The consideration of environmental matters in the audit of financial reports

Citation

Chiang, C. (2010), "The consideration of environmental matters in the audit of financial reports", Journal of Accounting & Organizational Change, Vol. 6 No. 2. https://doi.org/10.1108/jaoc.2010.31506baa.001

The consideration of environmental matters in the audit of financial reports

Article Type: Doctoral research abstracts From: Journal of Accounting & Organizational Change, Volume 6, Issue 2

Purpose – The purpose of this paper is to investigate the consideration of environmental matters in the audit of financial reports in the light of Audit Guidance Statement (AGS)-1010: The Consideration of Environmental Matters in the Audit of a Financial Statement, which is first issued in New Zealand in 2001. In particular, the following research issues are studied: how auditors generally perceive the consideration of environmental matters in the audit of financial reports; the common approaches and practices auditors undertake when auditing environmental matters; the challenges (if any) that auditors face in the audit of environmental matters; the impact (if any) of AGS-1010 on current audit practice; and finally, how current practices in the audit of environmental matters may be improved and further developed to meet better the espoused aims of AGS-1010.

Design/methodology/approach – This paper adopted a qualitative interpretive approach. In particular, naturalistic inquiry was chosen, and qualitative interviews were conducted to uncover and understand the little known phenomena. In total, 27 financial and public sector auditors (as chartered accountant members of New Zealand Institute of Chartered Accountants) were interviewed for their comments on the research issues. Data analysis were managed with NVivo7, a computerised qualitative data-analysis software package. A “top-down” approach was applied to the process of theorising, which led to legitimacy theory as the appropriate theory to frame the research.

Findings – Key findings from the research interviews are as follows: the introduction of AGS-1010 has little impact on current audit practice in New Zealand; environmental matters are treated no differently from any other audit issues, and auditors tended to apply common, familiar audit approaches in dealing with environmental matters; and auditors are challenged in effective auditing of environmental matters owing to their inability to identify such matters, and their lack of relevant expert knowledge. The most significant finding from this paper is that, in general, common audit practices are riddled with issues of concern, which point to a broader and more significant problem. It would seem that current audit practices fail to consider many potential audit issues (including environmental matters) adequately in the audit of financial reports because they tended to be too financially focussed when assessing audit materiality. For auditors to be more effective in their audit practice and in protecting the public interest, not only does audit methodology need a major review, but also auditors themselves need to change their attitudes and mindsets in their approach to auditing.

Originality/value – There has been a dearth of research on “auditors and environmental matters” since 1996. Growing international concerns for environmental matters has since led to the issue of International Auditing Practice Statement (IAPS)-1010: The Consideration of Environmental Matters in the Audit of Financial Report in 1998, by the International Auditing and Assurance Standards Board and, in New Zealand, AGS-1010: The Consideration of Environmental Matters in the Audit of a Financial Statement in 2001. Yet, to date, there has been no examination of the impact of IAPS-1010 or AGS-1010 on current audit practice. This paper has attempted to address the environmental impact gap in the auditing research literature.

Keywords Financial auditing, Environmental matters, Audit methodology, Legitimacy theory

Research type – Qualitative research

Institution – AUT University, Auckland, New Zealand

Contact e-mail – christina.chiang@aut.ac.nz

School of Business, AUT University, Auckland, New Zealand

Christina Chiang