Standard Audit Adjustments and How to Avoid Them

Below are the adjustments U.S. auditors most frequently identify across industries—SaaS, technology, manufacturing, services, D2C, and PE-backed portfolio companies.

1. Revenue Recognition Errors (ASC 606)

Revenue remains the single largest source of audit revisions due to its complexity and high audit risk.

Typical errors include:

• Incorrect timing of revenue recognition
• Improper allocation of revenue across performance obligations
• Inaccurate Standalone Selling Price (SSP) calculations
• Misclassification of contract assets and liabilities
• Deferred revenue overstatements/understatements

Why auditors adjust it:
Revenue drives profitability metrics, investor reporting, and valuation. Even minor misinterpretations of ASC 606 can materially impact financials.

2. Expense Cut-Off & Accrual Adjustments

Cut-off testing often reveals that expenses are not recorded in the appropriate accounting period.

Common issues:

• Unrecorded vendor invoices
• Missing accruals for committed expenses
• Incorrect amortization of prepaid expenses
• Duplicate or misclassified expenses

Impact:
These errors distort EBITDA, net income, and working capital.

3. Accounts Receivable & Bad Debt Reserve Adjustments

AR adjustments frequently arise due to inadequate documentation or outdated estimation methods.

Auditors adjust when:

• Aging schedules are inaccurate
• Reserve methodologies are inconsistent
• Write-offs are not recorded timely
• Collectability assessments are missing

High-risk sectors: SaaS, healthcare, lending, and subscription businesses.

4. Inventory Valuation & Obsolescence Adjustments

Inventory continues to be a high-risk audit area for product-centric businesses.

Common adjustments include:

• Errors in physical counts
• Missing or understated reserves for obsolete stock
• Variances between GL and sub-ledger
• Incorrect cost capitalization

Result:
Incorrect inventory impacts gross margin, profitability, and COGS reporting.

5. Fixed Asset & Capitalization Adjustments

Capitalization policies are often inconsistently applied.

Typical adjustments:

• Expenses incorrectly capitalized
• Missing disposals or asset write-offs
• Incorrect depreciation calculations
• Lack of documentation for CIP (construction-in-progress)

Auditor trigger:
Capital expenditures without support or outdated depreciation schedules.

6. Lease Accounting Adjustments (ASC 842)

ASC 842 remains a challenge for many private companies.

Adjustments often relate to:

• Missing ROU assets or lease liabilities
• Incorrect lease classification
• Unrecorded renewals or modifications
• Wrong discount rates applied

Auditors expect complete and up-to-date lease populations with clear authorization trails.

7. Equity, Stock-Based Compensation & 409A Errors

Equity reporting is technical and often misunderstood.

Common findings:

• Outdated 409A valuations
• Errors in option valuation or vesting schedules
• Missing or inconsistent cap table reconciliations
• Misclassified equity vs liability awards

Equity errors also have tax and fair value implications.

8. Intercompany & Consolidation Adjustments

Multi-entity organizations face recurring issues such as:

• Unmatched intercompany balances
• FX translation discrepancies
• Inconsistent policies across subsidiaries
• Incorrect eliminations

These issues create severe reporting risks at the consolidated level.

9. Tax Provision Adjustments (ASC 740)

Tax is one of the most common—and complex—audit adjustment areas.

Adjustments generally involve:

• Incorrect deferred tax calculations
• Missing temporary difference schedules
• Lack of state tax accruals
• Uncertain tax positions not recorded
• Weak documentation supporting tax provision

Tax provision errors adversely affect both the P&L and balance sheet.

10. Cash & Bank Reconciliation Adjustments

Although expected to be “clean,” cash remains a surprisingly frequent audit finding.

Issues include:

• • Unreconciled bank accounts
  • Stale outstanding checks
  • Unrecorded deposits
  • Posting errors
  • Cash issues are viewed as signs of poor financial hygiene and weak controls.

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• Technical accounting (ASC 606, 842, 820, 805)
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