Question

What environmental factors must be considered when evaluating financial statements? Be specific.

Answer 1

The significance of environmental matters to the financial statements normally

depends on the nature of an entity’s business. Whilst certain industries, by their

nature, tend to be exposed to significant environmental risk, potential impact on the

financial statements may arise from:

(a) the application of environmental laws and regulations

(b) the operation of processes that:

may have caused, or continue to cause, pollution of soil,

   groundwater, surface water or air;

use hazardous substances or generate hazardous waste; or

may potentially have an adverse effect on customers, employees or

neighboring sites;

(c) the holding of an interest in land and buildings that have been contaminated

by previous occupants; or

(d) dependence on a major customer or segment whose business is threatened

by environmental pressures.

In Addition There are many Factors:

There are a number of difficulties in recognizing and measuring the financial

effects of environmental matters in financial statements, all of which have

implications for the auditor for example:

• There is often a considerable delay between the activity that causes an

environmental issue and its identification by the entity or the regulators.

• Accounting estimates may not have an established historical pattern or may

have wide ranges of reasonableness because of the number and nature of

assumptions underlying the determination of these estimates.

• Environmental laws or regulations are evolving and interpretation may be

difficult or ambiguous. Consultation with an expert may be necessary to

assess the impact of these laws and regulations on the valuation of certain

assets (for example, assets that contain asbestos). Making a reasonable

estimate of liabilities for known obligations may also be difficult.