Journal Entry Testing Working Paper
(Following draft may be used as an example)
Background:
The purpose of this workpaper is to verify the journal entries and check the authenticity of the same on the financial statement.
a) Make inquiries with financial reporting personnel
b) Select journal entries and other adjustments at end of the period and
c) Test journal entries throughout the period
Procedures Planned:
Verification of period for which journal entries have been passed.
When identifying and selecting journal entries and other adjustments for testing and determining the appropriate method of examining the underlying support for the items selected, the following matters are of relevance:
- The assessment of the risks of material misstatement due to fraud – The presence of fraud risk factors and other information obtained during the auditor’s assessment of the risks of material misstatement due to fraud may assist the auditor to identify specific classes of journal entries and other adjustments for testing.
- Controls that have been implemented over journal entries and other adjustments – Effective controls over the preparation and posting of journal entries and other adjustments may reduce the extent of substantive testing necessary, provided that the auditor has tested the operating effectiveness of the controls.
- The entity’s financial reporting process and the nature of evidence that can be obtained – For many entities routine processing of transactions involves a combination of manual and automated steps and procedures. Similarly, the processing of journal entries and other adjustments may involve both manual and automated procedures and controls. When information technology is used in the financial reporting process, journal entries and other adjustments may exist only in electronic form.
The characteristics of fraudulent journal entries or other adjustments – inappropriate journal entries or other adjustments often have unique identifying characteristics. Such characteristics may include entries.
- (a) made to unrelated, unusual, or seldom-used accounts,
- (b) made by individuals who typically do not make journal entries,
- (c) recorded at the end of the period or as post-closing entries that have little or no explanation or description,
- (d) made either before or during the preparation of the financial statements that do not have account numbers, or
- (e) containing round numbers or consistent ending numbers.
The nature and complexity of the accounts – Inappropriate journal entries or adjustments may be applied to accounts that:
- (a) contain transactions that are complex or unusual in nature,
- (b) contain significant estimates and period-end adjustments,
- (c) have been prone to misstatements in the past,
- (d) have not been reconciled on a timely basis or contain unreconciled differences,
- (e) contain inter-company transactions, or
- (f) are otherwise associated with an identified risk of material misstatement due to fraud.
In audits of entities that have several locations or components, consideration is given to the need to select journal entries from multiple locations.
Journal entries or other adjustments processed outside the normal course of business – Non standard journal entries may not be subject to the same level of internal control as those journal entries used on a recurring basis to record transactions such as monthly sales, purchases and cash disbursements.
The auditor uses professional judgment in determining the nature, timing and extent of testing of journal entries and other adjustments. However, because fraudulent journal entries and other adjustments are often made at the end of a reporting period, paragraph 32(a)(ii) of SA 240 requires the auditor to select the journal entries and other adjustments made at that time. Further, because material misstatements in financial statements due to fraud can occur throughout the period and may involve extensive efforts to conceal how the fraud is accomplished, paragraph 32(a)(iii) of SA 240 requires the auditor to consider whether there is also a need to test journal entries and other adjustments throughout the period.
- Check whether there is effect of the journal entries on prior period financial statement.
- Check the effect of the same on Assets/Liabilities & Income/Expenditure and whether the ledger code and ledger number on which there will be effect of journal entry has been specifically disclosed.
- Ensure that narration of the Journal Entry passed during the year has been specifically mentioned.
- Check whether specific Invoice number is mentioned for such income/expenditure.
Procedures done:
1. Period for which journal entry passed has been verified based on the date of entry.
2. Checked the nature of expenditure/income & effect of the same on prior period financial statements.
3. The same has been verified on the basis of GL effecting the Financial Statements. Example-
b) Credit Party
4. Checked the same based upon the journal entry date mentioned in narration. Example
a) Debit Bank/Cash
b) Credit Party
(Being amount received from the XXX Party)
5. Specific Invoice number has been verified on sample basis & effect of the same on the Income/Expenditure & Asset/Liabilities has been crossly reconciled.
Observation and Conclusion: as per findings
