The Collapse of HIH - Solvency and Audit Risk Following the collapse of HIH, considerable debate, commentary and speculation has arisen regarding whether and at what point HIH is became insolvent. When a company is close to insolvency, the risk associated with auditing that company is significantly higher than that of a solvent company. This report examines the methods for determining insolvency, the roles of directors and auditors, and the level of audit risk associated with HIH before its collapse. There is general agreement that the concept of solvency refers to the ability to meet debts as they fall due. An insurance company is solvent if it is able to fulfill its obligations under all contracts at all times (or at least in most circumstances). However, assessing solvency can be a challenge, as it can be difficult to determine accurate estimates of liabilities at the balance sheet date. The analysis of company solvency can be carried out starting from two indications: financial indications and non-financial indications. Financial guidance is used to evaluate business insolvency: the inability of the company to pay all its debts as they fall due. Non-financial indications are used to evaluate regulatory default, which occurs when the company does not comply with the requirements imposed by legislation, supervisory regulations and other laws. Regulatory insolvency can lead to commercial insolvency. Financial ratios, such as the debt-to-asset ratio, current ratio, and ratios calculated from the cash flow statement can be used to determine business creditworthiness, however care must be taken to ensure that appropriate figures are used in the calculation. HIH's debt-to-asset ratio was 0.89 if figures from financial reports were used; however, if PPE, deferred acquisition costs, intangible assets and future tax benefits were not taken into account, the ratio would be 1.01 – a warning sign of default! This report indicates a serious shortage of long-term provisions. Operational indicators, such as strategic direction, shortcomings of the governing body, rapid or unplanned development of activities, should be considered non-financial indicators of insolvency. During the 1990s, the business environment for Australian insurers was difficult and insurance companies had to change their strategy. During this period, HIH relied excessively on reinsurance to meet its future debts and undertook high-risk insurance services such as UK film investments and marine insurance businesses. HIH's risky investments in FAI and operations in the US and UK were decisions that should have indicated problems with the group's management.