What it means
Every time money moves in a business, it is recorded through a journal entry. While most transactions happen automatically through billing or payroll software, accountants sometimes need to make manual adjustments.
Journal entry testing is the practice of inspecting these manual changes to ensure they are legitimate and backed by proper documentation. This process matters because manual entries bypass standard automated controls.
This makes them a common route for human error, accidental misstatements, or deliberate manipulation. By reviewing these entries, businesses protect the accuracy of their financial reports and satisfy compliance requirements during annual audits.
In practice, finance teams and external auditors look for red flags. These include entries made late at night, entries posted on weekends, or adjustments processed by staff with unusual access rights.
They also examine round-number amounts and entries that lack descriptions or supporting receipts. Advanced journal entry testing uses data analytics to scan entire ledgers in seconds.
Instead of checking a few random paper slips, auditors can filter thousands of transactions to isolate the highest-risk items for a closer look, saving time while improving accuracy.
In practice
Real-world examples.
Example
A startup founder notices a manual entry of 5,000 pounds credited to revenue on a Sunday. Testing reveals it was an accidental duplicate, which is corrected before the month-end board meeting.
Example
An SME manufacturing firm reviews manual journal entries and flags three transactions just under their 10,000 pound approval limit. Further checks show they were split to bypass manager sign-off.
Example
A retail chain uses automated software to test its daily store adjustments. The system flags 50 manual stock write-downs processed by a single branch manager, prompting an internal audit.
Think of it
“Journal entry testing is like a bank manager spot-checking handwritten withdrawals instead of trusting the ATM receipt printer. It ensures that any cash moved by hand actually has a valid reason behind it.
Case study
Seen in the real world.
BrightSpark Logistics, a growing delivery firm with 40 staff, prepared its annual accounts for the bank to secure a growth loan. The finance director noticed a late-season rush of manual adjustments designed to boost net profit by 35,000 pounds, helping the company hit its loan covenants. During the preparation for the external audit, the team performed rigorous journal entry testing. They found that several end-of-year accruals lacked invoices, customer contracts, or management approval. The internal review revealed that an overworked accountant had rushed the entries to meet the bank deadline without proper paperwork. BrightSpark reversed the unverified adjustments, adjusted the accounts to reflect true earnings of 45,000 pounds instead of 80,000 pounds, and provided accurate figures to the lender. While the loan took longer to approve, the transparent approach protected the business from regulatory penalties and built long-term trust with the bank.
Watch out
Common mistakes.
- Testing only large dollar amounts while ignoring a high volume of suspicious small entries.
- Failing to document the rationale behind why specific journal entries were selected for review.
- Treating journal entry testing as a once-a-year audit chore rather than a regular monthly check.
Questions
People also ask.
Who is responsible for journal entry testing?
External auditors perform it during financial reviews, but internal accountants and finance managers should also do it monthly.
Are all manual journal entries bad?
No, manual entries are normal for month-end adjustments, tax provisions, and correcting errors. Testing just ensures they are valid.
How many journal entries should be tested?
It depends on company size. Using data analytics, finance teams often screen 100 percent of entries for risk markers.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related