Audit Focus Points a Lens on Journal Entries

Today, the PCAOB released a staff publication, “Audit Focus: Journal Entries.”

This latest edition in the PCAOB’s Audit Focus series highlights an important investor-protection component of the audit: the auditor’s responsibilities related to journal entries. A PCAOB auditing standard – AS 2401, Consideration of Fraud in a Financial Statement – recognizes that when financial statements are materially misstated due to fraud, manipulation of the financial reporting process using inappropriate or unauthorized journal entries is often involved.

PCAOB staff continues to identify a large number of deficiencies related to the auditor’s examination of journal entries. As a result, this publication provides the following additional resources:

• Reminders regarding understanding controls over journal entries, identifying and selecting journal entries to test, testing the completeness of the population of journal entries, and testing of journal entries.
• Common deficiencies that staff has observed, such as auditors not testing any of the journal entries that met their fraud criteria, auditors unduly limiting their procedures to certain journal entries meeting their fraud criteria, and auditors not testing the completeness of the population of journal entries.
• Good practices that the staff has observed, such as audit firms providing examples to engagement teams of characteristics of potentially fraudulent journal entries, training for all partners and firm personnel on the applicable PCAOB standard, and journal entry practice aids.

About Audit Focus

Audit Focus is a series of PCAOB publications that aims to provide easy-to-digest information to auditors, especially those who audit smaller public companies. Each edition of Audit Focus reiterates the applicable auditing standards and/or staff guidance, as well as offers reminders and good practices tailored to PCAOB-registered auditors of smaller public companies – all with an eye toward protecting investors and improving audit quality. Previous editions of Audit Focus can be found at the PCAOB’s Staff Publications page.

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About the PCAOB

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers registered with the Securities and Exchange Commission, including compliance reports filed pursuant to federal securities laws.