Auditing Management Estimates: Exploring Leading Practices for Environmental Liabilities

Deloitte & Touche LLP July 2011

Auditing Management Estimates

Develop an independent expectation

Identify circumstances that require estimates

Understand managements process (consider risk of material misstatement)

Test managements process

Analyze evidence obtained and conclude

Contemporaneously document

Review subsequent events or transactions

Introduction Performing and documenting our testing of management estimates and judgments has historically been, and continues to be, the area with the highest rate of ndings in internal and external inspections. When auditing accounting estimates the primary objective of the auditor is to obtain sufcient appropriate audit evidence to provide reasonable assurance that the estimates are reasonable in the circumstances. The underlying theme in the inspection ndings is that often we are not obtaining sufcient appropriate audit evidence. The foundation of this practice aid was a review of internal and external inspection ndings. Although the ndings span a number of different audit areas, and occurred along the various elements of the audit process, our signicant ndings have predominantly been associated with substantive testing when we evaluated and tested the process used by management to develop the estimate.

A discussion about environmental liabilities that includes: Audit considerations for engagement leadership, primary reviewers, and engagement quality control reviewers that often will be appropriate in the context of the estimate Abbreviated hypothetical examples that denote audit considerations for staff practitioners As discussed above, our signicant ndings have predominantly been associated with substantive testing when we evaluated and tested the process used by management in developing the estimate; thus, the focus of this practice aid is on substantive testing.

Our testing of management estimates is the single greatest source of PCAOB ndings Common pitfalls include: Failing to evaluate managements assumptions or challenge managements explanations for reasonableness Failing to test underlying data used in developing estimates Failing to perform retrospective reviews This practice aid was designed to help you avoid these pitfalls

This practice aid was developed to assist professionals with gaining an understanding of the common pitfalls identied related to our audit work on management estimates, and provide further considerations to assist engagement teams with developing additional procedures to remediate these ndings. This practice aid provides professionals with: A workflow that depicts the key elements of the audit process for management estimates, which identies common pitfalls along that process

It does not address testing the operating effectiveness of internal controls over nancial reporting. It also does not address the substantive audit procedures that we perform when we use other approaches to auditing managements estimates (i.e., developing an independent expectation of the estimate to corroborate the reasonableness of managements estimate, or reviewing subsequent events or transactions occurring prior to the date of the auditors report).

Note: As described in U.S. AAM P020.15, certain management estimates are considered to be signicant matters. Each management estimate identied as a signicant matter is required to be described in our audit planning and summary memorandums in a manner that facilitates a thorough understanding of the signicant matter [U.S. AAM 2010.02a, U.S. AAM 7500.02a]. Furthermore, the engagement partner is required to perform a primary review of the audit documentation related to all signicant matters and discuss such matters with the engagement quality control reviewer [U.S. AAM P040.13a, U.S. AAM G240.02].

Auditing Management Estimates Workflow

The following is a workow depicting the key elements of the audit process for testing management estimates. The s indicate key considerations for each of the elements while the s indicate common pitfalls.
Develop an independent expectation

Identify circumstances that require estimates

Understand managements process (consider risk of material misstatement)

Test managements process

Analyze evidence obtained and conclude

Contemporaneously document

Review subsequent events or transactions

Model/ Methodology
includes

Internal control: D&I

includes

Using a specialist
includes

Testing underlying data

includes

Testing operating effectiveness of internal controls

Using a specialist
includes

includes

Understand managements process (consider risk of material misstatement)

includes includes

Test managements process

includes includes

Retrospective review

Assumptions & Uncertainty

Changes from prior year

includes

Evaluating assumptions

Evaluating for bias

Understand the entity, its environment, and managements process as part

of our risk assessment

Obtain audit evidence to provide reasonable assurance that the estimate is

appropriate in the circumstances

Consider alternative models/methodologies Consider controls around accumulation of reliable data Consider controls at service organizations and end user controls Consider if management uses or ought to use a specialist Perform retrospective review Consider whether there has been a change or ought to have been a
change in the process

Consider alternative factors or assumptions and conclude as to why the factors and assumptions used were most appropriate Consider all positive, negative, and contradictory evidence Failure to consider all available evidence Leverage managements conclusion instead of challenging it Failure to obtain sufcient persuasive evidence to overcome negative or
contradictory information

Test controls at appropriate level of precision Test completeness, accuracy, and relevance of any underlying data Understand specialists qualications, methodologies, and assumptions Concentrate on key factors and assumptions Consider alternative assumptions Review estimates for indicators of bias

Include relevant professional literature, GAAP, and GAAS, when

documenting the conclusion

Document consultations with Firm specialists and subject matter experts Document considerations of contradictory or inconsistent audit evidence Document challenges that were raised and alternative positions and
assumptions considered

Documentation fails to demonstrate the exercise of professional skepticism Failure to carry forward documentation or evidence

Understanding and Testing Managements Process Common Pitfalls

A B
Model/ Methodology Internal control: D&I Using a specialist includes includes includes

Model/ Methodology

Internal Using a control: D&I specialist Understand managements

A B C D E

Failure to obtain an understanding of managements process and

methodologies

process (consider risk of material misstatement)

includes includes includes includes includes includes

Controls identied and tested were not sufciently precise to address the Failure to identify controls at service organizations in addition to end user Failure to alter nature, timing, and extent from prior years Failure to challenge managements ability to accurately estimate by
performing retrospective review controls assertion

Understand managements Retrospective process Assumptions Changes (consider risk of from review & prior year material misstatement) Uncertainty
includes includes includes

Failure to perform sensitivity analysis to identify the signicant assumptions Failure to identify alternative assumptions Failure to challenge whether the process or methodology remained
appropriate in the current year

Retrospective review

Assumptions & Uncertainty

Changes from prior year

Testing underlying data

includes

Testing operating effectiveness of internal controls

includes

Using a specialist

Failure to test underlying data for completeness and accuracy Tested controls related to data integrity are not sufciently precise Failure to assess the impact of control deciencies on related substantive Failure to identify or address control deciencies noted in SAS 70 Tested controls do not address relevant assertions Failure to adequately understand specialists methodology and/or Failure to reconcile or understand differences between specialists Failure to adequately address and document matters raised by internal
specialists calculation and the amount recorded by management assumptions procedures

Testing underlying data

Test managements Evaluating Evaluating process assumptions for bias

includes includes

includes includes

Testing operating Using a effectiveness of specialist internal Test controls managements

includes includes

includes includes

process

Documentation includes Per discussion with management without Management assumptions are not challenged with external data Failure to consider whether differences between estimates best supported
by the audit evidence and the estimates included in the nancial statements, even if they are individually reasonable, indicate a possible bias on the part of management corroboration through source documents, reports, etc.

