environmental audititing 2006[1]

Apt Financial Consultants CPA Reviews

ENVIRONMENTAL AUDITING

1.0 What is environmental auditing?An environmental audit is the systematic examination of the interactions between any business operation and its surroundings. This includes all emissions to air, land and water, legal constraints, the effects on the neighbouring community, landscape and ecology and the public’s perception of the operating company in the local area.1.1 An environment audit is a management tool comprising a systematic, documented, periodic and objective evaluation and objective evaluation of how well organizations, management and equipment are performing with the aim of contributing to safeguarding the environment by facilitation management control of environmental practices, and assessing compliance with company policies, which would include meeting regulatory requirements and standards applicable. 2.1 The examination of environmental matters is increasingly becoming significant to an increasing number of entities and may have a material impact on their financial statements. These issues are of growing interest to the users of financial statements. The recognition, measurement, and disclosure of these matters is surely the responsibility of management.2.2 An environmental audit is an audit which confirms the compliance with both internally and externally determined emission /pollution standards. The results of an environmental audit have implication for the external financial auditor since financial liabilities for causing environmental damage are rapidly increasing.2.3 In its widest sense an environmental audit should involve examining all aspects of how an

organization impacts with the environment.2.4 The audit objective is to compare actual recorded emissions and discharges of all

environmentally sensitive materials against such pre-determined limits. The external statutory limits in case there result in legal action against the auditee enterprise; thus review for environmental liabilities forms part of the contingent liability checklist.

2.5 It has been described as a ‘management tool’ comprising a systematic, documented, periodic and objective evaluation of how well environmental organization, management and equipment are performing with the aim of helping to safeguard the environment by:

Facilitating management control of environmental protection Assessing compliance with company policies which would include meeting regulatory

requirements.2.4 What environmental auditing must not be thought of as is simply complying with legislation. Nor is it a public relations exercise. It is really about a strategic approach to the organization’s activities. Some people have described it as a ‘cradle to grave’ process or, if you apply a total approach it may be thought of as ‘design to recycling’. In short, it may be thought of as management system providing information on environmental performance against pre-set targets.2.5 There are three essentials to starting a successful audit; Commitment: you must have the backing of senior; management and Board level approval for the objectives and follow-up actions; Resources; this is not so much about money as management time. Time devoted early on can save time and resources later; Leadership : a big team of people is not usually necessary. However, responsibilities must be allocated. The audit requires a team leader or principal auditor who has access to the Board or Chief Executive. This person is responsible for accessing and harnessing appropriate skills within the company.2.6 An environmental audit has many similarities to a financial audit. The audit team needs checklist of key issues in order to verify compliance and performance. The check list would usually include

Company policy: is there a clear environmental policy statement approved at Board level ?

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Communication: is there a communication policy covering environmental issues? Staff training and participation: are company staff trained to care for the environment at work? Raw materials : are there alternative raw materials that can be used to put less demand on the

environment (eg. softwood vs. hardwood). Is recycling an option that could be implemented ? Products and processes : do the company’s products and services incorporate the most effective

technologies for minimizing environmental impacts ? Energy use : is there an energy policy as regards efficiency and reducing energy use (eg.

insulation ); Waste and discharges : does the company know what waste it produces, how much and what it

costs to dispose of or treat ? Is there a waste reduction programme in force Transport and distribution : how does the workforce travel to and from work ? could this be organised to reduce fuel demands ? is there a system for transporting dangerous goods and wastes ?

Accidents and emergencies : are there systems for dealing with accidents including effective communication links to emergency services ?

2.7 Objective of audit : What are we trying to achieve ? The following basic questions need to be answered in relation to the environmental performance of the company :What are we doing? Can we do it better? Can we do it more? Can we do it more cheaply? A balance is need to try to optimize the efficiency of the company’s business and, at the same time, minimize its environmental impacts

2.8 Scope of the auditDepending on the size of the company, it may be best to audit the whole operation, certain departments or certain sites. The principles remain the same whatever level of audit is undertaken.2.9 Define the baselineThis requires us to understand the regulations and standards in force at NEMC level, Radiation commission levels, national level and then local/regional statutes. Defining the baseline also requires knowledge of the technological and product developments that have occurred recently that could help the company’s environmental performance.

