Auditing - Detection and Prevention of Errors

Auditors should be very careful about the detection of errors because manipulation in accounting may also appear as error or it may be a result of carelessness on part of a bookkeeper.

Errors may be broadly classified as follows −

  • Error of Principle
  • Errors of Omission
  • Errors of Duplication
  • Errors of Commission
  • Compensating Errors

Error of Principle

Where the recording of the items of transactions are not done according to the Principle of Accounting, it is known to be an error of principle. These errors are not traceable from trail balance; these errors may be committed unintentionally or for the purpose of manipulation of accounts to inflate or deflate profit.

Following are the examples of such type of errors −

  • Providing excessive or inadequate depreciation

  • Where the provision for outstanding expenses or prepaid expenses is wrong

  • Where revenue expenses may be treated as capital expenditure or vice versa

  • Where valuation of Plant & Machinery, Stock, investment and other assets are not done according to the Principle of Accounting.

  • Where income received is credited to personal account of the person who is making the payment; for example, commission received from Mr. A credited to Mr. A’s account instead of the commission account, it will increase creditors in the BalanceSheet and reduce profit in the Profit & Loss account.

  • Where the payment of expenses is posted to the personal account of a person who receives payment; for example, the rent paid to Mr. A wrongly debited to Mr. A’s account, it will increase profit and also increase debtors in the Balance-sheet.

Errors of Omission

There may be two types of omission of entry while recording the transactions in the books of accounts;

  • Where transaction is totally omitted from the books of accounts, it will not affect the trial balance and the detection of such error is difficult. Following are the examples of such errors;

    • Omission of purchase or sale from the purchase day book or the sale day book respectively.

    • Omission of outstanding or unpaid expenses.

  • Examples of the transactions which are partially omitted from the books of accounts are −

    • Where total of purchase day book or sale day book omitted to be posted in purchase or sale account respectively.

    • Where payment or receipt transaction omitted to be recorded in ledger account from cash book.

Errors of Duplication

The detection of error of duplication is very difficult. It might be detected with proper and minute observation of accounts; for example, purchase may be recorded twice with original and duplicate copy of purchase invoice, etc. It is also possible to post the total of any ledger account twice in the trial balance.

Errors of Commission

Error of commission occurs the entry made in the books of the original entry or the ledger account is wrong. Let us see the following examples −

  • Purchase of goods for Rs. 25,000 wrongly entered as Rs. 2,500 in purchase book.

  • Credit purchase from AB Company wrongly credited to BA Company’s account.

  • Wrong totaling − total of purchase day book is totaled as Rs. 1,12,500 instead of 1,21,500.

  • Purchase from AB Company wrongly debited to AB company account instead of crediting AB company account and debiting purchase account.

Compensating Errors

When the effect of an error compensates with another error; it is known to be a compensating error. Such errors do not affect the trial balance; for example, total of a debit account as well as credit account totaled short by Rs. 7,500. This type of error will compensate both.

Prevention of Errors and Fraud

After the completion of audit, the Auditor can suggest his client to make changes in the accounting systems and also to improve his internal control system as an Auditor cannot do anything directly to prevent errors and frauds.

Auditors are expected to conduct audit as per professional standards expected from him. He cannot guarantee that no fraud exists. An Auditor should ensure and follow these standards −

  • Internal control system

  • While recording the business transaction whether accounting principle are being followed or not

  • Policies of management are being followed or not

  • Whether provisions laid in the Companies Act are being followed while preparing books of accounts

  • Whether Balance-sheet and Profit & Loss account show true and fair view of state of affairs of concern

Following factors decide whether an Auditor is responsible for non-detection of errors and frauds −

  • An Auditor should audit as per the principles laid out for auditing.

  • He should fulfil his duty as per the prevailing standards of his profession.

  • Error should be rectified during his audit and fraud is to be reflected in his audit report.

  • Even a simple hint that reflects that there is something wrong should not be overlooked.

  • He should believe on substantial accuracy in statement of accounts.