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CAQ Offers View on Testing Journal Entries to Spot Fraud

Tammy Whitehouse | December 12, 2008

The Center for Audit Quality is encouraging audit firms to follow a common format for testing journal entries and other journal adjustments to make it easier for auditors to spot potential fraud.

The CAQ developed a practice aid with the help of auditors from its various member firms for testing journal entries based on the requirements of AU Section 316, “Consideration of Fraud in a Financial Statement Audit.” That’s the standard audit firms are required to follow when auditing financial statements for public companies.

Studies have supported the notion that fraudulent financial reporting often involves bogus journal entries, especially post-closing adjustments and other types of nonstandard journal entries. AU Section 316 requires auditors to assume the risk of management override is...

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