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3.0 Set the priorities. It is important to be realistic. It is usually best to start with areas obvious improvements and efficiencies can be made. A common starting point is energy management because here there can be immediate cost savings with little capital investment, and there are immediate environmental benefits in terms of the ‘greenhouse effect’.3.1 Select and appoint the audit team. Where possible the team should include environmental experts as well as those familiar with the type of business involved. At company level it is usually helpful to have people on the team who represent: purchasing, production, marketing and distribution.3.2 Is external assistance needed? Time constraints or the lack of expertise sometimes mean that external consultants need to be appointed. This has the added advantage of impartiality. If consultants are to be used it is essential to ensure they are given a clear set of instructions and that confidentiality is respected. It must always be the company who determines what is made public or given to the appropriate authorities.3.3 What are the time scales?It is important that realistic deadlines are set and adhered to in terms of preparing a written audit report and sending it to the Board.3.4 What to look for and what to check on: Company environmental policy: how does the company communicate with employees and

shareholders? Staff training: is there a training programme to increase awareness of environmental issues? Accidents: is there a proper contingency plan? Permits: are all planning and operating licenses in place and adhered to? Process technology: are there improvements or modifications that could be made to reduce environmental impacts or improve efficiency of materials use so as to generate indirect environmental benefits? Products: what are the environmental impacts of the company’s products (eg. packaging, recycling potential). This is sometimes called Life Cycle Analysis; Wastes: how and where is waste generated? Can it be minimized? Could the waste streams be segregated or sorted so as to reduce environmental effects.

3.5 Assessment.This must be factual and objective, not subjective. The presentation of the data must be understandable and clear. Conclusions must be drawn and verified with the people responsible for the associated work area or process before the final report is prepared.3. 6 Reporting.This should draw attention to defects so that action can be taken Recommendations should be made, along with an estimate of costs and timescale of urgency.3.7 Implementation.Formulate an Action Plan, give it Corporate Policy status and publish it internally, indicating the 2timescales involved3.8 Monitoring and follow-up.People change and priorities change but this must not be used as an excuse for slowing down or ignoring environmental improvement initiatives. There needs to be a monitoring procedure to check on compliance (with the law) and on specific, especially vulnerable or sensitive processes or areas.This monitoring or checking procedures should include Management Systems. Oftenly refered as ENVIRONMENTAL MANAGEMENT SYSTEMS (EMS). The intention of a procedure such as this is to: permit a management system to be implemented, assure compliance with the environmental policy, demonstrate compliance to third parties, seek certification by an accreditation authority.

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Audit, Review and Improvement

Continual Improvement


Environmental Management System Model (ISO 14001)3.9. The EMS has the following advantages: Cost saving by Increased operating efficiency,

Improved environmental performance Identification of cost savings, Cheaper insurance premiums; Competitive advantage by Improved company image, Improved public relations, Marketing tool, Easier financing, Fulfillment of environmental policy; Risk reduction by Control of existing risks and future liabilities. Workforce awareness; and Regulatory compliance by controlling environmental legislation requirements, Staying ahead of legislation.

4.0 Internal Environmental Auditors, large companies have carried out environmental audit programs using teams of one or more competent staff members. Audit teams may comprise from one to ten members (generally three to five), selected because of their technical knowledge, their ability, their auditing experience and their independence from the facility being audited. 4.1 Figure 1 is a graphical representation of the activities during an audit of a large mining operation, and Figure 2 is a simplified procedure for small mines.

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Measurement and Evaluation

Commitment and Policy

Planning

Implementation


The audit protocol ( strategy) presents a plan for the auditor to follow in order to gain evidence about an organization’s environmental practices. This plan may be a standard procedure or it may be a guideline specific to the organization or facility being audited. A detailed protocol will also provide a format for assigning specific tasks to individual members of an audit team, for comparing what was accomplished during the audit with the original audit plan and for summarizing and recording the work in progress and work completed. A major advantage of using a comprehensive audit protocol is to ensure consistency in the audit process and reporting procedures. This is particularly important where audit team membership is rotated. An audit protocol can also be used to help train inexperienced auditors and to reduce the amount of supervision required by the leader of the team. It should be understood that not every audit will follow every step outlined below. Modification of the procedure will be necessary to suit each case.4.4 Audit planning. The pre-audit planning phase is often quite time-consuming, entailing lengthy reviews of relevant information on facilities being audited. Pre-audit requirements will also vary depending on whether it is a single or multiple site/facility and whether audits are to be conducted across legal boundaries, that is, whether all of the audited areas are in one State or country. Example

