Auditing and Ethics: Financial Analysis of Genworth Mortgage Insurance

This report provides a comprehensive analysis of the auditing and ethics considerations for Genworth Mortgage Insurance Australia Limited. It begins by defining audit materiality and its application within the context of Genworth, including quantitative and qualitative aspects. The report examines the level of materiality used in the audit of group accounts, referencing relevant standards and considering key financial figures like Gross Written Premium and total assets. It then delves into the financial position of the company, analyzing key ratios such as financial leverage, return on equity, net profit margin, and the current ratio from 2014 to 2017. The report identifies key risk areas and recommends relevant auditing procedures, including assertions of existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure. Furthermore, the analysis extends to the statement of cash flows, detailing cash inflows and outflows from investing and financing activities, as well as the company's exposure to various risks, including liquidity, market, and credit risks. The report concludes with a summary of the key findings and implications for the audit process.

Running head: Auditing and Ethics
Auditing and Ethics

Auditing and Ethics 1
Contents
Introduction.................................................................................................................................................2
Section 1......................................................................................................................................................2
Level of materiality used in the audit of group accounts in Genworth Mortgage Insurance Australia
Limited....................................................................................................................................................2
Section 2......................................................................................................................................................5
Analysis of the financial position of the company and relevant auditing procedures for assertions.........5
Section 3....................................................................................................................................................10
Analysis of the statement of cash flows.................................................................................................10
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13

Auditing and Ethics 2
Introduction
Audit materiality is amongst the most important concepts for auditors. Misstatements are
considered material if they influence the decision making of the users based on the financial
statements. Materiality encompasses qualitative and quantitative aspects of auditing. While
dealing with materiality in the aspects of quantity, the points to be considered are setting up of
the preliminary judgment of materiality which is done at the planning stage of audit (ICAEW,
2017).
In this context, there are certain phrases in relation to materiality such as misstatements including
omissions which can impact the decision making of the users of financial statements. It is also
based on the judgment which is based upon the surrounding circumstances comprising of size
and nature if misstatements (CFI Education Inc, 2015). .So, in this article, the concept of
materiality would be discussed in the context of Genworth Mortgage Insurance Australia
Limited.
The draft annual report and its financial statements would also be analyzed along with the
various ratios over the period of 2014-2017. The key risk areas will be assessed and audit
procedures would be advised to mitigate those risks.

Auditing and Ethics 3
Section 1
Level of materiality used in the audit of group accounts in Genworth Mortgage Insurance
Australia Limited
The auditors set the materiality regarding the financial statements at the stage of planning. The
primary purpose is to use it to identify the performance of materiality and clarifying the
thresholds for accumulating misstatements. The concept of materiality pertains to misstatements
and omissions which are considered to be material if they individually or collectively affect the
decision making of the stakeholders on the basis of financial statements. It comprises of
qualitative and quantitative aspects.
As per ASA 320 Materiality in Planning and Performing an Audit, the quantitative
considerations consider the aspects such as setting preliminary judgment for materiality.It is
done at the planning stage of audit and the performance materiality is considered .i.e. materiality
on a line item basis for example inventory and accounts receivable. The materiality should be
estimated in a cycle or a particular account(AASB Standard, 2013).
As per AASB 1031, the qualitative considerations pertain to the non-disclosers made by the
company such as contingent liability and transactions of a related party. There are various
methods which the group auditors use to determine the level of component materiality
comprising of setting up the limit of aggregate of component materiality which is relative to the
group materiality. Their limits would increase proportionately to the increase in the number of
components. Factors influencing the level of component materiality comprise the fact that
component materiality is lower than the group materiality.