Evaluating

Evaluating

Preface

This material is split into two parts, a Reviewer Considerations section and a Staff Practitioners Examples section. In the Reviewer Considerations section you will nd: A description of the estimate A list of significant assumptions that often are applicable to the respective estimate A list of factors that often influence the identification of risks of material misstatement A list of information which is often obtained to support our substantive audit of the estimate, along with a listing of substantive procedures which will often be appropriate in the context of the estimate and the information described A list of common pitfalls that often arise in the audit of the estimate In the Staff Practitioners Examples section you will nd: A description of factual situations where the estimate is being considered A list of the audit procedures which the hypothetical engagement team has already performed in testing managements process for establishing the estimate Descriptions of the most significant deficiencies in the audit procedures Examples of some possible additional audit procedures which may be considered in the circumstances

A meaningful way of using this material is in the planning of your activities and as a support to the work you perform or supervise. For example, an engagement partner may nd the Reviewer Considerations section of this estimate helpful in planning the audit work, and in reviewing the underlying working papers. Further, the staff auditor in this situation may nd the Staff Practitioners Examples section to be helpful in executing his or her role in supervising or performing the audit procedures. Additional examples of estimates which illustrate new principles and concepts will be added to the Practice Aid when appropriate. If you believe there are such estimates, contact the Audit Group in Wilton.

Environmental Liabilities
Reviewer Considerations

Introduction The purpose of this section is to provide users with considerations relevant to assessing the adequacy of procedures for auditing environmental liabilities. Environmental liabilities generally represent estimated future obligations for clean-up costs or damages and may be recognized in connection with environmental loss contingencies, environmental remediation liabilities, environmental guarantees, and asset retirement obligations (ARO) (see discussion in ASC 410, Asset Retirement and Environmental Obligations; the requirements for ARO estimates in ASC 410-20 are unique and not included in this section). Guarantees are discussed in ASC 460. Environmental estimates and liabilities are frequently performance-based whereby certain activities will be performed to achieve a desired objective or result (e.g., the remediation of contaminated groundwater or soil). Establishing these estimates requires the identication of a particular driver such as a consent order issued by regulator, lawsuit, or asserted or unasserted claim to indicate a liability has been incurred plus the activities or scope of work necessary and the supporting details to measure the liability. The existence of a liability for environmental remediation costs becomes determinable and the amount of the liability becomes estimable over a continuum of events and activities that help to frame, dene, and verify the liability. In the early stages of the process, cost estimates can be difcult to derive because of uncertainties about a variety of factors. Consequently, a multidisciplinary approach is typically used to identify, understand, and measure these liabilities, and may include technical or engineering resources, legal, regulatory, and accounting competencies. Environmental exposures frequently represent an understatement risk whereby (1) management may not be aware of new or potential environmental exposures or incidents or (2) management is aware of the environmental obligation and may assert that the criteria for recognition has not been met (i.e., probable that the entity has incurred a liability, however the loss is not reasonably estimable). The future cash outflows related to environmental matters may be deemed inestimable based on various factors (e.g., limited information regarding volume and nature of contamination or what will ultimately be required by the regulatory agency). While it may not always be possible to estimate the entire liability, a portion of the liability can frequently be measured. In these cases a liability should be recognized for that portion which can be estimated. Whether notication by regulatory authorities in relation to particular environmental laws and regulations constitutes the assertion of a claim is a matter of legal determination. If an entity concludes that it has no current legal obligation to remediate a situation of probable or possible environmental impact, then in accordance with paragraph 450-20-50-6 no disclosure is required. However, if an entity is required by existing laws and regulations to report the release of hazardous substances and to begin a remediation study or if assertion of a claim is deemed probable, the matter would represent a loss contingency subject to the disclosure provisions of paragraphs 450-20-50-3 through 50-4, regardless of a lack of involvement by a regulatory agency. The disclosure requirements of ASC 275-10 also apply to environmental remediation liabilities. Other disclosures related to environmental liabilities may be appropriate (see ASC 410-30-50).
6 Environmental Liabilities

NOTE These considerations provide example

procedures that an engagement team may consider to enhance the effectiveness of their audit. These consideration points are not all-inclusive and are not intended to replace the need for professional judgment. There may be other acceptable ways to accomplish the audit objectives for this management estimate that are not specically addressed herein. The nature, timing, and extent of testing and audit evidence that is appropriate will depend on the entity specic facts and circumstances as well as our approach to testing internal controls.

When identifying material classes of transactions, accounts, balances, and disclosures, we consider both qualitative and quantitative factors. As we obtain an understanding of the relevant industry, regulatory, and other external factors, we may consider the following qualitative factors related to contingent environmental liabilities: The relevant legislation and regulations Environmental requirements affecting the industry and the entitys business The experience of the entitys sector and competitors These factors may indicate an inherent risk and susceptibility to misstatement that is not reflected in the account balance or the entitys recent experience related to the environmental exposures.

Reviewer Considerations (cont.)

Common Signicant Assumptions (NOT ALL-INCLUSIVE) Technical assumptions regarding the expected scope of work to be required at a site: Interpretation of the scope of work expected as a result of the provisions of a consent decree, unilateral order, other directive issued by a regulator, claim or potential claim, or lawsuit Regulator approval of remedy and work plan Establishment (submission and conrmation) of site clean-up standards (e.g., residential standards or industrial use standards) The range of activities expected to be required Duration of activities during remediation and operations, maintenance, and monitoring periods Activities and cost components considered to be typical of the industry The timing of future expenditures and the impact on the classication of the liability in the balance sheet Judgments about: The probability and estimability of a loss related to an exposure The allocation percentages assigned to parties identied as potentially responsible parties (PRPs) and subject to joint and several liability or other cost sharing mechanisms The credit worthiness of the other PRPs and the likelihood they will pay their share of the allocated costs The cost build-up, including volumes and unit costs (internal and external cost) The application of accounting conventions (e.g., future cash flows are inestimable beyond 10 years) Consideration of facts and circumstances when an exposure is determined to not be estimable Classification of the liabilities based on the driver of environmental exposure (a remediation liability from an unexpected incident versus contamination from normal operation of an asset accounted for as an ARO, both may be present at a site) Differentiating between required environmental remediation and voluntary activities or pollution control activities Factors That Could Lead to Risks of Material Misstatement (NOT ALL-INCLUSIVE) Existing or new exposures associated with environmental contamination are not identified and assessed in a timely manner Relying on contractor estimates which were not developed for purposes of financial reporting Management relies on an external specialist to understand and apply the applicable accounting standards (e.g., U.S. GAAP, IFRS) and the external specialist does not have an adequate understanding of the accounting standards Managements internal or external specialist does not have the relevant experience or does not have the competency to be able to provide advice or a particular liability estimate Judgments and estimates are not subject to sufficient review by management Decisions whether to modify the reserve are not subject to the appropriate level of review by management Management does not incorporate new data into the assessment of the liability All cost elements may not be included in the measurement of the environmental liability or may not be priced appropriately The costs included in the estimate may be several years old or based on old assumptions The entitys policies state that liabilities are recorded when notice of a claim is received versus when it is probable that a claim will be asserted that will result in an unfavorable outcome Managements policy is interpreted as requiring the reserve be recorded at the low end of the range rather than the best estimate Liabilities viewed by the entity as probable but not reasonably estimable can be estimated within a reasonable range based on available information The entity has a recovery mechanism (e.g., insurance or indemnity) and the receivable has been improperly netted against the liability Management bias influences the assumption used and judgments made Financial assurance costs (e.g., performance guarantee mechanisms such as bonds, letters of credit) are included in the estimate versus treated as a period cost The cost estimate has been based on a scope of work that is not responsive to regulatory requirements or consistent with ASC 410-30 The entity discounts contingent liabilities that do not qualify for discounting as the timing and amount of the future cash flows are not fixed or reasonably determinable or the discount rate is not consistent with the rate used in other internal analyses (note: if the low end of a range of possible losses were accrued, SEC staff comments have indicated that discounting would not be appropriate because the aggregate obligation is not xed and reliably determinable)
7 Environmental Liabilities

