Page 14 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes audited books of accounts, Profit and Loss Account and Balance Sheet are showing the true and
fair view of the state of affairs of the company’s business. To get a true and fair view of the
companies’ affairs and express his opinion, he has to thoroughly check all the transactions and
relevant documents of the company made during the audited period. Which will help the
auditor to report the financial condition and working result of the organization? While carrying
out the process of audit, the auditor may come across certain errors and frauds. But detection of
fraud or errors is not the primary objective of the audit. They are come under the secondary
objectives of audit.

Did u know? Audit also disclose whether the Accounting system adopted in the organization
is adequate and appropriate in recording the various transactions as well as the setbacks of
the system.

1.8.2 Secondary Objectives

In order to report the financial condition of the business, auditor has to examine the books of
accounts and the relevant documents. In that process he may come across some errors and
frauds. We may classify these errors and frauds as below:
1. Detection and Prevention of Errors: Following types of errors can be detected in the
process of auditing.
(a) Clerical Errors: Due to wrong posting such errors may occur. Money received from
Microsoft credited to the Semens’ account is an example of clerical error. Even
though the account was posted wrongly, the trial balance will agree. We can classify
clerical errors as below:

(i) Errors of Commission: These errors are errors caused due to wrong posting
either wholly or partially of in the books of original entry or ledger accounts
or wrong totaling, wrong calculations, wrong balancing and wrong casting of
subsidiary books. For example ` 5000 is paid to Microsoft for the supply of
windows program and the same is recorded in the cash book. While posting
the ledger the Microsoft’s account is debited by ` 500. It may be due to the
carelessness of the accountant. Most of these errors of commission are reflected
in the trial balance and can be identified by routine checking of the books.
(ii) Errors of Omission: When there is no record of transactions in the books of
original entry or omission of posting in the ledger could lead to such errors.
Sales not recorded in the sales book or omission to enter invoices in the
purchase book is examples of Errors of Omission. Errors due to entire omission
will not affect the trial balance. Errors due to partial omission will affect the
trial balance and can be detected.
(iii) Compensating Errors are errors committed in such a way that the net result of
these errors on the debit side and credit side would be nullify the net effect of
the error. For example, Ram’s account which was to be debited for ` 5000 was
credited for ` 5000 and similarly, Sita’s Account which was to be credited for
` 5000 was debited for ` 5000. These two mistakes will nullify the effect of each
other. Unless detailed investigation is undertaken such errors are difficult to
locate as both the sides of the trial balance are equally affected.
These types of errors are said to occur when they offset the effect of each other either
wholly of partially.

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