Greenhouse and energy auditor inspections · Of the 41 audit files inspected, 22 were audits under the Emissions Reduction Fund, and two audits under the Carbon Farming Initiative—representing

Greenhouse and energy auditor inspections

Findings: 2016–17 program

April 2018

GPO Box 621 Canberra ACT 2601 1300 553 542 [email protected] www.cleanenergyregulator.gov.au 2

Auditor inspection program 2016–17

Purpose of inspections

The Clean Energy Regulator uses greenhouse and energy audits to provide independent assurance over the validity of data reported to the agency, detect non-compliance and inform regulatory decisions. Auditor inspections not only provide confidence in the performance and compliance of those Category 2 registered greenhouse and energy auditors (RGEAs) who conduct the audits, they also identify education opportunities to continuously improve RGEA capability and credibility in the audit process.

The agency appoints a team of independent inspectors who, between them, have extensive experience in assurance auditing and financial auditing, conducting quality reviews, knowledge of relevant Australian Standards on assurance engagements, greenhouse emissions and energy auditing, and have a background in engineering or other relevant technical expertise.

The National Greenhouse and Energy Reporting Regulations 2008 (NGER Regulations) allow us to inspect the performance of an RGEA in conducting Part 6 audits; in particular to:

ensure that auditors comply with the requirements of both the National Greenhouse and Energy Reporting (Audit) Determination 2009 (NGER Audit Determination) and the NGER Regulations in carrying out greenhouse and energy audits

review the decision-making processes auditors use in carrying out greenhouse and energy audits in order to determine whether their professional judgement is being exercised appropriately, and

provide confidence in the findings of audit conclusions.

Report scope

This document outlines the key findings from the 2016–17 auditor inspection program and areas of focus for improvement. It does not include information about any regulatory matters arising from inspections.

For the 2016–17 program, the Clean Energy Regulator selected firms, auditors and audit files for inspection based on risk, complemented by a random sample. Given the small and risk-weighted sample inspected, the findings should not be interpreted as a general finding about audit firms and auditors.

Our inspection findings focus on the capability of the auditor, the conduct of an audit and the quality of the audit files. Where deficiencies were identified, the findings do not necessarily indicate that the subject matter audited was materially misstated or materially non-compliant with the legislation. Rather, if there were deficiencies, questions arise as to whether the auditor had a sufficient basis to support their opinion in the audit report.

Suggestions for improvement are derived from the more common findings across the audit files examined.

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http://www.cleanenergyregulator.gov.au/


Pilot inspection program

A pilot auditor inspection program was run in 2015–16. Some auditors selected for inspection under this initial program were assessed as high risk, or with known issues, and there was an expectation that some findings would be significant. Findings were not published as this was the first time the Clean Energy Regulator had conducted inspections; however, common findings included:

poor application of required quality control processes and procedures

a lack of complete working papers

lack of evidence to support professional judgement, and some ambiguous opinions.

These findings should not be extrapolated across the whole population of auditors, as they represent a small percentage.

Summary

Key overall findings for 2016–17

Inconsistent application of quality control. Findings ranged from adequate firm level quality control systems that were not being properly and consistently applied at the engagement level, through to systems that did not comply with ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements.

Lack of documented evidence to support conclusions. 67% of files inspected had some level of missing or incomplete documentation. This meant that some auditors were required to spend extensive periods of time with the inspectors in order to explain elements of the audit that were not clear in the audit file. This included information about how risks were considered, how professional judgement was applied, the detail of testing undertaken, and the extent of the peer reviewer’s involvement.

Areas of improvement for auditors and their firms

Areas of improvement for auditors and their firms have been collated from the 2016–17 program findings and are summarised below. Further information can be found under our findings on page 7.

Scheme specific

For audits under the Emissions Reduction Fund (ERF):

» establish terms of engagement, integrity of the client and independence with the project proponent and not just with the agent for the project

» test for eligible interest holder consent and legal right to conduct a project as part of concluding on a project’s eligibility, and

» document all testing undertaken and gather evidence to support conclusions on a project’s eligibility.

