All Posts by Charles Hall


About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.

AICPA Consulting Standards
May 25

AICPA Consulting Standards – The Swiss Army Knife

By Charles Hall | Accounting and Auditing

In this post, I tell you how to use the AICPA Consulting Standards (Statement on Standards for Consulting Services). I will also compare AUP engagements with consulting engagement options.

Are you ever asked to perform unusual engagements such as reporting on a city’s water losses, or reviewing a company’s internal controls for billing, or performing test counts of widgets.

When such client requests are made, you might wonder “what professional standards should I follow?” Often the answer is in the AICPA Consulting Standards.

AICPA Consulting Standards

AUP or a Consulting Engagement?

Regarding unusual engagements, I am sometimes asked, “Should this be an agreed-upon-procedures (AUP) engagement or a consulting engagement?” 

My answer is usually, “It depends.”

Allow me a moment to compare AUPs with Consulting engagements, and then I’ll explain how to make this decision.

Agreed Upon Procedures Engagement

First, consider the AUP option.

AUPs are mainly composed of the following:

  1. Procedures
  2. Findings

An example of a procedure and finding follows:

Procedure – Agreed all January 2020 disbursements greater than $20,000 to checks that cleared the bank statement; also compared the payee on each check to the payee per the check register.

Finding – All check payees agreed with the exception of check 2394 for $45,000. The payee for this check was I. Cheatum, and the check register reflected a payment to King’s Supply Company.

CPAs must be independent of the client to perform AUP engagements.

CPA Consulting Engagement

Second, we’ll consider the consulting engagement option.

A consulting engagement (sometimes called management advisory services) is less precise than an AUP and does not necessarily follow the procedures/findings format. There are no specific reporting standards for a consulting engagement, so a CPA can more easily design the engagement to meet various needs. The consulting standards are more flexible than the attestation standards. And this flexibility enables you to be more creative in designing the engagement.

Independence is not required when performing consulting engagements, though the CPA still needs to be objective. For example, the CPA needs to be free of conflicts of interest. 

A consulting report might address the following:

  1. Reading of minutes
  2. Interviews of individual employees
  3. Flowcharting of internal controls
  4. Summary of production statistics
  5. Narrative of business goals and enterprise risks

As you can tell, there are no procedures and findings (though you are not prohibited from doing so). Most CPAs usually perform AUPs when there are specific procedures.

The Best Option

So which is better? An AUP or a consulting engagement?

I’ll say it again: It depends. On what? Third party reliance.

Consider the following:

  1. Will there be external parties (e.g. creditors) placing reliance on the report?
  2. Is the purpose of the report to add credibility to the information (by having the CPA attest to procedures and findings)?

If the answer to either of these questions is yes, then consider the AUP option. Why? The Attestation Standards–the guidance for AUPs–are more defined and rigorous. And AUP procedures tend to be more specific than those in a consulting engagement.

If no third party reliance, then a consulting engagement may be the better option. Always ask, “Who will receive the report?” You need to know who will read and potentially place reliance upon the report. Then design the work product accordingly. 

Litigation Exposure

Are consulting engagements riskier than AUPs? Generally, yes—at least, in my opinion.

The safer option is to perform an AUP. In such engagements, you are asked by the client to perform particular procedures or you design procedures that the client approves (see SSAE 19). This specificity lowers the risk of potential litigation as it relates to your work product.

The flexibility of a consulting engagement, while helpful in designing creative deliverables, can be riskier because of the lack of specific client requirements. (This is why the consulting engagement letter is so important. You can clearly define what the client wants done.)

Now, let me provide you with an overview of the Consulting Standards. 

AICPA Consulting Standards 

You might call the AICPA Consulting Standards the CPA’s Swiss army knife. Why? Because of the diversity of services you can perform.

What services fall under these standards?

The consulting standards specifically address six areas:

  1. Consultations – e.g., reviewing a business plan
  2. Advisory services – e.g., assistance with strategic planning
  3. Implementation services – e.g., assistance with a merger
  4. Transaction services – e.g., litigation services
  5. Staff and other support services – e.g., controllership services
  6. Product services – e.g., providing packaged training services

CPAs often provide consulting services such as the following:

  • Consultations with regard to complex transactions
  • Fraud investigation services
  • Internal control services
  • Bankruptcy services
  • Divorce settlement services
  • Controllership services
  • Business plan preparation
  • Cash management
  • Software selection
  • Business disposition planning

Now, let’s review the characteristics of consulting engagements.

