Audit Method: Audit of Environmental Compliance

According to INTERNATIONAL AUDITING PRACTICE STATEMENT 1010 “Environmental audits” are becoming increasingly common in certain industries. The term “environmental audit” has a wide variety of meanings. They can be performed by external or internal experts (sometimes including internal auditors), at the discretion of the entity’s management. In practice, persons from various disciplines can qualify to perform “environmental audits.” Often the work is performed by a multi-disciplinary team. Normally, “environmental audits” are performed at the request of management and are for internal use. They may address various subject matters, including site contamination, or compliance with environmental laws and regulations. However, an “environmental audit” is not necessarily an equivalent to an audit of an environmental performance report.

With respect to the entity’s compliance with environmental laws and regulations, the auditor’s purpose is not to plan the audit to detect possible breaches of environmental laws and regulations; nor are the auditor’s procedures sufficient to draw a conclusion on the entity’s compliance with environmental laws and regulations or the adequacy of its controls over environmental matters. To conclude that an entity operates in compliance with existing environmental laws or regulations ordinarily requires the technical skills of environmental experts, which the auditor cannot be expected to possess.

It is management’s responsibility to ensure that the entity’s operations are conducted in accordance with laws and regulations. The responsibility for the prevention and detection of noncompliance rests with management (ISA 250, paragraph 9). In this context, management has to take into account:

• Laws and regulations that impose liability for remediation of environmental pollution arising from past events; this liability may not be limited to the entity’s own actions but may also be imposed on the current owner of a property where the damage was incurred by a previous owner (“vicarious liability”);
• Pollution control and pollution prevention laws that are directed at identifying or regulating sources of pollution, or reducing emissions or discharges of pollutants;
• Environmental licenses that, in certain jurisdictions, specify the entity’s operating conditions from an environmental point of view, for example, a specification of the maximum levels of emissions; and
• The requirements of regulatory authorities with respect to environmental matters.

Practice

If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with management and, where appropriate, those charged with governance. If management or, as appropriate, those charged with governance do not provide sufficient information that supports that the entity is in compliance with laws and regulations and, in the auditor’s judgment, the effect of the suspected non-compliance may be material to the financial statements, the auditor shall consider the need to obtain legal advice.