INSTITUTE OF ACCOUNTANCY ARUSHA

CPA REVIEWS

ENVIRONMENTAL AUDITING
1.0 Definitions
1.1 Environmental Audit is a management tool consisting of a systematic. documented,
periodic and objective evaluation of how well organizations, management and
equipment are performing so as to safeguard the environment by facilitating
management control of environmental practices and assessing company policies and
other regulatory requirements and standards applicable.
1.2 Environmental Audit is a means by which a business can assess the environmental
impact of their operations
1.3 Environmental audit involves examining all aspects of how an organization impacts
with the environment and any legal requirements e.g. consideration of all company
processes ,materials used, transportation issues, waste/product disposal and recycling
issues.
1.4 The International Chamber of Commerce (ICC) defines environmental audit as 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. Environmental audit does not
stop at at compliance with legislation nor is it a “green washin” public relations exercise
rather it is a total strategic approach to the organization’s activities.

2.0 Organizations that need Environmental Audit most

Environmental audit would be required/be common in the following organizations:
 Companies dealing with extraction of minerals when big open pits are likely to result.
 Cement producing companies where both limestone extracted as a raw material and
dust from the factory chimneys do degrade the environment
 Chemical processing industries which may pollute the environment if managed
improperly
 Fishing companies which use small fishnets or use dynamite in fishing (no sustainable
fishing activities), lumbering companies that plant no trees, and plastic bag industries.
 Oil industry companies through products sold or pipelines transporting oil.
 Any other manufacturing companies

3.0 Environmental Responsibilities Facing Companies

The following are the environmental responsibilities which companies face:
 Meeting regulatory requirements or exceeding those expectations
 Clearing up pollution that already exists and properly disposing of the hazardous material
 Disclosing to investors, both potential and current, the amounts and nature of preventive
measures taken by management e.g. if there is a requirement to disclose estimated liability
due to environmental matters exceeding 10% of networth,has it been disclosed?
 Operating in a way that environmental damage does not occur (e.g. in mining activities use
of appropriate technology)

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  Promoting a company wide “environmental attitude”

4.0 Why Should the Auditor Consider Environmental Audit in the Financial Statements?
 Environmental risks may render financial statements misleading
 Going concern status of the company may be abandoned if environmental matters are not
considered (e.g. a company producing environmentally polluting product-DDT,Sweetheart
lotion, Asbestos roofing material etc)
 There could be problems associated with environmental laws and regulations including
impairment of assets, fines, costs, compensation and legal costs for non-compliance.

4.1 Types of Environmental Audit

There are many types of environmental audit some of which include the following:
 Compliance audits which are used to ensure that a company is meeting all regulations
regarding specific environmental practices, or check the implications of non-compliance.
 Systems audits which focus on how systems are used internally to manage
environmental risks.
 Audits of transactions of property transfers and due diligence for purchasing property are
used to reduce or to understand the potential risks. Lending institutions will often require
audit of a piece of property before they approve a mortgage so that they do not run a risk
of a company defaulting a loan.( that is where the lending institution becomes the owner
and if contamination exists, then the lending institution becomes the owner automatically
assuming the burden to pay for clean up/remedial costs-vicarious liability)
 Treatment, storage and disposal facility audits which are used to follow different types of
hazardous material throughout their life cycle(from origin to disposal).This helps to
ensure that they are properly disposed and stored.
 Audits which focus on preventive measures that can be taken to reduce the amount of
risk a company has if these measures are functioning
 Audits to determine accrual of the amount of liabilities and costs associated with
environmental damages to determine that proper disclosure of these costs have been
made to the public
 Audits to appraise the production process itself to ensure that products meet specific
requirements .Once the environmental risks have been identified the auditor must check
for compliance with the accounting standards.

