Practice Aid for Substantive Rollforward Procedures July 2021

Practice Aid for Substantive Rollforward Procedures (7-21)

2

Table of Contents

Section 1: Purpose and Scope ....................................................................................................................... 3

What is a Practice Aid for Auditors in DTTL Member Firms? ..................................................................... 3

Applicability ............................................................................................................................................... 3

Introduction ............................................................................................................................................... 3

Section 2: Distinguish Between Testing a Balance Sheet Account as of an Interim Date and Testing an Income Statement Account by “Staging” the Audit ...................................................................................... 4

Section 3: Decide Whether to Test a Balance Sheet Account at Interim ....................................................... 5

Assessed Risk of Material Misstatement ................................................................................................... 7

Nature of the Substantive Procedures ....................................................................................................... 8

Nature of the Balance Sheet Account ........................................................................................................ 8

Ability to Perform Audit Procedures to Cover the Remaining Period ........................................................ 9

Considerations Related to Cycle-Based Procedures .................................................................................. 9

Switched Variables Considerations .......................................................................................................... 10

Section 4: Evaluate Results of Interim, Including the Need to Revise Risk Assessments ............................. 11

Section 5: Plan the Nature and Extent of Substantive Rollforward Procedures .......................................... 12

Significant Risks ........................................................................................................................................ 14

Substantive Analytical Procedures ........................................................................................................... 14

Extent of Substantive Analytical Procedures ........................................................................................ 15

Other Considerations — Switched Variables ........................................................................................ 16

Tests of Details ......................................................................................................................................... 16

Extent of Test of Details ....................................................................................................................... 17

Revise our Risk Assessment ..................................................................................................................... 18

Considerations for Information to be Used in Our Audit ......................................................................... 18

Section 6: Perform and Evaluate Results of Substantive Rollforward Procedures ...................................... 19

Documentation Considerations ............................................................................................................... 20

Appendix A: Substantive Rollforward Testing Template ............................................................................. 21

Appendix B: Other Resources ...................................................................................................................... 21

Practice Aid for Substantive Rollforward Procedures (7-21)

3

Section 1: Purpose and Scope

What is a Practice Aid for Auditors in DTTL Member Firms?

Practice aids may be issued from time to time. They may be used by DTTL member firms as resource material with respect to general audit information and background to improve their knowledge when performing an audit, supporting an audit, or understanding aspects of auditing. Practice aids are developed by Deloitte Touche Tohmatsu Limited Global Audit Services and are issued to provide information and background on specific audit topics or issues. Practice aids do not establish requirements for the performance of an audit in accordance with Deloitte Touche Tohmatsu Limited's Audit Approach. These practice aids are designed only to provide us with detailed examples, additional background, or practical assistance in auditing.

Applicability

This practice aid focuses on planning, performing, and evaluating substantive rollforward procedures. Guidance on planning and performing internal control rollforward procedures can be found in the applicable Internal Control Guide.

This practice aid is for internal distribution and is not a substitute for reading the applicable professional standards, the PCAOB Audit Approach Manual (PCAOB AAM), and the Audit Approach Manual (AAM). It is intended to be read and applied in conjunction with, as applicable, the PCAOB AAM and the AAM.

The professional standards that address the requirements regarding the use of rollforward procedures in an audit, primarily include the following:

• Audits performed using the PCAOB AAM:

­ AS 2301 — The Auditor's Responses to the Risks of Material Misstatement.

• Audits performed using the AAM:

­ ISA 330 — The Auditor's Responses to Assessed Risks.

Introduction

The following sections of the practice aid are organized according to the key activities related to planning, performing, and evaluating substantive rollforward procedures. These activities are shown in the sequence they are typically performed; however, we consider the need to revise risk assessment as an iterative process throughout the audit. Key concepts emphasized in the practice aid include:

• Distinguishing between testing an account balance (herein referred to as a “balance sheet" account) as of an interim date and testing a class of transactions (herein referred to as an “income statement" account) by “staging” the audit. (Section 2)

• Deciding whether it is effective and efficient to perform audit procedures on a balance sheet account (or one or more related assertions) as of an interim date to respond to risks of material misstatements (“RoMMs”) at the assertion level. (Section 3)

Practice Aid for Substantive Rollforward Procedures (7-21)

4

• Evaluating the results of our interim procedures performed and considering whether information obtained during our interim testing or elsewhere in the audit contradicts the evidence on which we initially based our risk assessments and if so, whether we need to revise our risk assessments and modify our planned rollforward procedures. (Section 4)

• Planning the nature and extent of substantive rollforward procedures through substantive analytical procedures or tests of details, to extend our conclusions from interim to year-end. (Section 5)

• Performing and evaluating the results of our substantive rollforward procedures. (Section 6)

• The Substantive Rollforward Testing Template,1 which enables teams to document their considerations on the planning, performing, and evaluation of rollforward procedures is discussed in this practice aid. The Substantive Rollforward Testing Template also includes illustrative examples when performing substantive rollforward procedures to respond to RoMMs for certain assertions related to accounts receivable and the related allowance for doubtful accounts and fixed assets. (Appendix A)

This practice aid applies to balance sheet accounts. Income statement accounts are, by their nature, cumulative, and accordingly our audit procedures are generally allocated throughout the year on a reasonable basis and are therefore considered to be “staged.” The concept of “staging” the audit is described further in Section 2.

