EOFY Auditor Guide: How to Master Hedge Accounting Audits

Auditing hedge accounting programs can be a complex and challenging task, particularly when it comes to complying with the intricacies of IFRS 9.

Accurate financial reporting and identifying gaps within the hedge accounting program are critical for a successful end-of-year financial assessment.

To streamline the auditing process and ensure compliance, we’ve created a comprehensive 4 step guide specifically for audits involving IFRS 9 hedge accounting which provides auditors with a systematic approach to identify gaps and potential errors in financial records.

By following the steps outlined below, auditors can gain a more comprehensive understanding of the financial statements, enhancing confidence in EOFY reporting:

Step 1: Collate all relevant reports and documentation

The first step is to gather all relevant reports and documentation. This includes requesting a list from executing partners of all outstanding financial derivatives and reconciling it against the number of trades in the client's hedgebook at year-end. It is crucial to check whether the supporting hedge relationship documentation complies with IFRS 9 criteria requirements for hedge accounting.

Additionally, auditors should verify if the documentation mentions possible sources of ineffectiveness and methods to quantify them.

Step 2: Fair value measurement

In this step, auditors should focus on fair value measurement. It is essential to check the reasonableness of the fair value of the hedgebook and ensure it aligns closely with the calculated or assessed value.

Auditors should also examine whether any adjustments have been recorded for credit risk and if the credit risk has been adequately assessed. Furthermore, auditors should verify whether the valuation on the balance sheet includes the netting of assets and/or liabilities and if this has been appropriately disclosed in the notes to the accounts.

Step 3: Hedge effectiveness testing

Hedge effectiveness testing plays a crucial role in hedge accounting audits. Auditors should look for evidence of testing and consider any sources of ineffectiveness. For cash flow hedges, auditors should examine how the movements in fair value compare to the hypothetical swap and request the methodology used. It is also important to check if any amounts for ineffectiveness have been posted into the general ledger and how they were calculated.

Step 4: Hedge-related disclosures

The final step focuses on hedge-related disclosures. Auditors should verify whether a sensitivity analysis has been conducted to assess the impact of market risk movements on the financial reports for the entity's exposures.

Additionally, auditors should examine whether gains or losses have been presented consistently on the face of the income statement in comparison to prior years.

Mastering hedge accounting audits for EOFY success requires a deep understanding of IFRS 9 hedge accounting and meticulous attention to detail. By following the steps outlined in this blog, auditors can identify gaps and potential errors in financial records, streamline the auditing process and gain a more comprehensive understanding of the financial statements, enhancing confidence in EOFY reporting.