Turning the AU-C 240 characteristics into filters
Testing journal entries is a required response to the risk of management override of controls, which exists on every audit. AU-C 240 describes the characteristics of inappropriate entries in its application material, and the usual way to apply them is to filter the ledger on each characteristic and then examine what remains. The journal entry testing guide covers the whole procedure: understanding the financial reporting process, proving the population complete, choosing criteria, and documenting the results.
What each filter tests
- Weekend posting date. Entries dated on a Saturday or Sunday in a business that does not work weekends. It uses the entry date in the data, which is not always the date the entry was keyed.
- Near or after period end. Entries in the last days of the period and anything dated after it, which covers entries recorded at period end and post-closing entries.
- Round amount. Amounts that are an exact multiple of a unit you choose, such as 1,000. A round amount alone is weak, but it is a recognized characteristic of inappropriate entries.
- Unusual or infrequent user. Entries by anyone who is not on the list of usual preparers, which reflects entries made by individuals who typically do not make journal entries.
- Missing or thin description. Entries with little or no explanation.
- Seldom-used account. Accounts with very few lines in the file. Use a full-year ledger for this filter, because a short extract makes every account look seldom used.
- Amount threshold and repeated amounts. Large items, for example at or above performance materiality, and identical amounts that recur.
Limits
No standard prescribes a set of filters, and no filter set finds every inappropriate entry. Entries made by a user with legitimate access, on a weekday, at a non-round amount and with a full description, will pass every test here. The tool does not test whether entries are supported or approved, which is the substantive work after selection. The population is whatever you paste, so the completeness work stays with you. See the AU-C 240 summary for the standard and the Benford's law analyzer for a distribution test on the same amounts.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What journal entries should an auditor test under AU-C 240?
AU-C 240 requires the auditor to test the appropriateness of journal entries and other adjustments, and to select entries made at the end of the reporting period and consider testing throughout the period. The criteria come from the auditor's understanding of the entity and the fraud risks identified. The standard describes typical characteristics of inappropriate entries, including unusual or seldom-used accounts, entries by people who do not normally post them, entries at period end or after closing with little explanation, and round or consistently ending numbers.
Does a flag mean the entry is wrong?
No. A weekend date, a round amount or a thin description is a reason to look, and most flagged entries will have an ordinary explanation. The test narrows a large population to entries worth tracing to support and approval. Record how each selection was resolved.
How do I get the data out of QuickBooks?
Run the Journal report for the full period, with the columns date, transaction number, name, memo or description, account and debit and credit, and export it to Excel. Put the columns in the order the tool expects, show debits as positive and credits as negative, and add the user who created each entry if the audit log has it. Whatever you export, show that it is the complete ledger before testing.
How do I show the journal entry population is complete?
Roll the opening trial balance forward by the net activity in the journal data, account by account, and compare it with the ending trial balance. The difference should be zero for every account. Also check that debits equal credits, that entry numbers are continuous where the system assigns them, and that the dates cover the whole period and any post-closing entries. The tool checks the balance of each entry for you.
Will the standard change?
Yes. SAS 151, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, supersedes AU-C 240 for audits of periods ending on or after December 15, 2028, with early implementation permitted. Until a firm adopts it, AU-C 240 is the standard for nonissuer audits.
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