3410N Assurance engagements relating to sustainability reports

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1 3410N Assurance engagements relating to sustainability reports Royal NIVRA

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3 3410N ASSURANCE ENGAGEMENTS RELATING TO SUSTAINABILITY REPORTS Introduction Scope of this Standard ( T1 and T2) 1. This Standard provides guidance to the auditor when performing an assurance engagement relating to an organisation s sustainability report. It applies to assurance engagements relating to a sustainability report where the objective of the engagement is to obtain reasonable assurance (an audit engagement), as well as to those whose objective is to obtain limited assurance (a review engagement). A hybrid of the two types of engagement also falls within the scope of the Standard. In the case of a hybrid engagement, the audit elements must be clearly distinguished from the review elements. As this Standard applies to audit engagements as well as review engagements, the differences between the requirements and the disclosures for the two types are stated explicitly, insofar as this is necessary. 2. The objective of an assurance engagement relating to a sustainability report is that a public auditor examines the information in the report to determine whether it meets the relevant reporting criteria. The perspective of the intended users of a sustainability report is central to assurance engagements involving such reports. Objective 3. The objective of the auditor is to form a reasonable basis for his conclusion that the sustainability report provides a reliable and adequate presentation of the reporting organisation s policy for sustainable development, as well as the activities, events and performance of the organisation relating to sustainable development in a reporting period. Definitions 4. The following definitions apply in this Standard ( T 3 to T 10): External expert: an expert not employed by the reporting organisation. Intended users and user groups: the interested parties for the conduct of the organisation and for the content of the organisation s sustainability report. Legitimate information needs: the information that an average representative of the intended users or user groups can demand based on legislation, generally accepted reporting standards, case law, or agreements between the reporting organisation and these intended users or user groups. 3410N Assurance engagements Page 1

4 Sustainability report 1 : a publication for a reporting period in which a reporting organisation informs and renders account to intended users about its policy regarding sustainable development, as well as its activities, events and performance relating to sustainable development. Reporting organisation: an organisation that is responsible for the preparation and publication of a sustainability report and that engages an auditor to undertake an assurance engagement relating to the sustainability report. Reporting criteria: reporting criteria are the benchmarks used in assessing or validating the sustainability report, including, insofar as they are relevant, the principles observed by the reporting organisation in preparing the report. REQUIREMENTS General and engagement acceptance Engagement letter ( T 11 to T 17) 5. Before accepting the assurance engagement, the auditor should verify that: a. he is independent of the engaging party; b. there is a rational purpose for the engagement; c. he satisfies the requirements regarding the expertise for performing the engagement; d. it is justifiable to assume that the management of the reporting organisation is acting in good faith; e. it is justifiable to assume that the reporting criteria used by the reporting organisation are suitable; f. it is justifiable to assume that adequate assurance evidence can be obtained for the purpose of the engagement. 6. The auditor should focus the assurance engagement on the both the accuracy and completeness of the information in the sustainability report. The auditor is permitted to accept limitations that might relate to the aspects of accuracy and/or completeness. Such limitations should be explained in the sustainability report, as they might relate to limitations in the report itself or in its examination. 7. When accepting the engagement, the auditor should reach agreement with the management of the reporting organisation on the action to be taken if negative findings arise during the examination of the sustainability report. 8. If the engaging party wishes to change an audit engagement into a review engagement while it is being performed, the auditor should ascertain whether the reasons for the change 1 In practice, a sustainability report is also referred to as a corporate (social) responsibility report or triple bottom line report. Following the example of the DASB in its manual, this standard uses the term "sustainability report". A sustainability report can be published in various ways. This Standard assumes that it will take the form of a stand-alone report. If publication conforms to other generally accepted criteria, the instructions in this Standard are applicable. Page 2 Royal NIVRA

