How do I translate overstatement or understatement into an audit adjustment?

Start with the account that is wrong, not with the audit procedure. If revenue is too high, the correction usually reduces revenue. If a payable is too low, the correction usually increases the liability. If interest expense is missing, the correction records the expense and the related payable.

Example: a client has a $300,000 note at 8% signed on November 1, and no year-end interest accrual was recorded at December 31. The missing interest is $300,000 x 8% x 2/12 = $4,000.

The adjustment is:

• Debit interest expense for $4,000.
• Credit interest payable for $4,000.

That entry follows from the misstatement direction: expense is understated and liability is understated. Once you know the direction, the debit and credit are usually much easier to identify.