Superfund is the name given to the environmental program established to address abandoned hazardous waste sites. It is also the name of the fund established by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. It allows the Environmental Protection Agency (EPA) to clean up such sites and to compel responsible parties to perform clean ups or reimburse the government for EPA-led clean ups. The Superfund clean-up process is complex. It involves the steps taken to assess sites, place them on the National Priorities List, and establish and implement appropriate clean-up plans. Similarly, under the corrective action requirements of the Resource Conservation and Recovery Act of 1976 (RCRA), the EPA may order facilities that treat, store, or dispose of hazardous waste to clean up releases of hazardous waste constituents associated with past or ongoing practices. In addition to these programs, there are numerous federal and state environmental laws that may impact an entitys business and result in an environmental exposure.

Reviewer Considerations (cont.)

The costs to treat environmental contamination are capitalized rather than charged to expense The entity does not track aggregate possible losses to determine if possible losses in excess of the reserves recorded are signicant and should be disclosed The entity does not disclose that environmental liabilities are discounted and the amount of the discount The reserves are overstated to preserve remediation budgets or to serve as cookie jar reserves The entity does not make all of the required disclosures

8 Environmental Liabilities

Reviewer Considerations (cont.)

CAUTION
The following provides useful information about U.S. GAAP and the Financial Accounting Standards Boards Accounting Standards Codification (the Codication) that may be considered when auditing environmental liabilities. It may be helpful to provide context to the audit procedures and considerations that are outlined in this Section. The information was extracted from ASC 410-30 and it not intended as a substitute for the understanding of U.S. GAAP and the Codication and the exercise of judgment. Engagement teams should have a thorough understanding of the Codication and should refer to the text of the Codication, as necessary, in considering particular items presented below.

In the context of environmental remediation liabilities, the probability criterion in ASC 450-20-25-2 consists of two elements. The criterion is met if both of the following elements are met on or before the date the nancial statements are issued: Litigation has commenced or a claim or an assessment has been asserted, or, based on available information, commencement of litigation or assertion of a claim or an assessment is probable. In other words, it has been asserted (or it is probable that it will be asserted) that the entity is responsible for participating in a remediation process because of a past event. Based on available information, it is probable that the outcome of such litigation, claim, or assessment will be unfavorable. What constitutes commencement or probable commencement of litigation or assertion or probable assertion of a claim or an assessment in relation to particular environmental laws and regulations may require legal determination. Certain stages of a remediation effort or process and PRP involvement provide benchmarks that may be considered when evaluating the probability that a loss has been incurred and the extent to which any loss is reasonably estimable. The following are recognition benchmarks for a Superfund remediation liability. Analogous stages of the RCRA correctiveaction are also listed in ASC 410-30-25-15.
Identication as a PRP: If an entity receives notication or otherwise becomes aware that it may be a responsible party, it should examine its records to determine if it has been associated with the site. If the entity determines that it is associated with the site, it is probable that a liability has been incurred. If all or a portion of the liability is reasonably estimable, the liability should be recognized. Receipt of unilateral administrative order: If an entity receives an order to take action or risk penalties, management should accrue a liability for the requisite work. The cost of performing the requisite work generally is estimable within a range and recognition of a liability for costs of the study and any other short-term actions generally should not be delayed beyond this point. Participation in a remedial investigation-feasibility study: If an entity agrees to pay the cost of a study, it should accrue a liability for its share of the cost of the study and any other costs that can be reasonably estimated. As the study proceeds, the entitys estimate of its share of the total cost of the study can be rened.

Completed feasibility study: At substantial completion of the feasibility study, a minimum liability generally will be reasonably estimable. If management had not previously concluded that it could reasonably estimate the liability, recognition should not be delayed beyond this point.

Issued record of decision: The EPA species a preferred remedy, which further renes the amount of the potential liability. Managements estimate normally can be rened based on the specied preferred remedy and a preliminary allocation of the total remediation costs, which will likely result in an adjustment to the liability.

Remedial design through operation and maintenance: This phase includes actual site remediation and involves the most precise cost estimates, which management uses to continue to rene its liability adjustments. This phase continues through post-remediation monitoring.

An entity should determine its allocable share of liability for a site based on its estimate of the allocation methods and percentage that will ultimately be used for the entire remediation effort. The primary source for this estimate should be the allocation method and percentages that (1) parties have agreed to, (2) have been assigned by a consultant, or (3) have been determined by a regulator. If the entitys assessment of the ultimate allocation method and percentage differs from these primary sources, the entitys estimate should be based on objective, veriable information including data about the kinds and quantities of waste at the site, experience with allocation approaches in comparable situations, reports of specialists, or other data refuting contributions to the site.
9 Environmental Liabilities

Reviewer Considerations (cont.)

100 90 80 70 60 50 40 30 20 10 0

Incompatible Evidence

Contradictory Evidence

EVALUATE DEGREES OF EVIDENCE The determination of the nature, timing, and extent of procedures, and also the degree of documented evidence needed to support those procedures, is a professional judgment dependent upon specic facts and circumstances. Whatever the facts and circumstances, the documentation of the procedures performed would demonstrate the sufcient appropriate evidence obtained, the conclusions we reached, and the basis for our conclusions regarding the reasonableness of the estimate.