5 are acceptable and logical. The auditor is not permitted to accept such a change if its purpose is to prevent an adverse conclusion or a disclaimer of conclusion. 9. The auditor should take appropriate steps to allow him to bear undivided responsibility for performing the assurance engagement. If he intends to involve external experts, this should be stated in the engagement letter. The undivided responsibility of the auditor is expressed by his signing of the assurance report. If he involves internal experts, these persons and the auditor can jointly sign the assurance report. 10. The auditor should state in the engagement letter that he will report timely in writing on all his relevant findings that could be of significance to the management of the reporting organisation or the body charged with governance, as the case may be. 11. The auditor should state in the engagement letter that, if he finds indications of fraud, he will act in accordance with the regulations applying to auditors. Review of the reporting criteria ( T 18 to T 24) 12. The auditor should ascertain whether the generally acceptable and specifically developed reporting criteria selected by the organisation's management are suitable. If the auditor considers that the criteria selected are not suitable or not sufficiently suitable, he should not accept the engagement or state the reservations in his assurance report. 13. The auditor should assess the decision-making process of the organisation s management concerning the selection and depth of information in the sustainability report (reporting materiality) and, at a minimum, verify that the report is not misleading, or could be, owing to under-emphasis or over-emphasis on certain groups of intended users, topics and/or information on these topics, and that it satisfies the legitimate information needs of the report s intended users. Expertise ( T 25) 14. The auditor or the assurance team, as the case may be, should have the expertise needed to perform the assurance engagement, i.e. knowledge, experience and skills in the following areas: a. auditing; b. the subject matter of the examination; c. management and information systems; d. external reporting and reporting standards, as well as the relevant social and political issues. 15. The auditor should assemble an assurance team with sufficient experience and competency in the above-mentioned areas of knowledge, to enable it to identify and collect the required assurance evidence. The team can be multidisciplinary, including persons from outside the auditing profession (experts). The auditor should have sufficient understanding of the relevant topics in the sustainability report to enable him to take responsibility as the leader of an assurance team. Collaboration with external experts ( T 26 and T 27) 16. If the auditor involves an external expert, he (the auditor) should act in conformity with 3410N Assurance engagements Page 3

6 Standard 620, Using the Work of an Expert. 17. If the auditor involves an external expert, he should agree with the expert that they conduct joint consultation on the planning and performance of the engagement and that the expert reports his finding in writing to the auditor. The auditor should review the work of the expert and the results produced by it. Collaboration with internal auditors 18. If the auditor involves an auditor who is employed by the reporting organisation, he (the auditor engaged) should act in conformity with Standard 610, Considering the Work of Internal Audit. Risk analysis ( T 28 to T 35) 19. The auditor should obtain a good understanding of the sector in which the reporting organisation operates and of the characteristics of the organisation itself, including the important business risks relating to sustainable development and the reporting on these risks. 20. The auditor should obtain a good understanding of the corporate governance, internal control environment and control procedures. He should obtain sufficient understanding of the internal control environment to be able to verify the integrity of the management, supervisory directors and executive officers, as well as the standpoint of the bodies charged with the governance for which account is rendered in the sustainability report. 21. The auditor should evaluate the inherent risks and the internal control risks, focusing on the factors that could be material for the content of the sustainability report. System-related procedures ( T 36 to T 43) 22. The auditor should assess whether the relevant information systems satisfy the requirements set for them. If they do not, he should ascertain whether by performing substantive procedures, he would be able to obtain adequate assurance evidence. If this is not possible, he should determine what implications this will have for his assurance report. 23. Audit engagements: If the auditor can and wishes to rely on the internal controls, he should obtain sufficient evidence concerning their operating effectiveness. Review engagements: Testing the operating effectiveness of the internal controls is not part of a review engagement. Substantive procedures ( T 44 to T 46) 24. Irrespective of the assessed level of inherent risk and internal control risk, the auditor should perform certain substantive procedures. Audit engagements: The main types of procedure in this case are: a. inquiries; b. analyses (analytical reviews and tests of relationships); Page 4 Royal NIVRA

7 c. verification of information against documents and other primary sources of assurance evidence; d. tests of details. The auditor should determine the scope and timing of these procedures based on the understanding gained of the systems and his professional judgement. Review engagements: The main types of procedure in this case are: a. inquiries; b. analyses (analytical reviews and tests of relationships); c. comparing information with documents. If the auditor has reason to believe that the information under review contains material errors, he should perform the additional procedures necessary for him to make a professional judgement. Overall presentation of the sustainability report ( T 47) 25. The auditor should assess the overall presentation of the sustainability report. To this end, he should ascertain at a minimum that the information provided is not misleading, the content is balanced, and the topics dealt with are explained clearly and adequately. Special factors concerning multi-locations ( T 48 and T 49) 26. For the planning and performance of procedures in the case of multi-location organisations, the auditor should consider distinguishing between group entities according to their relevance in terms of activities, size and/or specific risks. Obtaining additional assurance evidence ( T 50) 27. The auditor should obtain a written representation from management confirming its responsibility for the content of the sustainability report and stating that it considers the organisation s reporting policy and criteria used adequate and that the report contains all the information it believes to be of material importance to the intended users. 28. If the organisation has a supervisory board, when the auditor holds his meeting with this board he should ask the board for its views on the organisation s reporting policy, reporting criteria and the adequacy of the sustainability report as a whole. 29. If the management of the reporting organisation refuses to issue a written representation or the supervisory board refuses to meet with the auditor to discuss the sustainability report, the auditor should consider the consequences of this for the wording of his conclusion. 30. The auditor should ascertain that the sustainability report clearly shows which parts of it have been audited, which parts have been reviewed and which parts are not considered to be within the scope of the engagement. 31. The auditor should critically read all information published in conjunction with the sustainability report, to ascertain that none of this information contradicts the report. 3410N Assurance engagements Page 5