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4.6 In addition, pre-audit planning for multiple sites/facilities also includes a range of choices that must be made about individual audit sites as well as the total audit program. To make these choices the following questions must be considered: 1.Are all facilities operated by the organisation to be included, or only selected facilities? What are the implications for environmental risk management in leaving out the facilities; not selected? Priority should be given to facilities with poor environmental practices or a history of non-compliance with regulatory requirements.

Will the same auditors conduct all of the audits at every facility? Factors to be considered are: the cost of training for additional auditors; the cost of travel and accommodation for a single audit team to visit each facility; whether consistency can be maintained using a variety of auditors; and whether using different auditors over a number of facilities will increase the knowledge base of the organisation.

Should a common protocol be used for each facility, or should specific protocols be developed for different facility types?

Should the cost of the environmental audit be carried by each facility being audited or should the funds be provided by the corporation?

Is the objective of the environmental audit the same for each facility or do different facilities warrant different objectives? For example, should the audit objective for an underground mine, an

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open-cut mine, a processing plant, a refinery, a warehouse, a transport workshop and the head office of a single organisation all be the same?

4.6 The legal information required for an environmental audit will depend on the type and complexity of the operation and the range of approvals, leases and licences that control its operation.4.7 Conducting the Audit InterviewEnvironmental auditors begin by interviewing relevant staff. These interviews should be pre-arranged with the facility management. Depending on the type of protocol being followed, interviews may take several hours for a small minesite or several days for a large operation and may consist of numerous separate discussions with individuals or groups.In addition to the environmental manager, the mine or facility manager, operational managers, maintenance managers, transport managers, processing plant managers and process control engineers, any others who may be involved in the production or removal of wastes should be present at the audit interview. Depending on the scope of the audit, marketing personnel, a legal representative (either in-house or external), plant chemists and quality control managers may also be interviewed.4.9 Conducting the Site InspectionAlthough a general site inspection may be appropriate before or during the course of the audit interview, it is preferable for a detailed site inspection to follow immediately after the interview. The inspection time may vary, depending on the size and complexity of a mine or operating facility.A walk-through site inspection can often be undertaken in an hour or two to give auditors a general overview of a facility. If outside auditors are commissioned to undertake an environmental audit, they will often have undertaken a walk-through prior to providing a quote.5.0 Collecting Audit Data -Working PapersA considerable amount of data and information is gathered during the environmental audit procedure. It consists of the audit protocol, documentation supplied by the facility, the auditor's own notes and observations, results of sampling and monitoring, if appropriate, and photographs, plans, maps, diagrams and other illustrative material. Effective Environmental Auditing suggests that for each topic assigned to each audit team member, the working papers should include notes of people contacted, discussions held, records reviewed, tests performed and conclusions reached. These working papers form an important part of the documentation of an environmental audit and must be carefully assembled. Each document or item should be numbered and preferably retained in a folder or large ring binder in numerical sequence, so that it can be easily reviewed and retrieved or, if it is removed from the binder, it can be replaced easily in the correct location. In the event of any dispute regarding the audit findings or procedures, these working papers will be important. However, their prime purpose is to support the audit findings.

5.1 DocumentationNot all of the many documents reviewed during an environmental audit need to be retained by the auditors. Only copies of such documentary evidence necessary to support or verify the audit evidence and findings should be retained. Normally, original documents are not retained.5.2 Recording ObservationsThe role of an environmental auditor is to observe, record, verify and report. It is therefore essential that the auditor has highly developed powers of observation and is trained and experienced in recording those observations. Nothing should be committed to memory. A complex environmental audit of a large mine or processing facility covers so much technology and operational information that it is impossible to recall all of the facts and figures that are presented during the course of the environmental audit unless they are properly recorded.5.3 Sampling and Analysis

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Generally, it is not the auditor's role to carry out sampling or monitoring. Monitoring of the operation should be carried out by the facility management over a period of time and in accordance with the requirements of the licences, permits, approvals and other documentation relating to the site. If these monitoring results are not available, it is the auditor's role to record that fact, not to carry out sampling in order to correct the deficiency. A single sample at a point in time may not be scientifically valid.By contrast, in the case of a site contamination audit (or assessment), sampling and analysis is a vital part of the procedure and may continue for many months before the nature and extent of contamination can be assessed (see also Chapter 3.10).Sampling in terms of a management environmental audit generally means sampling by the auditor of a statistically representative number of documented results, such as monitoring data, incident reports, inspection records etc. or physical inspection by the auditor, eg, the integrity of bunding, the storage of drums etc.

