It's no secret. No one really likes to test journal entries.
But there's no avoiding it. And not simply because journal entry testing (JET) is required by auditing standards (refer to our old friend, SAS 99). No - it's much more than that.
JET remains front-and-center for numerous reasons:
▶️ It is a high-priority focus area for regulators and audit inspections.
▶️ It can be inherently more complex than many auditors realize.
▶️ It addresses the risk of material misstatements due to fraud.
▶️ It is often completed incorrectly and rushed at the end of the audit.
We're going to tackle each of these reasons over the coming weeks. But let's start first with our 'friends' - the regulators.
The PCAOB has (yet again!) placed its focus on JET. And we honestly can't blame them - errors abound. The agency has found consistent issues in its inspection findings including, but not limited to:
▶️ The auditor not obtaining an understanding of the client's JE process and financial statement close.
▶️ The auditor not identifying and testing the correct entries in response to fraud and other critical audit risks.
▶️ The auditor not testing the completeness of the journal entry population.
The journal entry population is fundamentally the backbone of an audit - because it encompasses the full recorded transaction-level activity in the ledger that makes up the client's financial statement balances. It is the dough for the pizza, the foundation of the house. Without it - financial statements are made up of arbitrary (and un-testable) balances. Without understanding how the entries are recorded, addressing that all entries are included for testing, and then selecting those with the criteria for the highest risk - the auditor has missed the mark. Any other substantive testing could be fundamentally flawed and/or incomplete.
The good news? It doesn't have to be that difficult. Always start with the basics:
1️⃣ Understand how the client's financial statement close is completed & controlled and;
2️⃣ Obtain the full JE population.
We're here to help - our solution completes an automated JE roll-forward for you. So now you don't have to. With us you know that account balances are "testable" and complete by first assessing the completeness of the underlying client's data (i.e. JE population). Seamlessly and automatically.
The even better news?? The PCAOB is recommending our approach. Leverage software tools like Audit Sight to get your work done better. And faster.
We'll continue to tackle these other areas of JET and provide insights as our readers navigate this (cold!!) busy season. In the meantime - good luck - you got this 👊
