Auditing Special Purpose Frameworks: the General Ledger

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One of the most significant analytical procedures is reading, or scanning, the general ledger account activity. Whether it's done manually or with the assistance of data extraction software, this analytical procedure will produce significant amounts of substantive evidence.

Many auditors perform this procedure but fail to consider its effect on their audit strategy. After unusual transactions are investigated and any errors are corrected by proposed journal entries, the auditor has obtained significant, substantive evidence that relevant assertions for many account balances are reasonable. Acceptable evidence obtained from this risk assessment procedure, along with evidence from other risk assessment procedures, may enable the auditor to reduce the assessed level of risk of material misstatement from a high level and thereby reduce the extent of evidence desired from detailed tests of balances.

Special Purpose Frameworks
The Clarified Auditing Standards in the SAS, Terms of Engagement (AU-C 210), require an auditor to assess the appropriateness and reasonableness of an entity's applicable reporting framework. In other words, the auditor must determine that the framework results in a fair presentation of the entity's financial statements. Once relevant personnel are satisfied with the applicable reporting framework, an auditor's procedures will be designed to determine that the principles of the framework have been properly applied through the entity's financial reporting and internal control systems—that is, that management's representations and financial statement assertions are appropriate and reasonable.

For all reporting frameworks, particularly special purpose frameworks, an auditor must have a thorough knowledge of the applicable accounting principles. For the AICPA's Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), numerous resources are available on the AICPA site.  (More on this topic is also available in the archives of my blog.) Interested accountants will be able to register for my six one-hour, free webcasts on the FRF for SMEs to be presented by AccountingWeb.com later this year.

The Procedure
Reading or scanning a general ledger is usually performed by looking for (1) unusual amounts or postings; (2) transactions or general journal entries greater than the lower limit for individually significant items; (3) checks or disbursements to be used in support tests; (4) other unusual matters. The procedure may be performed by reading either a hard copy of the general ledger or an electronic copy on a monitor, or by using data extraction software such as IDEA, ACL or Monarch. Excel presentations of general ledger account activity also offer data manipulation capabilities.

The Documentation
Documentation of the procedure should include the parameters of the test, the exceptions the test revealed and the resolution of the exceptions in a spreadsheet, memo or other working paper.

Using a general ledger analysis worksheet can centralize the documentation of unusual matters that comes from reading the general ledger and performing analytical procedures and other auditing procedures. This worksheet can provide documentation of all unusual matters for control by the in-charge accountant, and can serve as a central source for review by the engagement leader. In addition, it can eliminate the time and work necessary to prepare numerous individual account analysis worksheets which otherwise must be indexed, cross-referenced, initialed and dated by the preparer and reviewed, initialed and dated by a reviewer.

A general ledger analysis worksheet may contain these and other column headings:

  1. The account number or location of the unusual item or potential misstatement.
  2. A transaction identifier, either a date and document number or description of the transaction identifying parties involved.
  3. A description of the nature of the transaction or unusual item or matter.
  4. The inquiry presented to management or accounting personnel.
  5. The name of the person to whom the inquiry is presented.
  6. The person's response to the inquiry.
  7. The auditor's action, which may include performing additional substantive procedures, determining that the unusual transaction or matter has been accounted for properly or explaning why a proposed journal entry is necessary.

The substantive evidence from a general ledger analysis worksheet, when combined with evidence from other risk assessment procedures, may provide sufficient evidence to assess risk of material misstatement at some level less than high and enable an auditor to modify the nature, extent and timing of detailed tests of balances, even on small audits. Other risk assessment procedures will ordinarily include:

  • Completing client acceptance and continuance documentation.
  • Documenting internal controls.
  • Performing systems walk-through procedures and/or tests of controls.
  • Completing a planning document.

Future articles will discuss other risk assessment procedures. For webcasts on accounting- and audit-related subjects, visit www.cpafirmsupport.com and see the list on the left.


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