Auditing and Ethics 4
In Genworth Mortgage Insurance Australia Limited, the general rule of considering materiality
is 5-10% of normalizing net income and 0.5-2% of the total assets. In this case, the materiality
margin in Gross Written Premium (GWP) should be up to 5-10 %. 10% of GWP A$ 381.91
Million in the year 2016 is A$ 38.191 Million. The maximum GWP in the year 2017 should be
A$ 343.719 Million. In this case, the GWP in the year 2017 is A$368.963 Million.
The total assets in 2016 are A$ 3835.552 Million. The materiality margin, in this case, should be
2% of the total assets which should be A$ 76.711 Million. The total assets should be A$
3758.841 Million. In the given case, the total amount is A$ 3765.885 Million which is greater
than the given amount.
The operating lease commitments of the company were A$10.135 Million in 2016 whereas it
was A$22.317 Million in the year 2017. The group leases the property and equipment as per the
operating leases in which the lessor retains all the benefits and risks arising out of the ownership
of leased items which expire from one to five years.
Upon their renewal, the terms are renewed and the payments of the lease comprise of base
amount along with an incremental contingent rental. The contingent rentals are based upon the
fluctuations in the Consumer Price Index. The auditing procedures to address the contingencies
and risk assessment are:
1. Control the environment
2. Assessment of risk
3. Information system
4. Control the activities
5. Monitoring controls

Auditing and Ethics 5
The auditors are required to assess the issues of governance and whether the company has
created and maintained a culture of honesty and ethical behavior. Secondly, auditors are required
to evaluate the risk assessment procedures of the entity by identifying its business risks and
estimating the relevance of those risks.
The next step would be to obtain the understanding of the information systems and accounting
records. The auditors are required to understand how the company communicates its role in
financial reporting with the regulatory authorities. They are also required to obtain the
understanding of the control activities which are relevant to evaluate the risks of material
misstatements and to formulate procedures to mitigate the risks. Lastly, the auditors should
analyze the monitoring activities used to control over the financial reporting ( Budescu, Peecher
& Solomon,2012).
Section 2
Analysis of the financial position of the company and relevant auditing procedures for
assertions
As per Genworth (2017) the company is the leading provider of Lenders Mortgage Insurance
(LMI) in Australia. LMI has been a crucial part of the residential mortgage lending market in
Australia since Housing Loan Insurance Corporation was founded in 1965 by the Australian
Government.
The vision of Genworth is to provide consumer-focused capital and risk management solutions
in the residential mortgage markets. In the year 2017, its Gross Written Premium was

Auditing and Ethics 6
A$369Million. Its Market Capitalization was $1.5 Billion and the investment portfolio was $3.4
Billion (Genworth, 2017).
The key ratios to be analyzed are financial leverage ratios, Current ratio, Quick ratios, Return on
equity and Net Profit Margin.
Financial Leverage of the company
Year Particulars
2014 7.46
2015 8.30
2016 8.28
2017 7.85
As the ratio is fluctuating from 7.46 in the year 2014 to 7.85 in the year 2017 which means that
the assets are mainly financed through debt than equity (Genworth Financial, Inc.,2015).
Return on Equity of the company
Year Particulars(in %)
2014 -8.49

Auditing and Ethics 7
2015 -4.43
2016 -2.18
2017 6.27
Return on Equity measures the profitability of the company in relation to book value of
shareholder’s equity, so it measures how well the company utilizes its investments to generate
the growth of its earnings. Since a 15-20% is considered good, so the company is not able to
generate income from the available equity.
Net Profit Margin of the company
Year Particulars
2014 -13.01
2015 -7.19
2016 -3.31
2017 9.85

Auditing and Ethics 8
This ratio indicates that how much profits are generated by sales of each Australia Dollar. So,
it has been observed that the net profit margins are reported as negative and in the year 2017,
a positive net profit margin has been reported. It represents the unhealthy financial position
of the company (Genworth Financial, Inc., 2016).
The current ratio of the company
Year Particulars
2014 0.24
2015 0.49
2016 0.72
2017 0.41
The current ratio of the company indicates the ability of the company to pay its short and
long-term obligations. A ratio below 1indicates that the liabilities of the company are greater
and it would be unable to pay its obligations when they become due. The current ratio of the
company for all the years is below 1, so the capability of the company to repay its liabilities
is doubted.