5.4 Photography; Photography is a vital part of gathering audit evidence. It is very rare that photography is not allowed during an environmental audit, but permission should always be sought at the planning stage. It is said that a photograph is worth a thousand words and this is certainly the case in environmental auditing. The value of the photograph is two-fold. Firstly, it is of immense value to the auditor, as it can be examined in detail after the site inspection and can be referred to in ensuring all relevant details are included in the audit report. Secondly, photographs are valuable additions to an environmental audit report. It will often be the case that the person or senior management receiving the environmental audit report rarely visit the mine or facility being audited and, even if they do, have probably not observed many of the locations visited by the environmental auditor. This is especially the case if the audit report is being received by a corporate counsel, managing director or other board member.

5.5 Verification of Audit Evidence. An environmental audit differs from a survey in that evidence obtained during the process is verified. In verifying documentation, the auditor must ensure that the documents produced are genuine, current and valid. The audit protocol should establish the level of verification required; alternatively, this should be established during auditor training or be included in an audit manual.5.6 Evaluating Audit Findings. The findings of the audit should be carefully evaluated against the objectives established in the agreed protocol. Auditor findings may be restricted to the recognition of exceptions or non-compliance events. This is the case in a strict compliance audit, and is a mechanism favoured by large multinational organisations that operate multiple facilities and have a long-established auditing program as part of a recognised environmental management structure. More commonly, the findings of a management environmental audit will be used in improving environmental management systems. Audit findings may be evaluated numerically to measure compliance with criteria established in the audit protocol, or to measure deviation from required performance levels. Where numerical results are not established, the audit findings will be evaluated empirically. Basically, audit findings will be evaluated on three criteria: does the parameter being evaluated comply with required standards; has the finding been verified; and is there any existing, residual, inherent, contingent or potential environmental risk revealed by this finding? 5.7 Audit Recommendations. The audit recommendations are aimed at minimising environmental risk, ensuring compliance with environmental legislation and improving environmental management procedures. An audit of a major mine or facility may contain fifty or more recommendations. Several times that number of recommendations may be made in a consolidated audit report covering many facilities. Implementing these recommendations as soon as practicable, to the satisfaction of the next audit, demonstrates best practice environmental management in the mining industry.

5.8 Case Studies (class presentation)

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REQUIREMENTS OF AUDIT STANDARDS5.9 IAS 1010 provides guide and practical help to auditors in complex environmental matters to auditors. The following are three main issues to be considered by an auditor in considering environmental matters for audit purposes. Auditors main consideration is an audit of financial information with respect to environmental

matters Examples of possible impacts of environmental matters in financial statements. Guidance that the auditor may consider when exercising professional judgment in this context to

determine the nature, timing and the extent of audit procedures with respect to knowledge of the business; risk assessments and internal controls; considerations of laws and regulations and other substantive procedures.

6.0 The auditors’ main consideration in an audit of financial statements with respect to environmental matters.

The objectives of an audit of financial statements ;In planning and performing audit procedures and in Evaluation and reporting results thereof; the auditor should recognize that non compliance by an entity with all laws and regulations may materially affect financial statements.; An auditor cannot be expected to detect non compliance with all laws and regulations; The auditors purpose is not to plan the audit to detect possible breaches of environmental laws and regulations nor auditors conclusion on the entity’s compliance with environment laws and regulations or the adequacy of its controls over environmental matters. Whether environmental matters give rise to a risk of material misstatement in the financial statements.

6.1 Determination with compliance with existing environmental laws or regulations depends on: Skills of environmental experts; which an auditor cannot be expected to possess; Breach of

environmental laws and regulations is a legal determination that is ordinarily beyond the auditor’s professional competence.

