Errors and Frauds in Auditing
In this article, we are going to discuss types of errors and frauds in auditing for study notes regarding auditing. It helps for some examinations in 2022.
In this article, we are going to give an answer of following answers
What are the types of frauds in auditing?
What is mean by errors in auditing?
What is error and types of error in accounting?
Types of Errors in Auditing
We are going to discuss in detail the Types of Errors in Auditing
(a) Errors of Omission :
When a transaction is not recorded in the original book or it is for a small amount, the error is called an ‘error of omission. Such errors occur unintentionally, i.e. a transaction is inadvertently left unrecorded. For example, under-recording of credit sales, under-recording of payables, and under-recording of goods purchased at the end of the year.
1. Omission of purchases from purchases day book.
2. Ignoring depreciation on fixed assets completely.
(b) Clerical Errors or Errors of Commission :
Generally, the mistakes that arise in the records, and calculations can be called ‘clerical errors. These errors include the complete or partial misrepresentation of a transaction. These types of errors are of the following types:
(1) Cutting on the wrong side
(2) Deducting by the wrong amount
(3) Debiting a wrong account
(4) Incorrect account balance withdrawal
(5) Entry of the wrong amount in Subsidiary Book of original entry
- The wrong amount recorded in the books of original entry, e.g. sale of goods of Rs. 15,000 recorded as Rs. 1,500 in the sales day book. This error will not affect the trial balance.
- Posting to the wrong side of an account. In place of debiting, e.g. an amount of Rs. 150 is credited. This error will affect the trial balance.
(c) Errors of Principles :
Any business transaction should be recorded as per the rule of double-entry bookkeeping. But the mistakes which are made without following those principles while recording the transaction can be called ‘Principal mistakes’. Accounting by a person who does not have a thorough understanding of accounting is prone to theoretical errors. These errors do not affect the balance sheet; Because that transaction is recorded somewhere; But it affects the profit and loss account and the balance sheet.
Wages paid for the installation of machinery is charged to the trading account under the head ‘wages’. It is an error of principle. The installation charges are capital expenses and hence are supposed to be added to the cost of the machinery.
D) Compensating Errors
If an error occurs in one account and at the same time an error of the same amount occurs in another account on the opposite side, it is called a complementary error. Errors that complement each other and cancel out the effect of each other are called compensatory errors.
The total purchase book is under cost by Rs.100 and the total sales return book is over cost by the same amount.
Thus one error is offset by another error of the same magnitude.
(e) Other Errors
This includes errors occurring twice and errors caused by the same name. When a transaction is recorded twice in the books of original entry and hence is posted twice in the ledger accounts, an error of duplication is said to be committed. These errors do not affect the Trial Balance. An Auditor has to carefully review the transactions with the source documents.
These are the Types of Errors in Auditing.
Types of Fraud in Auditing
Deliberate wrong entries are called Frauds. We are going to discuss in detail the Types of Fraud in Auditing.
1. Extortion of money
Cash flow includes sales flow, purchase flow, and cash flows. Mistakes made knowingly about money in all departments are called money fraud.
2. Misappropriation of Goods:
The embezzlement of goods is much more difficult than the embezzlement of money, as goods are not as easily stretched as money. In general, a business that manufactures high-value and lightweight products has a lot of scope for churn. Uncovering the smuggling of goods is a very difficult task. For this, a thorough inspection of the inventory register and actual counting of the inventory against its entries in the inventory can reveal such irregularities.
3. Falsification of Accounts :
The third way of fraud is to write or create false accounts by creating false documents. There is no real loss as there is no exchange of money or goods. But it cannot be done without the connivance of Afratkar senior officers who cannot understand the true and real nature of the business. This is why uncovering such fraud is such a daunting task.
Accounting fraud is done for two purposes:
(a) Do not show too much
(b) Understatement of profit
These are the types of errors in auditing and Types of Fraud in Auditing