Auditing 1 | Course Paper

PAPS 1010

Philippine Auditing Practice Statement 1010

THE CONSIDERATION OF ENVIRONMENTAL

MATTERS IN THE AUDIT OF

FINANCIAL STATEMENTS

Auditing Standards and Practices Council

PAPS 1010

PHILIPPINE AUDITING PRACTICE STATEMENT 1010

THE CONSIDERATION OF ENVIRONMENTAL

MATTERS IN THE AUDIT OF FINANCIAL STATEMENTS

CONTENTS

Paragraphs

Introduction 1-12

Guidance on the Application of PSA 310, Knowledge

of the Business 13-16

Guidance on the Application of PSA 400, Risk

Assessments and Internal Control 17-29

Guidance on the Application of PSA 250, Consideration

of Laws and Regulations in an Audit of Financial Statements 30-34

Substantive Procedures 35-47

Management Representations 48

Reporting 49-50

Effective Date 51

Acknowledgment 52-53

Appendix 1: Obtaining Knowledge of the Business from an

Environmental Point of View – Illustrative Questions

Appendix 2: Substantive Procedures to Detect a Material

Misstatement due to Environmental Matters

PAPS 1010

Philippine Auditing Practices Statements (“Statements”) are issued by the Auditing

Standards and Practices Council (“ASPC”) to provide practical assistance to auditors in

implementing the Philippine Standards on Auditing (“PSAs”) or to promote good

practice. Statements do not have the authority of PSAs.

This Statement does not establish any new basic principles or essential procedures: its

purpose is to assist auditors, and the development of good practice, by providing guidance

on the application of the PSAs in cases when environmental matters are significant to the

financial statements of the entity. The extent to which any of the audit procedures

described in this Statement may be appropriate in a particular case requires the exercise of

the auditor’s judgment in the light of the requirements of the PSAs and the circumstances

of the entity.

This Statement was approved by the ASPC in April 2003.

The ISAs on which the PSAs are based are generally applicable to the public sector,

including government business enterprises. However, the applicability of the equivalent

PSAs on Philippine public sector entities has not been addressed by the Council. It is the

understanding of the Council that this matter will be addressed by the Commission on

Audit itself in due course. Accordingly, the Public Sector Perspective set out at the end of

an ISA has not been adopted

into the PSAs.

PAPS 1010

Introduction

The Purpose of this Statement

1. Environmental matters are becoming significant to an increasing number of

entities and may, in certain circumstances, 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 the

responsibility of management.

2. For some entities, environmental matters are not significant. However, when

environmental matters are significant to an entity, there may be a risk of material

misstatement (including inadequate disclosure) in the financial statements arising

from such matters: in these circumstances, the auditor needs to give consideration

to environmental matters in the audit of the financial statements.

3. Environmental matters can be complex and may therefore require additional

consideration by auditors. This Statement provides practical assistance to auditors

by describing:

(a) the auditor’s main considerations in an audit of financial statements with

respect to environmental matters;

(b) examples of possible impacts of environmental matters on financial

statements; and

(c) guidance that the auditor may consider when exercising professional

judgment in this context to determine the nature, timing, and extent of

audit procedures with respect to:

•

knowledge of the business (PSA 310);

•

risk assessments and internal control (PSA 400);

•

consideration of laws and regulations (PSA 250); and

•

other substantive procedures (PSA 620 and some others).

The guidance under (c) reflects the typical sequence of the audit process. Having

acquired a sufficient knowledge of the business the auditor assesses the risk of a

material misstatement in the financial statements. This assessment includes

consideration of environmental laws and regulations that may pertain to the entity,

and provides a basis for the auditor to decide whether there is a need to pay

attention to environmental matters in the course of the audit of financial

statements.

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Appendix 1 provides illustrative questions that an auditor may consider when

obtaining knowledge of the business, including an understanding of the entity’s

control environment and control procedures from an environmental point of view.