For audits under the National Greenhouse and Energy Reporting (NGER) scheme:

» ensure that controls are adequately tested and evidence to support conclusions is adequately documented




» ensure meter calibration is tested in detail where it is a key control, in accordance with the relevant calibration requirements in the NGER Measurement Determination.

For audits under the Safeguard mechanism:

» use the difference between the existing baseline and the baseline applied for as a key element of determining materiality for the audit, not the reported base line amount alone

» ensure expertise is accessible on the use of ASAE 3450 Assurance Engagements involving Corporate Fundraisings and/or Prospective Financial Information.

Audit practice

Quality control systems and processes should align with the requirements of ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements and be consistently applied across all engagements.

Team leaders should devote sufficient time to, and be involved in, the activities of an audit, particularly in the higher risk areas of the audit. They should ensure that their involvement is adequately documented in the audit file.

Declarations of independence and engagement terms should be completed before work starts on an audit, in accordance with the NGER Audit Determination, sections 2.4 and 3.4.

Planning for audit conduct should include consideration of a wider range of risks, with better linkages to procedures supporting evidence and analysis.

Audit files should be comprehensive, complete, and stand alone, with work papers linking risks, considerations and evidence to audit conclusions and the basis for judgement.

Where an auditor is contracted to provide team leadership services for another firm, they should:

» agree on the quality control system to be used, and if it is not their own system, ensure they are satisfied with the comprehensiveness of the system and its compliance with ASQC 1

» ensure they are able to fully perform their role as a team leader in accordance with the NGER Audit Determination, NGER Regulations and relevant auditing and assurance standards

› if a team leader does not source their own audit team, they should evaluate the competency of the audit team provided to them for the audit

› if a team leader does not retain the complete audit file, they should ensure they can access the audit file for up to five years after the audit.

Peer review involvement should be enhanced to meet the requirements in the NGER Audit Determination, and should be adequately documented.




Coverage

During 2016–17 we inspected the performance of ten auditors and a total of 41 files of audits conducted between 2012 and 2016. These audits spanned five years and a number of the Clean Energy Regulator’s schemes, with a strong focus applied to Emissions Reduction Fund audits, to align with the agency’s Compliance Priorities 20171.

Of the 41 audit files inspected, 22 were audits under the Emissions Reduction Fund, and two audits under the Carbon Farming Initiative—representing a total of 59% of the sample. Eight audit files covered National Greenhouse and Energy Reporting, making up 19% of audit files inspected, two audits were inspected for the Safeguard Mechanism (5%), with a further seven (17%) covering the Carbon Pricing Mechanism.

1 http://www.cleanenergyregulator.gov.au/About/Compliance-and-Enforcement/compliance-priorities-2017

Emissions Reduction Fund

54%

National Greenhouse and Energy Reporting

19%

Safeguard Mechanism

5%Carbon Pricing Mechanism

17%

5% Carbon Farming Initiative

0

2

4

6

8

10

12

14

16

18

20

22

24

ERF NGER Carbon pricingmechanism

Safeguardmechanism

CFI

Initial

Subsequent

CER initiated s.215

CER initiated s.74 Liable

Entity

Jobs & Competitiveness Program

Figure 1: Scheme coverage

Figure 2: Audit type coverage by scheme



http://www.cleanenergyregulator.gov.au/About/Compliance-and-Enforcement/compliance-priorities-2017

http://www.cleanenergyregulator.gov.au/About/Compliance-and-Enforcement/compliance-priorities-2017


Figure 2 above shows the breakdown by audit type of audit files inspected for each of the schemes:

Under the Emissions Reduction Fund the majority of files inspected were for a project’s initial mandatory audit under the scheme, with six covering subsequent audits for projects, and four initiated by the Clean Energy Regulator as part of the annual audit program.

For the National Greenhouse and Energy Reporting scheme, we inspected eight files of audits the agency initiated as part of the annual audit program.

For applications under the Safeguard Mechanism we inspected two audit files.