8 Documentation 32. The auditor should record in his working papers all significant considerations and decisions concerning acceptance of the engagement, any changes to the engagement, the planning of the procedures, and the findings that were obtained during the performance of the procedures, in line with the concept of Standard 230, Audit Documentation. Assurance report ( T 51 to T 67) 33. The auditor should state which parts of the sustainability report have been audited, which parts have been reviewed and which parts are not considered to be within the scope of the engagement. An assurance report has to contain certain basic elements. 34. If the examination or the report is subject to limitations, the auditor should state this in his assurance report and refer to the reasons for the limitations expressed by management in the sustainability report. 35. If while performing the engagement the auditor reaches the conclusion that the reporting criteria used are unsuitable, he should state this in his assurance report. 36. If the auditor states in his assurance report that external experts were involved, he should add that he bears undivided responsibility for the entire engagement. 37. For a review engagement, the auditor should state that the procedures performed are more limited than those for an audit engagement, so that he sought and obtained less assurance than for an audit engagement. 38. In the case of a combined audit and review engagement, an all-embracing conclusion must not be given. Specific public sector aspects 39. If an auditor performs an assurance engagement and is not independent of the engaging organisation (being an internal auditor or public sector auditor), he should apply this Standard including a specific reference in his assurance report to the directions of footnotes 2 and 4 to Standard 3000, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. Page 6 Royal NIVRA

9 APPLICATION NOTES Sustainability report ( 1 and 2) T 1 This Standard has similarities to and differences from standards applying to the audit of historical financial information. The differences mainly concern the following: a. The quantitative information disclosed in a sustainability report is not generally measured in monetary units, but in units that are mutually independent (for example performance indicators for carbon dioxide emissions and performance indicators for supplier screening using respect for human rights as a criterion). b. The quantitative information disclosed in a sustainability report cannot usually be derived from a closed accounting system. The double-entry bookkeeping system, which in many respects determines the approach to auditing historical financial information, is often absent. A closed valuation cycle is often not in place and the records are generally stand-alone. c. The qualitative information (e.g. policy and management) is of equal significance as the quantitative information. d. Internal control systems for risk management and data collection comparable to the systems for historical financial information are not available for all topics covered by a sustainability report. Systems for risk management and information collection that are in place often provide fewer guarantees of completeness and accuracy than a system for reporting historical financial information. e. A sustainability report is aimed at a significantly wider and less homogeneous group of users than a report on historical financial information. The intended users or user groups of a sustainability report might differ considerably in terms of their aims and expectations regarding their legitimate information needs. f. The reporting criteria for sustainability reports are usually more recent and less developed than those applying to historical financial information. g. As yet, there is no statutory obligation for the audit of sustainability reports. T 2 Compared with an audit of historical financial information, the above leads to the following features characterising an audit or review of a sustainability report: a. Specific expertise criteria apply. The knowledge, experience and skills required for the examination of a sustainability report mean that the work is often performed by multidisciplinary teams. b. The choices of the reporting organisation concerning the content of the sustainability report are more important than those in the case of historical financial information. The auditor pays special attention to the consistency of the choices made by the reporting organisation. c. It can make financial sense to omit certain topics from the audit or review of the sustainability report if their inclusion necessarily entails disproportionate costs. d. The engagement is subject to more professional and financial limitations, which requires their clear explanation in the assurance report to avoid an expectation gap. e. The risk approach component of the procedures remains important but is, in part, implemented differently, owing to attention being given more explicitly to the interests of the various groups of intended users. f. As relatively more information in a sustainability report is qualitative, the emphasis for this information will be on interviews, its evaluation using the internal control system, the assessment of the integrity of the company officers responsible for the information, assessment of compliance with codes of conduct, and similar matters. 3410N Assurance engagements Page 7

