Guidance on Auditing Liabilities for Contaminated Sites Under PSAS

Introduction

The objective of this guidance is to assist auditors when auditing liabilities for contaminated sites under Public Sector Accounting Standards (PSAS).

It is based on Section PS 3260 (Liability for Contaminated Sites) that is applicable for fiscal years beginning on or after 1 April 2014. However, it may be used for audits of entities that recognize liabilities for contaminated sites in accordance with other standards or accounting policies, as long as it remains relevant and within the limits of these other standards or accounting policies. Note that PS 3260 does not apply to costs for acquisition or betterment of tangible capital assets (TCA’s), liabilities associated with the retirement, disposal or sale of long-lived TCAs, and closure of solid waste landfill sites.

This guidance supplements the standards contained in PS 3260 and substantive audit procedures contained in the Annual Audit TeamStore PSAS cabinet. Therefore this guidance is not meant to be an exhaustive audit program nor an exhaustive listing of items to consider when performing your audit. These guidelines are not to be used as a substitute for the auditor’s professional judgment.

The audit of the provision for environmental liabilities includes

The objective of our audit work is to ensure that the environmental liabilities booked by entities reflect, on a timely basis, new assessment and estimated cost information that is obtained as well as the progress of any remediation activities.

Obtaining knowledge of the entity and gathering evidence

In order to complete audit procedures “Test the liability for contaminated sites,” the following guidance may be useful.

Knowledge about the entity’s environmental liabilities may be identified through such means as

• discussions with the entity,
• review of any existing database of contaminated sites,
• budget, or
• newspaper articles.

Assess the completeness of management’s inventory of contaminated sites

• Determine whether management believes that all significant sites have been considered in determining its environmental liability and identify any sites that have not been considered and document the reason why. Enquire of management whether it has identified all the sites that pose the highest risk to human health, safety and the environment (these are the ones that will most likely involve a cash outflow).

Possible questions

• Do you have a complete list of all your contaminated sites? How was this list compiled? Do you distinguish between known and suspected contaminated sites?

• Have you ranked this listing in order to identify the high risk sites (i.e. those that pose the highest risk to human health and safety, such as those in Class 1 and 2 per the National Classification System for Contaminated Sites)?

Assess the accuracy of the estimates of the liabilities for contaminated sites that have been identified

• Determine how management estimates the costs to establish the liability, including any models used to calculate the liability for sites that have not undergone a detailed site assessment. Cost estimates could come from available site assessment information (technical or engineering estimates), as well as experience gained at other sites that have typical or common characteristics such as similarities in historical land use activities.

Possible questions

• How do you determine the amount of the liability for each contaminated site that you have identified?

• What types of costs are included in the estimate (i.e., remediation, monitoring, etc.)?

• For sites that will be remediated over long periods of time, do you use any discounting techniques? Do you consider inflation in your cost projections?

• How do you estimate the cost for sites that have not yet undergone a detailed site assessment (this is an important consideration as lack of detailed site assessments is often the rationale provided by management for not recording a liability, however, PS 3260.51 specifically indicates that estimates should be attempted using sites with similar characteristics)?

• Do you compare estimates to actual costs incurred on past projects of a similar nature to determine if estimates are still accurate?

Obtain an update on current year activities. This serves to identify significant changes, but also to monitor if management is making progress or efforts to revise its estimates so that they are more accurate

• Are there any new laws and regulations which could result in an environmental liability? Are there significant changes to existing laws and regulations (i.e. Canadian Environmental Protection Act) that could impact the entity’s environmental liability?

• Are there any new government policy decisions that could impact the recognition of environmental liabilities?

• Have there been any changes in any of the assumptions used to measure environmental liabilities (such as inflation for costs or discount rates to present value the liabilities)?

• Any significant adjustments to particular site estimates (due to recent assessments, updated data used in assessments, change in assumptions, etc.)? If so, provide details.

• Have any previously existing liabilities been extinguished in the current year? What is the rationale?

• How many sites are being assessed in the current year?

• What new assessments have been performed (either new sites not assessed before, or existing sites where more rigorous assessments have been completed)?

• Has the environmental liability required significant adjustment in the current year as a result of recent assessments?

• How many sites are being remediated?

• Have any environmental liabilities been significantly adjusted in the current year due to the advancement of remediation efforts? Have any environmental liabilities been significantly adjusted in the current year as a result of discovering additional contamination during the remediation efforts? What is the implication to the estimated remediation costs?

Sources of information

The following links are references to Government of Canada publications that could be relevant to your audit, depending on the type of entity.

Federal Contaminated Sites Inventory

National Classification System for Contaminated Sites, Guidance Document, CCME

Public Accounts of Canada

Remediation Liabilities Related to Contaminated Sites: A Supplement to the Financial Information Strategy (FIS) Manual