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.
The auditor may take the following points into consideration while detecting an
- If various books are maintained on self -balancing system, errors can be located by scrutiny of such books.
- If self balancing system is not used, then the trial balance should be checked and ledger account balances shall be compared with those shown in the Trial balance. It is possible that some balances in the ledger might not have been transferred to trial balance.
- Check the totals of trial balance. It is possible that there may be totaling mistake.
- In case there is any difference in trial balance, see if there is any account having similar balance which is not taken to Trial balance. Check the difference in Trial balance, and compare it with balance of an account, as the accounts balance may be taken on the wrong side in trial balance.
- Ascertain the nature of account. Asset accounts, expense accounts, reserve for discount to creditors always have debit balance;. ,ensure that these are shown in the proper column of Trial balance Similarly, liabilities accounts, income accounts, capital, account and reserves have credit balances and must be shown in credit column of trial balance.
- Examine the totaling and balancing of each account in the ledger and see that correct balances are carried forward to the next page.
- Total the list of creditors and debtors and compare it with the balance shown in trial balance.
- Verify the totals of subsidiary books and their posting to ledger.
- Compare items of trial balance with the items of trial balance of previous year to see if any account balance is omitted or shows abnormal balance.
- An error of Rs. 1, Rs. 10, Rs. 100, Rs. 1000 may be due to wrong totaling.
- See that all journal entries are posted to ledger.
- If self -balancing ledger system is maintained see that balances in control account tally with total of balances of personal accounts of the ledger.
- Over and above all this, intensive and careful verification of subsidiary records, vouchers and ledger is the only remedy for locating an error.