10 g. The wording of the conclusions in the assurance report cannot (yet) be standardised in the form of uniform texts. Definitions ( 4) T 3 The intended users form the core aspect both for the reporting organisation and for the auditor. This Standard uses the following concepts intended users (or user groups); legitimate information needs; average representatives of intended users (or user groups). Intended users (or user groups) T 4 The reporting criteria are defined from the perspective of the intended users. The criteria also reflect the role of the intended users (or user groups) in relation to the reporting organisation. T 5 The reporting organisation could hold regular, formal dialogues with intended users to determine their legitimate information needs. Other sources are just as feasible, however, such as the normal communication with intended users and other stakeholders via the organisation s website or the process for handling customer complaints. The works council can act as an important source to define the information needs of employees. The views of intended users and other stakeholders might emerge via the organisation s supervisory board or the media. T 6 Matching information to the needs of intended users can be effected by dividing them into the following six user groups, partially achieving the same end as formal user dialogues. a. suppliers of goods and services (the procurement market), including any partners for the joint procurement of goods or services; b. employees of the reporting organisation; c. customers and end users of supplied goods and services (the sales market); d. stakeholders in the context of the reporting organisation s impact on social aspects of society; e. stakeholders in the context of the reporting organisation s impact on the environment; f. financial and economic stakeholders, such as shareholders and other investors. T 7 An intended user can belong to more than one user group. For example, an employee is a stakeholder of the organisation as a member of groups b, d and e. Dividing users into groups simplifies the practical application of a test of completeness. T 8 The following three questions are important for the test of completeness used: a. Does the sustainability report address all six intended user groups? b. For each of the six intended user groups of the sustainability report, does it deal with the topics they need to have covered in order to obtain an adequate view, taking into account any biases in the material to be presented? c. At a minimum, is the relevant information provided for each topic so that an adequate view in relation to them can be obtained? If these completeness requirements are not met, it could have implications for the assurance report. Page 8 Royal NIVRA

11 Legitimate information needs T 9 To ascertain that the legitimate information needs of the intended users are met, the following procedures can be performed: ascertain whether the organisation s reporting criteria are being complied with in terms of objective and content; perform a test of completeness relating to the sustainability report; determine that available internal and external sources of information on the interests of intended users are referenced in preparing the sustainability report, with enquiries of the supervisory board being one such source; assess whether the organisation s handling of whistleblower reports and/or external complaints is adequate, and determine any effect they have on the content of the sustainability report. Average representatives of intended users (or user groups) T 10 The use of the expression average representatives of intended users (or user groups) is intended to convey that the materiality principle applies. Extreme requirements placed on the organisation regarding the content of its sustainability report do not have to be satisfied. However, it is recommended that an organisation accounts for its conduct as much as possible in relation to such requirements, thus taking into account the perspectives of all parties concerned. Reporting transparency is important to all stakeholders. General and engagement acceptance Engagement letter ( 5 to 11) T 11 When accepting the engagement, the auditor discusses with the management of the reporting organisation how the latter intends to define the reporting criteria. The purpose of the discussion is to remove all differences of opinion in advance concerning reporting policy and/or relevance, completeness and degree of accuracy applying to certain areas. T 12 On acceptance of the engagement, it is agreed that adverse findings are communicated as quickly as possible to the management of the reporting organisation, as well as to the supervisory board. T 13 If an assurance report contains adverse conclusions or disclaimers of conclusion and the management decides not to publish the report after the engagement has been completed, the auditor considers whether or not to renew the assurance engagement in subsequent years. The reason is that the primary aim of the engagement is to inform third parties about all significant findings from an examination of the sustainability report. T 14 Although it is not mandatory to state in the engagement letter that experts of the auditor s organisation (internal experts) will be involved, it is recommended to do so. T 15 During the performance of the engagement, the auditor and/or the engaging party might conclude that a limitation of the scope is necessary, concerning all or part of the engagement. In such cases, the auditor consults the engaging party on the extent of the limitation to ensure that the engagement as a whole remains acceptable and viable. The auditor must not accept limitations during the performance of the engagement if he considers their sole or main purpose is to prevent the assurance report containing adverse 3410N Assurance engagements Page 9

