ERRORS & FRAUDS

ERRORS

• Error refers to unintentional misstatements or

miss descriptions in the records or books of
accounts by the books keepers. In other words,
they are unintentional mistakes arising on
account of negligence or ignorance. Errors are
generally innocent. Examples of errors include-
errors in gathering data (say Tk 986 of purchase
accounted as Tk 896 from purchase bills), errors
in making accounting estimates, and errors in
application of accounting principles.
 TYPES OF ERRORS
• Errors may be basically of two types:
1) Clerical Errors and
2) Principle Errors.
 Clerical Errors

• Clerical errors arise on account of negligence of

the accounting staff. They are called technical
errors. They are committed in posting, totalling
and balancing. Clerical errors may be further
divided as
) Errors of omission,
) Errors of Commission,
) Duplicating Errors and
) Compensating Errors.
• Errors of omission: Error of omission is
one where a transaction has not been
recorded in the books of account either
fully or partially. If a transaction is fully
omitted, then it will be difficult to trace out,
as both the debit and the credit are
missing and the trial balance will tally in
spite of these errors. However if a
transaction is partly omitted, then only one
aspect of the transaction is recorded. In
this case it is easier to locate such an error
• Errors of Commission: When a
transaction has been recorded but has
been wrongly entered in the books of
original entry or posted in the ledger, error
of commission is said to have been made.
Errors of Commission include posting
errors, casting errors and totalling errors.
For example, a purchase invoice for Tk
1250 was entered in the purchase book as
Tk 1520. It is a casting error.
• Duplicating Errors: Such errors arise when
an entry in a book of original entry has been
made twice and has also been posted twice.
• Compensating Errors: A compensating
error or off-setting error is one which is
counter-balanced by any other error or
errors. For example, if A’s account was to be
debited for Tk 100 but was debited for Tk 10
while B’s account which was to be debited
for Tk 10 was debited for Tk 100. Thus, both
accounts have been debited for a total sum
of Tk 110 which amount ought have been
debited.
 Principle Errors
• Principle errors arise generally when the
fundamental principles of accountancy
are not observed while recording a
transaction. For instance, a capital
expenditure is recorded as revenue
expenditure or assets are valued against
the principles of book-keeping or incorrect
provisions for doubtful debts and vice
versa. Such errors are difficult to detect
as the Trial Balance tallies in spite of such
errors.
 PROCEDURE TO BE
FOLLOWED TO DETECT
ERRORS
– Check the opening balances from the
balance sheet of the last year.
– Check the posting into respective ledger
accounts
– Check the total of the subsidiary books.
– Verify all the castings and the carry
forwards.
– Ensure that the list of debtors and
creditors tally with the ledger accounts.
– Make sure that all accounts from the ledger are taken
into accounts.
– Verify the total of the trial balance.
– Compare the various items from the trial balance with
that of the previous year.
– Find out the amount of difference and see whether an
item of half or such amount is entered wrongly
– Check differences involving round figures as
Tk. 1,000; Tk. 100 etc.
– See that no entry of the original book has
remained unposted.
– Ultimately careful scrutiny is the only remedy
for detection of errors.
 FRAUDS
• According to the Auditing Standard issued
by the Institute of Chartered Accountants of
Bangladesh (ICAB), the term fraud refers to
intentional misrepresentation of financial
information by one or more individuals
among management, employees or third
parties. In other words, it is intentional or
wilful misrepresentation or deliberate
concealed of a material fact with a view to
deceive, cheat or mislead another person.
Fraud is committed using the method of
deception in order to gain an unfair or illegal
advantage.
 TYPES OF FRAUDS
I. Manipulation of accounts,
II. Misappropriation of cash
III. Misappropriation of Goods
 Manipulation of Accounts
• Manipulation of accounts is said to be
committed when a person makes a false
entry in the books of accounts knowing it to
be wrong, alters or destroys a true entry in
the business records or prevents the making
of a true entry in the business records.
• Normally it is done by people at the top
management level. It is done to overstate or
understate the profits and the financial
conditions of the business so as to serve
their purpose. This type of fraud is very
difficult to discover.
• Manipulation may be done in any of the
following ways:
i. Non provisions of depreciation on fixed
assets
ii. Overvaluation or undervaluation of assets
iii. Recording revenue expenditure as capital
expenditure
iv. Showing expenses of the next year in the
current year’s profit and loss account
v. Not recording currents year’s accrued
expenses etc.
• A common form of manipulation of
accounts is known as “window
Dressing.”
• A company can use window dressing when
preparing financial statements to improve
the appearance of its performance or
liquidity. Generally, window dressing is
considered to be an unethical practice
because it involves deception and
advancement of management’s interests
instead of interests of information users
(i.e., owners, investors, government).
To identify window dressing an auditor should
review all financial statements and any additional
available information to determine whether:
• A positive cash balance is a result of short-term
borrowing or non-operating activities (refer to the
statement of cash flows to see which activities
generated cash)
• There is an abnormal increase or decrease in any
balances
• The company’s policies were changed during the
period
• Strong sales are accompanied by increases in
accounts payable
 Misappropriation of Cash
• Misappropriation of cash is also
called embezzlement of cash. It
means fraudulent appropriation of
cash belonging to another person
by one who has been entrusted
to it.
Misappropriation may take place in
the following ways:
I. Omitting to enter any cash which
has been received.
II. Entering fewer amounts than what
has been actually received.
III. Making fictitious entries on the
payment side of cash book.
IV. Entering more amounts on the
payment side of the cash book than
what has been actually paid.
 Misappropriation of Goods
• It refers to fraudulent application of
goods by those who handle them. It can
be done by recording sales of larger
quantities and misappropriating the
balance or by recording purchase of
large quantities receiving less quantity
and then receiving the balance amount
privately.
• THE AUDITOR CAN SUSPECT
FRAUD UNDER THE FOLLOWING
CIRCUMSTANCES:
– When vouchers, invoices,
cheques, contracts are
missing etc.
– When control account does
not agree with subsidiary
books.
– When the difference in trial
balance is difficult to
locate.
– When there are greater
fluctuations in Gross profit and
Net profit ratios.
– When there is difference
between the balance and the
confirmation of the balance by
the parties.
– When there is difference
between the stock as per
records and the stock physically
counted.
– When the explanation given
by the client is not satisfactory.
– When there is a overwriting
of some figures.
– When there is a contradiction
in the explanation given by
different parties.
 Auditor’s Duty in respect of Fraud
– Examine all aspects of the finance.
– Vouch all the receipts from the
counterfoils or carbon copies or cash
memos, sales reports etc.
– Check thoroughly the salary and
wages register.
– Verify the methods of valuation of
stocks.
– Check up stock register, goods
inwards notes, goods out wards books
and delivery challans etc
– Calculate various ratios in order to detect
fraudulent manipulation of accounts
– Go through the details of unusual items.
– Probe into the details of the problems
when there is a suspicion.
– Make surprise visit to check the accounts
– Exercise reasonable skill and care while
performing the duty.
 Management’s Responsibility
• The responsibility for adopting sound accounting
policies, maintaining adequate internal control, and
making fair representations in the financial statements
rests with management rather than with the auditor.
Because they operate the business daily, a company’s
management knows more about the company’s
transactions and related assets, liabilities, and equity
than the auditor does. In contrast, the auditor’s
knowledge of these matters and internal control is limited
to that acquired during the audit.
THANK YOU