Auditing and Ethics 9
The key risk areas to be addressed to be addressed in the audit plan are an assessment of
audit areas which are affected by economic factors, analyzing the recurring audit
deficiencies. They should increase the transparency through new disclosers and focus on the
independence of auditors (Hall, 2015).
The relevant assertions are used by the auditors in the analysis of financial statements for
assessing their accuracy. These assertions are existence, completeness, rights and obligations,
accuracy and valuation and presentation and disclosure.
The assertion of existence is the declaration that the liabilities, assets and the balance of
shareholder’s equity actually existed at the end of the accounting period. The accounting
procedure to address this assertion is conducting interim and final audit tests. During the
interim audit, the internal control system is documented and assessed. It would determine the
mix of tests of controls and substantive tests which will target transactions conducted so far.
The assertion of completeness pertains to the inclusion of every item in the statement of the
given period. The auditors would check the entries in the relevant ledgers to make sure that
none of them is missed. The supporting documents shall also be assessed to ensure the
occurrence of the transaction (Knechel & Salterio, 2016).
The assertion of right and obligations pertain to controlling of rights by the entity to the
assets and that the liabilities are the obligations of the company. In the case of property, the
deeds of the title should be verified. The current assets should be checked regarding the
purchase of invoices and to confirm the cost (Kaplan Financial Limited, 2012).

Auditing and Ethics 10
The assertion of accuracy and valuation is associated with the actual amount at which the
liabilities, assets and equity interest are valued and recorded. The cost of assets should be
matched with the purchase invoices and the rates of depreciation should be verified.
The assertion of presentation is associated with disclosures of assets and liabilities are done
in a presentable manner which is easy to understand. The relevant accounting procedure is
disclosing the checklist to ensure that the financial statements are presented as per the
accounting standards and legislation (AASB Standard, 2015).
Section 3
Analysis of the statement of cash flows
It can be analyzed from the cash flow statement of the company that the maximum cash inflow is
received from investing activities. It amounts to A$ 120.206 Million in the year 2017. The
maximum cash outflow is from financing activities amounting to A$ 193.505 Million in the year
2017.
The primary cash receipts are from the proceeds received from the sale of investments amounts
to A$ 1398.475 Million and premium received amounting to A$368.963 Million in 2017.
The major cash outflow activities are payment for investments amounting to A$1276.963
Million and cash payments in the course of operations amounting to A$192.267 Million.
The cash flow from investing activities are payments done for plant, equipment and intangibles
amounting to A$13.06 Million and payment for investments amounting to A$1276.963 Million.
The amount received from the sale of investments is A$1398.475 Million.

Auditing and Ethics 11
The non-cash financing activity is the expenditure incurred on the development of software
expenditure amounting to A$25.263 Million and purchase of goodwill amounting to A$9123
Million (Genworth, 2017).
The company is exposed to liquidity, market and credit risk along with low financial leverage,
net profit margin, return on equity and current ratios. Liquidity risk is the risk of insufficient
funds to meet the obligations of the holders of policy and creditors. The company is also prone
to the market risks . It is the risk of loss arising from fluctuations of the market price of the
assets which would result in an adverse impact on the market value of the assets (Van et al.,
2014).
It is of three types viz- currency risk, cash flow and fair value interest rate risk and equity price
risk. Currency risk is the risk of loss arising due to unfavorable movements in the exchange rates
in the market. Interest rate risk arises due to the fluctuating rate of interest. Equity price risk
pertains to fluctuation in the fair value of a financial asset because of changes in the market rate
(Cullinan, Earley & Roush, 2012).
The company is exposed to credit risk because of low current ratio as there is a risk of default by
the borrowers and transactional counterparties and loss of value of assets due to decline in the
credit quality.
As per Siqani & Sekiraca (2016) for addressing the credit risk, the process of risk management
and internal control should be verified and tested regularly. The auditors should recommend that
the company should adopt and implement appropriate risk management and operate the credit
granting process and maintaining credit administration, monitoring and measurement process.