Characteristics of a Consulting Engagement

The characteristics of a consulting engagement include the following:

  • Generally nonrecurring
  • Requires a CPA with specialized knowledge and skills
  • More interaction with client
  • Generally performed for the client (usually, no third party sees the information)

But, what are the workpaper requirements for a consulting engagement?

Consulting Workpaper Requirements

Consulting workpaper requirements are minimal. Nevertheless, documentation is always wise.

The understanding with the client can be oral or in writing (I recommend the latter).

The consulting standards do not require the CPA to prepare workpapers, but you should do so anyway. The workpapers are the link between your work and your report. Also, the general standards of the profession, contained in the AICPA Code of Professional Conduct, apply to all services performed by members. The general standards state:

Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

By now, you’re probably thinking the Consulting Standards sound easy, I’ll bet the reporting requirements are challenging. Not so, my friend.

Consulting Reports

A report is not required, but if one is provided, the client and CPA determine the content and format. Again, define the particulars in an engagement letter. How’s that for flexibility? 

No Opinion or Attestation Report

For consulting engagements, the CPA does not issue an opinion or any other attestation report.

Subject to Peer Review?

Are deliverables created under the Consulting Standards subject to peer review? No.

Where Can I Find the AICPA Consulting Standards?

Here are the AICPA Consulting Standards. They are only a few pages in length. 

AICPA Consulting Standards Summary

The Consulting Standards provide us with a breath of options, enabling you and I to craft services and reports in the manner desired by our clients. This is one Swiss army knife that I will continue to use. 

Here is a table comparing consulting and AUP services. If needed, the table below scrolls horizontally.

Consulting vs. AUP

Question Consulting AUP
Procedure and finding format?Usually no, but permissible to do soYes
Engagement letter required?No, but best to obtain a signed agreement with specifications of what is to be done and the type of report to be issued (if any)Yes
Work papers required?
Must obtain obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performedYes
Report required?No; report can be provided but no specific wording is requiredYes; specific wording is required
Opinion provided?NoNo
Offers a high level of flexibility in terms of structuring the engagement?The approach and report (if one is issued) is very flexibleAccountants can design the AUP procedures but the client has to approve them
An attest service?NoYes
Provides assurance to third parties?No, report can be provided to third parties but it is not an assurance reportYes
Subject to peer review?NoYes
When a report is to be provided to third parties, consider using the AUP approach since it is an assurance service.
Compilation Engagements
May 22

AR-C 80: Definitive Guide to Compilations

By Charles Hall | Preparation, Compilation & Review

Knowing how to perform compilation engagements is important for CPAs. Below I provide an overview of the salient points of AR-C 80Compilation Engagements. I also provide a sample accountant’s compilation report.

AR-C 80

Compilation Guidance

The guidance for compilations is located in AR-C 80, Compilation Engagements.

Applicability of AR-C 80

The accountant should perform a compilation engagement when he is engaged to do so.

A compilation engagement letter should be prepared and signed by the accountant or the accountant’s firm and management or those charged with governance. An engagement letter to only prepare financial statements is not a trigger for the performance of a compilation engagement.

Previously (in the SSARS 19 days), the preparation and submission of financial statements to a client triggered the performance of a compilation engagement. Now, compilation engagement guidance is applicable only when the accountant is engaged to (requested to) perform a compilation.


The objectives of the accountant in a compilation engagement are to:

  • Assist management in the presentation of financial statements
  • Report on the financial statements in accordance with the compilation engagement section of the SSARSs


In a compilation engagement, a compilation report is always required. A compilation engagement is an attest, nonassurance service. Nonassurance means the accountant is not required to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements.

The compilation report looks distinctly different from audit or review reports (which include paragraph titles such as Management Responsibility and Accountant’s Responsibility). The standard compilation report is one paragraph with no paragraph titles. (See the Sample Compilation Report section below.)

Financial Statements

The accountant prepares financial statements as directed by management or those charged with governance. The financials should be prepared using an acceptable reporting framework including any of the following:

  • Cash basis
  • Tax basis
  • Regulatory basis
  • Contractual basis
  • Other basis (as long as the basis uses reasonable, logical criteria that are applied to all material items)
  • Generally accepted accounting principles (GAAP)

All of the above bases of accounting, with the exception of GAAP, are referred to as special purpose frameworks. The description of special purpose frameworks may be included in:

  • The financial statement titles
  • The notes to the financial statements, or
  • Otherwise on the face of the financial statements

Management specifies the financial statements to be prepared. The most common financial statements created include:

  • Balance sheet
  • Income statement
  • Cash flow statement

The accountant can, if directed by management, create and issue just one financial statement (e.g., income statement).

