The management prepares the books of accounts, and in large-scale businesses, journals are divided into different parts for proper recording of transactions. For example, a purchase journal is used for recording credit purchases, while a cash journal or cash book is used for recording cash receipts and payments.
In small businesses, there may be a single cash journal for all cash transactions. However, in large businesses, separate journals are maintained, such as a cash receipts journal and a cash payments journal. Similarly, a purchase returns journal records goods returned to suppliers, while a sales journal records credit sales to customers.
Other specialized journals include the sales returns journal for goods returned by customers, the bills receivable journal for bills received from debtors, and the bills payable journal for recording acceptances given to creditors.
The general journal is used for recording opening entries, closing entries, adjusting entries, correcting entries, and transfer entries. It also records transactions that cannot be entered in other journals.
The audit of these journals is essential to ensure that financial statements present a true and fair view of business activities. Since vouchers form the basis of journal entries, these journals are also known as books of original entry. Proper accounting principles and methods must be followed, and all entries must be supported by valid vouchers and approved by management to ensure accuracy.
Why is the Audit of Journals Important?
Auditing journals is important because journal entries provide the starting point for preparing financial statements. If transactions are recorded incorrectly at the journal stage, the errors may continue throughout the accounting system and result in inaccurate financial reports.
By examining journal entries, auditors can verify that transactions are genuine, properly authorized, correctly classified, and supported by valid documentation. This process helps detect accounting errors, prevent fraud, strengthen internal controls, and improve the reliability of financial information.
Audit Procedures for Examining Journal Entries
This section is highly recommended because it directly relates to the audit process.
When auditing journals, auditors verify that each journal entry is supported by appropriate documentation, properly authorized, accurately classified, and correctly posted to the ledger. They review unusual or high-value journal entries, test adjusting entries made near the end of the accounting period, compare journal records with supporting vouchers, and investigate any transactions that appear inconsistent with normal business operations. These procedures help ensure the reliability of financial reporting.
Example of Auditing Journals
During the audit of a trading company, the auditor reviews the general journal and discovers a large year-end adjustment increasing sales revenue without supporting documentation. The auditor examines invoices, customer confirmations, and management approvals before concluding that the entry lacks sufficient evidence. The adjustment is reversed, preventing the financial statements from overstating revenue.
Types of Journals and Their Purpose
| Journal | Purpose |
|---|---|
| Sales Journal | Records credit sales transactions |
| Purchase Journal | Records credit purchases |
| Cash Receipts Journal | Records cash received |
| Cash Payments Journal | Records cash payments |
| General Journal | Records adjusting, correcting, and miscellaneous entries |
| Returns Journal | Records sales and purchase returns |
Audit of Cash Journals (Cash Book)
1. Cash Memos
The auditor can verify cash sales using carbon copies of cash memos. The total of these memos should match the entries in the cash receipts journal.
2. Sales Statements
Large-scale cash sales can be verified through sales statements. These should agree with the total recorded in the cash receipts journal.
3. Cash Collection Totals
The auditor should check total cash collections and ensure they match the amounts recorded in the cash receipts journal.
4. Numbering of Cash Memos
Each cash memo should have a proper serial number. The auditor must ensure that all vouchers are properly numbered.
5. Trade Discount
The auditor should verify that trade discounts allowed to customers are within approved limits.
6. Cancelled Memos
Cancelled cash memos must be properly authorized by management. The auditor should ensure that these are not misused.
Audit of Purchase Journals
1. Business Name on Invoice
The auditor should verify that all invoices are issued in the name of the business. Entries should only be made for valid business transactions.
2. Invoice Relates to Current Year
The auditor should check that invoices relate to the current accounting year. Entries from previous or future periods should be properly adjusted.
3. Routine Purchases
The auditor must ensure that purchases recorded relate to the normal business activities.
4. Approval of Invoice
Every invoice should be approved by an authorized officer. This confirms that the purchase is genuine.
5. Entry in Purchase Journal
All approved invoices must be recorded in the purchase journal. The amount should agree with supporting documents.
