Darwin Pharmaceuticals Pty Ltd (DPPL) imports a number of pharmaceutical products. In order to hedge its...

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Darwin Pharmaceuticals Pty Ltd (DPPL) imports a number ofpharmaceutical products. In order to hedge its foreign currencytransactions, DPPL entered into a number of forward rate agreementsthis year. Prior to this time, DPPL had had little exposure toderivative instruments, but a series of bad experiences resultingfrom fluctuating exchange rates convinced the company that ahedging strategy was necessary. During planning for the audit ofDPPL, the company’s hedging arrangements were identified asinherently risky and increased testing was carried out in thisarea. A number of small errors were noted in accounting for hedgetransactions, but there did not appear to be any material errorsand as such, no adjustments were made. A review of the audit filesuggests that the errors noted were a result of inexperience andpoor controls in the area. While all of the errors were brought tothe attention of the treasurer, who is responsible for thecompany’s hedging strategy, no further action has been taken todate.
REQUIRED: Outline what further action the auditor should take inresponse to the errors and control weaknesses identified. Justifyyour response.

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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 See Answer

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Darwin Pharmaceuticals Pty Ltd (DPPL) imports a number ofpharmaceutical products. In order to hedge its foreign currencytransactions, DPPL entered into a number of forward rate agreementsthis year. Prior to this time, DPPL had had little exposure toderivative instruments, but a series of bad experiences resultingfrom fluctuating exchange rates convinced the company that ahedging strategy was necessary. During planning for the audit ofDPPL, the company’s hedging arrangements were identified asinherently risky and increased testing was carried out in thisarea. A number of small errors were noted in accounting for hedgetransactions, but there did not appear to be any material errorsand as such, no adjustments were made. A review of the audit filesuggests that the errors noted were a result of inexperience andpoor controls in the area. While all of the errors were brought tothe attention of the treasurer, who is responsible for thecompany’s hedging strategy, no further action has been taken todate.REQUIRED: Outline what further action the auditor should take inresponse to the errors and control weaknesses identified. Justifyyour response.