Some bases of accounting (e.g., tax-basis) do not require the issuance of a cash flow statement.

The financial statements can be for an annual period or for a shorter or longer period. So, financial statements can be for a fiscal year, quarterly, or monthly, for example.

Should a reference to the compilation report be included at the bottom of each financial statement page (including supplementary information)? While not required, it is acceptable to add a reference such as:

  • See Accountant’s Report
  • See Accountant’s Compilation Report, or
  • See Independent Accountant’s Compilation Report

Why add such references? The accountant’s report may become detached from the financial statements. The reference notifies the reader of the financial statement that a compilation report exists.

Check out my new book on Amazon: Preparation of Financial Statements and Compilation Engagements.

Compilation Documentation Requirements

The accountant should prepare and retain the following documentation:

  • The engagement letter
  • The financial statements, and
  • The accountant’s compilation report

The accountant should document any significant consultations or judgments.

If the accountant departs from a presumptively mandatory requirement, it is necessary to document the justification for the departure and how the alternative procedures performed are sufficient to achieve the intent of the requirement. (The SSARSs use the word should to indicate a presumptively mandatory requirement.)

Engagement Letter

compilation engagements

While it is possible for the accountant to perform only a compilation and not prepare the financial statements, most compilation engagement letters will state that the following will be performed by the accountant:

  1. Preparation of the financial statements (a nonattest service)
  2. A compilation service (an attest service)

Since a nonattest service and an attest service are being provided, the accountant will add language to the engagement letter describing the client’s responsibility for the nonattest service.

AICPA independence standards require the accountant to consider whether he is independent when he performs an attest service (e.g., compilation) and a nonattest service (e.g., preparation of financial statements) for the same client. If management does not possess the requisite skill, knowledge, and experience to oversee the preparation of the financial statements and accept responsibility, the accountant may not be independent.

Compilation Procedures

The accountant should:

  • Read the financial statements in light of the accountant’s understanding of the selected financial reporting framework and the significant accounting policies adopted by management
  • Consider whether the financial statements appear appropriate in form and free from obvious material misstatements

Here are examples of inappropriate form and obvious material misstatements:

  • An equity account is shown in the liability section of the balance sheet
  • The balance sheet does not reflect the accrual of receivables though the financial statements were supposedly prepared in accordance with GAAP
  • Total assets as reflected on the balance sheet do not equal the individual items on the statement (an addition error)
  • The financial statements omit a material debt disclosure, though the statements were prepared in accordance with GAAP and substantially all disclosures were to be included

Given that the focus of a compilation is the reading of the financial statements to determine if they are appropriate in form and free from obvious material misstatements, what are some procedures that are not required?

  • Confirmation of cash
  • Testing of subsequent receipts
  • Analytical comparisons with the prior year
  • Substantive analytics
  • Confirmation of debt
  • A search for unrecorded liabilities

Is it permissible to perform audit or review procedures while conducting a compilation engagement? While not required to do so, such procedures are allowed. If you perform audit or review procedures, be careful not to imply to the client or other parties that you are performing a service other than a compilation.

The accountant is not required to perform procedures to ensure the completeness of the client-supplied information, but what if the client provides information that is obviously not complete or contains material errors? If management-supplied information is not complete or appears incorrect, the accountant should request corrections.

Also, the accountant should request corrections if:

  • The financial statements do not appropriately refer to the applicable financial reporting framework
  • Revisions are necessary to comply with the selected reporting framework, or
  • The financial statements are otherwise misleading

If requested or corrected information is not received or if the financial statements are not corrected, the accountant should consider withdrawing from the engagement and may wish to consult with legal counsel.

If the accountant decides not to withdraw and a material departure from the reporting framework exists, he should modify the compilation report to disclose the departure. See the example below in Reporting Known Departures from the Applicable Financial Reporting Framework.

