City University College Department of Accounting & Finance

5. Current Issues
Environmental Audit
The environment can be seen as all of the air, land and water, with air
including air within building and structures above and below ground.
Environmental audit may be defined as a management tool comprising a
systematic, documented, periodic and objective evaluation of how well
organizations, management, and equipment are performing with the aim
of contributing to safeguarding the environment by facilitating
management control of environmental practices, and assessing
compliance with company policies, which would include meeting
regulatory requirements and standards applicable.
Thus, an environmental audit implies the following ideas:
 A set of planned environmental arrangements and procedures of
which the enterprise and all its management and staff are aware
 Includes legal requirements and management objectives
 Assessment of whether the planned arrangements are effectively
implemented and are suitable for fulfilling the enterprise’s
environment policies
 An environmental audit would include determination of the factual
data necessary to evaluate performance
Organizations are generally expected to have an overall management
system for environmental matters that includes an environmental audit
as a major component.
The components of the system may include:
 A detailed survey of the current environmental impact and
performance
 An environmental policy that includes a commitment to continual
improvement. This policy should be made public
 Clearly defined responsibilities for personnel, including training
and communication

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City University College Department of Accounting & Finance

 Up to date record of relevant legislation relating to the firm’s

activities
Relevant environmental matters include:
 Man induced climatic change
 Recycling
 Accidents
 Discharges to ground, water, air
 Energy use
 Storage, use and transport of hazardous materials
 Waste management
 Tidiness of the environment
 Industrial process
 Noise/vibration
 Landscape and tree planting
 Excessive lighting
Environmental audits are beyond competence of accountants and re
performed by team of suitably qualified experts from within or without
the enterprise with a leader who is independent i.e. from outside.
Disclosure
Environmental factors can be very important to some companies and
they need to make such matters public in order to: Ensure investment by
ethical investors. Companies need to be ethical in order to attract
investors who consider ethical issues like the environment, paying
reasonable wages, not employing child labor or even not opening on
Sundays.
 As part of marketing strategy in order to lure green customers
The obvious medium of making public information about a company’s
policies and achievements in environmental affairs is the company’s
annual report and accounts though advertisements and related public
relations exercises can be used.
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Asrat Bekele
City University College Department of Accounting & Finance

Corporate Governance
 Is a means of ensuring that companies are run well in the interest
of their shareholders and the wider community and is concerned
with:
o The responsibilities of directors
o The appropriate composition of the board of directors
o The necessity for good internal control – the necessity for an
audit committee
o Relationship with external auditors
 Good corporate governance is particularly important for publicly
traded companies
o Large amount of money
 Small shareholders
 Pension schemes and other financial institutions
o Among the stakeholders of the company are the community
within which it operates and managements commitment to
higher standards of environmental protection is viewed as
key measure of best practice
 Scandals are abuse of trust by management
o Direct extraction of excessive benefits
o Manipulation of the share price by misrepresenting company
profitability
The key to good corporate governance
 Ensure that talented individuals are rewarded at appropriate levels
for their effort and skill
 Also ensure that they act to the best interest of the company and
its stakeholders one of this being the environment

Responsibilities
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City University College Department of Accounting & Finance

 Maintaining satisfactory standards is the responsibility of those

operating a company
 External auditors do not have responsibility for standards of
corporate governance, but have interest in company’s attitude and
approach because:
o They are concerned with the risk that a company’s financial
statements might be misstated
o This risk is reduced if the company has good standards of
corporate governance and is well managed
Auditor’s responsibility for reporting on corporate governance
 Listed companies must include a corporate governance statement
in the annual report
 The auditors are not required to audit this but review it for
inconsistencies with other information
 If inconsistencies are found, there may be an impact on the audit
report:
o If it highlights an error in the financial statements
 The directors refuse to amend the error,
 The auditor will issue a qualified report
o If it highlights an error misleading information in the
corporate governance statement,
 Add an emphasis of matter paragraph to the audit
report
 No qualification but directs readers’ attention to the
matter
 In the US the auditors must attest compliance with corporate
governance and give opinion as to effectiveness of internal control
system

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City University College Department of Accounting & Finance

Audit committee

There is always a risk that the role of the directors as preparers of the
financial statements and the role of external auditor as ‘watchdogs’ will
not be carried out satisfactorily. In recent years, there have been several
accounting scandals involving directors preparing financial statements
that portray the financial performance and position of a company in a
way that bears little resemblance to economic reality. Furthermore,
external auditors have failed to spot the irregular accounting practices
used by directors to obscure the true financial health of the company.
This has cast doubt over the quality of the audit process and, in some
cases, over the independence of auditors. It has been argued that, where
directors commission large amounts of non-audit services, such as
consultancy, from the auditors, their ability to audit the financial
statements on behalf of the shareholders could be compromised. The
audit committee is designed to deal with these issues.