Pitfall

Failure to understand that our interim procedures for an income statement account are not designed to form a conclusion on the account at the interim date.

Instead, they are performed to obtain audit evidence prior to the entity’s year-end that will be a part of the overall evidence used by us to form our conclusion on the income statement account for the 12-month period. This lack of understanding can result in inappropriately designing and executing our audit procedures.

Section 2: Distinguish Between Testing a Balance Sheet Account as of an Interim Date and Testing an Income Statement Account by “Staging” the Audit The focus of this practice aid is on planning and performing substantive rollforward procedures to extend the conclusions reached on a balance sheet account (or one or more related assertions) from an interim date to year-end. Situations in which we perform audit procedures prior to the entity’s year-end, but in which our procedures are not sufficient to form a conclusion are often referred to as “staging” the audit.

As discussed in PCAOB AAM 23002-1.45 and AAM 23002-1.42, interim substantive procedures for testing of income statement accounts during the audit period are typically designed to test transactions from the beginning of the period to the interim date and then extended to the year-end date to cover transactions and events in the remaining period. These procedures to cover the remaining period are considered an extension of the interim test rather than a rollforward procedure. In these situations, the procedures performed through the interim date are not intended or designed to be sufficient to form a conclusion on the income statement accounts as of the interim date.

1 The Substantive Rollforward Testing Template is in development and will be published in the fall of 2021.

Practice Aid for Substantive Rollforward Procedures (7-21)

5

For example, we perform the planned test of details to address the RoMMs related to the occurrence, accuracy, and classification assertions of the ship and bill revenue as of an interim date to “stage” the audit and alleviate the number of selections that we would need to make for all transactions at year-end. We then perform test of details to address the same assertions for the remainder of the period from interim to year-end (i.e., to cover the transactions and events in the remaining period). This accumulation of audit evidence throughout the year supports our conclusion reached on the ship and bill revenue for the 12 months ended.

Other examples of “staging” the audit include:

• Testing demographic data in October as part of the planned tests of pension plan liabilities as of the December 31 year-end.

• Engaging with a Deloitte Transactions & Business Analytics Internal Fair Value specialist when testing valuation of certain investments for which direct or indirect market prices or inputs are not available and observable inputs used by management to estimate the fair value (e.g., alternative investments), to obtain and assess the methods/model, assumptions, and data in September as part of testing and concluding on the valuation assertion for investments as of the December 31 year-end. In such a situation, the remaining substantive procedures necessary to test and conclude on the valuation assertion, such as testing the data and assumptions (the inputs) used in the model, would be performed at year-end.

• Testing significant unusual transactions (e.g., business acquisitions or disposals) at the conclusion of each quarter.

In contrast, we often perform interim testing to respond to RoMMs of one or more assertions related to a balance sheet account for the purpose of forming a conclusion on those assertions as of the interim date. This practice aid and the examples included in the Substantive Rollforward Testing Template1 in Appendix A focus on situations in which we have tested and formed conclusions on one or more assertions for a balance sheet account as of an interim date and we plan to perform rollforward procedures to extend those conclusions to year-end.

Section 3: Decide Whether to Test a Balance Sheet Account at Interim The decision to test a balance sheet account (or one or more related assertions) at interim is a matter of professional judgment that is made during the planning and risk assessment phases of the engagement. Testing and forming a conclusion on a balance sheet account (or one or more related assertions) as of an interim date can benefit our engagement teams and entity management, in that it can facilitate early identification of audit issues, allowing adequate time for us and management to resolve and respond to any issues prior to year-end fieldwork, and to meet the entity’s reporting deadlines. While performing audit procedures at interim and extending our conclusions to year-end might not reduce total audit hours, the portion of the audit performed at final may be reduced measurably and provide for a higher quality audit.

PCAOB AAM 23002-1.36 and AAM 23002-1.36A require that we consider certain factors in determining whether it is appropriate to perform substantive procedures at an interim date.

Practice Aid for Substantive Rollforward Procedures (7-21)

6

PCAOB AAM In determining whether it is appropriate to perform substantive procedures at an interim date, the auditor should take into account the following:

a. The assessed risk of material misstatement, including:

1. The auditor's assessment of control risk, as discussed in paragraphs 85-88 of Section 23001;

2. The existence of conditions or circumstances, if any, that create incentives or pressures on management to misstate the financial statements between the interim test date and the end of the period covered by the financial statements;

3. The effects of known or expected changes in the company, its environment, or its internal control over financial reporting during the remaining period;

b. The nature of the substantive procedures;

c. The nature of the account or disclosure and relevant assertion; and

d. The ability of the auditor to perform the necessary audit procedures to cover the remaining period.

[PCAOB AAM 23002-1.36]

AAM For audits of listed entities, in determining whether it is appropriate to perform substantive procedures at an interim date, we shall take into account the following:

a. The assessed risk of material misstatement, including:

1. Our assessment of control risk;

2. The existence of conditions or circumstances, if any, that create incentives or pressures on management to misstate the financial statements between the interim test date and the end of the period covered by the financial statements;

3. The effects of known or expected changes in the entity, its environment, or its internal control over financial reporting during the remaining period;

b. The nature of the substantive procedures;

c. The nature of the class of transactions, account balance, or disclosure and relevant assertion; and

d. Our ability to perform the necessary audit procedures to cover the

Practice Aid for Substantive Rollforward Procedures (7-21)

7

remaining period.