Negative Evidence

Baseline

CAUTION
Common pitfalls Failure to identify relevant controls that are designed to specifically address the identified risks of material misstatement and operate at a sufficient level of precision Failure to assess important attributes of the design of controls identified Failure to appropriately challenge the sufficiency of managements process Failure to perform substantive tests of the underlying data used to develop the estimate Failure to challenge whether no change in the recorded balance year over year is appropriate Failure to adequately understand the external specialists methodology and/or assumptions Failure to reconcile or understand differences between the external specialists calculation and the amount recorded by management Failure to adequately address and document matters raised by the Environmental Specialist Failure to challenge if an exposure is truly not probable or estimable Failure to document all of the considerations made by the Environmental Specialist in finding that the managements estimates were reasonable (i.e., the basis for the Environmental Specialists conclusions) Failure to corroborate comments made by management or the external specialist engaged by management Failure to retrospectively review actual costs compared to estimated costs, where appropriate, for management bias and to assess if management has demonstrated prociency in determining the estimate Failure to properly determine whether costs to treat environmental contamination should be capitalized or charged to expense Failure to apply the appropriate accounting treatment or classification which may result in recognition or measurement differences Failure to include the appropriate disclosures (e.g., lack of appropriate disclosure of sites where the amount is not estimable) Failure to document sufficient information regarding the procedures performed and professional judgments made to enable an experienced auditor, having no previous experience with the engagement, to understand the nature, timing, and extent of the procedures performed, the evidence obtained, and the conclusions reached

Information we typically receive internal process ow narratives and internal control matrices

Audit procedures Procedures typically performed that may be incomplete1 Conduct and document high-level discussions with management to update the prioryear understanding Identify controls (e.g., review and approval of journal entries, reviews by senior management of environmental specialists reports) that may not consider all the signicant aspects of developing the estimate, may not be sufciently precise to meet the relevant assertions, or address the risks of material misstatements associated with the relevant nancial statement assertions Assess the design of controls by considering some of the important attributes of the control Tests of operating effectiveness for a portion of the important attributes of the control (e.g., only inspecting the documentation evidence of the reviewers sign-off) Determine how the responsibility for monitoring environmental liabilities is shared between Environmental, Health, and Safety (EH&S) and the legal department Additional procedures we might perform1 Obtain managements current-year process flow descriptions and control matrices and compare them with the prior year to identify whether any changes in the process or controls occurred Enhance our understanding of the likely sources of misstatements by updating and supplementing the prior-year understanding, including asking probing questions and obtaining corroborative evidence related to the following: New or potential environmental exposures Who reviews the list for completeness

1 The examples provide illustrative procedures that may assist in evaluating whether sufcient appropriate evidential matter has been obtained in connection with our audit of managements estimates. The example procedures indicated as Procedures typically performed that may be incomplete often are not sufcient and appropriate for management estimates when performed alone. Limiting the nature, timing, and extent of procedures to these items, and not combining these procedures with other testing procedures, might result in inadequate audit procedures as identied in internal and external inspection ndings. The examples indicated as Additional procedures we might perform present additional audit procedures that, individually or in some combination, may improve audit performance. Consider the signicance, complexity, and estimation uncertainty of the management estimate being tested to determine the additional audit procedures, if any, that might be relevant in the circumstances. 10 Environmental Liabilities

Reviewer Considerations (cont.)

Information we typically receive internal process ow narratives and internal control matrices (cont.) Audit procedures Additional procedures we might perform1 (cont.) What activities are designed to identify, monitor, and measure incidents or exposures and the impact on the related disclosures What controls exist to ensure consistency in evaluation of probabilities Relevant controls to review the key assumptions and cost build-up used to estimate the reserve and related documentation Relevant controls to review whether a reserve adjustment should be recorded Appropriate participation of resources with technical and engineering, legal, regulatory, and accounting competencies in the preparation and review of the remediation cost estimates and the reserves The appropriateness of the entitys accounting policies related to remediation liabilities The process by which data that could affect disclosures is tracked, aggregated, communicated, and reviewed How any overlap between environmental remediation liabilities, AROs, and voluntary and/or future expenditures required for pollution control are reviewed and addressed Frequency and adequacy of the entitys review processes to update remediation reserve estimates Identify controls that mitigate the risks of material misstatement of environmental liabilities and evaluate the adequacy of the level of precision at which the control operates, which may include: Purpose of the control. A procedure that functions to prevent or detect misstatements generally is more precise than a procedure that merely identies and explains differences (e.g., a detailed review of the calculation of the environmental liability reserve including the supporting regulatory or legal orders and assumptions by someone knowledgeable of ASC 410-30 is generally more precise than a procedure that identies and explains differences between the recorded reserve and the report prepared by the specialist engaged by management) Level of aggregation. A control that is performed at a more granular level generally is more precise than one performed at a higher level (e.g., an analysis of environmental liabilities by site normally is more precise than an analysis of total environmental liabilities) Consistency of performance. A control that is performed routinely and consistently generally is more precise than one performed sporadically Correlation to relevant assertions. A control that is indirectly related to an assertion normally is less likely to prevent or detect misstatements in the assertion than a control that is directly related to an assertion [e.g., a detailed review of the calculation of the environmental liability reserve including the supporting regulatory or legal orders and assumptions by someone knowledgeable of ASC 410-30 would not likely address the completeness assertion (i.e., there are no material omissions from the reserve)] Criteria for investigation. For detective controls, the threshold for investigating deviations or differences from expectations relative to materiality is an indication of a controls precision (e.g., a control that investigates items that are near the threshold for nancial statement materiality has less precision and a greater risk of failing to prevent or detect misstatements that could be material than a control with a lower threshold for investigation)

Assess whether other audit evidence obtained elsewhere in the audit contradicts or is inconsistent with any assumptions used in developing the estimate.

1 The examples provide illustrative procedures that may assist in evaluating whether sufcient appropriate evidential matter has been obtained in connection with our audit of managements estimates. The example procedures indicated as Procedures typically performed that may be incomplete often are not sufcient and appropriate for management estimates when performed alone. Limiting the nature, timing, and extent of procedures to these items, and not combining these procedures with other testing procedures, might result in inadequate audit procedures as identied in internal and external inspection ndings. The examples indicated as Additional procedures we might perform present additional audit procedures that, individually or in some combination, may improve audit performance. Consider the signicance, complexity, and estimation uncertainty of the management estimate being tested to determine the additional audit procedures, if any, that might be relevant in the circumstances. 11 Environmental Liabilities

Reviewer Considerations (cont.)

