Definition
The financial close is the recurring process an entity follows at each month, quarter and year-end. Steps are cutting off subledgers, recording accruals and deferrals, reconciling accounts, posting adjusting and consolidation entries, reviewing variances, drafting statements and disclosures, and locking the period. The period-end financial reporting process includes the journal entries, adjustments and consolidating entries made after the ledgers are closed.
Why it matters in an audit or review
Many audit adjustments and many fraud schemes are made during the close, so it is a core focus. AU-C 240 requires testing journal entries, including those posted at period end, to address management override. For issuers, PCAOB AS 2201 identifies the period-end financial reporting process as a control the auditor evaluates in an audit of internal control. The team walks through the close and tests review sign-offs.
Example
Illustrative: a company's close checklist has 40 tasks across 8 business days. The auditor samples the reconciliation, accrual and consolidation tasks, confirms that each was signed and dated before the statements were issued, and notes that three late-added entries were posted after the first draft with no approval.
Common mistakes
- Allowing top-side entries without support or approval.
Sources
- AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit (journal entry testing)
- AICPA, AU-C Section 315, Understanding the Entity and Its Environment (information system and period-end reporting process)
- PCAOB, AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (pcaobus.org)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error