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Question 4b

You are a manager in Groom & Co, a firm of Chartered Certified Accountants. You have just attended a monthly meeting of audit partners and managers at which client-related matters were discussed. Information in relation to a client, which was discussed at the meeting, is given below:

Bulldog Co

Bulldog Co is a clothing manufacturer, which has recently expanded its operations overseas. To manage exposure to cash flows denominated in foreign currencies, the company has set up a treasury management function, which is responsible for entering into hedge transactions such as forward exchange contracts. These transactions are likely to be material to the financial statements. The audit partner is about to commence planning the audit for the year ending 31 July 2013.

Required:

Discuss why the audit of financial instruments is particularly challenging, and explain the matters to be considered in planning the audit of Bulldog Co’s forward exchange contracts. (8 marks)