Audit Adjustment
An audit adjustment refers to a change or modification made to a company’s financial statements during an audit. These adjustments are made by the external auditor when they discover discrepancies, errors, or misstatements in the financial records of the company. The purpose of audit adjustments is to ensure that the financial statements present a true and fair view of the company’s financial position and performance in accordance with the applicable accounting standards and principles.
For example, an auditor may find that a company has overstated its revenue by recording sales transactions in the wrong accounting period. In this case, the auditor will propose an audit adjustment to correct the revenue figure by shifting the sales transactions to the appropriate accounting period. This adjustment ensures that the financial statements accurately reflect the company’s revenue and comply with the relevant accounting standards.
Example of an Audit Adjustment
Let’s consider a situation where an external auditor is reviewing the financial statements of XYZ Company. During the audit, the auditor discovers that XYZ Company has accidentally recorded a $10,000 expense as an asset.
The original entry was as follows:
- Debit: Office Equipment (Asset) $10,000
- Credit: Cash $10,000
However, the $10,000 payment was actually for office rent, which should have been recorded as an expense. To correct this error, the auditor will propose an audit adjustment.
The audit adjustment entry would be:
- Debit: Rent Expense $10,000
- Credit: Office Equipment (Asset) $10,000
With this adjustment, the financial statements now accurately reflect the company’s expenses and assets, ensuring compliance with the relevant accounting standards and providing a true and fair view of XYZ Company’s financial position.