 Consists of three or more non executive directors

 Is able to view a company’s affairs in a detached and independent
way
 Liaise effectively between the main board of directors and the
external auditors

If the committee is to be effective, clear lines of communication must be

in place with key individuals such as the chief executive, the finance
director, and the heads of the internal and external audit teams. These
individuals should provide the audit committee with timely and relevant
information and, where appropriate, attend meetings of the audit
committee.

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City University College Department of Accounting & Finance

When reviewing internal controls, the committee should receive details

on the effectiveness of the processes in place by both the internal and
external audit teams. The committee must be satisfied that the internal
controls have operated satisfactorily during the year and that any
recommendations for improvement were implemented. There should be a
code of conduct for employees as well as anti-fraud and anti-corruption
policies in place. These must also be reviewed to see whether they are
operating effectively.

When reviewing the company’s risk management systems, the committee

will need to be satisfied that the key risk areas are being monitored and
that any control failures or emerging risks are quickly identified and
dealt with. The committee must also be satisfied that risk management is
not seen as simply a ‘box-ticking’ exercise and that there is widespread
recognition of its importance. The work of the committee may help to
promote a sense of ownership by relevant employees towards the
management of risk.

Internal auditors should provide assistance to the audit committee by

reporting on the effectiveness of internal control and risk management
procedures. They can become the ‘eyes and ears’ of the audit committee
and may prove invaluable in providing necessary assurances. The
internal auditors can benefit from a close relationship with the audit
committee because it can strengthen their independence and status
within the company. The audit committee can help foster greater
independence through meetings with the internal auditors where
management is excluded. The audit committee can also strengthen the
authority of internal auditors by insisting that management cooperates
with them.

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City University College Department of Accounting & Finance

When reviewing the financial statements, the committee should pay

particular attention to the following:

 the accounting policies adopted and whether they conform to the

industry norm
 any changes to accounting policies
 the estimates and judgements that have been made in key areas
such as bad debts, provisions, depreciation, etc
 any unusual items, such as large write offs, or unusual
relationships, such as a very high bad debts to sales
 any unusual trends in financial performance or position.

By examining the above, it may be possible to identify irregular

accounting practices or fraudulent behavior. Any questions arising from
such an examination should be capable of being answered by the chief
executive, finance director, and external auditors.

The audit committee should also review its own effectiveness. This
should be done on a regular basis and, ideally, should involve external
parties in the assessment process. It should involve a review of the terms
of reference and the way in which the committee has carried out its
responsibilities. The contribution of individual members should be
assessed, which should include some assessment as to whether they
have kept up to date with financial reporting and corporate governance
issues.

Best practice
o A committee of at least three (two for smaller companies) of
non executive directors
o At least one member with relevant and recent financial
experience
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City University College Department of Accounting & Finance

Objectives
o Increasing public confidence in the credibility and objectivity
of published financial information
o Assisting directors in meeting their financial reporting
responsibilities
o Strengthening the independent position of the external
auditors
Functions
o Monitoring the integrity of financial statements
o Reviewing internal financial controls
o Monitoring and reviewing the effectiveness of the internal
audit function
o Making recommendations regarding:
 Appointment
 Removal
 Remuneration of external auditors
o Reviewing and monitoring:
o The external auditor’s independence and objectivity
o Effectiveness of the audit process
o Arrangements for confidential reporting by employees
(whistle blowing)
o to establish and implement policies concerning the supply of
non-audit services by the external auditor
 Advantages
o Improving quality of management accounting
o Assist directors in carrying out their legal duties
o Improving the quality of accounting and auditing functions
o Better communication between the directors, external
auditors and management