Auditing and Ethics 12
The risk measurement system should measure all the important market risks of the assets,
liabilities and off-balance sheet items. The auditors should adopt net income simulation,
economic valuation model, street test and repricing gap report ( Mock & Fukukawa,2015).
The liquidity risk should be managed by the internal auditors by verification the forecast cash
flows. Internal auditors must assess whether liquidity targets for cash balances have been
defined. Compliance has been monitored with regard to defined limits and they should report the
instances of non-compliance to the audit committee (International Professional Practices
Framework, 2017).
The key audit matters addressed were the valuation of gross outstanding claims liability and net
earned a premium and unearned premium liability. The valuation of gross outstanding claims is a
complex matter of valuation methods. The outstanding liability of claims reflects the analysis for
future expected outcomes which are influenced by several factors including the macroeconomic
ones. The role of the auditors is to evaluate the underlying documents regarding the methods and
assess the changes in the values as compared to the previous year.
The net earned a premium and unearned premium liability are the key audit matters as methods
of actuarial science are used to model the earnings curve and relevant judgment is applied to
assess the adopted assumptions. So, as a result, the senior level actuarial specialists have been
involved to judge the authenticity of the adopted assumptions and the contingency of adopted
pattern of risk emergence have been assessed.

Auditing and Ethics 13
Conclusion
Hence to conclude, it can be said that materiality is crucial for auditors as they are accountable
for providing an opinion of the financial statements are prepared in all the material respects and
according to the financial reporting framework . So the focus of auditing is to recognize the
risks of material misstatements and formulating the procedures to quantify them.

Auditing and Ethics 14
References
AASB Standard (2013). Materiality . Retrieved August 30th, 2018 from
https://www.aasb.gov.au/admin/file/content105/c9/AASB1031_12-13.pdf
AASB Standard (2015). Auditing Standard ASA 320 Materiality in Planning and Performing an
Audit. Retrieved August 30th, 2018 from
https://www.legislation.gov.au/Details/F2016C00029
Budescu, D. V., Peecher, M. E. & Solomon, I. (2012). The joint influence of the extent and
nature of audit evidence, materiality thresholds, and misstatement type on
achieved audit risk. Auditing: A Journal of Practice & Theory, 31(2), 19-41.
CFI Education Inc(2015) . Audit Materiality. Retrieved August 30th, 2018 from
https://corporatefinanceinstitute.com/resources/knowledge/accounting/audit-
materiality/
Cullinan, C. P., Earley, C. E. & Roush, P. B. (2012). Multiple auditing standards and standard
setting: Implications for practice and education. Current Issues in
Auditing, 7(1), C1-C10.
Genworth (2017) .2017 Annual Report. Retrieved August 30th, 2018 from
http://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_GMA
_2017.pdf

Auditing and Ethics 15
Genworth Financial, Inc.(2015). 2015 Annual Report. Retrieved August 30th, 2018 from
http://s2.q4cdn.com/240635966/files/doc_downloads/2016/Genworth-
Financial-2015-Annual-Report-(Bookmarked)-[FINAL].pdf
Genworth Financial, Inc.(2016). 2016 Annual Report. Retrieved August 30th, 2018 from
http://s2.q4cdn.com/240635966/files/doc_financials/2016/annual/GENWOR
TH-2016-ANNUAL-REPORT-[FINAL](Bookmarked).pdf
Hall, J. A. (2015). Information technology auditing. USA: Cengage Learning. 1-565.
ICAEW (2017). Materiality in the audit of financial statements. Retrieved August 30th, 2018
from
https://www.icaew.com/-/media/corporate/files/technical/iaa/materiality-in-
the-audit-of-financial-statements.ashx
International Professional Practices Framework (2017). Auditing Liquidity Risk. Retrieved
August 30th, 2018 from https://www.iia.nl/SiteFiles/PG-Auditing-Liquidity-
Risk-An-Overview.pdf
Kaplan Financial Limited(2012). Materiality . Retrieved August 30th, 2018 from
http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Materiality.aspx
Knechel, W. R. & Salterio, S. E. (2016). Auditing: Assurance and risk. NY: Routledge. 1-20.
Mock, T. J. & Fukukawa, H. (2015). Auditors' risk assessments: The effects of elicitation
approach and assertion framing. Behavioral Research in Accounting, 28(2),
75-84.