[AAM 23002-1.36A]

Note Although AICPA and ISA standards do not include a requirement related to determining whether it is appropriate to perform substantive procedures at an interim date, AAM 23002-1.36 as noted below, provides similar factors that may influence our decision to perform substantive procedures at an interim date.

“Performing substantive procedures at an interim date without undertaking additional procedures at a later date increases the risk that the auditor will not detect misstatements that may exist at the period end. This risk increases as the remaining period is lengthened. Factors such as the following may influence whether to perform substantive procedures at an interim date:

• The control environment and other relevant controls.

• The availability at a later date of information necessary for the auditor’s procedures.

• The purpose of the substantive procedure.

• The assessed risk of material misstatement.

• The nature of the class of transactions or account balance and related assertions.

• The ability of the auditor to perform appropriate substantive procedures or substantive procedures combined with tests of controls to cover the remaining period in order to reduce the risk that misstatements that may exist at the period end will not be detected.”

Assessed Risk of Material Misstatement

In determining whether to perform testing at interim, we consider our assessed risk of material misstatement, and whether we can sufficiently address those risks with rollforward procedures. A control environment where the entity has effectively designed and/or operating controls, is likely more conducive to performing substantive procedures at an interim date. Additionally, the lower the RoMM, the more likely we would perform substantive procedures at an interim date. However, we are not precluded from testing a balance sheet account (or one or more related assertions) at interim when significant risks, including fraud risks, are present. In some instances, performing interim testing when significant risks are present may be beneficial because we may identify issues early that could affect our conclusions at year-end. Conversely, in other instances we may determine that we cannot effectively address the significant risks through our rollforward procedures in order to extend our conclusions from interim to year-end.

Consider the following guidance from PCAOB AAM 23002-1.37 and U.S. AAM 23002-1.36a:

Practice Aid for Substantive Rollforward Procedures (7-21)

8

PCAOB AAM

U.S. AAM

In circumstances in which the auditor has identified risks of material misstatement due to fraud, the auditor’s responses to address those risks may include changing the timing of audit procedures. For example, the auditor might conclude that, given the risks of intentional misstatement or manipulation, audit procedures to extend audit conclusions from an interim date to the period-end reporting date would not be effective. In such circumstances, the auditor might conclude that substantive procedures performed at or near the end of the reporting period best address an identified risk of material misstatement due to fraud.

[PCAOB AAM 23002-1.37] [U.S. AAM 23002-1.36a]

We also consider the existence of conditions or circumstances, if any, that create incentives or pressures on management to misstate the financial statements between the interim test date and the end of the period covered by the financial statements, and the effects of known or expected changes in the entity, its environment, or its internal control over financial reporting during the remaining period. If these conditions exist, we are less likely to perform substantive procedures at an interim date.

Nature of the Substantive Procedures

The nature of the planned substantive procedures to respond to the assessed RoMMs allows us to design procedures to obtain audit evidence that is sufficient and appropriate. In determining whether to test a balance sheet account (or one or more related assertions) at an interim period, we need to consider the test objective of our audit procedures as well as the manner in which we obtain audit evidence (i.e., inspection, observation, inquiry, confirmation, recalculation, reperformance, or analytical procedures) that will support our conclusion of the balance sheet account (or one or more related assertions).

Refer to the Audit Evidence Guide for additional guidance on obtaining sufficient appropriate audit evidence and Section 5 of this practice aid for considerations when planning the nature and extent of substantive rollforward procedures through substantive analytical procedures or tests of details.

Nature of the Balance Sheet Account

The nature of the balance sheet account helps inform our determination whether to substantively test the account at an interim period. Balance sheet accounts that are less complex, reasonably predictable as to amount, relative significance, and composition, that have relatively low estimation uncertainty/level of judgment or that are determined formulaically, are generally more appropriate candidates for interim testing. The more the year-end balance can fluctuate significantly from the interim balance, the less likely we would perform substantive procedures at interim as it would render our substantive rollforward procedures ineffective, requiring us to reperform the substantive interim procedures at year-end. Significant fluctuations can result from rapidly changing business conditions, seasonality of business, transactions that are subject to management's discretion, or the volume of transactions naturally passing through the account.

For example, when determining whether to perform testing of warranty obligations at an interim date, we consider the results of our procedures performed to gain an understanding of the

Practice Aid for Substantive Rollforward Procedures (7-21)

9

entity’s business and specific risk factors pertinent to the warranty obligations. We noted unusual trends and relationships in the existing warranty obligations, including fluctuations in quantity and dollar value of claims month over month and across accounting periods. In addition, we noted that a new product was launched during the year. As a result, we plan to test the warranty obligations at year-end, as they are not predictable and are expected to continue to fluctuate between interim and year-end.

Ability to Perform Audit Procedures to Cover the Remaining Period

We also consider whether the entity will be able to provide the information we need in order to perform substantive testing of the balance sheet account (or one or more related assertions) at interim, as well as the information we will need at a later date to perform our rollforward procedures such that we will be able to accumulate sufficient audit evidence from our risk assessment, internal control, and substantive procedures to address the risk(s) of material misstatement.

