The journal entries are the records that are made directly in the major general. These are used to record transactions, classifications, adjustments and corrections in the general ledger, and include:
- The standard journal entries, and
- Non-standard journal entries to record unusual transactions or non-recurring adjustments
Evidence on journal entries is a mandatory procedure to mitigate the risk of fraud, since management may violate or surpass controls, and it is required to evaluate the design and implementation of relevant controls on them.
As auditors, we must select these made at the end of the report preparation period, and it is required to consider the evidence (not necessarily testing) of them during the period.
Evaluate the Population Integrity of Journal Entries
The auditor should design and perform audit procedures to test the adequacy of the journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements. Because journal entries and other fraudulent adjustments are usually made during the final reporting period, when designing and performing audit procedures for those tests, we must select journal entries and other adjustments made during the final reporting period.
As part of determining the criteria for identifying these and other high-risk adjustments, we must make inquiries with individuals involved in the process of issuing financial information about undue or unusual activities related to the processing of journal entries and other settings. Those inquiries must include if there were:
- Journal entry or other adjustments that were recorded without proper documentation or explanation.
- Cases of evasion of controls on a journal entry or other adjustments
- Journal entry or other adjustments initiated by management outside of the normal course of business.
Key questions the auditor should ask?
- Were sufficient procedures performed to determine the integrity of the journal entries?
- Are procedures and documentation sufficient for journal entry periods?
- Is sufficient documentation regarding our consideration for the journal entry tests during the period?
The auditor should obtain an understanding of the journal entry record process, which allows him to identify what can fail and the relevant controls; for example:
Improper access: An employee may have the ability to initiate, authorize and register a transaction or may have custody of assets within the process that allows him to commit and conceal an error or irregularity.
- Access to systems in the seat processing function
- Access to journal entry systems
- Segregation of functions in the processing of seats
Wrong journal entry: The journal entry is incorrectly registered or not properly authorized.
- Authorization of journal entries
- Management reviews the manual accounting entries
- Management reviews the exception report
When determining to test the journal entries, the auditor should consider:
- The evaluation of the risks of material errors due to fraud
- The controls that have been implemented on them and other adjustments.
- The processes of issuing financial reports of the entity and the nature of the evidence that can be obtained
- The nature and complexity of the accounts
- Journal entries or other adjustments processed outside the normal course of business
Our understanding should include:
- Sources of debts and significant credits for an account
- Who can start the seats in the major general
- What approvals are required for such seats, and
- How these entries are recorded (for example, entries can be initiated and registered online without physical evidence, or they can be created on printed paper and inserted into the batch module).
Procedures to assess the integrity of the identified population
- Understand and observe how electronic data is obtained/downloaded.
- Review the reconciliation.
- Perform gap detection tests.
- Carry out cutting tests.
- Reconciling the balance sheet with the financial statements.
- Use professional judgment
Considerations for selecting and testing
- The evaluation of fraud risk.
- Controls that have been implemented on journal entries and other adjustments.
- The process of issuing financial information of the entity and the nature of the evidence that can be obtained.
- The characteristics of fraudulent journal entries and other adjustments.
- The nature and complexity of the accounts.
Journal entries and other adjustments processed outside of the normal course of business
Selection of journal entries registered
- Method A: Select all items
- Method B: Select specific items (select items with specific characteristics to be tested).
- Method C: Select items using data analysis.
The data analysis includes looking for unusual items in the accounting records (for example, non-standard journal entries), as well as in the transaction data (for example, transitory accounts, journal entries) to determine if there is indications of errors that may have occurred. Data analysis typically includes the analysis of a large volume of data.
The identification of unusual items can be done by reading or analyzing entries in transaction lists, auxiliary journals, general ledger accounts, adjustment entries, transitory accounts, reconciliations, and other detailed reports.
The relevant population, in relation to the tests of the journal entries and other adjustments, is the population of journal entries and other adjustments in the identified period that could contain them and other high-risk adjustments.
Other manual adjustments created by the CEO/CFO and the sales manager are considered high risk.
Test the appropriateness
- Evaluate whether the journal entries reflect the underlying events and transactions.
- Inspect the supporting documentation, consider the commercial reasoning and the appropriateness of the accounting treatment.
- Evaluate whether journal entry was recorded in the period and correct account and in the correct amount.
- Evaluate if they were initiated by an authorized person and reviewed and approved by an appropriate individual.
Aspects that the auditor must document:
- Planned audit method for journal entry tests
- Client’s process of a recording journal entry
- Controls relevant to the risks identified on the registry of journal entries, including the evaluation of the design and implementation of the controls
- Test of operational effectiveness of the selected controls
- Substantive evidence and inquiries
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