Designing substantive procedures: nature, timing, extent and interim rollforward

In this lesson you will

Apply the AU-C 330.18 requirement to perform substantive procedures for each relevant assertion of each significant account
Choose between tests of details and substantive analytical procedures based on the assessed risk
Design rollforward procedures that extend interim conclusions to period-end under AU-C 330.23
Identify the documentation reviewers expect for the link between risk and response

The rule that cannot be skipped

AU-C 330.18 says the auditor should perform substantive procedures for each relevant assertion of each significant class of transactions, account balance and disclosure, regardless of the assessed level of control risk. That wording came in with SAS 145 for periods ending on or after December 15, 2023. Even a client with excellent controls gets substantive work on its significant accounts. Controls testing can reduce the extent of that work. It cannot remove it.

Two more requirements apply on every audit. AU-C 330.21 requires substantive procedures over the financial statement closing process: agreeing or reconciling the financial statements and disclosures to the underlying records, and examining material journal entries and other adjustments made in preparing the statements. AU-C 330.22 requires that, for a significant risk, the auditor performs substantive procedures specifically responsive to that risk, and when the approach is substantive only, those procedures include tests of details.

Nature, timing and extent

The application material in AU-C 330 splits design into three choices.

Nature is the purpose (test of controls or substantive procedure) and the type: inspection, observation, inquiry, confirmation, recalculation, reperformance or analytical procedures.
Timing is when the procedure is performed, or the period or date to which the evidence applies.
Extent is the quantity: a sample size, or the number of observations of an activity.

AU-C 330.07b requires more persuasive evidence the higher the assessed risk. In practice that pushes three levers. Change the nature toward evidence from outside the entity (confirmations, third-party documents). Move timing closer to period-end. Increase extent with a larger sample or a lower investigation threshold. A higher risk that gets the same procedure as last year with a bigger sample is a common review comment, because more of the same evidence type does not always address why the risk is high.

Match the procedure to the assertion. Vouching from the ledger to support tests occurrence and existence. Tracing from source documents into the ledger tests completeness. Confirmations are strong for existence and weak for valuation. A file that tests receivable existence twice and valuation never has a design gap even if every sample item ties out.

Substantive procedures at an interim date

Interim work lets you spread the load, but it leaves a gap between the interim date and period-end. AU-C 330.23 requires the auditor to cover the remaining period by performing either substantive procedures combined with tests of controls for the intervening period, or further substantive procedures only if the auditor determines that is sufficient. Either way, the procedures must give a reasonable basis for extending the interim conclusions to period-end.

The application material lists factors that bear on the decision, including the control environment, whether the information you need will be available later, the assessed risk, and your ability to cover the remaining period. The longer the remaining period, the higher the risk that period-end misstatements go undetected. Where the risk is due to fraud, AU-C 240 notes that work at or near period-end may address it better than a rollforward.

A typical rollforward compares the period-end balance with the interim balance, identifies unusual amounts, investigates them, and tests the intervening activity with substantive analytics or tests of details. If you find misstatements you did not expect at interim, AU-C 330.24 requires you to evaluate whether the risk assessment and the planned procedures for the remaining period need to change.

What reviewers look for

A clear line from each significant account and relevant assertion to a risk assessment and a procedure. A significant accounts scoping matrix makes the line visible.
A tests-of-details component for every significant risk handled substantively.
Interim work with a documented rollforward, not an interim confirmation followed by nothing.
Closing-process procedures under AU-C 330.21, including the tie-out of disclosures, which is often missing.

For the difference between control tests and substantive tests, see substantive testing vs test of controls and the AU-C 330 summary.

Worked example

Rolling forward interim receivable confirmations at Harbor Lane Dental Supply, Inc.

The team confirmed receivables at October 31: balance $1,840,000, no significant exceptions. Controls over billing and cash receipts were tested for the full year and found effective, so the team plans substantive procedures plus tests of controls for the intervening period.

At December 31 the balance is $2,105,000. The rollforward:

October 31 balance: $1,840,000
November-December sales per sales journal: $3,420,000
November-December cash receipts per cash receipts journal: ($3,120,000)
Credit memos and write-offs: ($35,000)
Expected December 31 balance: $1,840,000 + $3,420,000 - $3,120,000 - $35,000 = $2,105,000

The rollforward agrees to the ledger. The team then compares November-December sales with the same months last year (up 6 percent, consistent with price increases), scans the sales journal for entries over $50,000 and nonstandard credits, and performs cutoff testing at December 31. Two large December 29 invoices of $88,000 each are traced to shipping documents dated December 28. Conclusion: the interim confirmation evidence extends to year-end.

Self-check

Answer each question before you open the answer.

Can strong controls eliminate substantive procedures for a significant account?
Show answer
No. AU-C 330.18 requires substantive procedures for each relevant assertion of each significant class, balance and disclosure regardless of the assessed level of control risk. Effective controls can reduce the extent of substantive work, not remove it.
Revenue cutoff is a significant risk and you plan only substantive procedures. Is a substantive analytical procedure on monthly sales enough?
Show answer
No. AU-C 330.22 requires tests of details when the approach to a significant risk consists only of substantive procedures. The analytic can support the work, but you also need detail testing such as shipping documents around year-end.
What must you do after performing substantive procedures at an interim date?
Show answer
Cover the remaining period under AU-C 330.23, either with substantive procedures combined with tests of controls for the intervening period, or with further substantive procedures alone if those are sufficient. The work must give a reasonable basis to extend the interim conclusions to period-end.
Why is a larger sample not always the right response to a higher assessed risk?
Show answer
Persuasiveness comes from the nature and timing of evidence as well as quantity. If the risk is that internal documents are unreliable, more internal documents do not fix it; external evidence or period-end timing does.

Sources

AICPA Statements on Auditing Standards (AU-C sections), currently effective

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error