For example, if we plan to perform substantive testing of the accounts receivable balance at interim and rollforward procedures to extend our conclusion to year-end, we will need detailed records of the activity of cash collections and credit memos in addition to sales activity between interim and year-end. Therefore, we consider whether the entity can provide such information in a format that will allow us to perform the planned rollforward procedures, before determining to test at interim.

Further considerations relating to the creation, accumulation, and evaluation of audit evidence can be found within the Audit Evidence Guide.

Considerations Related to Cycle-Based Procedures

In certain circumstances, determining whether to test a balance sheet account (or one or more related assertions) at an interim date may also depend upon the planned approach to test other related accounts. Specifically, in situations in which we have determined cycle-based procedures are an appropriate Deloitte Way (see Chapter 5 of the Audit Evidence Guide), we carefully consider whether we can obtain sufficient evidence to address RoMMs related to the income statement account during the remaining period (i.e., the fourth quarter revenue transactions) if the related balance sheet accounts are tested at an interim date (i.e., testing accounts receivable as of the end of the third quarter).

When testing at an interim date and performing rollforward procedures, it may be difficult to obtain sufficient evidence related to the remaining period to address the income statement RoMMs. This is because the rollforward procedures performed to extend the conclusion on the balance sheet account (or one or more related assertions) to year-end, generally do not result in sufficient evidence to address the income statement RoMMs for the entire period.

For example, we plan to perform cycle-based procedures on ship and bill revenue within the order to cash cycle and identified accounts receivable as a related account. Our planned procedures include:

• Performing a journal entry analysis through the interim date.

• Sending confirmations using the expanded cycle-based accounts receivable confirmation at the interim date.

Practice Aid for Substantive Rollforward Procedures (7-21)

10

• Making a selection of cash receipts received subsequent to the interim date.

• Performing rollforward procedures using a substantive analytical procedure for accounts receivable.

These procedures would likely not provide sufficient evidence to address all of the RoMMs related to the revenue transactions that occurred during the remaining period (i.e., the fourth quarter revenue transactions).

Generally, it may be more efficient to perform the appropriate procedures on the related balance sheet account at year-end rather than at interim when performing cycle-based procedures.

Leading Practice

Engagement teams planning to perform interim testing of related accounts when performing cycle-based procedures are encouraged to contact the appropriate consultation resource (e.g., National Office (Audit Consultation)).

Switched Variables Considerations

Note For Deloitte firms, excluding the U.S., refer to local guidance or an appropriate consultation resource regarding the permissibility of the switched variables approach.

Similar to the cycle-based considerations discussed above, determining whether to test a balance sheet account (or one or more related assertions) at an interim date may also depend upon whether we plan to perform substantive analytical procedures using a switched variables approach to test other related accounts.

In a switched variables approach, we perform separate substantive analytical procedures on sales and cost of sales, and use cost of sales and sales, respectively, as an input to develop our expectations. To mitigate the circularity risks with this approach, we obtain independent evidence of the reliability of the inputs (i.e., sales and cost of sales) by testing the related accounts (i.e., accounts receivable and inventory). If we test accounts receivable and/or inventory at an interim date and plan to perform substantive analytical procedures to test the rollforward period to extend those conclusions to year-end, we may introduce circularity if we use sales and/or cost of sales as an input to develop our expectations for these balance sheet accounts.

Refer to Section 5 for additional guidance on rollforward procedures and using substantive analytical procedures with a switched variables approach and Chapter 8 of the Substantive Analytical Procedures Guide: Including Nonstatistical and Statistical (Reveal) Illustrative Example.

Practice Aid for Substantive Rollforward Procedures (7-21)

11

Section 4: Evaluate Results of Interim, Including the Need to Revise Risk Assessments Once we determine it is appropriate to test a balance sheet account at an interim date and we perform our planned substantive procedures, we evaluate the results of those interim procedures and the conclusions reached and consider whether the evidence obtained during our interim testing or elsewhere in the audit contradicts the evidence on which we initially based our risk assessments.2 If so, we are required to revise our risk assessments and modify our planned substantive rollforward procedures.

PCAOB AAM If the auditor obtains evidence that contradicts the evidence on which the original risk assessments were based, including evidence of misstatements that he or she did not expect, the auditor should revise the related risk assessments and modify the planned nature, timing, or extent of substantive procedures covering the remaining period as necessary. Examples of such modifications include extending or repeating at the period end the procedures performed at the interim date.

[PCAOB AAM 23002-1.39]

AAM If misstatements that the auditor did not expect when assessing the risks of material misstatement are detected at an interim date, the auditor shall evaluate whether the related assessment of risk and the planned nature, timing, or extent of substantive procedures covering the remaining period need to be modified.

[AAM 23002-1.34]

The determination of whether our interim testing provides a reasonable basis for concluding and thereby allowing us to extend our audit conclusion from the interim date to year-end, is based on professional judgment. Situations that may cause us to revise our initial risk assessment and modify the planned nature, timing, or extent of our substantive rollforward procedures include the identification of unexpected misstatements in our interim testing and/or the identification of deficiencies in internal control. The identification of misstatements and/or deficiencies in internal control does not necessarily preclude us from concluding at interim, although careful consideration is given to the nature and cause.

Understanding the nature and cause of the misstatement and/or deficiency helps us to determine whether our initial assessment of risk remains appropriate and whether our planned substantive procedures for the remaining period are sufficient. The nature and cause may also help us to determine the most appropriate substantive procedures to perform during the remaining period.

