• In view of the uncertainties in recognising and measuring environmental liabilities, typically relating to the timing of clean up, the technology available or possible new legislation, the auditor needs to exercise particular care in assessing the risk of a material misstatement or omission in the financial statements.
• Where environmental matters may be a significant source of risk, an internal control system would not be effective unless it covered items giving rise to environmental risk.
• Whilst management is responsible for all internal controls to safeguard the shareholders’ investment and the company’s assets, the auditor is only concerned with those environmental controls that are considered relevant to the audit of the financial statements.
• Auditors carry out their work recognising that non-compliance with laws or regulations may materially affect the financial statements. In view of the growing body of environment law, the auditor needs to obtain a general understanding of these laws and regulations relevant to the business, including those that are specific to an industry sector.
• There are a number of difficulties in recognising and measuring the financial effects of environmental matters in the financial statements, all of which may have implications for the auditor.
• Where management engages an expert to provide technical advice to assist in developing estimates and disclosures in the financial statements relating to environmental matters, the auditor should consider the adequacy of such work, as well as the expert’s competence and objectivity.
• The auditors should also consider any going concern issues that could arise on account of environmental challenges.      (Any 3 points)

* Planning the audit
* Performing Substantive Procedures
* Carrying a review and reporting

• During the Planning stage, the auditor needs to obtain knowledge of the business to determine how the company’s operation impact the environment and the nature of laws and regulations which the company has to comply with in its operations.
  The auditor will have to carry out inherent risk assessment to determine which environmental factors can translate into material misstatement in the financial statements and can affect the going concern of the entity.
• During Substantive procedures, the auditor will gather appropriate and sufficient evidence to ensure the correct treatment of the following in the financial statements;
  *Provisions- for site restoration, fines and compensation
  *Contingent liabilities in relation to pending legal action
  *Asset values- issues that may impact on impairment or purchase goodwill and products.
  *Capital/Revenue expenditure- cost of cleanup or meeting legal standards
  *Development cost-new products
  *Going concern issues
• At the review stage of the audit, the auditor will take into account environmental issues to determine whether management use of going concern basis is reasonable and acceptable to determine the type of opinion to issue.

• Provisions e.g. for site restoration costs.
• Contingent liabilities, e.g. arising from pending legal action.
• Assets values, e.g. inventory or non-current assets which may be subject to environmental concern.
• Accounting for capital or revenue expenditure on cleaning up the production process or to meet legal or other standards.
• Product redesign costs.
• Product viability/going concern considerations.                                        (1 mark each or any 3 valid points)

Actions that should be undertaken

• 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.
• Enquire of management as to any systems or controls which are in place to identify risk, evaluate control, and account for environmental matters.               (1 mark each or any 3 valid points)

Audit Procedures

• Obtain an understanding of the control environment operating within the client.
• Obtain written representations from management on any environmental matter.
•  Obtain evidence from environmental experts where this is necessary.
• Seek corroborative evidence of any statements by management.
• Use professional judgement to consider whether the evidence in relation to environmental matters is sufficiently persuasive.
• Consider minutes of directors, board, committees or environmental officers.
• Review documentation.
• Review all assets for impairment.
• Review liabilities and provisions to ensure all have been included.
• Review contingencies and ensure adequate disclosure.
• Include environmental issues in the review of the appropriateness of going concern.        (1 mark each for any 4 valid points)