Back to: Auditing
Hi everyone!
Welcome to Week 10. This week, we’ll focus on the types of errors that auditors may encounter during an audit.
Types of Errors in Auditing
Recognising these errors is key to improving the reliability of financial statements.
A. Meaning of Error
An error is an unintentional mistake in financial records. It differs from fraud, which involves deliberate misstatement.
B. Types of Errors
Error of Omission
Occurs when a transaction is completely or partially left out of the books.
Example: A sales invoice is not recorded at all.
Error of Commission
Happens when an entry is made but to the wrong account.
Example: Cash received from Mr A is wrongly recorded under Mr B’s account.
Error of Principle
Arises when a transaction is recorded in violation of accounting principles.
Example: Recording a capital expense as a revenue expense.
Compensating Error
When two or more errors cancel each other out mathematically.
Example: An overstatement of sales is compensated by an overstatement of expenses.
Error of Original Entry
When the original amount recorded is incorrect, and the error is carried through.
Example: A purchase of £250 is recorded as £520 and posted as such.
Error of Duplication
Occurs when a transaction is recorded more than once.
Example: Entering the same sales transaction twice.
Transposition Error
Mistake due to switching of digits.
Example: Writing £843 as £483.
C. Importance of Identifying Errors
Helps in correcting the accounts.
Improves accuracy of financial reports.
Prevents future misstatements.
Enhances internal control systems.
Evaluation:
Explain five types of errors commonly encountered during auditing.
Differentiate between error of principle and error of commission with examples.
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