6.2 Examples of possible impacts of environmental matters on financial statements Consequences of vicarious liability imposed by law (e.g. liability of damages caused by

previous owners). Consequences of violating environmental laws and regulations Initiatives to prevent abate or remedy damage to environment, or to deal with

conservation of renewable and non renewable resources (such initiatives may be required by environmental laws and regulations or by contract, or they may be taken voluntarily.

6.3 Examples of matters affecting the financial statements Going concern :non compliance with certain laws and regulations may affect the continuance of

an entity ,hence may affect disclosures and the basis of preparation of financial statements Contingent liability :a business /entity need to disclose in notes the existence of a contingent

liability where the expense relating to environmental matters cannot be reasonably estimated. Impairment of Assets : Introduction of environmental laws and regulations may involve need to

write down their carrying value Legal costs and compensation :Failure to comply with the legal requirements concerning

environmental matters , such as emissions or waste disposal , or changes to legislation with retrospective effect may require accrual of redemption , compensation and legal costs

Environmental obligations: some entities e.g. extraction industries (oil and gas exploration or mining chemical manufacturers or waste management companies) may incur the obligations as direct by product other core businesses

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Constructive obligations: An entity may have identified contamination of land, and although under legal obligation it may have decided to remedy the contamination, because of its long term reputation audits relationship with the community

6.4 Guidance that the auditors may consider when exercising professional judgment in this content to determine the: Nature, timing and extent of the business (ISA 310) Risk assessment and internal controls (ISA 400) Consideration of laws and regulations and other substantive procedures (ISA 250)

The auditors level of knowledge needs to be sufficient to enable the auditors to identify and obtain an understanding of the events, transactions, and practices related to environmental matter that may have a material effect of financial statements and audit.

The auditor considers the industry, in which the entity operates, it may be indicative of possible existence of environmental liabilities and contingencies.

Certain industries are exposed to environmental risks by their nature. e.g chemical , oil , gas , pharmaceutical metallurgical, mining and utility industries.

Potential exposure to significant environmental risk may in general arise for any entity that Is subject to environmental laws and regulations to a substantial degree Owns or hold security over, sites contaminated by previous owners (vicarious liability) Has a business process that may cause contamination of soil and groundwater.; Contamination

of surface water, or air pollution, may rise hazardous waste; or may have an adverse impact to customers , employee or people that are neighborhood of company’s sites

6.6 Risk assessment and internal control Inherent risk: in certain circumstances factor relevant to assessment of inherent risk may include the

risk of material misstatement the financial statements due to environmental matters (environmental risk). These may include Risk of compliance costs arising from legislation or from contractual requirements Risk of non compliance with environmental laws and regulations Possible effects of specific environment requirements of customers and their reactions to

entity’s environmental conduct.6.7 Examples of environmental risks at the level of account balances or classes of transactions are :-

The extent to which an account balance is based on complex accounting estimates with respect to environmental matters, eg. The measurement of an environmental provision for the removal of contaminated land and future site restoration as per ISA 540 guidelines

The extent to which account balance is affected by unusual of non – routine transactions involving environmental matters

Accounting and internal control systems the way in which management achieves control over environment matters differs in practice

Entities with low exposure to environmental risk , or smaller entities will probably monitor and control their environmental mattes as a part of their normal accounting and internal control systems.

Some entities operates in industries with high exposure to environmental risk may design and operate a separate internal control subsystem for this purpose, that conforms with existing standards for environmental management systems (E.M.S)

Other entities design and operate all their controls in an integrated control system , encompassing policies and procedures relation to accounting ,environmental and other matters (e.g. quality , health and safety)

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6.8 Only if, in the auditors judgment, environmental matters may have material effect on the financial statements of an entity, does the auditor need to obtain an understanding of entity’s significant policies and procedures with respect to its monitoring of and control over these environmental matters (the entity’s environmental controls), in order to plan audit and develop an effective audit approachAn auditor is only concerned with those environmental controls (within or outside the accounting and internal control systems) that are considered relevant to the audit of financial statements6.9 Control environment and control proceduresThe auditor obtains an understanding of control environment sufficient to assess directors and management attitudes, awareness, and actions regarding internal controls and their importance in the entityExamples of control policies and procedures are to Identify potential environmental matters and related contingencies affecting the entity Monitor compliance with the entity’s environmental policy, as well as with the relevant

environmental laws and regulations; Provide for reconciliation of environmental information with relevant financial data ,for example,

physical quantities of waste production relation to cost of waste disposal. Maintain an appropriate environmental information system which may include recording of , for

example ,physical quantities of emissions and hazardous waste , environmental characteristics products , complaints from stakeholders, results of inspections performed by enforcement agencies , occurrence and effects of incidents

