Discuss different types of errors. Explain the responsibilities of an auditor in connection with error.
The different types of errors in context of accounts are as follows:
Errors of Principle:
When principles of book-keeping and accountancy are not followed such an error is error of principle. For examples. Treatment of revenue expenditure as capital expenditure or vice -versa e.g., repair of plant and machinery debited to plant and machinery account, or purchase of Plant and Machinery debited to purchase account.
Errors of Omission:
When a transaction is omitted fully or in part from the books of accounts, such errors are known as errors of omission. Where the transaction is totally omitted, it will not affect the Trial balance and is more difficult to detect. Following are its examples:
- Omission of purchases from Purchase Book or sales from Sales Book.
- Omitting the entry for charging depreciation in the books.
Omissions, which are completely omitted from the books, are difficult to locate. Thorough checking of sequence of vouchers may help the auditor to locate such omission. Attention must always be drawn if there is a big break in the series of vouchers. Omission of purchase vouchers from the books is difficult to locate.
But when payment is made to a supplier for which no purchase entry appears in the account of such supplier, the omission can be located. Errors of omission may be intentional or otherwise. But in both the cases profit or loss of the year is affected.
Errors of Commission:
When entries made in the books of original entry or ledger are incorrect either wholly or partially, such errors are the errors of commission. For example, posting from original book of entry is wrongly made or made in wrong account on wrong side or of wrong amount is errors of commission. Some of the wrong entries affect Trial Balance and some other do not.
Errors of Duplication:
When a transaction is recorded twice and also posted twice in the ledger, such an error will not affect the Trial balance. Sometimes the supplier sends the invoice in duplicate and both the copies of the bill are recorded separately.It is more difficult to locate such errors. Only thorough checking and comparing of vouchers with entries in the books of original entry will reveal such errors. While going through an account, will reveal errors of duplication, if two entries on the same side are appearing with same amount,
When an error offsets the effect of another error, such errors are known as compensating errors. These errors do not affect agreement of Trial balance, hence can’t be located by the auditor easily.These errors can be located by checking the total, posting and casting. Some of these errors may affect the profits of the year.
Auditor’s Responsibility as Regards Errors
The auditor should make a detailed study, analysis and evaluation of the internal control system of the concern and see how much effective it is in prevention and detection of errors and fraud. If it is not result effective then find out its weak points and suggest how to improve the position so that chances of its occurrence maybe minimized.
It is not possible for an auditor to present errors and frauds completely yet he can put a moral check upon the staff by detecting them. The staff would, remain alert and would not carryout an dishonest attempt.
The auditor should be careful in examining the books of accounts. If he is suspicious about any transaction he should examine the transaction deeply.
Auditor should himself be honest while auditing the accounts of the client.