The National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 sets out how the safeguard mechanism will operate, the procedures that will be used to establish facility baselines, and the criteria that must be met if responsible emitters wish to apply for an alternative baseline determination.
These provisions introduce a number of more challenging aspects into the audit scope that registered greenhouse and energy auditors will need to address. This section of the handbook examines two of the new requirements and provides guidance on how they can be subjected to audit (note there is no verification option for these aspects). The two aspects are:
Since it was first brought into law in 2009, the NGER audit determination has only ever encompassed historical data. The safeguard mechanism approach requires forward-looking information to be brought into the framework.
Section 27 of the Safeguard Rule requires that applicants under the calculated-emissions baseline determination include information in their applications on a number of forward-looking aspects. These requirements include but are not limited to the:
It is important for auditors to assess that the production variable(s) for each facility is selected in accordance with section 5 of the Safeguard Rule. Failure to correctly identify appropriate production variables will result in the application being refused.
The Safeguard Rule also requires the application to be accompanied by an audit report where the forward-looking aspects are to be covered by a limited assurance opinion.
In terms of audit methodology, the applicant is essentially making claims on two points:
Appendix A examines the concept of ‘reasonably likely’ and ‘reasonably expected’ within the NGER audit framework, including a number of common statistical tools that applicants may use as evidence. These tools can be deployed by the registered greenhouse and energy auditors to test the claims made by the applicants on the production variables, the emission intensity and the future emission numbers.
During an assurance engagement over greenhouse and energy information it is expected an auditor will need to assess how reasonable management’s estimates and assumptions are. The auditor may assess management’s estimates against available evidence (for example, this may include data external to the audited body, e.g. supplier data).
To assess how reasonable management’s estimates are, the auditor can consider7:
In such situations the audit team leader must use their professional judgement to weigh up whether the available evidence, as well as the management representation, is sufficient to support the assurance conclusion as expressed in the assurance engagement report.
In the case of an available basis of preparation, in which the responsible party has chosen to prepare the financial and non-financial information that is acceptable in view of the nature and objective of the document, the assurance practitioner’s assurance procedures may include8:
The auditor is performing an assurance engagement over the production and emissions forecasts for Company C, a large chemical manufacturing company with multiple production variables.
Company C has provided historical information showing quarterly forecasts of production quantities and true up reports of actual production quantities. Additionally, Company C has provided a basis of preparation document.
The auditor used a variety of techniques to gain the necessary assurance over the forecasts, including:
To support the overall conclusions reached for the forecast production quantities and emissions, the auditor used a table to document a summary of the procedures performed and the evidence obtained on the assurance engagement file.
Nothing was presented to the auditor to suggest the assumptions used in the production forecast were not reasonable. The basis of preparation was comprehensive and clearly outlined the source of, and reason for, each assumption. Company C had correctly identified the production variable in accordance with the legislation and apportioned emissions appropriately. Consequently, the emissions intensity was fairly stated. The auditor was able to provide both the limited and reasonable assurance opinions required.
The term ‘reasonably likely’ is defined in statistics as values that lie in the middle 95 per cent (or two standard deviations from the mean) of the sampling distribution. In contrast, values that lie in the top or bottom 2.5 per cent are defined as rare. It is noted that this is the same level of statistical certainty applied in audit test programs for the reasonable level assurance of financial statements.
The audits over the applications for calculated-emissions baselines are to be conducted in accordance with the National Greenhouse and Energy Reporting (Measurement) Determination 2008 (NGER Measurement Determination). The NGER Measurement Determination contains the following:
Estimates for this Determination must be prepared in accordance with the following principles:
The National Greenhouse and Energy Reporting (Measurement) Determination 2008 also includes the concept of expressing values that are within the 95 per cent population envelope. In accordance with statistical standards, this principle should be considered when undertaking Part 6 audits.
Sole reliance on a statistical model should not replace an registered greenhouse and energy auditor’s professional judgement. It is important when providing assurance over the forecast estimates that the procedures are designed and implemented to address the assessed level of material misstatement. As with all assurance engagements, these procedures should be adaptable, flexible and responsive to the assessed risk of material misstatement.
In the majority of cases, responsible emitters will be sophisticated reporters with robust financial and production planning capabilities. The discipline of production planning is well established and the basic statistical tools such as the derivation of the confidence interval (CI) (from historic data) and the prediction interval (PI) (for forward-looking data) are likely to be well understood by the applicants. It should be straightforward for the applicant to provide sufficient evidence to support the claim on the quantity of production variables that are ‘reasonably likely’ to be produced at the facility. The types of information that an applicant may be expected to make available to an auditor on production variables will differ by the calculated baseline criteria that they are applying for.
To assist registered greenhouse and energy auditors become familiar with the concepts of production forecasting, a case study is provided in Appendix A. The case study uses the example of monthly data to illustrate the statistical concepts, however the same basic principles apply to annual forecasts.
Other forms of evidence to support the use of confidence intervals in production planning include, but are not limited to:
7 This guidance is based on ASA 540 Audit of Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures issued by the AUASB, available on the
Auditing and Assurance Standards Board website.
8 This guidance is based on ASAE 3450 Assurance Engagements involving Corporate Fundraisings and/or Prospective Financial Information issued by the AUASB, available on the
Auditing and Assurance Standards Board website.
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