What is the Journal Entry Module?
The Journal Entry Module is a powerful tool designed to streamline and enhance the testing of journal entries during audits. Journal entry testing is required as part of SAS 99. With our module, auditors can identify potential anomalies, such as unexpected transactions in revenue and expenses, while ensuring data completeness and accuracy with the underlying general ledger.
How Does It Work?
The Journal Entry Module analyzes accounting data to identify irregularities and potential risks. By leveraging automation, it performs tests like completeness checks and unexpected revenue or expense detection. Before the data is processed, Audit Sight automatically identifies reversing journal entries and splits batch entries into smaller entries based on dollar amounts and account combinations, creating greater transparency in your client’s data.
How This Approach Aligns With AU-C 240
Understanding the Financial Reporting Process
AU-C 240 requires auditors to obtain an understanding of how journal entries and other adjustments are initiated, recorded, and posted.
How this is addressed:
Walkthroughs are performed during planning to understand the journal entry process.
Inquiries are made of individuals involved in the financial reporting process regarding inappropriate or unusual activity.
Responding to the Presumed Risk of Management Override
The standard presumes a risk of management override in every audit and requires auditors to design procedures responsive to that risk.
How this is addressed:
Revenue is treated as a significant risk.
Balance sheet testing addresses complex accounts and estimates.
Proof of Cash verifies routine, expected transactions.
Once normal activity is verified, the remaining population consists of unusual entries, primarily impacting the P&L.
Journal entry testing is therefore focused on entries that are outside the normal course of business.
Expense testing is driven by professional judgment, consistent with AU-C 240.
Testing Journal Entries Throughout the Period
AU-C 240 requires auditors to consider whether journal entries and adjustments should be tested throughout the period, not solely at period-end.
How this is addressed:
Proof of Cash verifies routine transactions throughout the year.
This reduces reliance on traditional attribute testing over large populations.
Auditors perform completeness procedures to gain comfort over the journal entry population.
Unusual P&L entries are selected for detailed testing.
If no unusual entries are identified, no further journal entry testing is required.
Period-End and Financial Statement Adjustments
AU-C 240 requires auditors to select and test journal entries and other adjustments made at the end of the reporting period.
How this is addressed:
By this stage, auditors have gained comfort over the general ledger.
Period-end and post-close adjustments are evaluated during financial statement preparation.
These adjustments are reviewed and addressed as part of the tie-out process.
Important Clarification on What AU-C 240 Does Not Require
AU-C 240 does not mandate:
Testing journal entries posted on weekends or outside business hours
Testing entries above a specific dollar threshold
Using predefined filters or analytics
Applying a one-size-fits-all testing methodology
Instead, the standard requires auditors to apply professional judgment to design procedures that appropriately address the risk of management override.
General Information
What Data Is Required for the Journal Entry Module?
If your clients connect their accounting system, you're all set—no additional data is needed!
If connecting isn’t an option, the following reports are required:
- General Ledger Report: Detailed transactional data from the accounting system.
- Comparative Trial Balance: Includes prior period balances for completeness checks.
Note: If the general ledger includes starting and ending balances, the comparative trial balance may not be necessary.
What Tests Are Offered in the Module?
The Journal Entry Module provides the following tests:
- Completeness Testing: Verifies that all entries from the general ledger are included and none are missing. This is a required test in every audit.
- Unusual Revenue: Detects revenue transactions with irregular patterns or account pairings.
- Unusual Expenses: Flags unusual expense transactions based on account behavior or unexpected offsets.
What Makes Journal Entry Testing at Audit Sight Unique?
Audit Sight’s Journal Entry Module stands out by combining robust automation with precision testing. Key benefits include:
- Advanced data healing and conversion services to accommodate any general ledger format.
- Sophisticated algorithms for detecting anomalies, split batch transactions, repeated journal combinations, and auto-identification of reversing entries.
- Audit Sight applies a rules-based engine to analyze transactional-level journal entry data from the general ledger.
- Establishes expected vs. unexpected offsets for revenue and expense accounts.
- Applies performance materiality to exclude immaterial offsets in aggregate.
- Performs completeness testing to confirm all journal entries are included and no gaps in the data.
How Is the Journal Entry Completeness Test Performed?
The completeness test reconciles transactional data in the general ledger with the balances in the comparative trial balance. It ensures that all journal entries recorded in the accounting system are captured and accounted for without omissions.
Specifically, for each account listed on the trial balance, an expectation is set:
- Balance Sheet Accounts: The change in the account per the trial balance should equal the activity in the general ledger.
- Income Statement Accounts: The balance for the current year should equal the activity in the general ledger.
What Are Journal Entry Combinations?
Journal entry combinations refer to journal entries that share the same account combinations in the same debit and credit amounts.
For example:
- Debit A/R, Credit Revenue = 1 combination
- Debit Revenue, Credit A/R = Another combination
Every journal entry in the population is assigned a combination ID, which is included in our standard reports.
What Are Journal Entry Splits?
Batch journal entries have plagued auditors for years! A batch entry is one journal entry that serves multiple purposes. Audit Sight has built an algorithm that splits a single journal entry into multiple, bite-sized entries. Based on these split journal entries, our anomaly detection works effectively.
Data Healing and Formatting
What General Ledger Formats Do You Support?
Audit Sight supports all general ledger formats as long as the data is provided in CSV, Excel, or text. We also have over 30 system guides with step-by-step instructions on how your clients can export the general ledger. Some PDF ledgers are also acceptable.
What Happens If the General Ledger Doesn't Have a Journal Entry or Transaction ID?
If transaction IDs are not available, the module uses other unique identifiers, such as dates, descriptions, and account combinations, to create journal entry and transaction IDs.
What Happens If the Journal Entry Is Recorded Over Multiple Days?
The module accommodates entries recorded over multiple days by breaking the entry apart into multiple distinct entries. If the entries do not balance, the Audit Sight Clearing Account is used to account for the timing difference.
What Happens If I Can Only Get a Created Date and Not the Posted Date?
The module uses the posted date for analysis since it represents when the transaction affects the ledger. If only the created date is available, the created date will be used unless it is outside of the accounting period (i.e., the period under audit). In such cases, the date will automatically update to either the first or last day of the accounting period, depending on whether the entry is dated before or after the period.
What Is the Audit Sight Clearing Account?
The clearing account is a placeholder account used by Audit Sight to track journal entries that have multiple posted dates. These placeholder accounts ensure monthly reporting is accurate while having zero impact on the total results.
What Is the Audit Sight Historical Variance?
The historical variance account represents an unbalanced beginning trial balance. Often, this is prior-year net income or current year-to-date income for the company.
Other Information
What If I Need Help Troubleshooting an Issue With JE Testing?
If you encounter any issues or need assistance, our support team is here to help. You can contact your account manager directly or reach us through our support portal or via email at support@auditsight.com.