6. Comparison with Goods Inward Book
The auditor should compare invoices with the goods inward book to ensure that goods have actually been received.
7. No Duplicate Recording
Each invoice should be recorded only once. The auditor must ensure that there is no duplication.
8. Trade Discount Deducted
Trade discounts should be properly deducted, and entries should be made for the net amount.
9. No Omission of Invoices
All purchase invoices must be recorded. Any omission may lead to misleading financial results.
10. Capital Goods Not Treated as Purchases
Capital assets should not be recorded as routine purchases. They must be recorded separately as fixed assets.
11. Forward Purchase Contracts
The auditor should ensure that purchases under forward contracts are recorded only when goods are received. No profit should be recognized before that.
12. Personal Use of Goods
Goods used by owners or employees must be recorded separately and deducted from total purchases.
13. Checking Totals
The auditor should verify totals, calculations, and casting to ensure accuracy.
14. Posting to Purchase Account
The total of the purchase journal should be posted correctly to the purchase account, usually on a monthly basis.
15. Goods on Consignment
Goods sent on consignment should not be recorded as purchases. A separate account should be maintained.
16. Goods in Transit
Goods in transit should be properly recorded and disclosed separately.
17. Invoice Numbering
All invoices should be properly numbered and filed systematically for audit purposes.
Audit of Purchase Returns Journals
1. Internal Check System
The auditor should examine whether an effective internal control system exists for purchase returns.
2. Credit Notes
Credit notes received from suppliers should be verified and properly recorded.
3. Purchase Returns Book
All purchase returns must be recorded in the returns book. Missing entries may lead to inflated purchases.
4. Returns Outward Book
The auditor should compare entries in the returns outward book with credit notes.
5. Heavy Returns
Unusual or heavy returns at the beginning or end of the year should be examined carefully.
6. Fictitious Purchases
The auditor should check for fictitious purchases used to manipulate profits.
7. Checking Totals
Totals in the purchase returns book should be verified for accuracy.
8. Posting
The auditor should ensure that postings to the purchase returns account are correct and complete.
Audit of Sales Journals
1. Compare Invoice with Entry
The auditor should compare sales invoices with entries in the sales journal.
2. No Omission of Sales Invoices
All sales invoices must be recorded. Omission leads to incorrect financial results.
3. Trade Discount
Trade discounts should be properly deducted and recorded.
4. Goods on Sales or Return
Goods sent on approval should not be recorded as final sales until confirmed.
5. Sale of Fixed Assets
Sales of fixed assets should not be recorded as regular sales.
6. Goods Outward Book
Entries in the sales journal should be matched with the goods outward book.
7. Cancelled Invoices
Cancelled invoices should be verified and should not be included as sales.
8. Goods on Consignment
Goods sent on consignment should not be treated as actual sales.
9. Approval of Sales Invoices
All sales invoices should be approved by authorized personnel.
10. Forward Sales Contracts
Profit should not be recognized before goods are delivered.
11. Sales Tax
Sales tax collected should be properly recorded and paid to the government.
12. Hire Purchase Sales
Hire purchase transactions should be recorded separately.
13. No Fictitious Sales
The auditor should ensure that no fake sales are recorded.
14. Totals and Postings
Totals should be verified and properly posted to the ledger.
Audit of Sales Returns Journals
1. Internal Check System
The auditor should review the system controlling sales returns.
2. Returns Inward Book
Entries in the returns inward book should be checked for completeness.
3. Credit Notes Issued
Credit notes issued to customers must be verified.
4. Missing Credit Notes
Missing credit notes may indicate manipulation of stock or profits.
5. Heavy Returns
Unusual returns after year-end should be carefully examined.
6. Checking Totals
Totals should be verified using quantities and rates.
7. Posting
The auditor should confirm that postings to the sales returns account are accurate.
8. Unrecorded Goods in Stock
Goods included in stock but not recorded properly must be investigated.
Audit of Bills Receivable Journals
1. Bills Collected
The auditor should verify bills collected with cash book entries.
2. Bills Discounted
Discounted bills should be checked to identify loans obtained from banks.