For example, we tested the contract liability account at interim and found several misstatements in how the entity accounted for contracts. Our initial risk assessment was lower risk due to our

2 PCAOB AAM 12000.30 and AAM 13150.77 recognize that our assessments of the risks of material misstatement continue throughout the

audit and that we are required to revise our risk assessments and modify planned procedures or perform additional procedures, when we obtain evidence during the course of the audit that contradicts or is inconsistent with the evidence on which we originally based our risk assessments.

Practice Aid for Substantive Rollforward Procedures (7-21)

12

understanding of the nature of the account and that the relationship between the timing of when the entity invoices their customers and when revenue is recognized is relatively predictable. Based on the nature and cause of the interim misstatements, we concluded that our initial risk assessment of lower was no longer appropriate and that our planned rollforward procedures to use a substantive analytical procedure for the remaining period, would need to be modified.

In some cases, the nature and cause of these unexpected misstatements or deficiencies in internal control may lead us to determine that our interim tests do not provide a reasonable basis for concluding and therefore we are unable to extend our audit conclusions from the interim date to year-end. In these situations, we may determine that we need to repeat the interim substantive procedures at year-end.

For example, we confirmed accounts receivable as of an interim date and discovered that management recorded the same sale twice. Based on the nature and cause, we determined that poorly designed controls were the cause of the misstatement. As this is a pervasive issue that resulted in a misstatement and a control deficiency, we determined that we could not draw a conclusion over the balance sheet account at interim and therefore will need to repeat the interim substantive audit procedures at year-end.

Note As a reminder, we are required by PCAOB AAM 23002-4 and AAM 23002-4 to evaluate the results of our tests of details, including the evaluation of any misstatements identified at interim. Refer to the Audit Sampling Guide Chapter 6 for additional guidance when evaluating misstatements at interim.

Section 5: Plan the Nature and Extent of Substantive Rollforward Procedures Once we determine that the substantive procedures performed at an interim date were sufficient to form a conclusion on the balance sheet account (or one or more related assertions), PCAOB AAM 23002-1.38 and AAM 23002-1.33 require that we cover the remaining period by performing substantive procedures only or substantive procedures combined with tests of controls that provide a reasonable basis for extending our audit conclusions from the interim date to period end.

PCAOB AAM When substantive procedures are performed at an interim date, the auditor should cover the remaining period by performing substantive procedures, or substantive procedures combined with tests of controls, that provide a reasonable basis for extending the audit conclusions from the interim date to the period end. Such procedures should include

(a) comparing relevant information about the account balance at the interim date with comparable information at the end of the period to identify amounts that appear unusual and investigating such amounts and

(b) performing audit procedures to test the remaining period.

Practice Aid for Substantive Rollforward Procedures (7-21)

13

[PCAOB AAM 23002-1.38]

AAM If substantive procedures are performed at an interim date, the auditor shall cover the remaining period by performing:

(a) substantive procedures, combined with tests of controls for the intervening period; or

(b) if the auditor determines that it is sufficient, further substantive procedures only,

that provide a reasonable basis for extending the audit conclusions from the interim date to the period end.

[AAM 23002-1.33]

In order to cover the remaining period, we design our substantive rollforward procedures to address the activities or transaction flows that affect the balance sheet account throughout the rollforward period. Only in certain circumstances, such as testing the RoMMs related to the valuation assertion for investments and inventory, we may select certain investments or products, respectively, held at both interim and year-end to assess the valuation at both points in time in addition to selecting new investments or products held at year-end.

For PCAOB audits, we are also required by PCAOB AAM 23002-1.38(a), as noted above, to compare relevant information about the balance sheet account at the interim date with comparable information at year-end, to identify amounts that appear unusual and to investigate such amounts. This requirement is not intended to be a substantive analytical procedure, but rather is similar to a risk assessment procedure in which we consider whether there are any unusual amounts at year-end that would cause us to revise our initial risk assessments and planned rollforward procedures.

For example, we tested accounts receivable at interim for a PCAOB entity. As a result of comparing the interim information with the comparable information at year-end, we identified an unexpected decrease in the balance sheet account. Upon further investigation, we learned that the entity had factored a portion of their accounts receivable with recourse. The entity does not typically factor their accounts receivables and therefore we consider whether this is a new identified risk and whether we have to modify our planned substantive rollforward procedures or perform additional procedures.

Practice Aid for Substantive Rollforward Procedures (7-21)

14

Note Although AICPA and ISA standards do not include a requirement to compare relevant information at the interim date with comparable information at the end of the period to identify and investigate such amounts that appear unusual, AAM 23002-1.35 as noted below, provides similar guidance.

“In some circumstances, the auditor may determine that it is effective to perform substantive procedures at an interim date and to compare and reconcile information concerning the balance at the period end with the comparable information at the interim date to: (a) Identify amounts that appear unusual; (b) Investigate any such amounts; and (c) Perform substantive analytical procedures or tests of details to test the intervening period.”

Significant Risks

As discussed in Section 3, we are not precluded from testing a balance sheet account (or one or more related assertions) at interim when a significant risk, including a fraud risk, is identified. When we identify a significant risk, our rollforward procedures are designed to specifically respond to the significant risk.