12 conclusions or disclaimers of conclusion. General guidance for such situations is given in the General Framework for Assurance Engagements and in Standard T 16 The auditor can accept the following limitations: a. Limitations in the (content of the) sustainability report: for example, the report does not (yet) address all the relevant groups of intended users, does not (yet) apply to all countries where the organisation operates, or does not (yet) include all performance indicators of relevance to the intended users. b. Limitations on the examination: for example, although certain topics and performance indicators are included in the report, they are not (yet) sufficiently controlled and, for this reason, the auditor and the engaging party agree it is not logical to audit or review the information concerned, at least not at present. T 17 Acceptance of these types of limitation is subject to the following conditions: a. the management of the reporting organisation explains and justifies clearly what the limitations in the sustainability report are, stating, if possible, how they will be dealt with in the future. b. the auditor considers that the engagement is still viable in relation to the intended users, providing it is reasonable to assume that they are unlikely to be misled because of the limitations. Review of the reporting criteria ( 12 and 13) T 18 An assurance engagement comprises several essential elements, one of them being the existence of suitable criteria (see paragraphs 34 to 38 of the Stramien voor assurance opdrachten [General framework for Assurance Engagements]). When deciding whether to accept an engagement, the auditor reviews the reporting criteria being used. T 19 The five characteristics in the General Framework for Assurance Engagements concerning the suitability of reporting criteria are relevance, completeness, reliability, neutrality and understandability. T 20 The standards 2 available for sustainability reports include Guide to Sustainability Reporting (Handreiking voor Maatschappelijke verslaggeving) of the Dutch Accounting Standards Board (DASB), the Sustainability Reporting Guidelines of the Global Reporting Initiative (GRI), the standards of the World Business Council for Sustainable Development (WBCSD), and the standards of the Institute for Social and Ethical Accountability (AccountAbility). In preparing its Guide to Sustainability Reporting, the DASB drew on the GRI Guidelines (2002 edition). The GRI s Sustainability Reporting Guidelines were created by an authoritative and recognised body of experts, using a transparent multistakeholder process, and are accessible to everyone. T 21 The management of the reporting organisation is responsible for the selection of suitable reporting criteria. If the reporting organisation selects reporting criteria for its sustainability report other than those of the GRI s Sustainability Reporting Guidelines, the auditor is recommended to base his assessment of the suitability of the organisation s reporting criteria on part 1, Defining Report Content, Quality and Boundary, and part 2, Standard Disclosures, of the GRI s (G3) Guidelines, in conjunction with the DASB s 2 The criteria for sustainability reports are still at the development stage. Page 10 Royal NIVRA

13 Guide to Sustainability Reporting. In such cases, the professional opinion of the auditor as an expert on external reporting is of decisive importance. T22 Reporting criteria are the most important means for establishing the legitimate information needs of the intended users, and hence for the content of the sustainability report. Moreover, management has the responsibility to take into account other sources of additional requirements for the content of the sustainability report, such industry-wide agreements and covenants concluded with the government. The criteria selected and reporting principles applied by management are described in the organisation s reporting policy. The Guide to Sustainability Reporting of the DASB and the Sustainability Reporting Guidelines of the GRI both require information to be provided on the reporting policy. T 23 The auditor reviews the appropriateness of the reporting policy. When doing so, the areas he gains insight into include: the process for identifying the scope and limits of the reporting organisation; the dialogue processes for internal and external stakeholders; the understandability of the choices made concerning the topics to be reported and the methodology to be used, as well as transparency concerning limitations applying to these topics or their reliability. the consistency of the reporting policy. T 24 If information that might be relevant to certain groups of intended users is absent from the sustainability report, the reporting organisation must provide adequate justification for this omission in the report itself. One argument might be the need to keep sensitive information confidential, this argument also being accepted by the auditor. Expertise ( 14 and 15) T 25 The expertise of the auditor required for the examination of a sustainability report comprises the following elements: Knowledge of auditing Knowledge of, and experience in, providing assurance on information other than financial information in general and in the field of sustainability reporting in particular, including the application of the relevant IFAC and/or Royal NIVRA assurance standards. A general understanding of assurance standards of non-accountancy organisations, such as the AA1000 Assurance Standard of the Institute of Social and Ethical Accountability ( AccountAbility ); Knowledge of the sector. Familiarity with the social environment of the reporting organisation. Knowledge of subject matter Knowledge of environment issues and of the associated technical risks. Knowledge of the social and economic aspects considered, or which should be considered, by the sustainability report. Knowledge of current environmental, social and/or employment legislation, as well as of sectoral, national and/or international agreements, rules, conventions and/or protocols. Knowledge of sustainability risks in the relevant chain, associated standards and international developments. 3410N Assurance engagements Page 11