Sample Compilation Report

The following is a sample compilation report:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. I (we) do not express an opinion, a conclusion, nor provide any assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate] [Accountant’s city and state] [Report Date]

Minimum Compilation Report Elements

The compilation report should:

  • Include a statement that management (owners) is (are) responsible for the financial statements
  • Identify the financial statements
  • Identify the entity
  • Specify the date or period covered
  • Include a statement that the compilation was performed in accordance with SSARS
  • Include a statement that the accountant did not audit or review the financial statements nor was the accountant required to perform any procedures to verify the accuracy or completeness of the information provided by management, and does not express an opinion, a conclusion, nor provide any assurance on the financial statements
  • Include the signature of the accountant or the accountant’s firm
  • Include the city and state where the accountant practices and
  • Include the date of the report (which should be the date the accountant completes the compilation procedures)

You may have noticed that a compilation title and salutation are not required. Can they be included? While AR-C 80 does not require a report title or a salutation, it is permissible to add them. Here’s a sample report title and salutation:

                        Accountant’s Compilation Report

To the Board of Directors and Management

XYZ Company

The signature on the compilation report can be manual, printed, or digital.

If the accountant’s letterhead includes the city and state where the accountant practices, then the city and state can be omitted from the bottom of the compilation report.

The date of the compilation report should be the date the accountant completes the compilation procedures.

Omission of Substantially All Disclosures

Can the accountant omit all disclosures (notes to the financial statements) in a compilation engagement? Yes. Alternatively, the accountant can provide selected disclosures or if needed, full disclosure. In short, the accountant can do any of the following:

The compilation report should disclose the omission of substantially all disclosures with language such as the following:

Management has elected to omit substantially all the disclosures ordinarily included in financial statements prepared in accordance with the tax-basis of accounting. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the company’s assets, liabilities, equity, revenue, and expenses. Accordingly, the financial statements are not designed for those who are not informed about such matters.

The engagement letter should describe the level of disclosure to be included in the financial statements.

Reporting Known Departures from Reporting Framework

Accountant’s compilation report

If the accountant becomes aware of a material departure from the basis of accounting that is not corrected, he should modify the compilation report to disclose the departure. For example:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed compilation engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. I (we) do not express an opinion, a conclusion, nor provide any assurance on these financial statements.

Accounting principles generally accepted in the United States of America require that material impairments in the fair value of owned property be recognized in the balance sheet. Management has informed us that a recent appraisal of its Fumbleton office reflected a fair value of $2.25 million less than carrying value. If accounting principles generally accepted in the United States of America were followed, the buildings and equity accounts would have decreased by $2.25 million.

[Signature of accounting firm or accountant, as appropriate] [Accountant’s city and state] [Report Date]

The effects of the departure, if known, should be disclosed in a separate paragraph of the compilation report. If the effects of the departure are not known and cannot be readily determined with the accountant’s procedures, the compilation report should include a statement that the determination has not been made by management.

The accountant may not issue a compilation report that states the financial statements (as a whole) are not presented in accordance with the applicable financial reporting framework. Doing so is considered, in effect, an adverse opinion. An adverse opinion can only be expressed in an audit engagement.

Reporting When There are Other Accountants

Other accountants might perform a compilation of a subsidiary. What is your reporting responsibility if you are performing a compilation of a consolidated entity that includes the subsidiary? The compilation report for the consolidated entity is not altered to make a reference to the other accountant. AR-C 80 is silent in regard to whether you are required to obtain a copy of the other accountant’s compilation report.

Going Concern in Compilations

If the accountant becomes aware of uncertainties with regard to an entity’s ability to continue as a going concern, he may suggest additional disclosures. Without the additional going concern disclosures, it is possible that the financial statements could be misleading.

If substantially all disclosures are omitted from the financial statements, disclosure of the going concern uncertainty is not required. Even so, the accountant should be careful not to issue financial statements that are misleading. If needed, ask management to include the requisite going concern disclosures.

If the necessary going concern disclosures are not added and the financial statements are misleading, the accountant should consider withdrawing from the engagement.

Is it permissible to include an emphasis-of-a-matter paragraph in a compilation report? Yes.

The following is an example of a going concern uncertainty paragraph that could be added to a compilation report:

Going Concern

As discussed in Note H, certain conditions indicate that the Company may be unable to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.


Where should an accountant’s lack of independence be noted in the compilation report? The accountant can disclose his lack of independence in the last paragraph of the compilation report with wording such as:

I am (We are) not independent with respect to XYZ Company.

The reason for the lack of independence need not be included, but if the accountant includes one reason for a lack of independence, then all such reasons should be included.

If independence is impaired and the accountant desires to provide the reason independence is impaired, the compilation report may include wording such as:

We are not independent with respect to XYZ Company as of and for the year ended June 30, 2019, because an engagement team member made management decisions on behalf of XYZ Company.

Compilation Report – Special Purpose Frameworks

compilation engagements

The compilation report should highlight the use of a special purpose framework when one is used.

