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Thursday, 22 September 2011

Describe the various kinds of errors and discuss their effect on trial balance sheet and as an auditor how you will locate and detect these errors

Generally in the books of accounts we find the following types of errors. Detection of error is the main advantage of auditing.

1. ERRORS OF OMISSION :-
When any transaction is not recorded in the books of accounts, it is called an error of omission. So transaction is absolutely omitted from the record.

Effect On Trail Balance :- Now this error will not be detected by the trial balance. The trial balance will agree even this error is committed. So the error willing to be disclosed by the trial balance. It will be very difficult to locate the error.

Example :- Suppose some purchase was not recorded in the books. The total purchase recorded in the books will be less than actual purchase. This error will not be disclosed by the trial balance.

Detection Of Error :- An auditor may detect the error by comparing the data of previous with this item. We may say that critical analysis of the auditor locate such type of errors.


2. ERRORS OF COMMISSION :-
When the transaction is recorded but incorrectly we say that error of commission is committed.
(i). Wrong posting from original books to ledger.
(ii). Incorrect entries in the original records.

Effect On Trial Balance :- (a). In the invoice if transaction is recorded incorrectly, the effect on the trial balance will be nil.
(b). If a part of transaction is recorded incorrectly then the trial balance will be not balanced.

Detection Of Errors :- Such errors can be detected by checking the arithmetical accuracy of the original books. It can also be discovered when somebody challenges the transaction.


3. ERRORS OF PRINCIPLE :-
When the entries are not recorded according the fundamental principles of accounting, such errors may arise which are called errors of principle. Such errors may be committed intentionally or unintentionally.

Example :- (i). Ignoring the outstanding assets.
(ii). Wrong allocation between revenue and capital.
(iii). Valuation of assets on wrong principles.

Effects :- Errors of principle effect the profit and loss account and balance sheet.

Detection Of Errors :- Such errors can be detected by independent checking and searching inquiry. Because such error is not found by the trial balance or routine checking.


4. COMPENSATING ERRORS :-
When one error is counter balanced by another error or errors is called compensating errors.

Example :- Suppose an over casting of an account by Rs. 1000 may be counter balanced by under casting of another account to same extent.

Effect :- Such errors will not effect the trial balance.

Location Or Detection :- Such errors may be detected by intelligent and arithmetical checking of books.


5. TRIAL BALANCE ERRORS :-
While preparing the trial balance some errors may happen, these are called trial balance errors. These may consists of :
(i). Entering an amount incorrectly.
(ii). Casting of errors in the trial balance.
(iii). Wrong addition of the trial balance column.
(iv). Omission of cash and bank balance.
(v). Omission of a balance from the trial balance.

Detection Of Errors :- Trial balance errors can be detected by routine checking.


LOCATION OF DIFFERENCE IN TRIAL BALANCE :-
An auditor will locate the difference in the trial balance keeping in view the following points :

1. Checking Of Total :-
It is the first point, that auditor should check the total of the trial balance.

2. Compare The Names :-
Auditor should compare the names of the accounts in trial balance with the ledger. Some times in case of cash book balance of some accounts may not be transferred to the trial balance.

3. Compare Debtors And Creditor :-
Third point is that auditor should compare the list of creditors and debtors with trial balance.

4. Locate The Ledger :-
Auditor should try to locate the errors in a particular ledger.

5. Divide The Difference By Two :-
Auditor should divide the difference of trial balance by two and check that is there any time of this value.

6. Checking Of Posting :-
Auditor should check all those amounts of posting which are corresponding to the difference or half of the difference.

7. Checking Of Exact Amount :-
Auditor should check the exact corresponding amounts which are equal to the difference amount.

8. Importance To The Totaling :-
Auditor should pay special attend on the checking of total. If the difference of the trial balance is divisible by the error then it will be due to misplacement or figure transposition. For instance 98 for 89.

If all the above tests are applied and error is not located then all the accounts should be checked thoroughly.

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