Audit files inspected under the Carbon Pricing Mechanism comprised mainly mandatory audits from liable entities and one for an application under the Jobs and Competitiveness Program.

For the Carbon Farming Initiative we inspected two audit files for project mandatory audits, similar to an initial audit under the Emissions Reduction Fund.

Looking more closely at the methods covered under the Emissions Reduction Fund and Carbon Farming Initiative, our inspections centred on audit files for Vegetation, Landfill and Savanna Burning methods, correlating with the predominance of these projects in the scheme.

0 1 2 3 4 5 6 7

Early Season Savanna Fire Burning 1.1 2013

Alternative Waste Treatment 2015

Reforestation and Afforestation 2.0 2015

Avoided deforestation 1.1 2015

Human Induced Regeneration 1.1 2013

Savanna Fire Management 2015

Landfill Gas 2015

Figure 3: Emissions Reduction Fund/Carbon Farming Initiative method coverage




Our findings

When assessing the findings in audit files across the five-year span, we found that the quality and comprehensiveness of the files has improved over time which indicates a maturing of auditor knowledge and skillset within our schemes.

We have laid out our findings and areas for improvement from the 2016–17 inspection program below by scheme and then by area of audit practice. Findings from the inspection program do not apply to all auditors or files inspected. Where findings are consistent across a number of audit files, they may differ in the level compliance with requirements.

Findings by scheme

Scheme Findings

Emissions Reduction Fund (ERF)

and

Carbon Farming Initiative (CFI)

Engagements to audit individual projects in the ERF should be established with the project proponent as the audited body. We found several cases where auditors engaged only with agents acting on behalf of the audited body. This creates issues in that the project proponent is ultimately responsible for the project’s compliance, yet has no involvement in agreeing to the engagement plan or providing management representation.

Where an agent acts on behalf of a project proponent, we also found a lack of evidence on the audit file that the controls and monitoring procedures between the agent and the proponent were fully understood.

Where an audited body engages a third party to prepare material data being reported, we found a lack of evidence on file that the systems and processes for that engagement were fully considered.

Certain projects require consent from eligible interest holders in order to be considered eligible under the scheme. This is an important compliance requirement for a project and, consequently, a key risk area for audit. We found instances of no evidence to demonstrate that this area was adequately considered or tested, or copies of relevant documentation retained on file.

For human-induced regeneration projects to be eligible, the land must have had activities on it that suppressed forest growth for at least 10 years before the project started. In several cases we found a lack of testing evidence on file to support conclusions that suppression activities, such as grazing, had ceased.

Areas for improvement: ERF

For engagements under the ERF, auditors should:

ensure that terms of engagement, integrity of client and independence are established with the project proponent and not just with the agent

test for eligible interest holder consent, and legal right, to conduct a project as part of concluding on a project’s eligibility

document all testing undertaken and gather evidence to support conclusions on a project’s eligibility.




Scheme Findings

National Greenhouse and Energy Reporting (NGER)

and

Carbon pricing mechanism

Meter calibration is a key control point to test the accuracy of recorded emissions under NGER. We found that in one instance an auditor had not fully tested the calibration of conveyor weightometers to an appropriate level of detail against the measurement standards for the meter.

In another example, an auditor relied on information provided without adequately testing the stated procedures for coal sampling and bias testing.

Areas for improvement: NGER

For engagements under NGER, auditors should:

ensure that controls are adequately tested and evidence to support the conclusion is adequately documented

ensure meter calibration is tested in detail, where it is a key control, in accordance with the NGER Measurement Determination.

Safeguard mechanism

For audits conducted under the safeguard mechanism, we found instances of materiality being determined using the reported base line amount rather than the difference between the initial baseline and the increased baseline being applied for.

The differential represents the potential benefit to the client and consequently is considered the most appropriate amount to use in determining materiality. Where increases are small, setting materiality using the proposed baseline may result in an inappropriate materiality figure; for example, where a baseline increase of 40,000 tonnes is considered immaterial against 5% (50,000 tonnes) of a reported baseline of 1,000,000 tonnes.

