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Auditing Prior Period Adjustments – Getting it Right

Technical FAQs

Prior period adjustments can be a red flag for auditors. They often indicate either historic errors or changes in accounting policies and require thorough scrutiny to ensure proper correction, disclosure, and compliance with FRS 102. Auditing prior period adjustments is essential to ensure the accuracy and reliability of financial statements.

Key Considerations:

  • Risk Assessment:
    • Treat PPAs as a potential significant risk area
    • Assess the nature of the adjustment and whether it suggests wider control or fraud issues
  • Understanding the Reason for the Adjustment:
    • Was the adjustment due to an error, misstatement, or policy change?
    • Obtain management’s written rationale
  • Audit Evidence:
    • Inspect prior period working papers, source documentation, recalculations and identify any material errors
    • Evaluate management’s restatement of comparatives
    • Assess the materiality of errors both quantitively and qualitatively
  • Impact Assessment:
    • Assess the materiality of the adjustment on prior year and current year financials
    • Reconsider opening balances and implications on audit opinion
  • Disclosures:
    • Ensure full and clear disclosure in line with FRS 102
    • Confirm that users of financial statements are adequately informed
  • Audit Reporting:
    • If the error is material and not properly corrected, consider a qualified opinion
    • Evaluate if a KAM (Key Audit Matter) disclosure is needed (if relevant under ISA 701)

Common mistakes:

  • Inadequate Evidence: Failing to gather sufficient evidence to support the adjustments.
  • Overlooking Qualitative Factors: Ignoring qualitative factors when assessing the materiality of errors

 

Conclusion:

Auditing prior period adjustments demands professional scepticism, robust documentation, and well-reasoned professional judgement. When executed effectively, it strengthens the credibility of financial reporting and upholds confidence in the integrity of the audit process.

At HAT, we offer specialized training and can review your audit work to ensure it complies with auditing standards, helping you maintain the highest level of accuracy and reliability in your financial reporting.