The Most Common Audit Adjustments - and How to Prevent Them

You’ve made it through the audit. The report is almost ready.

Then the auditor sends a list of adjusting journal entries (AJEs):

• A receivable wasn’t recorded

• A grant reimbursement was duplicated

• Capital asset depreciation was missed

• Fund balances are off

• Payroll accruals need to be fixed

Sound familiar?

 

Most audit adjustments are avoidable—with the right prep, process, and awareness.

Here’s a look at the most common audit adjustments in government entities—and how to prevent them before your next audit season.

1. Missed or Incomplete Accruals

📉 What gets adjusted:

• Payroll accrued into the wrong period

• Unpaid vendor invoices not accrued at year-end

• Receivables missing from grant or tax revenue

🛠️ How to prevent it:

• Create a year-end closing checklist that includes common accruals

• Review prior-year AJEs for recurring entries

• Request and review final payroll reports and AP aging as of year-end

• Confirm grant reimbursements earned but not yet received

Pro tip: If it hits cash after year-end but was earned or incurred before—it's likely an accrual.

2. Duplicate Grant Revenues or Expenses

📉 What gets adjusted:

• Grant expenses recorded twice (once during drawdown, once in accounts payable)

• Revenues recorded when reimbursement was submitted—not earned

🛠️ How to prevent it:

• Reconcile each grant’s expenditures to the general ledger

• Track drawdowns and match them to actual allowable costs

• Record revenues only when earned—not just when received or billed

• Use a SEFA tracking sheet throughout the year to stay audit-ready

Grant programs are a top audit focus—especially in single audits. Accuracy matters.

3. Capital Assets Not Updated or Depreciated

📉 What gets adjusted:

• New purchases not added to the capital asset schedule

• Disposals not removed

• Depreciation not recorded at year-end

🛠️ How to prevent it:

• Maintain a capital asset rollforward year-round

• Save invoices and categorize them by asset type

• Review prior-year schedules and reconcile additions/disposals

• Use a depreciation template or software to calculate year-end entries

Pro tip: Even if the client doesn’t maintain full GAAP books, your audit file should reflect GAAP-ready capital asset info.

4. Debt Principal and Interest Misclassified

📉 What gets adjusted:

• Principal payments recorded as expense instead of debt reduction

• Interest amounts miscoded or missing

• Bond premiums or deferred amounts not amortized

🛠️ How to prevent it:

• Reconcile all debt payments to amortization schedules

• Break out principal vs. interest clearly

• Review prior-year disclosures and update with current activity

• Confirm debt service funds tie to GL and trial balance

Debt schedules are low volume but high risk—clean tie-outs save hours.

5. Fund Balance Classifications Are Incorrect

📉 What gets adjusted:

• Restricted or committed balances not properly tracked

• Assigned fund balances overstated or duplicated

• Unassigned fund balance off due to missing entries

🛠️ How to prevent it:

• Track restricted/committed purposes throughout the year

• Review board actions for fund designations

• Reconcile total fund balance to prior year plus net activity

• Use a worksheet to break out GASB 54 classifications before year-end

Fund balance is the story your audit tells. Make sure it reflects your policies.

6. Reclassifying Accounts for Financial Statement Presentation

📉 What gets adjusted:

• Revenues or expenditures posted to the wrong category

• Internal balances not eliminated in government-wide statements

• Interfund activity misclassified

🛠️ How to prevent it:

• Review GL codes and map them to final FS line items

• Flag internal transfers and due to/from early in the prep process

• Keep your chart of accounts aligned with financial statement headings

These aren’t always “errors”—but cleaning them up early makes reporting easier.

Adjustments Don’t Make You a Bad Bookkeeper—But Fewer of Them Make You a Better Partner

Audit adjustments aren’t personal. But they do reflect how prepared and organized your records are before audit season begins.

✅ Use last year’s AJEs as a roadmap
✅ Build templates for accruals, SEFA, assets, and debt
✅ Tie out every major balance to support
✅ Ask your auditor early if something doesn’t look right

Because the goal isn’t just a clean audit—it’s a process that gets cleaner every year.