When an auditor proposes a financial statement adjustment in Indonesia, management should assess the accounting basis for the proposed entry, quantify its financial and tax effects, and understand the consequences of leaving it uncorrected before deciding whether to accept or challenge it. Management remains responsible for the financial statements, while the auditor must evaluate identified and uncorrected misstatements in accordance with Indonesian auditing standards.
Review the Auditor’s Adjustment Against the Company’s Applicable SAK
The first step is to determine which Indonesian financial reporting framework applies to the company and which requirement the auditor believes has not been applied correctly.
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Indonesia has several financial reporting frameworks. SAK Indonesia includes standards converged with IFRS Accounting Standards, while SAK Indonesia for Private Entities (SAK EP) is intended for entities without public accountability that prepare general-purpose financial statements for external users. SAK EP became effective on January 1, 2025, replacing SAK ETAP.
Management should identify the transaction or balance concerned, compare the existing and proposed accounting treatments, and examine the evidence supporting each position. Depending on the issue, this may include contracts, invoices, tax documents, bank records, inventory records, fixed-asset registers, intercompany agreements, valuation calculations, or management estimates.
An auditor may, for example, identify an expense that should have been accrued before year-end, revenue recorded in the wrong reporting period, an unsupported asset carrying value, an inventory valuation issue, or a related-party balance requiring different recognition, measurement, presentation, or disclosure. Foreign subsidiaries can encounter these and other audit adjustments during the Indonesian audit process.
Management can then determine whether the proposed adjustment corrects an accounting error or relates to a treatment that the company can support under the applicable SAK.
Quantify the Accounting and Tax Impact of the Adjustment
Management should then determine how the proposed adjustment would flow through the financial statements and whether it has corresponding Indonesian tax consequences.
Consider an Indonesian company with a December 31 year-end that reports pre-tax profit of IDR 10 billion (USD 560,000). In January, it receives a supplier invoice for IDR 2 billion (USD 112,000) for professional services completed before December 31. The company records the expense only when the invoice arrives, but the auditor concludes that the obligation existed at year-end and proposes an accrual.
Recording the adjustment would increase the previous year’s expenses and liabilities by IDR 2 billion (USD 112,000). Reported pre-tax profit would fall from IDR 10 billion (USD 560,000) to IDR 8 billion (USD 448,000), a 20% reduction, with a corresponding effect on retained earnings after considering the relevant tax effects.
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The accounting adjustment does not necessarily produce an identical change in Indonesian taxable income. An expense recognized for financial reporting remains subject to the tax rules determining whether and when it is deductible. Significant proposed adjustments may consequently need to be reflected differently in the financial statements and the company’s fiscal reconciliation.
For a foreign investor reviewing an Indonesian subsidiary, an adjustment can materially change reported profitability without producing an equivalent change in taxable income.
What Happens Under Indonesian Audit Standards If Management Rejects the Adjustment?
Rejecting a proposed adjustment does not automatically result in a modified audit opinion.
Indonesia’s SA 450 (Revised 2021) sets out how auditors evaluate misstatements identified during an audit, including those that management does not correct. Auditors must accumulate identified misstatements other than those considered clearly trivial. The standard applies to audits of financial statements for periods beginning on or after January 1, 2022.
A difference that is not material individually may become relevant when combined with other uncorrected misstatements. There is no universal percentage at which an adjustment automatically becomes material; its significance must be evaluated in the context of the financial statements and the circumstances of the misstatement.
SA 450 also requires auditors to address uncorrected misstatements with those charged with governance, including the effects of relevant uncorrected misstatements from prior periods. Where an unresolved misstatement is material, it can affect the auditor’s opinion, depending on the nature, magnitude and, where relevant, pervasiveness of its effects.
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For Indonesian PTs subject to a statutory audit, the issue can also extend into the company’s statutory reporting process. Article 68 of Indonesia’s Company Law requires an audit in specified circumstances, including where a company has assets and/or annual turnover of at least IDR 50 billion (USD 2.8 million), as well as certain other categories of companies. If a company subject to Article 68 does not fulfill the audit requirement, its financial statements cannot be ratified by the shareholders’ meeting.
Resolve Financial Statement Adjustments with MAP Resources Indonesia
MAP Resources Indonesia can assist foreign-invested companies in reviewing proposed audit adjustments, assessing technical accounting treatments, and resolving financial reporting issues. Contact us today at info@mapresourcesindonesia.com.