Information we typically receive internal process ow narratives and internal control matrices (cont.) Audit procedures Predictability of expectations. Some entity-level controls are designed to detect misstatements by using key performance indicators or other information to develop expectations about reported amounts. The precision of those controls depends on the ability to develop sufciently precise expectations to highlight potentially material misstatements [e.g., the EH&S Directors review of a summary of the three-year trend line of total expenditures would not likely detecting material misstatements because the EH&S Director is merely reviewing the trend reports for indications that the balance may be wrong (i.e., nothing came to his or her attention that would indicate the balance is materially misstated)] The completeness and accuracy of any reports or information that the control is dependent upon Perform tests of the relevant controls, including evidence to verify each of the important attributes of the design of the control (e.g., observation of meetings in which the control is performed, and reperformance of the review) Specifically indicate the degree of Estimation Uncertainty associated with each aspect of the process and tailor the substantive procedures accordingly When assessing the qualifications and objectivity of environmental specialists engaged by the entity, specically assess and document the professional qualications and the nature of any relationship with the entity that may impair or appear to impair the objectivity of the work Procedures typically performed that may be incomplete1 Agree the beginning balance to prior year working papers and agree ending balance to the general ledger Hold discussions with management regarding the status of each site Read any new relevant information related to existing environmental exposures/ incidents, nes and violations, and claims Read relevant information related to new environmental exposures/incidents, fines and violations, and claims Test the rollforward for completeness Consider the following sources of information to identify missing environmental exposures or incidents, nes and violations, and claims: The entitys incident reporting system Internal audit reports and findings EH&S compliance audit reports and findings, which are frequently managed at the facility or business unit level Legal letters from in-house and external legal counsel Disbursement testing and other audit procedures performed Make inquiries of management, in-house legal counsel, business unit leadership, EH&S leadership, and facility personnel Perform a public domain search using Google and Factiva to identify any events, issues, or claims reported in the media Review changes to the reserve balances for any unusual variances that are inconsistent with our understanding Consider if tests of IPE that support the control activities that management undertakes need to be performed on the reports we use in our substantive testing, and/or that are used to support managements control activities where we test those control activities.

Rollforward of environmental exposures and claims including any new environmental incidents, nes, and violations which may be indicative of exposures and claims

Because of the complexity and highly specialized knowledge and experience in identifying, assessing, and measuring nancial information, multiple competencies may need to collaborate to determine if and how to report a contingent environmental liability: Legal counsel must determine the likelihood that an asserted claim will result in an unsuccessful outcome Environmental scientists, engineers, and nancial experts work with legal counsel to estimate the amount of probable loss Accountants determine whether the amount of the loss, individually or in the aggregate with other environmental liabilities, are material

1 The examples provide illustrative procedures that may assist in evaluating whether sufcient appropriate evidential matter has been obtained in connection with our audit of managements estimates. The example procedures indicated as Procedures typically performed that may be incomplete often are not sufcient and appropriate for management estimates when performed alone. Limiting the nature, timing, and extent of procedures to these items, and not combining these procedures with other testing procedures, might result in inadequate audit procedures as identied in internal and external inspection ndings. The examples indicated as Additional procedures we might perform present additional audit procedures that, individually or in some combination, may improve audit performance. Consider the signicance, complexity, and estimation uncertainty of the management estimate being tested to determine the additional audit procedures, if any, that might be relevant in the circumstances. 12 Environmental Liabilities

Reviewer Considerations (cont.)

Information we typically receive Rollforward of environmental exposures and claims including any new environmental incidents, nes, and violations which may be indicative of exposures and claims (cont.) Audit procedures Procedures typically performed that may be incomplete1 (cont.) Make a selection of exposures and claims for further testing Evaluate the current versus the noncurrent classification of environmental liabilities Evaluate the discount rate and whether the costs that were discounted met the criteria of ASC 410-30-35-12 (i.e., timing of cash payments is xed or reliably determinable) Additional procedures we might perform1 Consider the circumstances and factors in U.S. AAM G018.03.04 to determine the nature and involvement of an Environmental Specialist In order to establish an understanding with the Environmental Specialist regarding the nature of his or her assistance to the audit team, perform the following: Conduct a planning meeting Consider including the Environmental Specialist in the walkthrough Complete a detailed scoping memo that summarizes the allocation of the procedures between the Environmental Specialist and the audit team. Agree that the Environmental Specialist will provide a memo and supporting working papers that document the procedures performed and the conclusions reached Prior to the Environmental Specialist completing his or her planning memo, arrange a planning call with the Environmental Specialist, the EH&S Director, the Controller, and specialists engaged or employed by the entity in order to understand the scope of the work performed by managements specialist, the methodology used in estimating the reserves, sources of information, key assumptions, and important administrative matters to facilitate the engagement teams procedures Involve an Environmental Specialist to assist with testing the entitys process for understatement by performing the following: U.S.: Conduct a search of the regulatory, legal, and other databases in the public domain to identify environmental events, lawsuits, news items, and violations reported during a stated period. Such databases tend to be based on U.S. events or exposures International: Conduct a search of Factiva and other international news services and local jurisdiction regulatory databases, if available. Searches may be possible in some countries but require coordination with other DTTL Member Firms and may require submitting a request for information to a national or municipal government ofce Compare results of the searches to (1) the incident reporting system and (2) the litigation and claims listing to access completeness Involve an Environmental Specialist to assist in the identification of industry/sector or peer group environmental exposures reported in the public domain Assess the process and documentation maintained if the entity has determined a reserve adjustment is not required for a site or a period

Retrospective reviews can be an effective technique to assess if management has demonstrated prociency in determining the estimate and to understand whether management has a tendency to skew estimates with bias.

1 The examples provide illustrative procedures that may assist in evaluating whether sufcient appropriate evidential matter has been obtained in connection with our audit of managements estimates. The example procedures indicated as Procedures typically performed that may be incomplete often are not sufcient and appropriate for management estimates when performed alone. Limiting the nature, timing, and extent of procedures to these items, and not combining these procedures with other testing procedures, might result in inadequate audit procedures as identied in internal and external inspection ndings. The examples indicated as Additional procedures we might perform present additional audit procedures that, individually or in some combination, may improve audit performance. Consider the signicance, complexity, and estimation uncertainty of the management estimate being tested to determine the additional audit procedures, if any, that might be relevant in the circumstances. 13 Environmental Liabilities

Reviewer Considerations (cont.)