14 Knowledge of management and information systems General understanding of relevant management systems, such as environmental management systems or health and safety systems, as well as of the relevant standards, such as ISO and SA 8000; Knowledge and experience of assessing the adequacy of internal information systems for collecting and reporting on the intended information, including the internal control aspects. Knowledge of external reporting and reporting standards, as well as of the relevant social and political issues Knowledge of the relevant standards for external reporting, such as the sustainability reporting manual of the DASB, the GRI's Sustainability Reporting Guidelines, and other comparable national or international reporting standards and recommendations. Understanding of the current major social and political issues in the area of sustainable development, both national and international. Understanding of the opinions, views and interests of intended users, including their legitimate information needs. Familiarity with the social environment of the reporting organisation. Collaboration with external experts ( 16 and 17) T 26 The undivided responsibility of the auditor takes priority. If an external expert is used, the auditor states that he (the auditor) has undivided responsibility, even in those cases where the work of the expert is performed under the direction of the organisation. T 27 The auditor is recommended to refer in his assurance report to the contribution of external experts with respect to the relevant parts of the engagement, for example, by including a description of the work. This reference is useful for the intended readers of the assurance report and can increase the credibility of the auditor s conclusions. The reference does not impair the undivided responsibility of the auditor to the intended users of the sustainability report, nor does it affect the intended meaning of the assurance report. If the contribution of an external expert is mentioned in the assurance report, it is also stated that the auditor takes undivided responsibility for the entire engagement. Moreover, the auditor alone signs the assurance report. Risk analysis ( 19 to 21) T 28 In principle, the auditor applies the same concepts, methods and procedures to an assurance engagement whose subject matter is a sustainability report as to the examination of historical financial information. The concepts particularly relevant to the performance of the engagement are set out in Standards 300 to 330 on risk estimation and the treatment of estimated risks. T 29 Many organisations that commission an assurance engagement relating to their sustainability report will also engage an auditor to audit their financial statements. During the discussion of the auditor with other auditors involved with the reporting organisation, he introduces the subjects of the quality of the corporate governance, the control environment and the control activities at the organisation. In addition, he takes cognisance of the significant elements of the risk analysis, as well as of the findings by the auditor of the financial statements and by the internal auditor, insofar as they are (or could be) relevant to the examination of the sustainability report. Page 12 Royal NIVRA

15 T 30 Consultation between the auditor who audits or reviews the sustainability report and the auditor of the financial statements in no way reduces the full responsibility of the former for performing his examination. When accepting the engagement concerning the sustainability report, it is agreed with the engaging party that information exchange between the auditors is allowed, with this being confirmed in writing by the engaging party. T 31 If the auditor of the financial statements is the same person auditing or reviewing the sustainability report, it is clear that the risk analysis for the assurance engagement concerning the sustainability report draws on the results of the risk analysis being performed for the audit of the financial statements. As a consequence, the auditor will determine those aspects of the examination of the sustainability report that require a detailed risk analysis to be made. T 32 Sources for obtaining an understanding of the sector and the specific nature of the organisation, including the most significant risks to which it is exposed, include the local or central compliance officers and the local or central sustainability or environmental managers. Other sources are the relevant laws, regulations, codes of conduct and standards, insofar as they are significant for the content of the sustainability report. Also important for this purpose are the organisation s policy documents and codes of conduct. Additional information on the sector and the organisation is available in the form of study reports and open information on the Internet. Many international laws, codes of conduct, and standards relating to aspects of sustainability performance are also available on the Internet. T 33 Estimating the inherent risk is affected by the following and other factors: the size and the complexity of the reporting organisation, its business processes and their possible impact on the environment and society (for example environmental risks resulting from the consumption of raw materials, energy and water and the effect of this on biodiversity); the presence of multiple locations or locations in various countries or in areas with different cultures, statutory provisions, legal precedents, etc.; the sensitivity of information as perceived by the reporting organisation on the one hand and the intended users on the other. Widely ranging interests can lead to the risk of differences of opinion on, for example, the completeness of the information provided; the perception of the intended users regarding the direct and indirect economic effects on them and on the economic systems. It should be noted that the indirect effects in particular cannot always be determined accurately; the extent to which judgments and estimates have been used to determine the reported information. T 34 When obtaining an understanding of the internal control environment, the auditor determines the commitment of the organisation's management to sustainable development and hence for maintaining the right balance between achieving financial objectives and the wider economic, social and environmental impact of the decisions taken in this context by the organisation. The auditor ascertains that the business strategy, business principles, including the codes of conduct based on them, the attitude of senior management and the sustainability awareness within the organisation are in line with each other. The auditor 3410N Assurance engagements Page 13

