Definition
AU-C 240 requires the auditor to test the appropriateness of journal entries recorded in the general ledger and of other adjustments made in preparing the statements. The auditor assesses the risk of override, identifies and selects entries using criteria, tests them, and considers entries made throughout the period, including period-end. Criteria can include unusual accounts, round amounts, weekend postings, or posting by unusual users.
Why it matters in an audit or review
Management is in a position to override controls by posting entries that look ordinary, so this testing is performed no matter how strong the controls appear. The population must be complete, which means reconciling the entry listing to the trial balance. Selected entries are traced to supporting documents and business purpose.
Example
The system yields 18,400 entries (illustrative) for the year, agreed to the trial balance. The auditor filters to manual entries posted in the last three days of the year to revenue and reserve accounts, finds 14, and inspects each. One $310,000 entry reversing a warranty reserve has no supporting analysis and is escalated.
Common mistakes
- Not testing the completeness of the entry population.
- Using only entries above a dollar threshold.
- Ignoring top-side entries made in consolidation or the financial reporting process.
FAQ
Is journal entry testing optional on a small audit?
No. It is required regardless of size, though the scope scales.
Sources
- AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit (journal entries and other adjustments; management override of controls)
- AICPA, AU-C Section 500, Audit Evidence (information produced by the entity; completeness of the population)
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