Mitigating Audit and Compliance Risks Under AASB S2

Mitigating Audit and Compliance Risks in ASRS Climate Disclosures

When preparing first-year climate-related financial disclosures under the Australian Sustainability Reporting Standards (ASRS), our experience working with Group 1 entities shows that effective audit and compliance risk mitigation depends on clear scoping decisions, disciplined use of transition reliefs and well-evidenced judgement.

For lawyers advising on ASRS implementation, managing liability exposure depends on supporting defensible judgement and ensuring disclosures are proportionate and tailored to organisational circumstances.

Drawing on direct engagement with executives and boards during Year 1 implementation of AASB S2, and early interactions with auditors following recent AASB and ASIC guidance, Pangolin Associates has gained firsthand insight into how audit readiness under ASRS is being approached in practice and how risks can be effectively mitigated. We share practical observations rather than formal advice, and readers should seek legal advice specific to their circumstances.

Pangolin’s Key Learnings from ASRS Implementation

Understand and Leverage Transition Reliefs

It is essential to have a clear understanding of the transition reliefs embedded within legislation and the applicable standards.

In practice, this includes:

• Relief related to existing greenhouse gas (GHG) measurement approaches, including the potential use of NGER methodologies while reporting against the GHG Protocol, and Year 1 reliefs under AASB S2.
• Flexibility relating to Scope 3 emissions.
• Modified director liability settings during the early years of implementation.
• Proportionality mechanisms that allow entities to calibrate the depth of scenario analysis and the balance between qualitative and quantitative financial impacts.

Entities that can clearly articulate which reliefs they are relying on, why they are appropriate, and how they will be phased out over time are materially better positioned to direct preparation activities, support disclosures and manage auditor engagement.

Tight Scope 1 and Scope 2 GHG Reporting is Non-Negotiable

Scope 1 and Scope 2 GHG disclosures are among the most mature components of ASRS reporting. As a result, auditor and regulator expectations around completeness, accuracy and timeliness are high.

At a minimum, entities should be able to clearly evidence:

• Organisational and operational boundaries, including any distinctions between the GHG inventory, CRRO analysis and financial reporting.
• Emissions calculation methodologies.
• Key assumptions underpinning the inventory.
• The standards and guidance applied.

A practical challenge emerging for many Group 1 entities is timing. Compressed ASRS reporting timelines often conflict with historically longer GHG reporting cycles. Addressing this may require process redesign, increased automation, or approaches such as 9+3 reporting, involving nine months of actual data plus three months of forecast or estimated data, to meet reporting deadlines without compromising control.

Governance Adjustments Are Likely and Must Be Specific

Governance is foundational to AASB S2, and generic descriptions are unlikely to withstand audit scrutiny. Clear accountability lines are required from the board through executive management to those responsible for ASRS disclosure preparation and ownership of climate-related risks and opportunities (CRROs).

In practice, this typically requires formal Year 1 governance adjustments, including clarified board and committee oversight, explicit executive accountability, and clearly defined ownership of new ASRS-related processes.

Be Conservative and Explicit When Taking a Minimalist Approach

Group 1 entities are generally expected to have greater capability and resourcing to identify and quantify climate-related risks and opportunities. Early auditor feedback suggests boards and executives may face scrutiny where disclosures remain largely qualitative, particularly where no clear rationale is provided.

Where proportionality mechanisms or other flexibility measures are applied in Year 1, discipline and transparency are critical. Entities should clearly evidence the basis for decisions, be explicit about uncertainty and data gaps, and articulate a credible pathway toward more detailed and quantitative disclosures in future reporting periods.

Evidencing Is Critical

Across all aspects of ASRS reporting, an “audit trail” mindset is essential from day one. This means systematically documenting key decisions, stakeholder involvement, inclusions and exclusions, methodologies, criteria and assumptions. Well-documented judgement is materially easier to defend than undocumented ambition.

Methodology is particularly important for CRRO disclosures. Auditors need to understand how materiality has been assessed, and disclosures should avoid obscuring material risks through extensive lists of immaterial items.

Consistency Across Reports Matters More Than Many Expect

Finance teams play a central role in reducing scrutiny risk. There must be consistency between financial statements and sustainability reports, including aligned narratives, assumptions and terminology. Where appropriate, cross-referencing between reports can further strengthen coherence and defensibility.

Practical Actions to Reduce Audit, Reporting and Compliance Risk

Several actions consistently prove critical during Year 1 implementation:

• Engage Finance early in the ASRS program and CRRO assessment process, ensuring Finance owns the final report as an extension of core corporate reporting.
• Engage auditors early, agree on the Year 1 assurance scope upfront, and establish regular touch points to minimise late-stage issues.
• Socialise emerging disclosures with directors early to build familiarity with this evolving area of reporting and judgement.
• Plan GHG measurement and reporting cycles well in advance, recognising that legacy timelines may need to change to meet ASRS requirements.
• Establish strong evidencing processes from day one and use Year 1 implementation learnings to improve automation and strengthen internal controls over time.

Next Steps

As ASRS reporting moves from implementation into assurance and ASIC review, boards and executives must ensure Year 1 sustainability reports are audit- and ASIC-ready. For lawyers, this increases the importance of early involvement in scoping, judgement framing and evidencing, as these directly influence liability exposure and regulatory defensibility.

For organisations seeking to translate AASB S2 requirements into robust governance, informed decision-making and defensible reporting, Pangolin works alongside in-house and external legal teams to support practical Year 1 implementation.

Please refer to our most recent report, which outlines the key lessons from this first reporting cycle in greater detail. For organisations preparing for the next phase of climate reporting, these insights provide an early view of what works, what doesn't, and where assurance expectations are heading.