An audit adjustment is regarded as a correction, amendment, and adjustment of a financial information misstatement or errors identified by the auditor, whether it is recorded or not.
An audit adjustment is also a proposed correction to the general ledger that outside auditors carry out. The auditors may reference the proposed correction on evidence found in their audit steps or procedures or want to classify amounts into different accounts again.
That kind of adjustment should only be for a material amount, or the client could be buried under a rolldown of small adjustments that have no impact on its financial statements.
An audit adjustment may not be welcomed by the client, especially if the amendments will affect bonus payments that would have been paid to the management or when the effect could cause the company to break a loan covenant.
If that is the case, the auditor must conclude whether the non-inclusion of the audit adjustment impacts the accuracy of the client’s financial statements, which could, in turn, impact the auditor’s willingness to give a very clean audit opinion on those statements.
A dissimilar situation is that the auditor proposes many audit adjustments, which importantly offset each other. If that is the case, the net impact on the financial statements may not be in material form.
However, the net effect of snubbing these changes could be to report the amounts in the wrong line items in the financial statements, which could be false or misleading to the users of those statements.
In many cases, the client approves the proposed adjustments and records them as was requested by the auditors, making it much simpler for the auditor to justify a clean audit opinion.
If a company possesses an audit committee, the auditors will typically discuss more material adjustments with the committee.
By hearing about them, committee members understand potential control qualms or other issues regarding the accounting department’s effectiveness incorrectly writing down transactions.
This may result in changes in the management of the accounting department. Audit adjustment entries are carried out inside your accounting journals at the end of an accounting period after a trial balance is made.
After you make adjustment entries in your accounting journals, they are transferred to the general ledger in the same way as any other accounting journal entry.
Many audit adjustment entries can be carried out, each dependent on the kind of financial activities that define your business.
Purpose of Audit Adjustment:
The audit adjustment’s purpose is to accurately assign revenues and expenses to the accounting period in which they occurred.
Whenever you put down your accounting journal transactions, they should be done in real-time. If you’re making use of an accrual accounting system, money doesn’t change hands at that particular time of the accounting entry; the purpose of Audit adjustment is to indicate when the money was transferred officially and to turn your real-time entries to the one that accurately reflects your accrual accounting system.
Types of Audit Adjustments:
Each month, audit accountants carry out audit adjustment entries before publishing the final version of the monthly financial statements. The following five entries are the most common, although some companies might have other adjustment entries like allowances for doubtful accounts.
1. Prepaid Expenses: Prepaid expenses are known as assets that are being paid for and then used gradually during the accounting period, i.e., office supplies. A company purchases and pays for office supplies, which will become an expense as they are consumed. When the office supplies are utilized during the month, an audit adjustment entry will be made to credit prepaid office supplies and debit office supply expenses.
2. Depreciation: Depreciation can be defined as allocating or distributing the cost of an asset, like a building or an equipment piece, over the serviceable life of the asset. Audit Adjustment entries are a little different for depreciation. Owners of Businesses have to take depreciation accumulated into account. Accumulated depreciation is otherwise known as the depreciation of a company’s fixed assets over the company’s life.
3. Accrued Revenues: If you do a service for a customer in a month but don’t bill the customer until the following month, you would make an adjustment entry that shows the revenue in the month you did the service. You would debit receivable accounts and credit service revenue.
4. Accrued Expenses: Employee wages are a good sample of accrued expenses. When a business firm owes employees wages, they will adjust entry at the end of an accounting period by debiting wage expenses and crediting wages payable.
5. Unearned Revenues: Unearned revenues refer to payments for goods or services delivered in the future or services to be performed in the future. If you submit an order from an online shop or retailer in March and the item does not reach you (and you don’t pay for it) until April, the company from which you submitted the order will write down the cost of that item as unearned revenue. In the month you bought the item, the company would adjust entry by debiting unearned revenue and crediting revenue.