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ACC3AUD Auditing And Assurance

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ACC3AUD Auditing And Assurance

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Course Code: ACC3AUD
University: La Trobe University

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Country: Australia


You are a part of the team responsible for planning the audit engagement for 2018 of your selected firm. You and your colleagues are required to gather relevant background information and prepare a report for a meeting with your senior managers and audit partner. Your report must address the following issues:

What are the areas in which the firm conducts its operations?
Who are the FOUR primary competitors of the firm?
Which particular laws/regulations (other than financial related categories, e.g., Australian taxation laws, Corporation Act 2001 etc.) affect operations of the firm? You need to identify and describe at least FOUR laws/regulations.
Identify and explain FOUR business risks that could have impact on the audit of the firm.
Based on your business risk analysis and understanding of the firm and its environment, list and explain FOUR accounts to be at risk of material misstatements.  You also need to identify the key assertion at risk for each identified account.
Based on your understanding of the client and assessment of the client’s business and audit risks, would you undertake the audit? Why?            


Areas in which Medibank conducts its operations:
Medibank Private Limited is an integrated healthcare organisation involved in providing health solutions and private health insurance in Australia. The organisation is engaged in operating in two segments, which mainly include Medibank Health and Health Insurance. It is the second biggest health insurance provider after Bupa in Australia having 29.1% of market share and 3.8 million members (Medibank 2018). The segment of Health Insurance provides private health insurance products constituting of hospital cover providing members with health cover for hospital treatments. The organisation includes ancillary cover as well that offers its members with health cover for healthcare services like optical, dental and physiotherapy. The segment provides health insurance products to the overseas students and overseas patients.
In addition, the segment of Medibank Health provides telehealth and health management services to the corporate and governmental customers along with distributing life, travel as well as pet insurance products. The organisation is associated with underwriting its health insurance products under the brands of AHM and Medibank. The head office of the organisation is situated at Docklands in Australia and it has been established in 1976. The primary aim of the organisation is intended to deliver superior health to the customers by providing health services, advocacy of the health system and overall community work. Thus, Medibank ensures widening the most effective combination of products, services and advices for its customers.
Four business risks that could have impact on the audit of Medibank:
The four business risks, which could affect the audit operations of Medibank, include the following:
Market risk/interest rate risk:
Market risk could be defined as the risk that the future cash flows or fair value related to a financial instrument, which would vary owing to changes in market values. Interest rate risk is one such market risk, in which the future value of cash flows of any financial instrument would vary owing to variations in market interest rates (Cohen, Krishnamoorthy and Wright 2017). In case of Medibank, the organisation has been exposed to the change risks in market interest rates with reference to its fixed income investments along with cash and cash equivalents. These two financial assets have variable rates of interest and hence, they are exposed to movements in cash flows with variations in interest rates. As per the annual report of Medibank in 2017, the financial assets exposed to the variable interest rate risk are illustrated as follows:
In this case, it is necessary to ascertain whether an effective level of top management or staff validates and reviews the structure and assumptions of the interest rate. If the staffs or management conducting these reviews are not independent adequately from those developing interest rate risks, it would pose significant threat to the auditors. This is because the estimations might be biased.
Foreign currency risk:
Another business risk that would affect the audit activities of Medibank is foreign currency risk. In the words of Griffiths (2016), foreign currency risk could be explained as the risk, in which the fair value of financial instruments would vary because of modifications in foreign exchange rates. The investments of Medibank in infrastructure and syndicated loans are managed externally and the fund manager hedges the currency exposures from the economic perspective. The global equities are managed externally and nearly 50% of the foreign currency exposure is not hedged. The organisation has transactional currency exposures arising from currency purchases besides the functional currency (Hines et al. 2015). These transactions include operating costs within trade payables, which are minimum and foreign currency investment purchases. As per its annual report in 2017, the organisation has revealed its net exposures to movements in foreign currencies, which are represented as follows:
The risk exposures in the balance date depict the risk exposure evident in the financial instruments. In this case, if the foreign currencies are not translated based on intra-day and daily fluctuations of exchange rates, it might result in audit risk for the organisation. In fact, this inaccuracy might result in material misstatements in the financial reports of Medibank.
Price risk:
Another inherent business risk for Medibank is price risk. This type of risk mainly arises when the fair value of future cash flows of any financial instrument changes due to variations in market prices, influential dynamic particular to the financial instrument or influential dynamics impacting all other similar financial instruments in the market (Iskandar et al. 2018). Medibank is observed to be exposed to price risk in relation to its fixed income investments owing to fluctuations in credit spreads. The management of risk is conducted by active credit exposure management as well as credit spread duration. The equity price risk of the organisation takes place from investment in infrastructure, property, Australian and global equities. The risk management department of Medibank manages this risk by developing and monitoring objectives along with constraints on investments, expansion plans and investment restrictions in each sector, market and nation. If the estimations are not made accurately, the future return on investment would be lower and this poses a significant audit risk for the organisation. In addition, the impact of provisional pricing and future price revisions might not be disclosed adequately in the financial statements (Leidner and Lenz 2017).
Credit risk:
As commented by Bessis (2015), credit risk is apparent in investment and lending. This could arise due to brokers, agents, clients and reinsurers. This type of risk is default in decline or payment in the quality of credit. The investment concentration in counterparty, economic sector, geographical areas and industry is normally risky.  Moreover, this type of risk could occur from too much exposure to group organisations. Furthermore, perfunctory overview of the potential risks and complexities in complicated derivative contracts could result in credit risk as well.
In case of Medibank, credit risk takes place from the financial assets of the organisation constituting of cash and cash equivalents, trade and other receivables along with financial assets at fair value via profit or loss. The organisation uses reference to exposures by ratings bands, industry, country and instrument type. The policy of investment management of Medibank restricts maximum of internally handled credit exposure to A- or increased rated categories in relation to long-term investments and A2 or greater in relation to short-term investments. The external rating agencies like Standard & Poor’s mainly help in providing credit rating to Medibank. Any shifts or departures from this policy and recruiting external managers need approval from the board of the organisation.
Credit risk is computed depending on the repaying ability of the organisation (borrower). Some organisations have established departments accountable for analysing the credit risks of its existing and potential customers. In addition, with the help of technology, the business organisations have the ability to assess data rapidly for analysing the risk profiles of their customers (Sadgrove 2016). However, in case of Medibank, the organisation does not possess financial instruments for mitigating credit risk and hence, security is not ensured on investments. There are certain exceptions, which include asset-backed securities, covered bonds and mortgage-backed securities. The board of Medibank manages the effect of the counterparty default with the help of approved limits by rating, counterparty and expansion of counterparties. This might have significant influence on the financial statements, as the unavailability of financial instruments to mitigate credit risk might have adverse impact on the investment return for the investors. As a result, it could be considered as a significant audit risk for the organisation (Van Buuren et al. 2014).
Bessis, J., 2015. Risk management in banking. John Wiley & Sons.
Cohen, J., Krishnamoorthy, G. and Wright, A., 2017. Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members, CFO s, and External Auditors. Contemporary Accounting Research, 34(2), pp.1178-1209.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hines, C.S., Masli, A., Mauldin, E.G. and Peters, G.F., 2015. Board risk committees and audit pricing. Auditing: A Journal of Practice & Theory, 34(4), pp.59-84.
Iskandar, T.M., Jamil, A., Yatim, P. and Sanusi, Z.M., 2018. The role of internal audit and audit committee in the implementation of enterprise risk management. International Journal of Business and Globalisation, 21(2), pp.239-260.
Leidner, J.J. and Lenz, H., 2017. Client’s business risk, public?interest entities, and audit fees: The case of German credit institutions. International Journal of Auditing, 21(3), pp.324-338.
Medibank., 2018. Medibank Private Health Insurance | For Better Health | Medibank. [online] Available at: https://www.medibank.com.au/ [Accessed 20 Dec. 2018].
Medibank.com.au., 2018. [online] Available at: https://www.medibank.com.au/content/dam/medibank/About-Us/pdfs/MPL_Annual_Report_2017.pdf [Accessed 20 Dec. 2018].
Sadgrove, K., 2016. The complete guide to business risk management. Routledge.
Van Buuren, J., Koch, C., Van Nieuw Amerongen, N. and Wright, A.M., 2014. The use of business risk audit perspectives by non-Big 4 audit firms. Auditing: A Journal of Practice & Theory, 33(3), pp.105-128.

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