For example, we identified a significant risk related to the valuation assertion relative to two large customers with significant accounts receivable balances as of the interim date that were experiencing financial difficulties. Sales to these large customers had been made on a cash on delivery basis as of the interim date, and the entity had developed a payment plan for each customer; however, collectability of the balances due from each customer was uncertain. At interim, we performed substantive testing of the allowance (including focused procedures with respect to the solvency and financial viability of the two customers that gave rise to the significant risk) and concluded that the allowance as of November 30 (one month before year-end) was reasonable. We determined that the planned substantive rollforward procedures for the allowance would include:

1. Inquiries of management and sales personnel regarding any changes in the entity and its environment that would affect the allowance at year-end; and

2. Performing substantive analytical procedures to cover the remaining period.3

In addition, to further address the significant risk, we updated the focused procedures related to the solvency and financial viability of the two large customers experiencing financial difficulties in evaluating whether the amount reserved at year-end was appropriate.

Substantive Analytical Procedures

As noted in PCAOB AAM 23002-1.40 and AAM 23002-1.43, regardless of whether an interim substantive procedure of a balance sheet account was performed using substantive analytical procedures or tests of

3 Note: For audits performed in accordance with the standards of the PCAOB, we are required to perform substantive procedures, including

tests of details, that are specifically responsive to the assessed risks. Adapted from PCAOB AAM 13300.65. For audits performed in accordance with the standards of the ISA, when the approach to a significant risk consists only of substantive procedures, those procedures shall include tests of details. Adapted from AAM 13300.41.

Practice Aid for Substantive Rollforward Procedures (7-21)

15

details, it is generally more efficient to use substantive analytical procedures to test the rollforward period and extend our conclusions from interim to year-end. A test of details rollforward procedure ordinarily involves testing the transaction flows related to the account for the period between the interim date and balance sheet date using audit sampling.

Substantive analytical procedures may also provide more insights about the activity in the balance sheet account during the rollforward period that could affect our conclusions at year-end. They may also be effective and efficient tests for assertions in which potential misstatements would not be apparent from an examination of the detailed evidence or in which detailed evidence is not readily available. Differences from expected relationships may also indicate potential omissions when independent evidence that an individual transaction should have been recorded may not be readily available.

When determining whether to perform substantive analytical procedures with respect to the rollforward period, we may consider the following factors:

• Whether the period-end balances of the particular balance sheet account are reasonably predictable with respect to amount, relative significance, and composition.

• Whether the entity’s procedures for analyzing and adjusting such a balance sheet account at an interim date and establishing proper accounting cutoffs, are appropriate.

• Whether the information system relevant to financial reporting will provide information concerning the balances at the period-end and the transactions in the remaining period that is sufficient to permit investigation of the following:

­ Significant unusual transactions or entries (including those at or near the period-end).

­ Other causes of significant fluctuations or expected fluctuations that did not occur.

­ Changes in the composition of the balance sheet account.

Extent of Substantive Analytical Procedures

As noted in PCAOB AAM 23002-1.43 and AAM 23002-1.39, the extent of our substantive analytical procedures is a matter of professional judgment, based on factors such as the nature and materiality of the balance sheet account and the length of the rollforward period (because the risk increases as the intervening period is lengthened). However, we often use the thresholds in Figure 23002-2.1 in PCAOB AAM 23002-2 and AAM 23002-2 when performing substantive analytical procedures to cover the remaining period.

Although we generally design our substantive analytical procedures for the rollforward period to address the activity in the balance sheet account during the rollforward period, there may be situations in which a comparison of the interim balance to the year-end balance is sufficient. Such an approach may be appropriate when we expect that the balance sheet account will not fluctuate from interim to year-end and that the activity in the balance sheet account during the rollforward period will be immaterial. In these situations, we document the basis for these expectations that the balance sheet account has not fluctuated from interim to year-end and that the activity in the balance sheet account during the rollforward period was immaterial. This approach becomes less appropriate as the volume and complexity of activity in the balance sheet account increases.

Practice Aid for Substantive Rollforward Procedures (7-21)

16

The Substantive Rollforward Testing Template1 in Appendix A illustrates two scenarios when we expect the change in the balance sheet account from interim to year-end to be immaterial and the activity during the rollforward period is (1) not expected to be material and (2) expected to be material.

Other Considerations — Switched Variables

As discussed in Section 3, thoughtful consideration is needed to avoid circularity risks when we plan to use substantive analytical procedures to test the rollforward period for a balance sheet account and we plan to use substantive analytical procedures with a switched variables approach to test other related accounts.

For example, we tested accounts receivable and/or inventory at an interim date and we tested sales and cost of sales (their respective related accounts) using substantive analytical procedures with a switched variables approach. If we plan to perform substantive analytical procedures to test the rollforward period for accounts receivable and/or inventory, we cannot use sales and/or cost of sales as an input to develop our expectations for these balance sheet accounts, as that would introduce circularity. Alternatively, we may develop our expectations using different inputs (independent of sales and cost of sales) or modify our planned rollforward procedures (i.e., perform a test of details for the rollforward period).

Leading Practice

Refer to the Substantive Analytical Procedures Guide: Including Nonstatistical and Statistical (Reveal) Illustrative Example for additional guidance when designing and performing substantive analytical procedures.