As a new audit type with new requirements including the use of Australian standard ASAE 3450, we found that auditors did not always source expertise to assist their understanding of prospective financial information, such as production forecasts included in safeguard applications.

Areas for improvement: Safeguard mechanism

For engagements under the Safeguard mechanism, auditors should:

use the difference between the initial baseline and the application amount in setting materiality

ensure they have access to expertise on the use of ASAE 3450 Assurance Engagements involving Corporate Fundraisings and/or Prospective Financial Information.

Table 1: inspection program findings by Clean Energy Regulator scheme




Findings by audit practice area

Audit practice area Findings

Quality control

At the firm level, we found differing levels of consistency with the elements and requirements of Auditing Standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements.

In addition, we found instances where quality control was not consistently applied at the engagement level. Examples of this include:

audit files not adequately reviewed, including timely review of key planning decisions

engagement terms not being agreed to before the work starts.

Areas for improvement: quality control

Section 2.5 of the NGER Audit Determination was updated in July 2017 to mandate that audit team leaders ensure audits comply with auditing and assurance standards. This includes ASQC 1. Auditors and their firms must:

ensure that quality control systems and processes align with the requirements of ASQC 1, including

» monitoring of quality control systems through formal, periodic inspections of selected engagements by an independent reviewer, in either real-time or as a ‘cold review’.

Team leadership and supervision

The NGER Audit Determination clearly lays out the role of a team leader when conducting audits. In particular, being personally involved in preparing for and conducting an audit, as well as supervising the work of each audit team member.

We found differing levels of involvement, from consistent engagement with the audit through to findings indicating minimal oversight. There was also insufficient clarity in audit files as to the evidence of team leaders’ involvement, particularly where the hours recorded appeared low for the complexity of the audit.

Insufficient involvement by the team leader may undermine the level of judgement and professional scepticism that is essential for an audit.

In some instances, the low number of hours recorded correlated with findings indicating limited supervision, review and signoff by the team leader.

Areas for improvement: team leadership and supervision

Team leaders are accountable for the conduct of the audit and should:

devote sufficient time to, and be involved in, the activities of an audit, particularly in the higher risk areas of the audit

ensure that their involvement is adequately documented in the audit file.





Client engagement

Procedures undertaken, and the timeliness with which they are done, differ significantly across the audit files examined. The most common issues included:

independence declarations not completed before the audit work started

engagement terms not signed by the client and team leader before the audit work started.

For one engagement, we found the team leader was subcontracted to conduct the audit for another audit firm. This practice leads to several issues:

questions over whose quality control system is applied to an audit

team leaders not having full control over the conduct of an audit

audit files not being complete, with some documentation being retained by the contracting audit firm and copies not being included in the audit file.

Areas for improvement: client engagement

Auditors should:

ensure that independence declarations are completed before the audit work starts

ensure that engagement terms are agreed to and signed before the audit work starts.

Where an auditor is contracted to provide team leadership services for another firm, they should:

agree on the quality control system to be used, and if it is not their own system, ensure they are satisfied with the comprehensiveness of the system and its compliance with ASQC 1

ensure they are able to fully perform their role as a team leader in accordance with the NGER Audit Determination, NGER Regulations and relevant auditing and assurance standards

evaluate the competency of the audit team provided to them, if they do not source their own team

ensure they have access to the audit file for up to five years after the audit if they do not retain the file themselves.

Planning

Risk identification, assessment and management is crucial for driving the focus of an audit. Here, we found differing levels of sophistication across the audit files.

In almost all cases, the financial context associated with the subject matter being audited had not been fully assessed and documented. Full consideration of this context leads to a better appreciation of the risks, in particular fraud risk, and management controls that are, or should be, in place.

In some cases risk assessments did not consider key practical considerations of the engagement such as condensed timeframes and the location and access to remotes sites.





Risk assessments also often lacked explicit consideration of familiarity and self-interest where engagements related to other prior work with the client or agent.