If a special purpose framework is used and disclosures are included, then the compilation report should include a separate paragraph such as the following:

We draw attention to Note X in the financial statements, which describes the basis of accounting. The financial statements are prepared in accordance with the tax-basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

If disclosures are omitted, the separate paragraph could read as follows:

The financial statements are prepared in accordance with the tax-basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

Unless the entity elects to omit substantially all disclosures, the compilation report should be modified to describe departures when the financial statements do not contain:

  1. A description of the special purpose framework
  2. A summary of significant accounting policies
  3. A description of how the special purpose framework differs from GAAP
  4. Disclosures similar to those of GAAP

The description of the special purpose framework can be included in the titles of the financial statements or the notes. If the financial statements omit notes, the financial statement titles should include the special purpose framework; for example, Statement of Revenues and Expenses—Tax Basis.

If substantially all disclosures are omitted, then 2, 3, and 4 above are not necessary. However, the accountant should include a separate paragraph in the accountant’s compilation report stating that management elected to omit substantially all disclosures. (See the preceding section titled Omission of Substantially All Disclosures.)

Click here for more information about which special purpose framework you should use.

Other Historical Information

In addition to historical financial statements, AR-C 80 may be applied to the following:

  • Specified elements, accounts, or items of a financial statement, including schedules of:
    • Rents
    • Royalties
    • Profit participation, or
    • Income tax provisions
  • Supplementary information
  • Required supplementary information
  • Pro forma financial information

Prospective Information

AR-C 80 can be applied to prospective information.

Prospective financial information is defined as any financial information about the future.

Prospective financial information can be presented as:

  • A complete set of financial statements, or
  • One or more elements, items, or accounts

If you prepare prospective financial information, the summary of significant assumptions must be included Why? It is considered essential to the user’s understanding of such information.

If you prepare a financial projection, you should not exclude:

  • The identification of hypothetical assumptions, or
  • The description of the limitations on the usefulness of the presentation

The compilation report should include statements that:

  • The forecasted or projected results may not be achieved and
  • The accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report

AR-C 80 references the AICPA Guide Prospective Financial Information as suitable criteria for the preparation and presentation of prospective financial information.

Prescribed Forms

Is it permissible to perform a compilation engagement with regard to prescribed forms?

Yes. There is nothing in the SSARSs that prohibits the accountant from performing a compilation engagement with regard to prescribed forms (e.g., bank personal financial statement).

When a bank, credit union, regulatory or governmental agency, or other similar entity designs a prescribed form to meet its needs, there is a presumption that the required information is sufficient. What should be done if the prescribed form conflicts with the applicable basis of accounting? For example, what if the prescribed form requires all numbers to be in compliance with GAAP with the exception of receivables? Follow the form, and no departure from the applicable reporting framework exists. In effect, the form and its related directions are treated as though they are the applicable reporting framework. The accountant must report departures from the prescribed form and related instructions as a departure from the applicable financial reporting framework. Include any significant departures in the compilation report. (See the preceding section titled Reporting Known Departures from the Applicable Financial Reporting Framework.)

If the prescribed form includes a compilation report not in conformity with AR-C 80, the report should not be signed. Append an appropriate compilation report to the prescribed form.

Compilation Engagements Conclusion

There you have it. Now you know how to perform a compilation engagement.

The main things to remember are (1) you need a signed engagement letter, (2) always include a compilation report with the financial statements, and (3) read the financial statements to determine if they are appropriate.

If you desire to issue financial statements without a compilation report, read my article about the use of AR-C 70, The Definitive Guide to Preparations.

If you desire to issue financial statements in conjunction with a review engagement, read my article about the use of AR-C 90, Review Engagements.

Compilation Book

Check out my new SSARS book on Amazon or read about it here: New SSARS Book.

Differences in Preparation and Compilation Engagements

How do preparation engagements compare to compilations? Here’s a video that explains the differences.

YouTube player


And here’s a table highlighting differences in preparations and compilations. If needed, the table scrolls horizontally.

QuestionPreparation ServicesCompilation Services
When does the standard apply?When engaged to prepareWhen engaged to compile
Is an engagement letter required?YesYes
Is the accountant required to determine if he or she is independent of the client?NoYes
If the accountant is not independent, is that fact required to be disclosed?N/AYes
Does the engagement require a report?No - legend required that no assurance is providedYes
May the financial statements go to users outside of management?YesYes
May the financial statements omit notes?YesYes

accounting journal entries
May 06

Eight Types of Accounting Journal Entries

By Charles Hall | Accounting

In this article, I provide eight different types of accounting journal entries.

