representation of the financial report.
Question 2 – Legal Liability
B) In the case study, the management team of HIH insurance company is responsible for the failure for the organization. The negligence act shows the breaching of duty of care that can harm an individual. The elements provide the negligence act that is shown in the case study. The accountants and auditors are responsible for unfair representation of the financial statements. It shows the negligence act conducted by the accountants, auditors, and management of the company. The case study clearly depicted that the results affected the interests of many stakeholders (Powers and Needles, 2012). The facts and findings show that the stakeholders of the company were mostly affected and lost their faith. The process that was being followed by the auditors were inappropriate which shows negligence act by them. The law clearly states that the unethical accounting and auditing procedures are to be considered as an unethical act. Legal actions should be taken against the management team of the company. The process can be considered as breaching the rules and regulations of the law.
a) The company appointed Arthur Andersen as the part of the audit team which is depicted to the three partners as the part of the audit team. The HIH insurance company provided $7 million for the work of audit to Arthur Anderson for the accomplishing the accounting and auditing processes. The company also focused on establishing a professional relationship with the auditors. The external audit team plays a significant role in providing the fair value of the company to the stakeholders. The internal auditors help the external auditors to carry out the auditing processes (Spiceland, 2010). Thus, the external auditors play a significant role in determining and evaluating errors and omissions in the accounts of the financial statements.
B) The advantages of having the same firm providing both the auditing and consulting services are that the company will be able to get advice from the firm. The audit firm will determine and analyze the accounts of the financial statements and also provides a suggestion about where to make changes for providing the fair value of the company. The main job of the audit firm is to provide the fair value of the company and maximizing the efficiency of the company (Stice and Stice, 2014). The audit firm will be able to direct the internal accountants and auditors about how the financial statements should be prepared. The rules and regulations should be followed by the accountants and auditors.
C) The unfair representation of the financial statements clearly shows that the ethical standards are violated. The ethical rules and regulations were not followed by the accountants and auditors. The representation of financial report in an appropriate manner means unethical practices being conducted by the accountants and auditors. The act should be considered as an illegal act, and ethical standards are violated (Weil, 2017). The management team is also responsible for the mismanagement of all the processes. The financial statements were not reviewed by the accountants and auditors.
D) The main reason for the failure of the HIH insurance limited organization was the unfair preparation of the financial statements, and the management team mismanaged all the business operation. The Ramsay report provides guidelines to the auditors and importance for the independence of the auditors (Welch, 2014). The auditors are responsible for preparing the financial report and provided adequate powers to carry out their responsibilities. The misrepresentation of the financial statements means illegal accounting practice conducted by the accountants and auditors. The Ramsay report and CLERP 9 guides the auditors to analyse the financial statements. The accounts in the financial statements is to be recognized at fair value.
References
Appannaiah, H., Reddy, P. and Putty, R. (2010). Financial accounting. Mumbai [India]: Himalaya Pub. House.
Besley, S. (2016). Corporate finance. [Place of publication not identified]: Cengage Learning.
Britton, A. and Waterston, C. (2013). Financial accounting. Harlow: Financial Times Prentice Hall.
Powers, M. and Needles, B. (2012). Financial accounting. [Mason]: South-Western, Cengage Learning.
Spiceland, J. (2010). Intermediate accounting. Toronto, ON: McGraw-Hill Ryerson.
Stice, J. and Stice, E. (2014). Intermediate accounting. Mason: South-Western/Cengage Learning.
Weil, R. (2017). Financial accounting. [Place of publication not identified]: Cengage Learning.
Welch, I. (2014). Corporate finance. Los Angeles: Ivo Welch.
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