16 also determines whether procedures are in place for collecting and processing sustainability information. The aspects here include: the way in which the sustainability information is managed by the managers responsible for it (for example, in accordance with ISO and SA ; the way in which the responsibilities for management of the main sustainability issues are assigned to the company officers of the reporting organisation; the way in which the organisation complies with environmental and social laws and regulations, including reporting requirements, regulations and international treaties (such as the Kyoto Protocol and the Universal Declaration of Human Rights), codes of conduct for preventing unethical acts, and industry conventions on voluntary environmental reporting (such as the Responsible Care programme of the chemical industry). the way in which company officers or departments specifically responsible for contributing to the control environment operate, such as internal auditors, operational auditors and/or compliance officers. T 35 The reasons internal control risks arise include: internal controls are absent from the design of the internal control system; existing internal controls are not complied with; significant internal deviations are not identified early enough; measurement systems can fail or have not been designed to take measurements during exceptional circumstances (such as accidents or during the start-up of a factory or process, which can lead to incompleteness of the available environmental data); the management of the reporting organisation circumvents or ignores the correct performance of important internal control procedures by overruling the relevant company officers. For example: o the notification of undesirable situations is not followed-up adequately by senior management because it knows that the supervisory authorities tolerate certain violations of emission standards. o Sensitive information is deliberately withheld. System-related procedures ( 22 and 23) T 36 The auditor can assess the design of the information systems and the internal controls by interviewing the most senior managers responsible for the financial, environmental and social policies of the reporting organisation, as well as by studying the descriptions of the related internal controls. In doing so, the auditor considers the way in which the reporting organisation s management approaches sustainable development and the associated reporting, as well as the internal supervision of compliance with laws, regulations, codes of conduct and standards. The auditor substantiates findings based on interviews as much as possible with descriptions of the internal controls. 3 The ISO issues standards on quality (ISO 9000 series) and the environment (ISO series). SA 8000 has been issued by the human rights organisation Social Accountability International (SAI) and contains standards for the rights of employees. These standards include the requirements specified in conventions of the International Labour Organization (ILO). Page 14 Royal NIVRA

17 Audit engagements: In the case of audit engagements, the auditor primarily considers the design and existence of the policy objectives and controls that the management of the reporting organisation sets for its own performance (known as key managerial controls ), including a review of the irreplaceable internal controls. Regarding the examination of the key managerial controls, the auditor determines the extent to which his examination will include the design and existence of other internal controls. Review engagements: In the case of review engagements, the auditor reviews only the design of the policy objectives and controls that the management of the reporting organisation sets for its own performance (known as key managerial controls ), including a review of the irreplaceable internal controls. T 37 Audit engagements: The auditor can ascertain the existence of the information systems and the relevant internal controls by performing walk-throughs. In the case of an audit engagement, the auditor tests the effectiveness of the relevant internal controls. Review engagements: In general, a review engagement does not involve testing the effectiveness of the relevant internal controls. T 38 In practice, the internal control systems for the information included in a sustainability report are often not as developed as those for financial information. This means that the examination of such systems usually has less significance for the work to be performed, than for an audit of the financial statements. If this is so in a particular case, the auditor determines whether, and to what extent, substantive procedures can produce adequate assurance evidence. If the evidence is not sufficient, the auditor will issue an assurance report other than an unqualified one without an emphasis of matter paragraph. T 39 It is important that adequate systems are in place to collect information for the sustainability report, including a sufficient degree of internal control. The types of information collection requiring this internal control depend on the legitimate information needs of the intended users, the materiality of the information, and the related risks. T 40 If the auditor considers that the internal controls are of sufficient quality that he wishes and is able to use them in his work, he examines them to obtain enough understanding of their design and implementation to be able to estimate the internal control risk. Examples of internal controls in relation to subjects for inclusion in the sustainability report are the procedures in place for: supervising compliance with general laws and regulations, environmental and/or health and safety legislation, and compliance with business principles and codes of conduct, whether or not performed by separate compliance officers; performing internal audits in accordance with ISO and SA 8000, and monitoring their effects in practice; creating proper audit trails; performing internal analyses and tests of relationships on production volumes and/or energy consumption, waste and emissions, using the relationships with the financial accounting records to the fullest extent possible; the collecting of samples by recognised external laboratories or skilled in-house staff. T 41 The depth of understanding required for the above-mentioned internal controls depends on the specific objective of the sustainability report and the user groups for whom it is 3410N Assurance engagements Page 15

