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Auditors examine a client’s records to ensure they meet specific criteria. Usually, it includes the financial statements backed by the general ledger. Sometimes, auditors disagree with some entries passed in the client’s records. In these cases, auditors may provide some adjustment entries to the client, known as audit adjustment.
What is an Audit Adjustment?
An audit adjustment includes proposed entries from the auditor to a client. This adjustment may come due to various reasons, including errors, incorrect treatment, lack of evidence, etc. Usually, auditors only provide audit adjustments that affect the financial statements materially. Therefore, if these adjustments do not impact the subject matter, auditors may ignore them.
The primary objective of an audit adjustment is to modify the general ledger to rectify issues found during audit work. Consequently, it also impacts the financial statements. Auditors use these adjustments to ensure the client’s records do not include material misstatements. However, audit adjustments are only a proposal from the auditor. These may come through written or verbal communication with the management.
How does an Audit Adjustment work?
Auditors must form an opinion on the client’s financial statements based on their work during the audit engagement. This work entails obtaining audit evidence that supports the information reported in those statements. Sometimes, auditors may find material misstatements in the client’s records. These misstatements occur when the client has mistreated a single or several financial transactions.
Once auditors identify an issue with the client’s records, they discuss it with the management. It ensures the auditors that there is no misunderstanding in interpreting the evidence. If the auditors are confident that the issue causes a material misstatement in the financial statements, they will ask the client to modify the records. During this process, the auditor will provide one or several adjustment entries to the client to post to the general ledger.
The audit adjustment will ensure the financial statements conform to the standards. However, the client has no obligation to accept audit adjustments. Sometimes, the management may oppose the treatment proposed by auditors. In those cases, auditors must contemplate how to counteract the issues. Usually, auditors will qualify their audit opinion in the audit report.
What is the objective of Audit Adjustments?
The primary purpose of audit adjustments is to rectify misstatements in the financial statements. These adjustments allow auditors to propose changes to records that impact those statements. On top of that, audit adjustments help report figures accurately. These may be crucial if the client has not recorded financial transactions properly.
Audit adjustments also help ensure the proper treatment of financial transactions according to accounting standards. Sometimes, clients may not treat items in the financial statements as these standards indicate. Audit adjustments are also crucial in providing modifications to adjusting entries. These may cover various areas, such as prepaid and deferred items, estimates, revenues, expenses, etc.
Auditors may come across issues in the financial statements with a material impact. Usually, they propose audit adjustments that rectify those issues. The objective of these adjustments is to help make the financial statements more accurate. However, clients may not accept these adjustments every time. In those cases, auditors may modify their opinion on their audit reports.
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