One of the possibilities for the auditor to obtain an understanding of the entity’s control over environmental mattes may be to read the entity’s performance report, if available. The report often discloses the entity’s environmental commitments and policies and its major environmental controls.7.0 Control risk: -An auditor, after obtaining an understanding of the accounting and internal control system, may need to consider the effect of environmental matters in the assessment of control risk and in any test of control that may be necessary to support that assessment.

7.1 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS-ISA 250The responsibility for prevention and detection of non–compliance rests with management, eg. Vicarious liability, pollution, emissions levels and regulatory authorities requirement. Any changes in environmental legislation could have consequences for the operation of the entity. In order to obtain a general understanding of relevant environmental laws and regulations ; the auditor : Discusses with the management the policies or procedures adopted for identifying, evaluating and

accounting for litigation, claims and assessments. Uses existing knowledge of the entity’s industry and business Inquires of management (including key officers for environmental matters) concerning the entity’s policies and procedures regarding compliance with relevant environmental laws and regulations

Inquires of management as to the environmental laws and regulations that may be expected to have fundamental effect on operations of the entity going concern issue

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7.2 SUBSTANTIVE PROCEDURES Substantive procedures include Obtaining evidence through inquiry of both management responsible for the preparation of

financial statements and key officers responsible for environmental mattes The gathering of corroborative audit evidence for any environmental assertions form sources inside

or outside the entity Need to consider using the work of environmental expert The auditor considers the assessed levels of inherent and control risk in determining the nature ,

timing and extent of substantive procedures required to reduce the risk of not detecting a material misstatement in financial statements to an acceptable level, including any material misstatements if the entity fails to properly recognize, measure or disclose the effects of environmental matters.

Consultation fees or repayment of penalties as a result of violation of environmental laws and regulations

In these circumstances the auditor needs to re-asses inherent and control risk and the resulting impact on detection risk. If necessary, the auditor needs to consult an environmental expert.

7.3 ISA 620 –USING THE WORK OF EXPERT (ENVIROMENTAL)Management is responsible for accounting estimates included in financial statements. Management may however require technical advice from specialists such as lawyer, engineers or other business expert to assist in developing proper accounting estimates and disclosures related to environmental matters. Such experts may be involved in many stages in the process of developing accounting estimates and disclosures including assisting management in Identifying situations where the recognition of liabilities and related estimates is required (e.g. an

environmental engineer, may make a preliminary investigation to site to determine if contamination has occurred or a lawyer may be used to determine the entity’s legal responsibility to restore the site.)

Gathering the necessary data on which to base estimates and providing details of information that needs to be disclosed in financial statements (e.g. an environmental expert may test a site in order to assist in quantifying the nature and extent of contamination and considering acceptable alternative methods of site restoration)

Designing the appropriate remedial action plan and calculating financial consequences The auditor needs to use professional judgments in determining whether the planned substantive

procedures either individually of in combination are appropriate Most of audit evidence available to the auditor is persuasive rather than conclusive The use of professional judgments may become even more important because of a number of

difficulties with respect to recognition and measurement of the consequences of environmental matter in financial statements. eg. Environmental laws and regulations are evolving, and interpretation may be difficult or ambiguous. Consultation of an expert may be regulations on valuation of certain assets e.g. assets that contain asbestos). Making a reasonable estimate of liabilities for known obligations may also appear to be difficult in practice or liabilities may rise other than as a result of legal or contractual obligation.

In performing certain substantive procedures or in gathering knowledge of the business or in assessment of inherent and control risk (in due course of audit process) evidence may come to attention of the auditor that indicates the existence of a risk that the financial statements may be materially misstated due to environmental matters e.g. violation of environmental laws and regulations cited in correspondence with ;or in report issued by regulatory bodies (NEMC) or information media comments about entity related to major environmental matters or evidence indicating purchases of goods and services relating to environmental matters that are unusual in relation to the nature of the entity’s business, or increased or unusual legal or environmental fee

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The auditor intending to use the work of expert (engineer, lawyer or environmental specialist) needs to consider the adequacy of work performed by environmental expert for purposes of the audit, as well as expert’s competence and objectivity.

