Field guide / Scope & expectations
Quality of earnings vs. an audit: what each helps you answer.
An audit and a quality of earnings analysis can draw on the same books while serving different decisions. Clear expectations make both more useful.
A financial statement audit addresses whether financial statements are presented fairly, in all material respects, under the applicable reporting framework. A quality of earnings (QoE) analysis focuses on the financial performance being evaluated in a transaction. RSM describes the engagements as separate but related, with differences in scope, time periods and procedures.1
Start with the decision.
| Question | Financial statement audit | Quality of earnings analysis |
|---|---|---|
| Primary purpose | Support an opinion on a defined set of financial statements. | Inform a transaction team's assessment of earnings and related financial issues. |
| Key lens | The applicable reporting framework and material misstatement. | Drivers of historical performance, proposed normalization and transaction-specific questions. |
| Scope and periods | Defined by the audit engagement and financial statements. | Agreed with the adviser; may include monthly trends and a trailing period. |
| Typical output | An auditor's report accompanying the financial statements. | Transaction analysis and findings; not a substitute for an audit opinion. |
A simplified comparison. The engagement letter and the professional's actual scope govern what work is performed.
Audited earnings and normalized earnings can differ.
An expense can be correctly recorded in the accounts yet still require discussion in a transaction analysis. Consider a fictional company that recognized an unusual legal settlement. The accounting question concerns recognition, measurement and disclosure. The transaction question might ask how that settlement affects a view of recurring performance.
That does not make the amount an automatic addback. Management should document what happened, the period and accounts affected, the supporting evidence, and why recurrence is or is not expected. Related costs, insurance recoveries, repeated similar events and any replacement expense can change the analysis.
Use a schedule that keeps reported results, proposed adjustments and the adviser's conclusions in separate columns. The EBITDA Adjustments tool can help organize a proposal; it cannot determine what a buyer will accept.
Look beyond an EBITDA number.
RSM's financial diligence scope includes earnings quality, working capital and cash flow, revenue and customer analytics, and debt or net debt considerations.2 Those topics connect, but they are not interchangeable.
- Revenue quality: A customer schedule should reconcile to the ledger before concentration or retention analysis begins. Keep explanations for credit notes, timing differences and acquired revenue.
- Working capital: A proposed earnings adjustment does not by itself settle how receivables, accruals or other balance sheet items enter the transaction mechanism.
- Debt-like items: Maintain a separate discussion list. Classification is specific to the deal and definitions; avoid quietly treating every liability as working capital.
Prepare the bridge between the two engagements.
Management can reduce duplicated questions by preparing a clean route from the accounting record to transaction schedules:
- Identify the final financial statement version, audit adjustments and the ledger used for monthly reporting.
- Reconcile the monthly trial balances to annual financial statements and explain any differences.
- Show each transaction schedule's source system, extraction date, scope and reconciliation.
- Separate factual corrections from management judgments and proposed normalization.
- Maintain one issues log so open questions do not disappear across email threads.
The QoE Kit checklist measures completion of preparation tasks. It does not test the financial records, issue an opinion or predict an adviser’s findings. Confirm required work with the professionals responsible for your transaction.
Further reading
- RSM — Financial statement audits versus quality of earnings analysis. Scope distinctions between the engagements.
- RSM — Financial due diligence. Areas commonly addressed in transaction financial analysis.
- BDO — Due diligence. Financial diligence within a wider transaction review.
Sources reviewed October 11, 2026. The workflow examples and checklist are this site's own educational framework. Referenced firms have not endorsed this tool.
Turn questions into a working file.
Assign evidence, owners and next actions across five financial workstreams.
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