Areas for improvement: planning

Other areas of focus for auditors when assessing risk include:

obtaining an understanding of the control environment between an ERF agent and a project proponent

implications of a compressed timeframe to conduct an audit, including efficiency measures and how they might compromise the quality of the audit

difficulty associated with gathering sufficient evidence from remote sites

familiarity or self-interest threats to independence from a client, especially where the engagement is linked with other services provided to the client.

Documentation

The structure of an audit file should allow an experienced auditor, not involved in the engagement, to easily follow how it was conducted. In particular, the file should document significant matters and professional judgement applied to reach a conclusion. We found that, in a number of instances, work papers were not sufficiently clear, detailed and complete to provide an understanding of the engagement. A consequence was that, during inspections some auditors were required to spend extensive periods of time with the inspectors in order to explain elements of the audit that were not clear in the audit file. Findings included:

missing or incomplete documentation around engagement risks

missing or incomplete documentation around the nature, timing and extent of procedures and the sufficiency and appropriateness of evidence gathered to support conclusions

inadequate referencing across work papers

lack of clarity between risks identified during planning and the link with testing completed

audit files that were not able to stand alone or were inadequately locked down after the audit was completed.

Areas for improvement: documentation

Auditors should focus on ensuring:

audit files are well structured, comprehensive and complete

work papers clearly link risks, considerations and evidence to audit conclusions and the basis for judgement.

audit files are to be completed and closed in a reasonable time after the audit in accordance with the requirements of the auditing and assurance standards.





Evidence

Across the audit files, we found many instances of not enough evidence, or documentation on how the evidence supported conclusions, examples include:

where reliance was placed on evidence gathered during previous engagements, we found instances of files not containing adequate documentation on how the auditor confirmed that the evidence remained relevant

where photo imagery was used as evidence, some files lacked documentation around how it supported the conclusion.

Areas for improvement: evidence

Auditors should focus on:

ensuring work papers link considerations and evidence to audit conclusions and the basis for judgement.

Peer review

A peer reviewer must be impartial and independent. They must evaluate judgements made by an audit team leader in carrying out an audit, and document how the evaluation was done and its outcome. Across many audit files inspected, we found minimal evidence of peer review being conducted adequately.

Documentation was lacking around the peer reviewer’s involvement, especially at key milestones of an engagement.

We also found, in one case, where a peer reviewer raised an issue, the audit file did not contain sufficient information on how the issue was resolved.

Areas for improvement: peer review

Auditors should:

enhance the role of their peer reviewers to ensure they meet the requirements in the NGER Audit Determination

ensure peer reviewer involvement is adequately documented, including key discussions of issues raised and how they were resolved.

Table 2: inspection program findings by areas of audit practice




Where we will continue to focus

The Clean Energy Regulator intends on inspecting all registered Category 2 auditors over time and will continue to select auditors for inspection using a risk-based and targeted approach.

While inspections concentrate primarily on the capability of an auditor, for the upcoming inspections we will also focus on the following areas.

The Clean Energy Regulator’s Compliance priorities 2018 for auditors and our schemes will be published soon and this will also inform our focus for inspections.

Focus area Detail

Safeguard mechanism files

Whether the complexity of the Safeguard mechanism is fully understood in the planning and conduct of an audit. This is a relatively new scheme for the Clean Energy Regulator.

Internal quality control Examining evidence of active quality control including results of recent internal reviews involving audits under our schemes.

Complex engagement arrangements

Whether the auditor is adequately performing their team leader role in accordance with the NGER Audit Determination within complex engagement arrangements. These arrangements create risks for the auditor and should be managed appropriately.

Peer review Whether the peer review role is being adequately performed and documented.

Audit report - Part B Whether Part B conveys all the relevant findings of the audit and aligns with requirements introduced into the audit determination handbook in October 2017.

Quality of evidence Whether the auditor has considered the quality of the evidence provided, in particular management representation as opposed to source documentation and observation.

Table 3: Ongoing areas of focus for inspections



Documents

Greenhouse and energy auditor inspections · Of the 41 audit files inspected, 22 were audits under the Emissions Reduction Fund, and two audits under the Carbon Farming Initiative—representing