Information we typically receive For those cost estimates selected for further testing, support for the cost estimates used as the basis for the reserve (e.g., engineering reports, managements analysis or estimates, regulatory orders) Audit procedures Procedures typically performed that may be incomplete1 Reconcile the cost estimate in the engineering report or other detailed estimate to the general ledger Read the engineering report or cost estimate for consistency with the stated requirements (e.g., general scope of effort) in the consent decree or other directive Compare recent expenditures to the amount for the same period/tasks from the engineering report cost estimate or other detailed estimate and consider the impact on projections Detail test the current year spending by obtaining the respective support (e.g., invoice and canceled check) and determine: If the expenditure was appropriately applied against the respective reserve and task If the expenditure was recorded for the correct amount If the nature of the expense was appropriate (e.g., incremental costs directly related to the remediation or other direct internal costs) The effect, if any, on estimated future expenditures, if the spending is related to an overrun Read related regulatory correspondence or approvals for additional information and new developments which have affected or should affect managements estimates Read correspondence from the party(ies) managing the clean up at the site (e.g., PRP Committee, site operator) for additional information and new developments which have affected or should have affected managements estimates Inquire of management regarding key assumptions used to develop the estimate which may include the following: Assumptions regarding the allocation of responsibility (i.e., PRP allocation) The timeframe and scope associated with long-term remediation efforts and postremediation operations, maintenance, and monitoring Recovery opportunities (e.g., insurance, indemnities, cost recovery) Basis for estimating the costs (e.g., internal rates, external market rates, inclusion of other internal direct costs, legal costs, regulatory oversight costs) Utilization of a life cycle cost estimation approach (i.e., consideration of costs expected to be incurred over the lifetime of the remediation as compared to only the cost of the current activities) Assess whether the credit worthiness of other PRPs has been appropriately considered in the entitys assessment and measurement of its PRP allocation Assess the funding mechanism used to manage the site, if applicable and determine whether the trust fund/account has been set up as a separate legal entity under a trust agreement or represents a cooperative account controlled by the parties Obtain from the entity a list of nancial assurances (i.e., performance guarantees) provided to the government or regulatory agencies and conrm a similar liability is recorded (e.g., contingent liability or ARO) [note: statutory measurement requirements may vary from the applicable accounting standard (e.g., U.S. GAAP, IFRS)]

Assess whether other audit evidence obtained elsewhere in the audit contradicts or is inconsistent with any assumptions used in developing the estimate.

1 The examples provide illustrative procedures that may assist in evaluating whether sufcient appropriate evidential matter has been obtained in connection with our audit of managements estimates. The example procedures indicated as Procedures typically performed that may be incomplete often are not sufcient and appropriate for management estimates when performed alone. Limiting the nature, timing, and extent of procedures to these items, and not combining these procedures with other testing procedures, might result in inadequate audit procedures as identied in internal and external inspection ndings. The examples indicated as Additional procedures we might perform present additional audit procedures that, individually or in some combination, may improve audit performance. Consider the signicance, complexity, and estimation uncertainty of the management estimate being tested to determine the additional audit procedures, if any, that might be relevant in the circumstances. 14 Environmental Liabilities

Reviewer Considerations (cont.)

Information we typically receive For those cost estimates selected for further testing, support for the cost estimates used as the basis for the reserve (e.g., engineering reports, managements analysis or estimates, regulatory orders) (cont.) Audit procedures Additional procedures we might perform1 Read the engagement letters between the entity and its external environmental specialist to assess the relevance of the specialists report and any potential for bias or manipulation [e.g., the intended use or purpose of the external estimates is inconsistent with the applicable accounting standard (e.g., U.S. GAAP, IFRS)] Determine the key regulatory requirements and drivers for the site Read the regulatory documents and identify what requirements and tasks are active and/or open as some requirements from previous orders from the regulator may be unresolved Reconcile the regulatory requirements stated in the consent decree, regulations, or other directive to the scope of work included in the engineering cost estimate or other detailed cost build-up by considering the following: Extent of investigation and study required Alignment of the geographic coverage of the estimate with the requirements Process and status of report submissions and approvals [note: guidance related to staging and milestones and the presumption that costs should be estimable are included in ASC 410-30] Progress and success with remediation performed to date Identication of remediation that is likely to require an extended timeframe and the timeframe is not specied by the regulator as it is objective based Expected post-remediation operations, maintenance, and monitoring scope and time frame Identify gaps in the scope of work due to uncertainties resulting from open investigations, indecisiveness or inaction by the regulator, or ongoing negotiations with the regulator Assess the reasonableness of the engineering estimate or detailed cost build-up based on available supporting information (e.g., contracts, bids, drawing, workplans), industry practice, and cost benchmarks Assess the reasonableness of the estimate as most probable. If there is no more probable estimate, assess the range of possible costs and the points within the range used for the reserve balance and for disclosure purposes [note: ASC 410-30-25 provides for the low end of the range to be recorded if there is no more probable amount within the range] Corroborate information provided by management regarding the status of the site, the regulatory interest and requirements, and any offsite or related community exposures to the information available in the public domain Perform a site visit to confirm the status of the site Challenge managements assertion when no accrual has been recorded Assess the adequacy and completeness of the entitys documentation regarding key assumptions, impact of uncertainties and alternative scenarios. Such assumptions are frequently embedded in the engineering estimate Assess the methodology utilized by the entity to estimate the liability (e.g., probabilistic modeling, actuarial approach, range of possible costs)

Consider using an Environmental Specialist (see U.S. DPM 10610.127) to perform some of the procedures.

Retrospective reviews can be an effective technique to assess if management has demonstrated prociency in determining the estimate and to understand whether management has a tendency to skew estimates with bias.

1 The examples provide illustrative procedures that may assist in evaluating whether sufcient appropriate evidential matter has been obtained in connection with our audit of managements estimates. The example procedures indicated as Procedures typically performed that may be incomplete often are not sufcient and appropriate for management estimates when performed alone. Limiting the nature, timing, and extent of procedures to these items, and not combining these procedures with other testing procedures, might result in inadequate audit procedures as identied in internal and external inspection ndings. The examples indicated as Additional procedures we might perform present additional audit procedures that, individually or in some combination, may improve audit performance. Consider the signicance, complexity, and estimation uncertainty of the management estimate being tested to determine the additional audit procedures, if any, that might be relevant in the circumstances. 15 Environmental Liabilities

Reviewer Considerations (cont.)

