IFRS S1 and S2 are reporting standards issued by the ISSB, not auditing standards. They tell an entity what sustainability information to disclose; they say nothing about how an audit should be performed. Yet their arrival changes the financial statement audit all the same — because the assumptions behind a company’s climate disclosures rarely stay confined to the sustainability section. They surface in impairment testing, in useful lives, in provisions, and in going concern. This article looks at IFRS S1 and S2 strictly through the lens of the external auditor of financial statements, and at the existing International Standards on Auditing that already govern how we respond.

IFRS S1 and S2: 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.

The financial statement audit is narrower — and it has not become optional. 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 risk

The term “climate change” does not appear in the ISAs. That absence has been misread as silence. The IAASB has been explicit that auditors remain required to identify and assess the risks of material misstatement, respond to those risks, and obtain sufficient appropriate evidence — and that for certain entities, climate-related events and conditions may increase the susceptibility of particular amounts and disclosures to misstatement.

In practice, understanding the entity now includes understanding its exposure. 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, not in a footnote about corporate values. Where management has published a transition plan, the auditor should ask 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 in the financial statement audit remains anchored to the financial statements and their users. Sustainability disclosures do not change the benchmark.

What they can change is the qualitative dimension. A misstatement that is small in magnitude may still be material by nature — for instance, where it concerns an amount that management has publicly committed to, or where it obscures an obligation the entity has disclosed elsewhere. Auditors have always considered qualitative materiality. The volume of public commitment now sitting outside the financial statements simply gives it more to bite on.

Accounting estimates: where climate assumptions actually land

This is where most of the audit work sits. Climate-related assumptions rarely arrive labelled as such. They arrive embedded in:

• Impairment testing — cash flow projections, discount rates, and terminal values that may assume markets, regulation, or demand unchanged.
• Useful lives and residual values — assets a transition plan implies will be retired early, still depreciating over their original lives.
• Provisions — restoration, decommissioning, or onerous contract obligations affected by changing regulation.
• Inventory and receivables — valuation and recoverability 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 used are reasonable in the context of the applicable framework.

The consistency test that catches most issues

The single 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 that management cannot support. Either way, it is a finding.

Going concern and events after the reporting period

Climate-related events and conditions may bear on management’s assessment of going concern, particularly where financing, insurance, licences, or major customers are exposed. The auditor’s obligation is to evaluate management’s assessment and to consider whether events or conditions cast significant doubt. Nothing new in the standard — but a wider set of conditions to consider within it.

Other information: the auditor’s most misunderstood duty

Where sustainability disclosures appear in the annual report alongside the audited financial statements, they may fall within the scope of “other information” — defined as financial and non-financial information, other than the audited financial statements, included in the entity’s annual report.

The auditor does not audit this information and expresses no opinion on it. But the auditor is required to read it, and to consider whether there is a material inconsistency between that other information — including any climate-related information within it — and the financial statements, or the auditor’s knowledge obtained during the audit. Where a material inconsistency appears, or where the other information appears materially misstated, the auditor must respond.

This duty is often underestimated. It is not a courtesy read. It is a requirement, and it is the point at which a company’s sustainability narrative meets an auditor who has spent months in its ledgers.

Evidence and testing

Where climate-related amounts do affect the financial statements, evidence is subject to the same tests as any other: sufficiency and appropriateness. Sampling and substantive procedures apply as they always have — to the recorded amounts and disclosures in the financial statements, not to the sustainability report’s metrics, which sit outside the audit scope.

In practice the difficulty is source data. Financial systems have decades of control discipline behind them. Operational data — fuel logs, utility records, supplier information — often does not. Where such data feeds a financial statement amount, the auditor must obtain evidence over its completeness and accuracy, and cannot simply accept it because it appears in a published report.

What this means for audit planning

For an auditor, IFRS S1 and S2 do not introduce new procedures. They introduce new information — published, public, and attributable to management — against which the financial statements can be tested. That information is an audit input, not an audit obligation. For entities operating in the Emirates, this intersects directly with our UAE audit and assurance services.

The practical consequence is that 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, a California-licensed Certified Public Accountant and GRI Certified Sustainability Professional, founder of ANCPA Auditing L.L.C., a Ministry of Economy registered audit firm in the UAE.

This article is for general information only and does not constitute audit, legal, or regulatory advice. It concerns the audit of financial statements and does not address assurance engagements over sustainability information, which are governed separately.