18 intended. In the case of a sustainability report that is mainly aimed at local or regional groups of intended users, the results of local ISO and/or SA audits, for example, might be more important than in the case of the global report of a multinational. T 42 The work referred to in section T 40 includes interviews with the most senior managers responsible for the environmental and social policy of the reporting organisation, with attention focusing on the internal supervision of compliance with relevant laws, regulations, codes of conduct, etc. If necessary, interviews are also held with company officers for whom the results of the examination are not directly relevant, R&D managers for example. T 43 If the auditor concludes that he cannot rely on the internal controls, he determines what effect this will have on the nature, planning and scope of the substantive procedures, and/or on the type of assurance report he will issue. Substantive procedures ( 24) T 44 A substantial amount of information in a sustainability report is generally qualitative (for example, information on the strategy of the organisation, its policy and code of conduct, and its relationships with groups of intended users). For this kind of information, the auditor obtains assurance evidence by using a combination of procedures, often involving: holding interviews with the most senior managers responsible for the environmental and social policy of the reporting organisation and with the company officers responsible for internal supervision and/or independent assessment of the acceptability of the information obtained in this way; studying internal and external sources, such as policy documents and Internet pages, and verifying in the case of an audit engagement or confirming in the case of a review engagement that the documents and data provide adequate substantiation for the information included in the sustainability report and for the scope of the examination; studying the minutes of the meetings of the Management Board and the Supervisory Board, as well as of other meetings that are relevant to the content of the sustainability report, such as meetings relating to the implementation of human resources and social policy. T 45 Examples of analytical procedures are: analytical reviews of performance in relation to available standards or formulated objectives, and data trend analyses; comparisons with the data of other entities in the organisation s sector; confirming the existence of a relationship between the financial data and the data in the sustainability report (for example, the relationship between the quantity of natural gas consumed and the quantity of carbon dioxide emitted). T 46 Examples of tests of details are: examining documentation and data and verifying in the case of an audit engagement or confirming in the case of a review engagement that the documents and data provide adequate substantiation of the information concerned. This documentation and data can be in the form of internal as well as external documents. Verification based on external documentation can be used relatively often in auditing the environmental data in the sustainability report. Some examples are the examination of statements or service contracts with waste management services showing the type, frequency and Page 16 Royal NIVRA

19 extent of the work performed by third parties (such as invoices for refuse disposal). Examples relating to internal documentation are checking consistency of data with records, and comparing the results of emission registrations with data contained in publications of the reporting organisation (such as documents on the Internet or filed with supervisory authorities) and similar media. investigating the correct use of established methods and formulas to derive the relevant information (for example, formulas for calculating the quantity of heavy metals in wastewater discharged); investigating whether key data are entered in the systems on time; re-calculating and/or re-measuring significant emissions into the air or the production of hazardous waste. Overall presentation of the sustainability report ( 25) T 47 To assess the overall presentation of the sustainability report, it generally makes sense for the auditor to conduct focused media research. This is particularly important for a test of completeness on the topics addressed by the sustainability report. Special factors concerning multi-locations ( 26) T 48 An assurance engagement relating to the sustainability report of a group of companies that comprise geographically diverse locations and/or different legal entities or business units, referred to below as multi-locations, entails a number of special considerations. Some of them relate partly to differences in culture, statutory provisions and legal precedents. Others relate to the structure of the reporting organisation, such as: the degree of centralisation of authority; the existence of centralised guidelines; the organisation s control over local processes; the existence of central and local compliance officers. The above-mentioned special considerations might apply to the sustainability report as a whole and to individual sections of it. T 49 The selection of group entities to be examined separately depends on the total set of circumstances, including: the nature and the comparability of the business processes; the effectiveness of the internal control environment, in particular the direct involvement of head-office management in monitoring the activities relevant to the sustainability report that are conducted by the group entities in question; the quality of the local internal control systems. Obtaining additional assurance evidence ( 27 to 31) T 50 The purpose of a letter of representation from the management of the reporting organisation is to confirm that no information has been withheld from the auditor and that from the end of the reporting period until the date of the assurance report no events have occurred whose consequences have been erroneously excluded from the sustainability report. The views of the Supervisory Board on issues relating to the sustainability report can be recorded in the minutes of the relevant meeting that the auditor has with the Board, as well as in other documents. The auditor keeps the above-mentioned minutes in his files. 3410N Assurance engagements Page 17

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