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Asrat Bekele
City University College Department of Accounting & Finance

 Disadvantages
o Fear that their purpose is to catch management
o Non executive directors overburdened with detail
o A two tier board of directors
o Additional cost
Auditing Theory
Auditing can be termed as a tool of control over those who handle
resources belonging to others. This applies to responsible officials in both
corporate businesses and governments.
These responsible parties may have bias and hidden motives in providing
financial information and their goals may be inconsistent with those of
the owners due to
 Honest optimism
 Intention to influence
 Voluminous data which increases the likelihood of improperly
recorded transactions
How can such risks be reduced?
 Verification by the user, the user may verify information by
o Going to the source and checking
o This alternative is impractical and economically inefficient
o It is some times done a good example is tax audit by the
government
 Audited financial statements fill this gap by providing
o Reasonably complete, accurate and unbiased information
o To ensure provision of such information the profession has
quality control disciplinary procedures discussed in the next
chapter
 Mere existence of audit acts as a check against actions of the
responsible bodies
 Hence auditing can be viewed as:
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City University College Department of Accounting & Finance

o A tool for enhancing credibility of economic information

o A tool for improving economy and efficiency in use of
resources
 Audits may also be conducted for certain special purposes
 Auditing in general benefits owners of a business, management
who are entrusted with the responsibility of the business and the
government
o Owners
 Adds credibility to financial information
 Improves efficiency there by leading to higher profits
 Provides overall checks on integrity of management in
preparation of financial statements
o Management
 Improves control and check especially internal audit
 Makes it easier to deal with third parties due to added
credibility
 Provides assurance as to reliability of tax returns
 Brings about greater confidence of owners
 Helps in more efficient use of resources
o Government
 Provides reliable information as a basis for policy
decisions like
 Taxation
 Pricing and overall economic performance
 Provides reliable tax returns
The above discussion may justify why audits are needed and the
benefits the stakeholders can obtain there from. However, auditing is a
practical subject. It is something people do. How it is done today is a
result of long process over the centuries. There is no real body of theory
in the way there is for other fields. In accounting, for example, there are
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City University College Department of Accounting & Finance

few recognized conventions like going concern, accruals etc which

underlie all accounting and ensure coherent and consistent application.
But there accepted principles and standards which guide the whole audit
process.
Auditing principles and standards

Auditng Principles

Principles are generaly, guideines that help direct or chart goals and
aims. Auditing principles thus are broad guidelines that help in
identifing auditing goals and objectives or help direct efforts towards
goals. Principles are based on concepts or assumptions, and/or
developed from particular observations and conventions/customs.
Whichever way they are developoed they are necessary for evaluating
alternative methods of doing things, for realizing differing perceptions,
harmonizing views and practices, and help uniformity.

Auditing professions in many countries have attempted to embody these

guidelines in their professional association emblems. For example in US
and UK “truth, fairness and objecivity” were identified as basic auditing
principles, other have tried to base their accounting principles on
accounting principles them selves. In Ethiopia for example the Ethiopian
Professional Association of Accountants and Auditors [EPAAA] had the
following as principle guidelines in its emblem, “Retee Laele Kulu”.
Auditing Standards
Standards are criterion or measure of quality of performance. They serve
as roads against which work performed is compared and thus principles
are translated into more practical adhereable terms. In thisregard it
would seem that standards are more specific than principles, though
there are authors in accounting that consider principles and standards
to be the same or interchangeable.

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City University College Department of Accounting & Finance

 General Stadards of Qualification and conduct

o Auditing must be done by a person possessing an
adequate and competent professional training.
o An auditor must maintain an independent physical and
mental attitude at all times.
o An auditor must exercise due professional care in his
work.

 Standards of field work in audit performance

o Auditor work must be properly planned and supervised.
o Auditor must study and evaluate internal control.
o Auditor must gather sufficient and competent evidence

 Standards of reporting
o The audit report must state whether financial statements
have been prepared in accordance with specific
accounting standards.
o The audit report must state whether the applicable
standards has been consistently applied with that of the
preceding period.
o The audit report is to be presumed to have adequate
information disclosure unless and otherwise stated so.
o The audit report must maintain an expression of opinion
on the financial statements as a whole or an explanation
for not expressing an opinion.

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