What Are The Steps To Audit A Company’s Climate Risk Disclosure?

audit-company-climate-risk

What Are The Steps To Audit A Company’s Climate Risk Disclosure?

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The SEC has recently proposed a rule that mandated companies to show climate risk and integrate the disclosure of how it affects the business in their report. Prior to this, only a few companies voluntarily provide this report, and in the light of this, a question pops up. How accurately can this be implemented for companies that issue climate change reports? What are the chances of a audit company climate risk disclosure? There is a bottleneck as the climate disclosure reports are presented in a manner that makes it difficult to ascertain its performance and comparatively evaluate it with other companies. It thus has proven impossible for investors to relate the climate report to the financial statements provided by the companies.

The reality is that the narrative style and painted scenario are washed in these reports. There is an absence of auditing and a form of evaluation of clarity and consistency in the financial statements and the reports.

The Need For a Foolproof Auditing System of Climate Risk Disclosure 

Undoubtedly, matters related to the climate can greatly impact a company’s financial status, and the climate risk disclosure must be provided to auditors that can assess the financial statement and investigate the accuracy of the report when juxtaposed with the assertions in the climate risk disclosure report.

 It is also an avenue to ascertain that documents are void of misappropriated statements and possess a high level of accuracy; this also goes a long way in benefiting investors by providing trustworthy measurement and evaluation of the impact-driven by climate on a company.

This auditing works to synergize the information and aids in improving the performance of the Capital markets while being essential to delivering the climate information to the investors and market.

Steps To Audit Company Climate Risk Disclosure Report

The center of audit quality CAQ released a resource that explicitly outlined the management and auditors’ roles in climate-related risk reporting. According to the Vice President, professional practice for the CAQ aims to “Foster a dialogue on climate-related measure and disclosure among all the stakeholders in the financial reporting ecosystem.’

Risk Disclosure

This entails the disclosure of risks whose effects can alter the financial statement of an organization. For climate issues, it is typically are categorized into

● Physical risk that can cause damage to a company’s facilities, such as weather events that can lead to a relocation

● Risk associated with a transition to a low-carbon economy 

With this, the varying effects of climate risks on financial statements are also considered.

Risk Assessment

● Auditors are to attain full understanding of the organization and the environment and also consider the company’s objective business strategies that can lead to a risk of misstatement 

● Invariably auditors are to assess the impact on financial statements. During the risk assessment, auditors are required to source more information asides from what is present in the financial statements. This gives auditors a view from different perspectives as to the impact of such risk. This information can be obtained from press releases, sections of Form 10-k, sustainability reports, and others.

● A full exposition of the methods, assumptions, and data used by the companies to provide an accounting estimate is also expedient.

Fact-Checking

The auditor must follow the existing auditing standards and check to ensure that the financial statements are factual and free of errors that are either fraudulent or due to an omission. It is also the responsibility of the auditors to ensure the accuracy of the management’s consideration of the financial statements, applications of potential risks of material misstatement, which are related to the climate-related risk. Contradictory information is also evaluated and assessed in relation to evidence in the financial statements.

Critical Audit Matters CAM

These are meant to be communicated to the Audit Committee as it relates to an account or a disclosure that is material to the organization’s statements. Climate-related contributions might be included as a part of the CAM in the auditor’s report, as they could highlight considerations that push them to the level of CAM. There is a need for the auditors to also access all information in the document in the climate-related disclosure and to determine if the manner of its delivery is consistent with the information on the financial statements that have been audited.

Conclusion of Audit Company Climate Risk Disclosure

In conclusion, the importance of the demand for climate-related information and its financial effects cannot be negated. These steps are taken to ensure that the financial statements and climate disclosure reports are coherent in recognition of this relevance. The auditing procedure also helps investors understand the sustainability of business models and help make the right investment decisions.

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