Information we typically receive For those cost estimates selected for further testing, support for the cost estimates used as the basis for the reserve (e.g., engineering reports, managements analysis or estimates, regulatory orders) (cont.) Audit procedures Additional procedures we might perform1 (cont.) Perform the following procedures to identify possible management bias in the entitys estimate: Perform a retrospective review by comparing current period payments to prior-year estimates to evaluate the accuracy of the entitys prior cost estimates Determine if overruns are consistently recorded or experienced Assess whether there are inconsistencies with observable marketplace assumptions (e.g., impacts of new environmental regulation or technology, evolving standards of what constitutes acceptable remediation) Evaluate whether the historical results of our retrospective review indicate a pattern of excessive optimism or pessimism Evaluate whether the historical results of our retrospective review fluctuate with the overall nancial performance of the entity (e.g., the reserves were increased when the entitys nancial performance exceeded analysts expectation but decreased when analysts expectations were not met without any appropriate underlying reason) Determine whether compensation is tied to remediation cost savings or other aspects of environmental liabilities Evaluate any differences noted from managements estimate, document the reason for the variance, and perform additional procedures, if necessary, to adequately resolve the difference If an insurance recovery is recorded, evaluate nancial or other available information regarding the insurer to support collectibility. If the insurer is experiencing solvency issues, evaluate managements analysis and rationale for amounts deemed collectible Evaluate the entitys conclusion that the recovery of a receivable is probable, overcoming the presumption that the insurance receivable is not realizable when negotiations to reach agreement and resolve essential details (e.g., payment amounts, the period of payment, and other provisions) are still ongoing Compare assumptions and judgments used with assumptions and judgments made in other nancial statement estimates (e.g., projections used by management for other purposes such as the goodwill impairment analysis) Use the Professional Judgment Whitepaper to assist in applying judgment and documenting consideration of the procedures performed and judgments made

1 The examples provide illustrative procedures that may assist in evaluating whether sufcient appropriate evidential matter has been obtained in connection with our audit of managements estimates. The example procedures indicated as Procedures typically performed that may be incomplete often are not sufcient and appropriate for management estimates when performed alone. Limiting the nature, timing, and extent of procedures to these items, and not combining these procedures with other testing procedures, might result in inadequate audit procedures as identied in internal and external inspection ndings. The examples indicated as Additional procedures we might perform present additional audit procedures that, individually or in some combination, may improve audit performance. Consider the signicance, complexity, and estimation uncertainty of the management estimate being tested to determine the additional audit procedures, if any, that might be relevant in the circumstances. 16 Environmental Liabilities

Staff Practitioners Examples

CAUTION
The following examples focus on specic facts and circumstances used to illustrate and highlight certain procedures performed when auditing environmental liabilities. Therefore this listing of procedures presented is not intended to be complete. When conducting an actual audit, additional procedures would be necessary to obtain sufcient appropriate evidential matter in connection with our audit of environmental liabilities.

Consider if tests of IPE that support the control activities that management undertakes need to be performed on the reports we use in our substantive testing, and/or that are used to support managements control activities where we test those control activities.

Example 1 Facts The Company is the sole responsible party for Site X for which remediation activities started in 20X5 The reserve balance as of December 31, 20XX, represents the projected remediation costs for the next 10 years based on the estimate prepared by the contractor engaged to assist in the remediation; the estimate was prepared to assist the Company in understanding the lowest cost alternative Management asserts that costs cannot be estimated beyond 10 years, although information submitted to the regulatory agency includes an estimate for the next 20 years Note: For purposes of Example 1, assume that we performed the appropriate procedures to identify any additional sites or projects that may require recognition or disclosure under ASC 410-30 and did not identify any other than Site X. The example is designed to focus attention on managements assertion that costs could not be estimated beyond the 10-year period and that the control we identied over the estimation process lacked sufcient precision to detect a material misstatement in the nancial statements. Audit procedures performed Conducted high-level discussions with the contractor and management to update the prior-year understanding of managements process Identified and tested one control the CFOs meeting with the contractor to review the contractors recommendations and to approve the reserve balance on an annual basis Tested the control by reviewing the report and noting the CFOs signature as evidence of the control operating effectively Detail tested current-year spending by obtaining the respective support (e.g., invoice and canceled check) and determining whether the expenditure was appropriately applied against the reserve Reconciled the projected costs from the contractors report to the technical order and amounts recorded Compared the projected costs for the next 10 years to the current year spending and assessed the projected costs for reasonableness Deciencies in audit procedures We did not challenge whether the report prepared by the contractor was appropriate for audit purposes (i.e., whether the report was prepared to assist the Company in estimating its environmental liability for nancial reporting purposes or to perform remediation tasks and establish a budget for spending through the next 10 years) We did not evaluate the qualifications and objectivity of the expert We did not understand managements process sufficiently, which resulted in a failure to identify all the risks and relevant controls We did not adequately evaluate the design of the control We did not sufficiently test the operating effectiveness of the control We did not challenge whether there was a more probable amount in the range of outcomes other than the low end of the range We did not challenge whether the 10-year period for the remediation tasks was appropriate and whether costs may be estimated beyond that period We did not perform procedures to identify possible management bias Potential additional audit procedures1 To challenge whether the report prepared by the contractor was appropriate for audit purposes, we could have performed the following procedures: Evaluated the qualications and objectivity of the expert Obtained an understanding of the contractors work (e.g., reviewed the engagement letter to understand the terms of the engagement)
1 The additional audit procedures that would apply and/or sufce are a matter of professional judgment based on specic facts and circumstances

17 Environmental Liabilities

Staff Practitioners Example (cont.)