Understanding journal entries is critical to understanding accounting. So, read on.

Journal entry types include the following:

  1. Recurring
  2. Nonstandard
  3. Accruals and deferrals
  4. Adjusting entries
  5. Reclassifying entries
  6. Closing entries
  7. Consolidating entries
  8. Proposed audit adjustments

These journal entry types are not mutually exclusive. For example, an accrual entry can be recurring or nonstandard.

accounting journal entries

1. Recurring Journal Entries

Recurring journal entries are those that are repetitive. Often, these entries are automated with the company’s accounting software.

For instance, if a company will pay $5,000 per month for rent for the next three years, the accountants might set up an automated entry. That way, the company doesn’t have to make this monthly entry manually. Most accounting software packages provide for automated entries. Set it up once and specify the number of periods to make the entry. Then, the software will record an entry such as the following until the rental agreement terminates.






Accounts payable


To accrue the monthly rental expense due to Clockworks, Inc.


Another example of a recurring journal entry is depreciation. If the company purchases a corporate office for $5,000,000 and plans to depreciate it straight-line over 50 years, it can create an automated entry of $8,333 each month.




Depreciation expense


Accumulated depreciation – buildings


To record the monthly building depreciation for the corporate office

So, what are nonstandard journal entries?

2. Nonstandard Journal Entries

Nonstandard journal entries are those that are not repetitive. For example, they might be one-time entries or occur twice a year. These entries are usually manually inputted into the company’s accounting software. Examples of nonstandard entries include the following:

  • Impairment charges
  • Writing off bad debts
  • Stock buy-backs
  • Legal settlements
  • Debt restructuring

Nonstandard journal entries, such as those for mergers with or acquisitions of other companies, can be complex.

Next, I explain what accruals and deferrals are.

3. Accruals and Deferrals

When a company uses the accrual basis of accounting, it accrues and defers revenues and expenses based on when it earns revenues and incurs expenses. The company’s activity—goods or services provided or purchased—drives the accounting.

For example, if you are an attorney, you can recognize revenue as you provide services on a particular day, even though you may not receive the related payment until weeks later. And if you buy office supplies on the first day of a month, you accrue (record) the expense on that day, though you make the related payment thirty-five days later. Accruals are the recognition of revenues and expenses before cash is received or paid.

In contrast, a company using the cash basis of accounting recognizes revenues and expenses as cash is received and paid: the receipt and payment of cash drive the accounting. Companies using the cash basis of accounting do not accrue or defer revenues and expenses.


Suppose a company receives an invoice from a CPA for audit services totaling $25,000, but it plans to pay the expense at the end of the month. The company can accrue the expense upon receiving the invoice.




Professional services


Accounts payable


To accrue audit expenses for the September 12, 20XX Crofts and Seals invoice #1015

Cash Payment

The company would recognize the cash payment when paid.




Accounts payable


Operating checking


To record the October 2, 20XX payment of the Crofts and Seals invoice #1015


Deferrals postpone the recognition of revenues and expenses until a period after the one in which cash is received or paid.

Suppose a repair company receives $10,000 for services on April 2, 20XX, but performs the work on May 10, 20XX. The company can defer revenue recognition until it provides the repair work. Deferred revenue is a liability account.






Deferred revenue


To defer revenue recognition for the April 2, 20XX receipt from Jerry’s, Inc., repair work is to be done in May.


The company recognizes the earned revenue when it provides that service on May 10, 20XX.




Deferred revenue


Repair services


To recognize income earned on May 10, 20XX, repair ticket 1452

Another type of journal entry is an adjusting entry. 

4. Adjusting Entries

Adjusting entries are often made at period-end (e.g., month-end) to correct the company’s financial statements, though they can be made during the period.

For example, if company employees work one week but are not paid by month-end, an accrual can be made to recognize the salary expense incurred. So, the company makes an adjusting entry (in the form of an accrual) at the end of the month.

While adjusting entry is often used synonymously with the word accrual, they are not the same. Adjusting entry is broader than accrual and encompasses all entries made to record a company’s activities. Accruals record revenues and expenses. On the other hand, adjusting entries include non-accrual activities such as depreciation, allocations, and bad debts—and accruals of revenues and expenses.

Here are examples of adjusting entries:

  • Accrued expenses
  • Accrued revenues
  • Prepaid expenses
  • Unearned revenues
  • Depreciation
  • Amortization
  • Bad debts

Adjusting entries also encompass prior period adjustments. A prior period adjustment is an entry made to correct a prior period error.

