Question

Darwin Pharmaceuticals Pty Ltd (DPPL) imports a number of pharmaceutical products. In order to hedge its foreign currency transactions, DPPL entered into a number of forward rate agreements this year. Prior to this time, DPPL had had little exposure to derivative instruments, but a series of bad experiences resulting from fluctuating exchange rates convinced the company that a hedging strategy was necessary. During planning for the audit of DPPL, the company’s hedging arrangements were identified as inherently risky and increased testing was carried out in this area. A number of small errors were noted in accounting for hedge transactions, but there did not appear to be any material errors and as such, no adjustments were made. A review of the audit file suggests that the errors noted were a result of inexperience and poor controls in the area. While all of the errors were brought to the attention of the treasurer, who is responsible for the company’s hedging strategy, no further action has been taken to date.

REQUIRED: Outline what further action the auditor should take in response to the errors and control weaknesses identified. Justify your response.

Answer 1

Auditing is an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. The objective of auditing is therefore to assist members of the organization in the effective discharge of their responsibilities. In this scenario, the auditor should perform below duties to measure the severity of the errors and controls weaknesses identified and publish the report as per the Auditing principles:

1. Determine whether the existing system of controls is in harmony with the structure of the organisation. As far as possible keeping the controls within the operating functions acts as a cost effective measure.
2. Review each control and analyse them in terms of costs and benefits;
3. Review the reliability and integrity of financial and operating information and the means used to identify measure, classify, and report such information.
4. Review the systems established to ensure compliance with those policies, plans, procedures, laws, and regulations which could have a significant impact on operations and reports, and should determine whether the organisation is in compliance.
5. Review the means of safeguarding assets and, as appropriate, verify the existence of such assets. The objective of the management is to ensure that assets are reasonably and adequately protected against loss and that they are properly managed and accounted for.
6. Review operations or programmes to ascertain whether results are consistent with established objectives and goals and whether the operations or programs are being carried out as planned.