Tests of Details

As noted in PCAOB AAM 23002-1.40 and AAM 23002-1.43, it is generally more efficient to use substantive analytical procedures to test the rollforward period and extend our conclusions from interim to year-end. However, we use our professional judgment when determining the nature of the substantive procedures that will provide a reasonable basis for extending our audit conclusions from the interim date to year-end. A test of details rollforward procedure ordinarily involves testing the activity (e.g., sales and cash received for accounts receivable) related to the account for the period between the interim date and balance sheet date using audit sampling.

Practice Aid for Substantive Rollforward Procedures (7-21)

17

Pitfall

Failure to test the activity or transaction flow of the rollforward period can lead to inappropriate procedures performed and therefore may not provide a reasonable basis for extending our audit conclusions from interim to period end.

Performing a test of details on the year-end balance alone (i.e., not testing the activity), is generally not an appropriate rollforward procedure and may not always provide us with sufficient audit evidence. However in certain circumstances, we may obtain audit evidence, typically through data analytics, that the account has not fluctuated from interim to year-end and that the activity in the account during the rollforward period was qualitatively and quantitively immaterial. These facts may support performing substantive rollforward procedures (i.e., a test of details) on the year-end balance alone. This approach becomes less appropriate as the volume and complexity of activity in the balance sheet account increases.

Extent of Test of Details

The extent of our test of details (i.e., the determination of a sample size) is also a matter of professional judgment and may be based on factors such as:

• The nature and materiality of the balance sheet account (refer to Section 3).

• The length of the rollforward period (i.e., the risk increases as the intervening period is lengthened (e.g., when the rollforward period exceeds three to four months)).

• The characteristics of the activity (e.g., volume, dollar amount, and similarity of the items comprising the population of rollforward activity in relation to the population tested at interim).

• The assessed risks of material misstatement (i.e., the higher the RoMM, the more evidence may be needed; refer to Section 3 and Significant Risks below).

• Results of substantive tests performed at interim (refer to Section 4).

• Results of tests of the design and operating effectiveness of controls (refer to Section 4).

• The evidence obtained from other procedures such as tests of related accounts (e.g., testing cost of goods sold throughout the year may provide evidence for the relief of inventory during the rollforward period).

• If more persuasive evidence has been obtained to support conclusions reached at an interim date, we may need less persuasive evidence for the rollforward period (e.g., obtaining confirmations from independent third parties at interim is a more persuasive form of substantive audit evidence, and accordingly we may decide that other types of audit procedures that produce less persuasive substantive audit evidence may be appropriate for the rollforward period).

The sample size tables in Figures 23002-4.1 and Figure 23002-4.2 in PCAOB AAM 23002-4 and AAM 23002-4 provides us with the minimum sample size we need to test, to be able to reach a conclusion on the balance sheet account at an interim date. These tables are not required to be used to determine the extent of testing for the rollforward period because the objective of our rollforward procedures is to obtain sufficient evidence in order to extend our conclusions reached at interim to year-end, rather than to form a conclusion on the activity in the account during the rollforward period.

Practice Aid for Substantive Rollforward Procedures (7-21)

18

We exercise professional judgment when determining the extent of testing during the rollforward period considering the factors as discussed above. There is often a direct relationship between the complexity of the factors and the need for more evidence from our rollforward procedures. As the complexity of the factors increases (e.g., the rollforward period exceeds three to four months, there has been significant changes in the characteristics of the activity since interim), the need for more evidence from our rollforward procedures increases. Conversely, as the complexity of the factors decreases (e.g., the assessed RoMM is lower, there has been minimal changes in the characteristics of the activity since interim), the need for more evidence from our rollforward procedures decreases.

Therefore, we use our professional judgment to determine a samples size considering the evidence needed to provide a reasonable basis for extending our audit conclusions from interim to year-end. Generally, the sample size used to test the activity during the rollforward period is much less than the sample size used to conclude on the balance sheet account at interim.

Leading Practice

Refer to the Audit Sampling Guide for additional guidance when performing a test of details using audit sampling.

Revise our Risk Assessment

As discussed in Section 4, our assessments of the risks of material misstatement is an iterative process that continues throughout the audit. Although we would have considered the evidence obtained during our interim testing and may have revised our risk assessment accordingly at the time, we might also need to revise our risk assessment when changes in the entity and its environment or significant unusual transactions have occurred since the interim testing date.

For example, we tested the allowance for doubtful accounts at interim and subsequently discovered there has been a significant economic decline in one of the entity’s major markets during the rollforward period. As a result, we may identify a new risk factor related to the entity failing to properly reflect the changed economic conditions in the allowance and may revise our planned substantive rollforward procedures to perform additional tests of the allowance at year-end.

Generally, we determine whether any changes in the entity and its environment or significant unusual transactions have occurred since interim by making inquiries of management. As noted in PCAOB AAM 23002-1.44 and AAM 23002-1.44, we may also supplement our inquiries with inspection and observation procedures for:

• Significant nonroutine, nonsystematic adjustments to the balance sheet account recorded in the financial ledgers or trial balances.

• Significant unusual items reconciling subledgers to the general ledger.