Suppose a company uses GAAP and does not record $45,000 in payables at the end of December 31, 20X3, and records that amount as an expense in January 20X4. Now, the expense appears in the wrong year (assuming the company has a calendar year-end), resulting in an understatement of 20X3 expenses and an overstatement of 20X4 expenses. On July 2, 20X4, the company discovers the error. So, a prior period adjustment is necessary and is recorded in December 20X4.

Now, let’s look at reclassifying entries.

5. Reclassifying Entries

A reclassifying entry is one made to move amounts between different accounts.

For example, if a company has recorded an expense as Miscellaneous Expense that should be Office Expense, a reclassifying entry is made to debit Office Expense and credit Miscellaneous Expense. Doing so moves the expense from Miscellaneous Expense to Office Expense. This entry has no impact on net income. It only reclassifies the expense to the correct account.

Here is the reclassification entry:




Office Expense


Miscellaneous Expense


To reclassify office expenses to the appropriate account for the Skagg’s invoice #41230


Classification of amounts can be critical to accurate reporting. For instance, what if a company defaults on the debt covenants of a $9 million loan? According to GAAP, the debt usually becomes short-term. Why? The loan is callable by the lender, meaning the creditor can demand immediate payment. So, a reclassifying entry is made to move the debt from long-term to short-term. This reclassification entry has no impact on equity, only on the presentation on the balance sheet.




Debt – long-term


Debt – short-term


To reclassify the Herald Bank note payable to short-term after default of debt covenants

Next, we explore closing entries. 

6. Closing Entries

Closing entries are journal entries made at the end of an accounting period to transfer balances from temporary accounts (e.g., revenue accounts) to permanent accounts (e.g., equity accounts).

A temporary account is an account that is closed at the end of every accounting period, meaning its balance is $0 on the first day of the next accounting period (usually a year). Temporary accounts include all income statement accounts, such as revenues and expenses.

Permanent accounts are those that are not closed out at period end. Their balances do not reset to $0 on the last day of the period. Permanent accounts include asset, liability, and equity accounts—balance sheet accounts.

Closing Out Revenues

For example, sales revenue is $2,010,099 on December 31, 20X3 (for a calendar year entity), but $0 on January 1, 20X4. The revenue is closed to retained earnings (an equity account) at year-end. Revenue accounts start with a $0 balance at the beginning of the new accounting year. 






Retained earnings


To close out the sales revenue amount at year-end


This entry increases retained earnings, which is a permanent account.

Closing Out Expenses

In another example, the salary expense account is $687,098 on December 31, 20X3 (for a calendar year entity), but $0 on January 1, 20X4. At year-end, the expense is closed to retained earnings (an equity account). Expense accounts start with a $0 balance at the beginning of the new accounting year.




Retained earnings




To close out the salary expense amount at year-end


This entry decreases retained earnings, which is a permanent account.

Closing entries are normally made automatically by a company’s accounting software.

7. Consolidating Entries

Companies make consolidating entries when two or more entities are combined. Consolidating entries eliminate intercompany transactions.  

In consolidation (or combined) financial statements, the presentation should appear as though the two entities are one. So, revenues recognized in selling from company A to company B are eliminated (when consolidating the two entities). Company B’s expense (for these transactions) is also removed from the consolidated financial statements.

Additionally, companies eliminate intercompany receivables and payables. That is, companies normally offset intercompany receivables and payables against each other.

Consolidating entries are often made in a spreadsheet (e.g., Excel) with the two entities’ account balances side by side and then additional columns to record the eliminating entries. The final columns include the adjusted balances for the financial statement balances.

Some accounting software packages make the consolidating entries for you, and no spreadsheet is necessary.

Finally, we look at proposed audit adjustments. 

8. Proposed Audit Adjustments

External auditors sometimes propose journal entries to adjust a company’s accounts. Auditors create the proposed audit adjustments to correct misstatements. These are provided to the company, and it decides whether it will record the entries; this is why they are called “proposed adjustments.” If the company does not record material proposed audit adjustments, the auditor may need to modify their audit opinion. Companies seldom desire a modified audit opinion.

Types of Journal Entries – Summary

There, you have eight types of accounting journal entries. Now, it will be easier to speak the language of accounting. 

If you’re an auditor, see my article about testing journal entries

May 04

Information Technology Controls and Risk Assessment

By Charles Hall | Risk Assessment

Information technology controls (IT controls) are getting increased attention with the implementation of SAS 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatements.