5.0 Audit Approach in Environmental Matters

When the auditor is auditing a client who has potential environmental matters ( Geita
Gold Mining,Barrick,Williamson Diamond,Twiga Cement,Tanga Cement etc for the case of
Tanzania),that are likely to affect the financial statements,he should take the following steps:
i. Gain an understanding of the company,its operating especially its environmental issues
(ISA 310 Knowledge of the Business)
ii. Evaluate the possibilities of risk of misstatement in the financial statements due to
environmental issues.
iii. Enquire of the management if they have in place any systems or controls to identify risk,
evaluate control and account for environmental matters.
iv. Obtain an understanding of the control environment operating within the environment ( ii-iv
ISA 400 Risk Assessment and Internal Controls)

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 v. Obtain written representations from management on any environmental matters (See 5.1
below)
vi. If necessary obtain evidence from environmental experts (ISA 620 Using the Work of
Expert)
vii. Seek corroborative evidence of any statements by management
viii. Use professional judgement to consider whether the evidence about environmental
matters is sufficiently persuasive
ix. Consider minutes of directors, board committees or environmental officers
x. Review documentation about environmental matters (see 5.2)
xi. Review all assets for impairment-thus environmentally risky e.g. high degrees of emission
xii. Review liabilities and provisions to ensure all have been included(outstanding for
compensation to people around the company’s factory for health damages)
xiii. Review contingencies to ensure adequate disclosure e.g. court case pending judgement
on environmental matters.
xiv. Include environmental issues when reviewing appropriateness of going concern. Other
standards to consider will include ISA 250 Consideration of Laws and Regulations in the
Audit of Financial Statements and an International Auditing Practices Statement 1010
“The Consideration of Environmental Matters in the Audit of Financial Statements”

5.1 Forms of Representations from Management on Environmental Matters.

The management may make the following statements about environmental matters
 Management are not aware of any material liabilities or contingencies arising from
environmental matters
 Management are not aware of any environmental matters that may have an impact on
financial statements
 If aware of above matters, then such matters have been properly disclosed in the
financial statements.

5.2 Documentation to be Reviewed by the Auditor

i. Publicly available industry information on environmental matters e.g. information
about oil companies and environmental matters.
ii. Reports issued by environmental experts about the entity –if environmental
matters review was done in the entity
iii. Internal audit reports on environmental matters as verified by external assessors
(Registered Environmental Impact Assessors)
iv. Environmental Audit Reports (if any)
v. Reports on or to regulatory agencies (e.g. EWRA in Tanzania for companies in
the Oil and other Energy industries)
vi. Correspondence with lawyers on environmental matters
vii. Correspondence with enforcement agencies e.g.NEMC in Tanzania)

5.3 Annual Reports and Environmental Matters

It is recommended that annual reports should contain details of:
i. The company’s environmental policy
ii. The impact of the business on the environment
iii. The company’s extent of compliance with external requirements

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 iv. Identify the director with environmental responsibility.

6.0 Benefits of Environmental Audit to Companies

Environmental when included in annual reports they help the company benefit in the
following ways:
i. Marketing tool because globally people are aware of environmental issues such as
global warming, famine and others. They will be interested in doing business with
the company that is concerned about environmental matters.eg.Product X has
been made from recycled materials.
ii. Positive perception by the public about ethical issues and social obligations by the
company.e.g.the company that fishes without dynamite and or fishnets with
smaller eyes will appear ethical and thus meeting social obligations.
iii. The company’s appears prepared/committed to innovation and change on matters
related to environmental issues.
iv. Enhances credibility of financial statements for disclosing environmental issues

In some places such as UK environmental matters and audit are given a top concern such that
there is an Environmental Audit Committee of the UK parliament.In the European Union there is
eco-audit strategy where a company voluntarily arranges for environmental audit of all sites
periodically e.g. quarterly for taking actions on deviations.

REVIEW QUESTIONS

QUESTION ONE
The importance of the environment is increasingly recognized .Environmental issues often have
implications for business and cannot be ignored by auditors. Auditors need a general awareness of
the risk that environmental issues may have an impact on the financial statements.

Required:
Discuss

QUESTION TWO
You are the auditor of Tembo Ltd, a company manufacturing cement. In the course of your audit for
the year ended 31 December 2004 you performed all the necessary audit procedures and
concluded that there existed material uncertainties about environmental matters.

Required:
What kind of audit report will you issue.

QUESTION THREE
What audit standards does the auditor need to consider when conducting environmental audit?