Audit requirements under the safeguard mechanism

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5.5.1 Reasonableness of forward looking estimates
5.5.2 Providing assurance over estimates
5.5.3 ‘Reasonably likely’ and forecasting the quantity of production variables and estimating emissions intensity
5.5.4 Pre-existing production planning processes

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:

The requirement of establishing the reasonableness of forward looking information—specifically production data and emission intensity data up to three years forward (or five years for a large new facility) and for that to be subjected to a limited level of assurance.
The need to provide a reasonable level of assurance over claims of reasonable expectation in relation to future emissions.
- In the case of a new facility ‘is reasonably expected to emit, more than 100,000 tCO2-e of covered emissions in the first year of the proposed calculated-emissions baseline determination’ (subsection 23(4) of the Safeguard Rule).
- In the case of an application for calculated baseline under the inherent emissions variability criteria ‘the facility’s covered emissions are reasonably expected to exceed the baseline emission number which applies to the facility in that financial year’ (subsection 25 (4) for the Safeguard Rule).
- A similar requirement applies to the transitional calculated baseline criteria (paragraph 26A(3) of the Safeguard Rule).

5.5.1 Reasonableness of forward-looking estimates

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:

quantity of all production variables that are reasonably likely to be produced by the facility
expected emissions intensity per unit of production for each production variable consistent with the emissions-intensity calculation criteria, and
expected covered emissions from the facility calculated by multiplying the quantity of each of the production variables by either the estimated or default emissions intensity of that variable.

It is important for auditors to assess that the production variable(s) for each facility is selected in accordance with the Safeguard Rule, including section 5 and schedules 2 and 3. 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:

a claim that a forecast quantity is reasonable, and
a claim that an event is reasonably likely (i.e. that emissions are reasonably expected to exceed a baseline).

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.

5.5.2 Providing assurance over estimates

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:

reviewing and testing the processes used by management to develop the estimate
reviewing how management considered the nature of the production variables, or emissions intensity being estimated when using a particular method
whether the designated large facility operates in a particular business, industry or environment in which there are methods commonly used to make the particular type of estimate
how management determines the completeness, relevance and accuracy of the data used to develop estimates
approved internal business planning documents
public statements by the audited body, including ASX announcements, about production levels and asset impairments which indicate reductions in productions forecasts
using an independent estimate for comparison with that prepared by management
reviewing subsequent events which provide assurance over the estimate made or estimate method used (refer to section 5.6.2 of this handbook for guidance on subsequent events) and whether the estimates are consistent with expectations based on the audit team leader’s understanding of the audited body and its reporting environment and other assurance evidence already obtained, or
seeking written representations from management regarding how reasonable the significant assumptions are used in estimating covered emissions and production information when little other evidence is available to support the estimate (see section 5.6.4 of this handbook).

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:

evaluating the chosen stated basis of preparation
making clerical checks such as re-computations and reviewing internal consistency of assumptions including those with common variables (that is, the actions the responsible party intends to take are compatible with each other and there are no inconsistencies in the determination of the amounts that are based on common variables, such as commodity prices)
ensuring prospective financial and non-financial information reflects any changes made to the stated basis of preparation from previously audited information
considering the interrelationships of elements within the prospective information
agreeing or reconciling the assumptions included to the states basis of preparation, and
obtaining through enquiry of the responsible party, an understanding of assumptions and considering whether any other procedures are necessary in the circumstances.

Case study 5: Techniques used in performing the assurance over forecasts

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:

ensuring the chosen production variables have been correctly identified as production variables, in accordance with section 5 of the Safeguard Rule
performing analytical procedures (see section 5.5.3 of this handbook) over the historical forecasts and actual production quantities, providing the auditor with some degree of confidence in the ability of Company C’s management to predict production quantities
obtaining comfort in the method used for calculating the forecast emissions
obtaining comfort on the emissions data through review of previous NGER reports including audited and non-audited reporting periods. It is not necessary for the auditor to ‘reaudit’ previous reporting periods, and
reviewing the basis of preparation document to ensure the assumptions are robust and reasonable.

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.

5.5.3 ‘Reasonably likely’ and forecasting the quantity of production variables and estimating emissions intensity

General principles for measuring emissions (section 1.13)

Estimates for these applications should be prepared in accordance with the following principles:

transparency—production and emission estimates must be documented and verifiable
accuracy—having regard to the availability of reasonable resources by a registered corporation or liable entityresponsible emitter and the requirements of this Determination, uncertainties in emission estimates must be minimised and any estimates must neither be over nor under estimates of the true values at a 95 per cent confidence levelshould represent a reasonable mid-point and not over estimate likely production or emissions, and
completeness—all identifiable emission sources mentioned in section 1.10 must be accounted for.

Sole reliance on a statistical model should not replace a 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.

5.5.4 Pre-existing production planning processes

In the majority of cases, responsible emitters will be sophisticated organisations with robust financial and production planning capabilities, as well as pre-existing processes. It should therefore be straightforward for the applicant to provide sufficient evidence to support the claim on the quantity of production variables that is ‘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 depending on the calculated baseline criteria 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 existing production plan include, but are not limited to:

technical and engineering design parameters, plans, mass balance/material flow calculations
supply chain information for the input materials (e.g. contracted inputs and/or contracted outputs)
business case studies and the internal project assessment and approval documentation, and
details of the forward production plans (as previously noted).

Footnotes

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.