The auditor may need to engage another expert in considering such work, to apply additional procedures, or to modify the auditors report.

Environmental audit is an emerging specialty and it may be difficult to assess professional competence of an expert, the auditor have to give particular consideration to the experience and reputation of the environmental expert.

Timely and ongoing communication with the expert may assist the auditor to understand the nature, scope, objective and limitations of expert report.

It is also necessary for the auditor to discuss the assumptions, methods, procedures, and source of data used by the expert.

7.5 If the auditor wants to use the findings of environmental audits as appropriate audit evidence, she has to decide whether the environmental audit meets the criteria included in ISA 610 (work of internal auditing) or ISA 620 (using the work of an expert)Factors to consider are : Proper direction, supervision and review of audit Due professional care exercised by the team in the performance of the environmental audits Impact of the results of environmental audit on the financial statements Competence and skill of environmental audit team and objectivity of auditors, especially when

chosen from entity’s staff. Scope of environmental audits, management’s reaction the recommendations that results from

environmental audit and how this is evidenced.

7.6 Auditor may consider using the internal auditing findings on environmental aspects of entity’s operations as part of their internal auditing activities. The auditor should consider the appropriateness of using such work for purpose of audit as per ISA 610 guideline7.7 The auditor may wish to obtain specific representation from management as much of the evidence available to auditor with regards to the impact of environmental matters on the financial statement will be persuasive in nature rather than conclusive; interalia representation that management If aware of such matters has disclosed them properly in the financial statements Is not aware of any other environmental matters that may have a material impact on financial

statements Is not aware of any material liabilities or contingencies arising from environmental matters,

including those resulting from legal or possible illegal acts.

7.8 Opinion on Environmental issuesAuditor should consider the following when forming an opinion Whether the effects of environmental matters are adequately treated or disclosed in accordance with

the appropriate financial reporting framework. Reads any other information to be included with the financial statements in order to identify any

material inconsistencies, eg. Regarding environmental matters.7.9 Management assessment of uncertainties and the extent of their disclosure in financial statements.8.0 There may be circumstances when, in auditors judgment the going concern assumption is no longer appropriate. 8.1 The auditor- may conclude that there are significant uncertainties or appropriate disclosures, due to

environmental matters.

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8.2 The report will normally included the following points: - The methodology stated The matters reviewed are spelled out precisely Reference is made to other documents An opinion is given

REVIEW QUESTION1. You are auditing KTM Ltd, a textile manufacturing company in Dar es Salaam. In due course of

your audit it has been realized that the client may have environmental issues, which could have an impact on the financial statements. Discuss major steps you would take in order to obtain the appropriate evidence.

Suggested solution Obtain an appropriate understanding of the company, its operations and , in particular ,

its environmental issues. Evaluate whether there is any possible risk of misstatement in the financial statements as

a result of environmental issues. Enquireof management ot any systems or controls which are in place to identify risk,

evaluate control and account for environmental matters. Obtain understanding of the control environment operating within the client Obtain written representation from management on any environmental matters Otain evidence from environmental experts where the evidence in relation to

environmental matters is sufficiently persuasive. Consider minutes oa directors, board committees or environmental officers Review documentation Review all assets impairment Review liabilities and provisions to ensure all have been included Review contingencies and ensure adequate disclosure Include environmental issues in the review of appropriateness of going concern

Obtain representation by management which may take the form of a statement to the following effect

Management are not aware of any material liabilities or contingencies arising from environmental matters, including those resulting from illegal or possible illegal acts.

Managements are not aware of any environmental matters that may have a material impact on the financial statements.

If aware of such matters, those matters have been properly disclosed in the financial statements.

The auditor must review the following documents Publicly available industry information on environmental matters Reports issued by environmental experts about the entity Internal audit reports Environmental expert reports (if any) Reports on due diligence investigations Reports on or to regulatory agencies Correspondence with lawyers Correspondence with enforcement agencies.

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environmental audititing 2006[1]

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