Considerations for Information to be Used in Our Audit

When determining the extent of procedures to perform on internal information that we plan to use in our audit, it is important to understand whether the information is produced at a single point or at multiple

Practice Aid for Substantive Rollforward Procedures (7-21)

19

points in time. An "instance" of a report is one singular iteration of that report. We commonly use one iteration of a report during planning, risk assessment, or interim fieldwork and another iteration of that report later in the audit. Since each iteration is an instance, we consider the accuracy and completeness of both instances. Although management may have generated a report with the correct parameters for the interim instance, they may have used incorrect parameters for the rollforward period. As a result, each instance is identified and evaluated, as necessary, to determine if it is complete and accurate for our audit purposes.

In many cases, we use a rollforward schedule prepared by the entity, or internal information, showing account activity from the interim testing date to year- end. As discussed in Chapter 2 of the Audit Evidence Guide, we consider whether procedures performed elsewhere in the audit have already provided evidence for the same information. In some circumstances, obtaining audit evidence about the accuracy and completeness of internal information is accomplished concurrently with (or as a result of) audit procedures applied to the significant account or disclosure. Rollforward schedules are often examples of this type of internal information, and as a result, our substantive rollforward procedures may be sufficient to address the accuracy and completeness of the rollforward schedule.

Leading Practice

Refer to the Audit Evidence Guide when determining our basis for concluding that the information to be used in our audit is sufficiently complete and accurate for our purposes.

Section 6: Perform and Evaluate Results of Substantive Rollforward Procedures After considering the need to revise our risk assessments and making any changes to our planned substantive rollforward procedures, we begin performing the substantive procedures (refer to PCAOB AAM and AAM 23002-1, 23002-2 and 23002-4 for additional policies and guidance when performing substantive procedures, substantive analytical procedures, and test of details, respectively).

In addition to the planned rollforward procedures, as noted in PCAOB AAM 23002-1.34 and AAM 23002-1.33A, we would, at a minimum, review the year-end reconciliation of the detailed records to the general ledger and compare it to the reconciliation tested at the interim date. If we determine there are unusual or omitted reconciling items, we generally perform additional procedures to test the year-end reconciliation.

For example, we reviewed the year-end reconciliation of the inventory records to the general ledger and identified a reconciling item for inventory-in-transit that was significantly larger than the corresponding item in the interim reconciliation. Therefore, we may need to perform additional procedures to obtain evidence related to this reconciling item at year-end.

Once we perform our planned substantive rollforward procedures, we evaluate the results of those rollforward procedures and determine whether we obtained sufficient appropriate audit evidence to be able to extend our interim conclusion on the balance sheet account to year-end. We may identify unexpected misstatements or deficiencies in internal control in our rollforward procedures that may

Practice Aid for Substantive Rollforward Procedures (7-21)

20

cause us to revise our risk assessment and modify our procedures. In some cases, the nature and cause of these unexpected misstatements or deficiencies in internal control may lead us to conclude that our rollforward procedures do not provide a reasonable basis for extending our audit conclusions from the interim date to year-end. In these situations, we may determine that we need to repeat the interim substantive procedures at year-end.

Documentation Considerations

We are required to follow the audit documentation requirements in PCAOB AAM 00200 and AAM 00200, Audit Documentation. The documentation that we include in our working papers as it relates to planning, performing, and evaluating substantive rollforward procedures will vary, depending on the specifics of the entity. However, we may document the following:

• The appropriateness of testing a balance sheet account (or one or more related assertions) as of an interim date.

• The results of our interim procedures performed and whether information obtained during our interim testing or elsewhere in the audit contradicts the evidence on which we initially based our risk assessments and if so, whether we revised our risk assessments and modified our planned rollforward procedures.

• The nature and extent of the substantive rollforward procedures performed to extend our conclusions from interim to year-end.

• The quantitative and qualitative considerations in determining the sample size used during the rollforward period, if applicable.

• The results of our substantive rollforward procedures and the evidence obtained.

For additional documentation requirements when performing substantive analytical procedures, refer to PCAOB AAM 23002-2.56 and AAM 23002-2.53B.

For additional documentation considerations when performing test of details using audit sampling, refer to the Audit Sampling Guide.

Leading Practice

Consider using the Substantive Rollforward Testing Template1 to document the procedures performed when designing, performing, and evaluating substantive rollforward procedures.

Practice Aid for Substantive Rollforward Procedures (7-21)

21

Appendix A: Substantive Rollforward Testing Template The Substantive Rollforward Testing Template, 1 enables teams to document their considerations on the planning, performing, and evaluation of rollforward procedures as discussed in this practice aid and also includes illustrative examples when performing substantive rollforward procedures to respond to RoMMs for certain assertions related to accounts receivable and the related allowance for doubtful accounts and fixed assets. These examples are not all-inclusive, and they are not intended to replace the exercise of professional judgment.

Appendix B: Other Resources • Substantive Analytical Procedures Guide: Including Nonstatistical and Statistical (Reveal) Illustrative

Example.

• Audit Sampling Guide.

• Chapter 6, “Design Further Audit Procedures to Respond to Risk of Material Misstatement” of Risk Assessment: A Practical Guide to Auditing.

• Audit Evidence Guide.

• Audit Sampling and Substantive Analytical Procedures: Quick Reference Guide.

• Data Analytics Guide.

• Appropriate Consultation Resource (e.g., National Office — Audit Consultation).

• Section 2.2.7 of Inventory — Select Topics: A Practical Guide to Auditing.

Practice Aid for Substantive Rollforward Procedures (7-21)

22

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the U.S. member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms. Copyright © 2021 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited