Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p24
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 24/41)
Character Range: 78448–81506

due to fraud may assist the auditor to identify specific classes of journal entries and other adjustments for testing.

           * Controls that have been implemented over journal entries and other adjustments – effective controls over the preparation and posting of journal entries and other adjustments may reduce the extent of substantive testing necessary, provided that the auditor has tested the operating effectiveness of the controls.

           * The entity's financial reporting process and the nature of evidence that can be obtained – for many entities routine processing of transactions involves a combination of manual and automated controls.  Similarly, the processing of journal entries and other adjustments may involve both manual and automated controls.  When information technology is used in the financial reporting process, journal entries and other adjustments may exist only in electronic form.

           * The characteristics of fraudulent journal entries or other adjustments – inappropriate journal entries or other adjustments often have unique identifying characteristics.  Such characteristics may include entries (a) made to unrelated, unusual, or seldom‑used accounts, (b) made by individuals who typically do not make journal entries, (c) recorded at the end of the period or as post‑closing entries that have little or no explanation or description, (d) made either before or during the preparation of the financial report that do not have account numbers, or (e) containing round numbers or consistent ending numbers.

           * The nature and complexity of the accounts – inappropriate journal entries or adjustments may be applied to accounts that (a) contain transactions that are complex or unusual in nature, (b) contain significant estimates and period‑end adjustments, (c) have been prone to misstatements in the past, (d) have not been reconciled on a timely basis or contain unreconciled differences, (e) contain inter‑company transactions, or (f) are otherwise associated with an identified risk of material misstatement due to fraud.  In audits of entities that have several locations or components, consideration is given to the need to select journal entries from multiple locations.

           * Journal entries or other adjustments processed outside the normal course of business – nonstandard journal entries may not be subject to the same nature and extent of controls as those journal entries used on a recurring basis to record transactions such as monthly sales, purchases and cash disbursements.

A45.         The auditor uses professional judgement in determining the nature, timing and extent of testing of journal entries and other adjustments.  However, because fraudulent journal entries and other adjustments are often made at the end of a reporting period, paragraph 33(a)(ii) requires the auditor to select the journal entries and other adjustments made at that time.  Further, because material misstatements in the financial report due to fraud can occur throughout the period and may