Appendix 2 provides examples of substantive procedures that an auditor may

perform to detect a material misstatement in the financial statements due to

environmental matters. These appendices are included for illustrative purposes

only. It is not intended that all, or even any, of the questions or examples will

necessarily be appropriate in any particular case.

4. This Statement does not establish any new basic principles or essential

procedures: its purpose is to assist auditors, and the development of good practice,

by providing guidance on the application of the PSAs in cases when

environmental matters are significant to the financial statements of the entity. The

extent to which any of the audit procedures described in this Statement may be

appropriate in a particular case requires the exercise of the auditor’s judgment in

the light of the requirements of the PSAs and the circumstances of the entity.

5. The Statement does not provide guidance on the audit of the financial statements

of insurance companies with regard to claims incurred under insurance policies

relating to environmental matters affecting policyholders.

The Auditor’s Main Considerations with respect to Environmental Matters

6. The objective of an audit of financial statements is:

“…to enable the auditor to express an opinion whether the financial

statements are prepared, in all material respects, in accordance with an

identified financial reporting framework.” (PSA 200, paragraph 2).

7. The auditor’s opinion relates to the financial statements taken as a whole and not

to any specific aspect. When planning and performing audit procedures and in

evaluating and reporting the results thereof, the auditor should recognize that

noncompliance by the entity with laws and regulations may materially affect the

financial statements. However, an audit cannot be expected to detect

noncompliance with all laws and regulations (PSA 250, paragraph 2). In

particular, 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.

1

Examples of environmental laws and regulations are the Philippine Clean Air Act of 1999 and the Philippine Ecological Solid

Waste Management Act of 2000.

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8. In all audits, when developing the overall audit plan, the auditor assesses inherent

risk at the financial statement level (PSA 400, paragraph 11). The auditor uses

professional judgment to evaluate the factors relevant to this assessment. In

certain circumstances these factors may include the risk of material misstatement

of the financial statements due to environmental matters. The need to consider,

and extent of the consideration of, environmental matters in an audit of financial

statements depends on the auditor’s judgment as to whether environmental matters

give rise to a risk of material misstatement in the financial statements. In some

cases, no specific audit procedures may be judged necessary. In other cases,

however, the auditor uses professional judgment to determine the nature, timing

and extent of the specific procedures considered necessary in order to obtain

sufficient appropriate audit evidence that the financial statements are not

materially misstated. If the auditor does not have the professional competence to

perform these procedures, technical advice may be sought from specialists, such as

lawyers, engineers, or other environmental experts.

9. 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. Also, whether a

particular event or condition that comes to the attention of the auditor is a breach

of environmental laws and regulations is a legal determination that is ordinarily

beyond the auditor’s professional competence. However, as with other laws and

regulations:

“…the auditor’s training, experience and understanding of the entity and

its industry may provide a basis for recognition that some acts coming to

the auditor’s attention may constitute noncompliance with laws and

regulations. The determination as to whether a particular act constitutes or

is likely to constitute noncompliance is generally based on the advice of an

informed expert qualified to practice law but ultimately can only be

determined by a court of law.” (PSA 250, paragraph 4.)

Environmental Matters and their Impact on the Financial Statements

10. For the purpose of this Statement, “environmental matters” are defined as:

(a) initiatives to prevent, abate, or remedy damage to the 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 undertaken voluntarily);

(b) consequences of violating environmental laws and regulations;

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(c) consequences of environmental damage done to others or to natural

resources; and

(d) consequences of vicarious liability imposed by law (for example, liability

for damages caused by previous owners).

11. Some examples of environmental matters affecting the financial statements are the

following:

•

the introduction of environmental laws and regulations may involve an

impairment of assets and consequently a need to write down their carrying

value;

•

failure to comply with legal requirements concerning environmental

matters, such as emissions or waste disposal, or changes to legislation with

retrospective effect, may require accrual of remediation, compensation or

legal costs;

•

some entities, for example in the extraction industries (oil and gas

exploration or mining), chemical manufacturers or waste management

companies may incur environmental obligation as a direct by-product of

their core businesses;