IT Controls Video

In the following video, I provide an overview of what you need to do regarding IT controls including general and information processing controls. 

YouTube player


Consider general controls and transaction processing controls as you plan your financial statement audits. 

General Controls

Examples of general controls include:

  • Passwords
  • Intrusion detection
  • Backup and recovery
  • Logical access to software 
  • Change control
  • Physical protection of IT systems

Transaction Processing Controls

An example of a transaction processing control is a software requirement that information in purchase orders, invoices, and shipping documents agree (known as a three-way match) before processing the payment. 

IT controls

Design and Implementation 

Review the design and implementation of these IT controls, and do so in the planning phase of your audit. Weak IT controls may require you to perform additional audit procedures to lower detection risk. Why? Because weak general controls or transaction processing controls might allow material misstatements to occur without detection. 

Payment fraud tests
Apr 24

Payment Fraud Tests: Five Powerful Ideas

By Charles Hall | Auditing , Fraud

Are you looking for payment fraud tests? Ways to detect fraudulent payments and create unpredictable tests. Here’s your article.

You are leading the audit team discussion concerning disbursements, and a staff member asks, “Why don’t we ever perform fraud tests? It seems like we never introduce elements of unpredictability.”

You respond by saying, “Yes, I know the audit standards require unpredictable tests, but I’m not sure what else to do. Any fresh ideas?”

The staff member sheepishly responds, “I’m not sure.”

And you are thinking, “What can we do?”

Payment fraud tests

Five Payment Fraud Tests

Here are five payment fraud tests that you can perform in most any audit.

1. Test for duplicate payments

Why test for duplicate payments?

Theft may occur as the accounts payable clerk generates the same check twice, stealing and converting the second check to cash. The second check may be created in a separate check batch, a week or two later. This threat increases if (1) checks are signed electronically or (2) the check-signer does not normally examine supporting documentation and the payee name.

How can you test for duplicate payments?

Obtain a download of the full check register in Excel. Sort by dollar amount and vendor name. Then investigate same-dollar payments with same-vendor names above a certain threshold (e.g., $25,000).

2. Review the accounts payable vendor file for similar names

Why test for similar vendor names?

Fictitious vendor names may mimic real vendor names (e.g., ABC Company is the real vendor name while the fictitious name is ABC Co.). Additionally, the home address of the accounts payable clerk is assigned to the fake vendor (alternatively, P.O. boxes might be used).

The check-signer will probably not recognize the payee name as fictitious.

How can you test for similar vendor names?

Obtain a download of all vendor names in Excel. Sort by name and visually compare any vendors with similar names. Investigate any near-matches.

3. Check for fictitious vendors

Why test for fictitious vendors?

The accounts payable clerk may add a fictitious vendor. What address will be entered for the fictitious vendor? You guessed it: the payable clerk’s home address (or P.O. Box).

Pay particular attention to new vendors that provide services (e.g., consulting) rather than physical products (e.g., inventory). Physical products leave audit trails; services, less so.

How can you test for fictitious vendors?

Obtain a download in Excel of new vendors and their addresses for a period of time (e.g., month or quarter). Google the business addresses to check for validity. If necessary, call the vendor. Or ask someone familiar with vendors to review the list (preferably someone without vendor set-up capabilities).

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4. Compare vendor and payroll addresses

Why compare vendor and payroll addresses?

Those with vendor-setup ability can create fictitious vendors associated with their own home address. If you compare all addresses in the vendor file with addresses in the payroll file, you may find a match. (Careful – sometimes the match is legitimate, such as travel checks being processed through accounts payable.) Investigate any suspicious matches.

How can you test for the same vendor and payroll addresses?

Obtain a download in Excel of (1) vendor names and addresses and (2) payroll names and addresses. Merge the two files; sort the addresses and visually inspect for matches.

5. Scan all checks for proper signatures and payees

Why test checks for proper signatures and payees?

Fraudsters will forge signatures or complete checks with improper payees such as themselves.

How can you test for proper signatures and payees?

Pick a period of time (e.g., two months), obtain the related bank statements, and scan the checks for appropriate signatures and payees. Also, consider scanning endorsements (if available).

Your Payment Fraud Tests

Those are a few of my payment fraud tests. Please share yours.

Need additional ideas regarding how fraud might occur. Check out my post: 25 Ways Fraud Happens.

My fraud book provides more insights into why fraud occurs, how to detect it, and–most importantly–how to prevent it. Check it out on Amazon by clicking here. The book focuses on local government fraud, but most of the information is equally applicable to small businesses.

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