Auditing the Financial Close Process: An Investigation of Current Procedures and Implications for Research

• In Event: Design Science and Field Studies

Abstract

The paper explores how external auditors examine the financial close process. This topic is important for four reasons. First, auditors generally view the financial close process as a high risk area given its significance in the financial statement preparation process and its time constraints. Second, several internal control weaknesses in recent SEC filings involved the financial close process Third, the recent economic volatility led to an increase in restatements, some of which were the result of time and resource constraints imposed by the financial close process. Finally, new regulations and technology demands impact the financial close process, especially as they relate to entity level internal control.

Results suggest that auditors place significant dependence on walk-throughs when evaluating clients’ financial close processes and rely on analytical review in deciding the scope and materiality levels. Moreover, auditors employ the COSO framework in deciding which journal entries to test, but often fail to test the link between the financial statements and supporting systems, particularly ignoring the access controls that monitor this process. The PCAOB notes that auditors are often not adequately testing the internal controls related to the financial close process. Further, the PCAOB appears to be focusing more on entity level or general controls surrounding the financial close process, with particular attention to access controls that track who can add or change financial information during the close process. Overall, our results suggest that that auditors may need to increase the scope of their financial close work.

Authors

• Diane J Janvrin, Iowa State University

• Maureen Francis Mascha, Purdue University Calumet

• Melvin Arnaldo Lamboy Ruiz, Iowa State University