A distinction worth keeping clear
Assurance over a sustainability report is a separate engagement, performed under a different standard, resulting in a different conclusion. It is not part of the financial statement audit and should never be confused with it. Where an entity publishes sustainability disclosures, the auditor's existing responsibilities continue to apply to the financial statements themselves, and to certain information published alongside them.
Risk assessment: climate as a source of misstatement
The term "climate change" does not appear in the auditing standards. That absence has been misread as silence. The auditor remains required to identify and assess the risks of material misstatement, respond to them, and obtain sufficient appropriate evidence, and for certain entities climate-related events and conditions increase the susceptibility of particular amounts to misstatement. A manufacturer facing carbon costs, a logistics business with a fleet transition ahead of it, a property owner with coastal assets: each presents identifiable risks that belong in the risk assessment. Where management has published a transition plan, the auditor asks a simple question: does the entity's own public analysis suggest a risk that the financial statements do not reflect?
Materiality: quantitative and qualitative
Materiality remains anchored to the financial statements and their users. Sustainability disclosures do not change the benchmark. What they change is the qualitative side. A misstatement small in size may still be material by nature, for instance where it concerns an amount management has publicly committed to, or where it obscures an obligation disclosed elsewhere. The volume of public commitment now sitting outside the financial statements gives qualitative materiality more to bite on.
Where climate assumptions actually land
This is where most of the audit work sits. Climate-related assumptions rarely arrive labeled as such. They arrive embedded in impairment testing, where cash flow projections and discount rates may assume markets and regulation unchanged; in useful lives and residual values, where assets a transition plan implies will be retired early are still depreciating over their original lives; in provisions for restoration, decommissioning or onerous contracts; and in inventory and receivables where customers or products face transition risk. The auditor's task with estimates is unchanged: evaluate the method, the assumptions and the data, consider indicators of management bias, and test whether the assumptions are reasonable.
The consistency test that catches most issues
The most productive procedure is also the simplest. Read the sustainability disclosures. Then read the notes to the financial statements. Ask whether the same company wrote both. If the strategy section describes a scenario in which an asset class becomes uneconomic within a decade, and the impairment model assumes an indefinite useful life, one of the two is wrong. The inconsistency is evidence, either of an unrecorded impairment indicator or of a disclosure management cannot support.
Other information: the most misunderstood duty
Where sustainability disclosures appear in the annual report alongside the audited financial statements, they fall within "other information". The auditor does not audit it and expresses no opinion on it. But the auditor is required to read it and to consider whether there is a material inconsistency with the financial statements or with the knowledge obtained during the audit, and to respond where there is. It is not a courtesy read. It is the point at which a company's sustainability narrative meets an auditor who has spent months in its ledgers.
What this means for planning
IFRS S1 and S2 do not introduce new audit procedures. They introduce new information, published, public and attributable to management, against which the financial statements can be tested. Planning conversations now happen earlier and involve people who used to sit outside them. Finance still owns the numbers. But an auditor who reads only the numbers, and never the strategy the company has published about them, is reading half the file.
Written by Ashraf Noureldin, California licensed CPA and GRI Certified Sustainability Professional, for ANCPA Auditing L.L.C, a Ministry of Economy and Tourism registered audit firm. This article is general information about the audit of financial statements and is not advice.