3. Overdue Bills
Overdue bills should be examined as they may indicate doubtful recovery.
4. Debtors’ Accounts
Debtors’ accounts should be verified to confirm bills receivable balances.
5. Bills Not Due
Bills not yet due should be verified with records and schedules.
6. Totals and Postings
Totals should be checked and properly posted to the ledger.
7. Provision for Bad Debts
Provision for doubtful debts should be examined based on overdue bills.
Audit of Bills Payable Journals
1. Bills Paid
The auditor should verify payments made against bills payable.
2. Bills Unpaid
Unpaid bills should be checked at year-end for accurate reporting.
3. Cash Book Entries
Payments recorded in the cash book should match bills payable records.
4. Checking Totals
Totals of the journal should be verified and correctly posted.
5. Creditors’ Accounts
Creditors’ accounts should reflect accurate bills payable balances.
6. Posting
The auditor should confirm that postings to the ledger are accurate.
Audit of General Journals
1. Opening Entries
Opening entries should be verified with the previous year’s balance sheet.
2. Closing Entries
Closing entries should match figures in the trial balance.
3. Correcting Entries
The auditor should verify entries made to correct errors.
4. Adjusting Entries
Adjusting entries should properly allocate income and expenses.
5. Transfer Entries
Transfers between accounts should be properly supported.
6. Bad Debts
Bad debt entries should be approved and properly justified.
7. Bills Dishonoured
Dishonoured bills should be recorded correctly and verified.
8. Allowances
Allowances given to customers should be supported by proper documentation.
9. Depreciation
Depreciation should be consistently applied and correctly recorded.
10. Provision for Bad Debts
Adequate provision should be made based on realistic estimates.
11. Issue of Shares
Entries for share issues should be verified with supporting documents.
12. Issue of Debentures
Debenture issues should be supported by legal and management approvals.
13. Forfeiture of Shares
Forfeiture entries should be supported by proper resolutions.
14. Reissue of Forfeited Shares
Reissue should be verified with cash receipts and allotment records.
15. Assets of Vendors
Assets acquired should be verified with agreements.
16. Liabilities of Vendors
Liabilities taken over should match contractual agreements.
17. Consignment of Goods
Consignment transactions should be properly recorded and verified.
18. Castings
Totals in the journal should be checked for accuracy.
19. Postings
All journal entries should be correctly posted to ledger accounts.
Common Journal Entry Errors
| Error | Description |
|---|---|
| Incorrect Amount | Wrong monetary value recorded |
| Wrong Account | Transaction posted to an incorrect account |
| Omission | Transaction not recorded |
| Duplicate Entry | Same transaction recorded more than once |
| Incorrect Classification | Capital and revenue items incorrectly recorded |
| Unauthorized Entry | Entry recorded without proper approval |
Frequently Asked Questions (FAQs)
What is the audit of journals?
The audit of journals is the examination of books of original entry to verify the accuracy, completeness, and authenticity of recorded financial transactions.
Why do auditors examine journal entries?
Auditors examine journal entries to detect errors, identify fraudulent adjustments, verify supporting documentation, and ensure transactions are properly recorded.
What are the main types of journals?
The main types include the sales journal, purchase journal, cash receipts journal, cash payments journal, general journal, and returns journal.
What are common journal entry errors?
Common errors include incorrect amounts, wrong account postings, omissions, duplicate entries, and unauthorized journal entries.
How has technology improved journal auditing?
Technology enables auditors to analyze electronic journal entries using data analytics, AI, automated testing tools, and ERP systems to detect unusual transactions more efficiently.
Conclusion
The audit of journals is an essential part of the auditing process because journal entries form the foundation of the accounting system. By verifying journal entries, auditors ensure that financial transactions are properly authorized, accurately recorded, correctly classified, and supported by appropriate evidence before they are reflected in the financial statements.
As accounting systems increasingly become digital, journal auditing has evolved through the use of automated testing, data analytics, and artificial intelligence.
Nevertheless, the auditor’s professional judgment remains essential for identifying errors, detecting fraud, and maintaining the reliability and integrity of financial reporting.
