What are Audit Adjustments?

What are Audit Adjustments

An audit adjustment is a correction a firm needs to make on its the financial account (Also see What is Financial Accounting and Management Accounting) that its outside auditor proposes. The auditors may suggest the correction according to the evidence they discovered when they carry out the audit procedures, or maybe they want to assign the sums into other accounts. The auditors will only suggest the adjustments like this for material amounts. If not, the small changes which do not have a material effect on the financial statement that their customer needs to make could pile up to an intimidating amount.

The customer may not accept an audit adjustment, particularly when the adjustment is going to nullify bonus payments which they would have paid to the management, or if the impact may cause the firm to break any loan covenant. In such a condition, the auditor needs to determine whether there will be any material effect on the accuracy of financial statements of the customer if he does not include the audit adjustment which the customer should make. This may, in turn, affect whether the auditor is going to give his customers an honest audit opinion on their financial statements.

Another scenario may be the auditor suggests a few audit adjustments that are going to counterbalance each other. In this case, it can bring about an immaterial net effect on the financial statements, so the client has sufficient and reliable reasons for not documenting all the adjustments.

Nevertheless, the net impact of taking no notice of these adjustments could be the reporting of sums in the incorrect line items within the financial statements. This may mislead the readers of those financial statements (Also see What are IFRS and GAAP?). Most of the time, the customer will accept the adjustments an auditor has suggested, and he will record them according to the request of the auditors. Hence, the auditor can justify clean audit opinions more easily.

If there is an audit committee in a firm, the auditors will normally talk about the audit adjustments, which are more material with that committee (Also see Common Bookkeeping Errors that You Should Avoid). By understanding these adjustments, the committees can learn about possible control issues or other problems about the accounting department’s efficiency in recording the transactions correctly. This can result in adjustments in the way that the company is managing its accounting department.

The last thing that the auditors should inspect is the beginning account balances when the audit of the next year has started to make sure that the customer has recorded all the audit adjustments correctly. Otherwise, their customer should make adjustments.

To prevent yourself from getting lost in piles and piles of audit adjustments when an auditor audits your account, you should ensure that you have recorded every transaction of your business correctly. Thus, if you are not familiar in accounting, it would be best if you could employ an accounting firm in JB so that you make yourself well-prepared when it is time for audits.

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