Definition
Adjusting entries bring the books to the proper balance at period end, such as accruing unpaid wages or recording depreciation. During an audit, auditors may identify misstatements and propose adjusting entries, usually listed with debit, credit, account and effect on net income. A reclassifying entry moves an amount between accounts without changing net income, such as moving a long-term debt portion to current.
Why it matters in an audit or review
Proposed entries that management books remove the misstatement. Those declined become uncorrected misstatements. The auditor may propose and prepare entries, but management approves and records them. Keeping that line clear matters for independence. Final entries are agreed to the trial balance and the lead schedules.
Example
The auditor finds $42,000 of December rent paid in January and not accrued (illustrative). The proposed entry debits rent expense $42,000 and credits accrued liabilities $42,000. Management books it as client entry AJE-7, and the lead schedule shows the unadjusted balance, AJE-7 and the adjusted amount.
Common mistakes
- Posting entries to the trial balance without management's approval.
- Leaving the support for each entry out of the file.
- Not rolling reversing entries forward.
FAQ
Can the auditor post the entry?
The auditor can propose and prepare it, but management approves and records it.
Sources
- AICPA, AU-C Section 450, Evaluation of Misstatements Identified During the Audit
- AICPA, AU-C Section 230, Audit Documentation
- AICPA Code of Professional Conduct, ET 1.295, Nonattest Services
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error