External presentation
The views and opinions expressed by guest speakers
do not necessarily reflect the views or position of the
Clean Energy Regulator
Audit Quality
Findings from the RGEA Inspection Program and Suggested
Improvements
C A R O L I N E S P E N C E R , A N D R E W S T R I N G E R , S O N YA S I N C L A I R , M AT T D AV I E S
SYDNEY
1 7 M AY 2 0 1 7
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This session
Objective: To provide the RGEAs with information
on:
Key findings from inspections to date
Observations and Suggestions for improved audit
quality in RGEA practice.
Our material only provides information that is:
 relevant to the inspection findings
 on matters of a general nature
 in a de-identified form
 placed in the public domain by the CER.
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Auditor Performance and Quality – why it
matters
Audit quality determines auditor performance.
Integrity of emission and abatement reporting.
Scheme integrity is very important:
 ERF - $2.55 billion, $2.25 billion contracted to date (189 m t CO2-e).
 The audit opinion creates the value - a higher risk relative to financial audits.
 Safeguard Mechanism to control future emissions growth
Independence is critically important.
Scrutiny of auditors is standard practice.
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About the RGEA inspectors & framework
The NGER legislation provides the regulatory
framework.
It provides for the:
◦ regulatory role of the CER in scheme establishment,
monitoring and assurance etc.
◦ registration of Greenhouse and Energy Auditors
◦ scope of the work of RGEAs
◦ enforcement of RGEA conduct and performance
(inspection and regulatory actions).
Five independent inspectors and advisers:
Lead Inspectors
Ms Caroline Spencer
Mr Andrew Stringer
Ms Sonya Sinclair
Technical Inspectors
Dr Nick Wood
Mr Matthew Davies
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The inspection program:
September 2016 – May 2017 (ongoing)
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Inspections of RGEAs – what we looked at
Broadly, we reviewed:
We sought evidence of:
 Decision making processes
 Quality Control - firm & engagement level
 Professional judgement
 Div. 6.6 of the NGER Regs. and the Audit
Determination, including that stated assurance
standards were complied with
 Compliance with NGER Regulations and Audit
Determination.
 Quality and compliance - from discussions and
review of a selection of audit files
This provides the Regulator with intelligence on one  Understanding the context, including code of
group within its regulated community.
conduct, judgement, and decision-making
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Note on inspection findings
Our inspection findings do not necessarily mean that the audited information was materially misstated or
materially non-compliant with the methodology.
Rather, in our view, the auditor did not have a sufficient basis to support their opinion in the audit reports.
Consequently, the risk of an incorrect audit opinion is substantially increased.
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Key inspection findings & Outcomes to date
Inspection Findings
Inspection Outcomes
Audit conduct: Lack of evidence of testing key controls
and substantive procedures, site visits, sufficient
appropriate evidence
Confidence
Documentation: Variable quality and extent of work
papers, standalone audit files,
◦ or
Enforcement actions - including deregistration or
suspension.
Professional judgement: Lack of understanding of the
audit and operating context
Quality control: No evidence of systems of QC
Auditor independence: Lack of consideration of RGEA
work as assurance engagement, fee dependence, shares
held, timely declarations etc.
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Suggested improvements
Risk assessment: Understanding the entity
Independence
Controls
Documentation of significant judgements
Materiality
Sufficient Appropriate Evidence
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Risk assessment: Understanding the entity
ERF – audit signature creates the value.
Higher risk than financial statement audits?
Of the 20 +ERF project audit files examined so far
 NOT ONE mentioned the financial context in the planning or risk assessment
Signed off on $20 million + of future revenue
No assessment of financial aspects!
“Scope of the engagement is compliance with Government regulations”
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Independence
Classification by the audit firm of RGEA activity as assurance work?
What if the RGEA assurance engagement is only a small part ( 5 – 10 %) of the overall annual (assurance or
other) fee that the firm receives from the client?
What if the NGER audit finds a “showstopper” issue. A major failing of controls. No way past it. No audit
opinion is possible. What should be the approach?
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Controls
NGER Audit Determination 2009
Section 3.10 - Risk assessment: Audit team leader must observe systems and processes that may impact
on the risk of there being a misstatement in the matter being audited.
Audit Determination Handbook
Section 5.3.3 - Controls discussed at length.
Improvement
Must be evidence on file of the auditor’s consideration of whether controls are appropriate given the risks,
and are functioning as designed.
ERF audits – very little evidence on file that controls had been considered
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Professional Judgement
Documentation to demonstrate sound professional judgement.
High risk areas.
Areas of estimation or areas of uncertainty.
Usually involves:

More time required by the auditor

Significant discussions with Management

Not just corroborating the data but challenging the underlying data

Documenting professional judgement and scepticism is difficult!
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Materiality: Safeguard Mechanism Rule
Sect 27 Application
An example: Production site A
Criteria -e.g. initial calculated baseline
Baseline = 2,157,225 t cement clinker
An outline of measures to reduce GHG intensity
undertaken, to be taken…
Baseline emission intensity = 0.82 t CO2-e
/ cement clinker
Sect. 28 Audit reports
Application = 2,320,000 t cement clinker in
FY18
Limited assurance matters
(c) the estimates of the quantity of each
production variable… and the emission intensity of
each production variable…
An increase of 7.5%
Projected emission intensity = 0.82 t CO2e / cement clinker
What level of materiality should be used?
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Activity: Audit Scope - ERF Method,
report and Sect 27
CFI Act 2011
Three “types” of audit evidence
A few audit challenges!!!!!
1. Legal right, registration, conditions etc.
2. Historical project criteria: Land cleared,
regrowth, used for grazing etc.
3. Ongoing project management
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Project eligibility
9 Native forest cover
At the time of the application under section 22 of
the Act, the land must:
(a) have native forest cover; and
(b) be substantially uniformly covered in trees.
…
native forest cover—land has native forest cover
if the land is dominated by trees that:
(a) are located within their natural range; and
(b) have attained a crown cover of at least 20% of
the area of land; and
(c) have reached a height of at least 2 metres.
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Project eligibility – cont.
10 Native forest cover—evidence
(1) The project proponent must provide the Regulator
with evidence that the land:
(a) has native forest cover; and
(b) is substantially uniformly covered in trees.
(2) The evidence must include the following:
(a) a list of the dominant tree species present on the
land;
(3) The evidence may include the following:
(a) remotely-sensed imagery;
(b) the most recent forest cover data layer shown in
the Carbon Farming Mapping Tool.
(4) Any remotely-sensed imagery must be:
(a) date-stamped; and
(b) of sufficient quality to identify forest cover.
(b) written evidence that the dominant tree species are
within their natural range.
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Ongoing management activities
29 Ongoing management
(1) The project proponent must
undertake appropriate management
activities to reduce the risk of
damage to the native forest within
the carbon estimation areas from
fire, weeds and feral animals.
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Activity - Audit planning and risk
assessment
The more difficult the subject matter…
Project eligibility
…the more critical the planning becomes.
Must… attained a crown cover of at least 20 %
All ERF audits are “reasonable level”
Note: If 19% then NO PROJECT
Identify controls and test that they work
Must…must undertake appropriate management activities
Or
How does the project proponent “control” these?
Test everything (substantive)
How does the auditor test that the control is effective?
What type of evidence and how much?
A quick exercise - handout
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