What is Journal Entry Testing? Why Is It Important?

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Journal entry testing:

Journal entry testing has to be done to recognize the risk of material misstatement in financial transactions due to fraud. The auditor has to test the nature, timing and extent of Journal entries whenever there is an instance of fraud.

Journal entry testing can be done by the auditors who audit the financial transactions of the company.

The auditor should be cautious in its audit of transactions and look at all suspicious nature transactions. The auditor should check all the transactions with the backup documents, and a higher authority should duly approve all the entries after the staff accountant records the transactions.

During the field work, the auditor generally tests the few transactions by following substantive procedures. He confirms the authenticity, validity, accuracy of the transactions. During this process, auditor may cross-check the journal entries with the supporting documents, vouchers.

Auditors can be done Journal entry testing to check the functionality of the company’s internal control system.

Need of Journal entry testing arises based on the compliance procedures adopted by the company in dealing with the conventional rules and principles of accounting and auditing.

Mostly journal entries are posted by the accountants, so this testing has to involve the reviews of management and other staff, including the internal auditors, about fraud risks.

Also, this testing can be done as per the requirements of government orders or by a court as part of examination into the company’s financial transactions due to financial misconduct, fraud, and negligence.

Importance of Journal Entry Testing:

To gather Audit Evidence: JE testing is carried out to gather sufficient and appropriate audit evidence to support the opinion expressed on the financial statements by the auditor.

To validate the data: The volume of data in companies is increasing multifarious. These transactions are recorded in various accounting software’s. Hence it helps to increase the authenticity, validity, and accuracy of the transactions.  The journal entry testing ensures that all the entries are done in line with standards set by the organization and following as per audit and accounting standards.

To detect fraud: This testing is done on sample basis and if any doubt arises on such entries, the auditor goes through broad audit procedures viz. compliance and substantive procedures to detect misstatements and frauds. The frauds when noticed during journal entries testing mean that auditors need to increase their audit sample and, in some cases, extend to the whole of the population.

To test the authenticity: This testing can be done to know whether the entries are authorized by the proper authority and the proper support of such entries is available.

To test the internal control system: Journal entry testing aids in identifying the existence, the efficiency of the internal control system. When the internal control system is operating correctly, the frauds cannot go unnoticed and it can be noticed by preparer and approver policy. Preparer and approver policy basically mean a dual way of preparation of any accounting records and authentication of the same by another accounting staff preferably of greater authority and qualification.

To identify incorrect financial assertions: Management assertions include completeness, cut-off, accuracy, occurrence, and classification. So, the recorded expense transactions should pass the above tests. When any gaps occur in relation to the above criteria, journal entry testing can trace those errors. The accountants may make mistakes as a result of ignorance or due to low knowledge of such aspects. Hence, the journal testing would help to remove such assertions.

To be used in forensic audits: When forensic audits are carried out to extract the frauds in a company, journal entry testing can be used as evidence by the investigating agencies in trial proceedings.

To protects the interests of stakeholders: This testing helps to detect the gaps in the internal control system and frauds in the accounting of the financial transactions. If frauds are noticed at an early stage, the reputation of the company still remains intact.

Want to know more about journal entry testing audit and planning to hire Offshore Audit Support Staff outsource your journal entry testing audit. Connect with our team call us on +1 929 254 6300 or email us on contact@crspconnect.com

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