ACCA P7 Chapter 16 Social and Environmental Audits

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Chapter 16

Introduction to Social and Environmental Audits

Environmental audit has been defined as ‘A management tool comprising a systematic, documented, periodic and objective evaluation of how well organisations, management and equipment are performing with the aim of contributing to safeguarding the environment by facilitating management control of environmental practices and assessing compliance with entity policies which would include meeting regulatory requirements and applicable standards’.

Environmental issues cannot be ignored by external auditors.

Potential impact on the financial statements may arise from:

the application of environmental laws and regulations

the operation of processes that may cause pollution or the use of dangerous or poisonous substances

the holding of an interest in land and buildings that have been contaminated by previous occupants, or

dependence on a major customer segment whose business is threatened by environmental pressures

Auditors do not have a specific knowledge of environmental matters. However, in planning the audit, they should obtain sufficient knowledge of the business to understand the events, transactions and practices that may have a significant affect on the financial statements or the audit.

Difficulties in measuring social and environmental performance

It is accepted that measuring social and environmental performance is difficult.

The following types of measures may be used:

Direct – for example the number of kilos of contaminant emitted.

Relative –
data compared to another parameter. For example, kilos of contaminant / kilo of product.

Indexed – measured over a period of time.

Aggregated –
information of the same type, but from different sources expressed as a combined value.

Weighted – information modified by applying a factor relating to its significance.

Entities usually provide such information by way of disclosure in their financial statements.

Controls over social and environmental risks

Where environmental matters represent a significant risk, they may fall within the ambit of the internal control system.

Management may achieve control over environmental matters in the following ways:

entities with low exposure to environmental risk, or smaller entities, will probably monitor and control environmental matters as part of their normal accounting and internal control system;

some entities that operate in industries with a high exposure to environmental risk may design and operate a separate internal control sub-system, known as an Environmental Management System (EMS);

other entities design and operate all their controls within an integrated control system, encompassing policies and procedures related to accounting, environmental and other matters (eg quality, health and safety);

some entities may have obtained registration for the environmental controls at specific sites where they operate under the European Commission’s Eco-Management and Audit Scheme (EMAS).

Substantive procedures

Auditors may perform substantive testing to obtain evidence in relation to environmental matters. It is not intended that all of the procedures listed below will be appropriate in any particular case. In many cases, the auditor may judge it unnecessary to perform any of these procedures.

General

Documentary review

Consider minutes from meetings of directors, audit committees, or any other sub-committees of the board specifically responsible for environmental matters.

Consider publicly available information regarding any existing or possible future environmental matters.

Where relevant, consider:

reports by environmental experts about the entity, such as site assessments, due diligence investigations or environmental impact studies

internal audit reports and other internal reports dealing with environmental matters

reports issued by, and correspondence with, regulatory and enforcement agencies

publicly available registers or plans for the restoration of soil contamination and

correspondence with the entity’s lawyers

Obtain written representations from management that it has considered the effects of environmental matters on the financial statements, and that it:

is not aware of any material liabilities or contingencies arising from environmental matters, including those resulting from illegal or possibly illegal acts

is not aware of environmental matters that may result in a material impairment of assets or

if aware of such matters, has disclosed to the auditor all related facts

Assets

Asset impairment

Enquire about any planned changes in capital assets, for example, in response to changes in environmental legislation or changes in business strategy and their impact on the valuation of those assets or the entity as a whole.

For any asset impairments related to environmental matters that existed in previous periods, consider whether the assumptions underlying a write-down of related carrying values continue to be appropriate.

Liabilities, provisions and contingencies

Completeness

Enquire about policies and procedures operated to identify liabilities, provisions or contingencies arising from environmental matters

Enquire about events or conditions that may give rise to liabilities, provisions or contingencies arising from environmental matters

Penalties or possible penalties arising from breaches of environmental laws and regulations or

Claims or possible claims for environmental damage

For property abandoned, purchased, or closed during the period, enquire about requirements or intentions for site clean-up and restoration

For property sold during the period and in prior periods, enquire about any liabilities relating to environmental matters retained by contract or by law

Accounting estimates

For liabilities, provisions, or contingencies related to environmental matters, consider whether the assumptions underlying the estimates continue to be appropriate.

Disclosure

Review the adequacy of any disclosure of the effects of environmental matters on the financial statements.