Understood the assumptions described in the contractors report, which may have indicated the nature of the engagement or raised questions about the specialists understanding of U.S. GAAP or the specialists objective to identify the lowest cost alternative Evaluated the appropriateness of that contractors work as audit evidence for the relevant assertion To understand managements process steps sufficiently in order to identify additional relevant controls, we could have performed the following procedures: Involved an Environmental Specialist to participate in our procedures to obtain our understanding to assist in identifying the process steps, risks, and relevant controls including: Made inquiries of persons involved in the process Asked probing questions To evaluate the design of control, we could have considered the following factors to assist us in evaluating the design of the control and enable us to better plan the tests of operating effectiveness of controls: Purpose of the control Correlation to relevant assertions Level of aggregation Criteria for investigation Consistency of performance Predictability of expectations To test the operating effectiveness of the control, we could have performed the following procedures: Attended the meeting between the CFO and the contractor to assess the extent and nature of the CFOs interaction and effectiveness of the review (observation) Examined the reports and any other supporting documents used in performing the control to understand the level of detail available to the reviewer and tested the reports/documents for accuracy and completeness (inspection) Reviewed the report and data for anomalies and appropriate support for the assumptions and conclusions (reperformance) Examined documentary evidence to validate the criteria for investigation used and follow up actions taken (inspection) To challenge whether there was a more probable amount in the range of outcomes other than the low end of the range and the Companys assertion regarding the 10-year period, we could have performed the following procedures: Involved an Environmental Specialist to assess: Whether the scope of the client estimate is responsive to the regulatory requirements and represents the most probable amount The reasonableness of the 10-year period, considering the following: Whether an indenite remediation period is expected due to the nature of the contaminant The regulatory order or the relevant regulations to determine if a time horizon is specied The effectiveness of clean-up activities to date to assess the reasonableness of assumptions The cost components and cost build-up of the reserve to determine consistency with U.S. GAAP Evaluated the reasonableness of recording the low cost alternative and the high end of the range of possible costs which should be considered for disclosure. If there is no more probable estimate, assessed the range of possible costs and the points within the range used for the reserve balance and for disclosure purposes [note: ASC 410-30-25 provides for the low end of the range to be recorded if there is no more probable amount within the range] To identify possible management bias in the Companys estimate, we could have performed the following procedures: Performed a retrospective review by comparing current-period payments to prior-year estimates to evaluate the accuracy of the entitys prior cost estimates Involved an Environmental Specialist to assess whether the key assumptions embedded within the estimate are: Reasonable and appropriately identified in the documentation Consistent with observable marketplace assumptions (e.g., impacts of new environmental regulation or technology, evolving standards of what constitutes acceptable remediation) Determined if overruns are consistently recorded or experienced Evaluated whether the historical results of our retrospective review indicate a pattern of excessive optimism or pessimism Evaluated whether the historical results of our retrospective review fluctuate with the overall financial performance of the Company (e.g., the reserves were increased when the Companys nancial performance exceeded analysts expectation but decreased when analysts expectations were not met without any appropriate underlying reason) Determined whether compensation is tied to remediation cost savings or other aspects of environmental liabilities

Retrospective reviews can be an effective technique to assess if management has demonstrated prociency in determining the estimate and to understand whether management has a tendency to skew estimates with bias.

18 Environmental Liabilities

Staff Practitioners Examples (cont.)

Example 2 Facts The Company has grown through acquisitions in the U.S. and continues to manage and track environmental exposures at the business unit level Support for the reserve estimates and exposures are maintained at the business unit or facility level The EH&S Director reviews of a summary of the following environmental-related information, which includes a threeyear trend line of total expenditures, the total number of new issues identied during the period, the total number of issues resolved, and the net change in the reserve on quarterly basis. The EH&S Director relies upon each business unit to determine whether any exposure has met the criteria for recognition under ASC 410-30 (e.g., probable and estimable) The Companys policy is to consider remediation obligations probable and reasonably estimable only when the regulatory order has been agreed to Audit procedures performed Obtained a list of environmental exposures or incidents, fines, violations, and claims Performed a public domain search using Factiva and Google to test the completion assertion Discussed significant changes from the prior-year with the corporate-level management to update our prior-year understanding Evaluated design of the control, determined whether it was implemented, and tested the operating effectiveness Verified that the Companys policy was consistently followed Deciencies in audit procedures We did not adequately assess whether the list of environmental exposures or incidents, fines, violations, and claims was complete We did not challenge whether the control is effective at detecting material misstatements either overstatements or understatements in the estimates because the EH&S Director is merely reviewing the trend reports for indications that the balance may be wrong (i.e., nothing came to their attention that would indicate the balance is materially misstated). The EH&S Director would not be able to determine that: There are no material omissions from the reserve One or more of the key assumptions were appropriate There are no material errors in the underlying calculations The Company is measuring its exposures on a consistent basis (e.g., each business unit may have different criteria for reporting environmental exposures or incidents, nes, violations, and claims) Management at the business unit has the appropriate knowledge and competence of U.S. GAAP We did not challenge whether the Companys policy (i.e., consider remediation obligations probable and reasonably estimable only when the regulatory order has been agreed to) is in accordance with U.S. GAAP

Assess whether other audit evidence obtained elsewhere in the audit contradicts or is inconsistent with any assumptions used in developing the estimate.

19 Environmental Liabilities

Staff Practitioners Examples (cont.)

Potential additional audit procedures1 To challenge whether the list of environmental exposures or incidents, fines, violations, and claims was complete, we could have performed the following procedures: Considered the following sources of information to identify missing items: Incident reporting Internal audit reports and findings EH&S compliance audit reports and findings Legal letters from in-house and external counsel Disbursement testing and other audit procedures performed Corroborated inquiries of management, internal legal counsel, business unit leadership, EH&S leadership, and facility personnel Involved an Environmental Specialist to assist to conduct a search of the regulatory, legal, and other databases in the public domain to identify environmental events or releases, cases, news items, violations reported during a stated period To challenge whether the control is effective at detecting material misstatements, we could have performed the following procedures: Understood the process and identied controls for recording a liability at the business-unit level in addition to our understanding at the corporate-level Corroborated our understanding obtained from discussions with corporate-level management with management at the business unit level Assessed whether the business unit management has the appropriate knowledge and competence to determine when a liability should be recorded (i.e., does business unit management understand the objectives of the reserve process) Included an Environmental Specialist in updating our understanding that includes questioning business unit personnel about their understanding of what is required by the Companys prescribed procedures and controls at the points at which important processing procedures occur To challenge whether managements policy to consider remediation obligations probable and reasonably estimable only when the regulatory order has been agreed to is consistent with ASC 410-30, we could have performed the following procedures by teaming with an Environmental Specialist: Performed a site by site analysis to consider the specic requirements and circumstances for each site Considered whether a portion of the remediation costs may be estimated [note: at the early stages of the remediation process, particular components of the overall liability may not be reasonably estimable. This fact should not preclude the recognition of a liability. Rather, the components of the liability that can be reasonably estimated should be viewed as a surrogate for the minimum in the range of the overall liability] Assessed whether the site situation is common or similar to situations at other sites with which the Company has been associated (e.g., the remediation involves only the removal and disposal of contaminated soil and on-going groundwater monitoring, similar to other company sites) and therefore the liability can be reasonably estimated

Assess whether other audit evidence obtained elsewhere in the audit contradicts or is inconsistent with any assumptions used in developing the estimate.

1 The additional audit procedures that would apply and/or sufce are a matter of professional judgment based on specic facts and circumstances 20 Environmental Liabilities

Contacts
For more information please contact: Mark Loizeaux Partner Audit Group Wilton +1 203 761 3081 mloizeaux@deloitte.com Shelby Murphy Audit Senior Manager Audit Group Wilton +1 203 761 3160 shemurphy@deloitte.com

Questions concerning the Practice Aid can also be directed to National Ofce (Audit Consultation) or +1 866 547 1725.

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