Page 15 - DCOM204_AUDITING_THEORY

Unit 1: Introduction to Auditing

Notes
Example: If a person was to be credited by ` 1,000 and he is wrongly debited by ` 1,000
and he is wrongly debited by `1,000 was trial balance. It may also occur when the name of two
persons are interchanged for each other. For examples, we buy goods from Mr.B.
(b) Errors of Duplication: These types of errors occur when a particular transaction is
recorded twice in the books of account. Since they are also posted twice these do not
affect the trial balance.
(c) Errors of Principle: While recording a transaction, the fundamental principles of
accounting is not properly observed, these types of errors could occur. Overvaluation
of closing stock or incorrect allocation of expenditure or receipt between capital and
revenue are some of the examples of such errors. Such errors will not affect the trial
balance but will affect the Profit and Loss account. It may occur due to lack of
knowledge of sound principles of accounting or can be committed deliberately to
falsify the accounts. To detect such errors, the auditor has to do a careful examination
of the books of account.

When accountings principles are violated in writing the books of account the error
of principal occurs. For example, when wrong account head is chosen to record a
transaction, error of principal occurs. When expenses of capital nature are debited to
revenue or vice versa it is said that error of principal has occurred.
2. Detection and Prevention of Frauds: To get money illegally from the organization or
from the proprietor frauds are committed intentionally and deliberately. If it remains
undetected, it could affect the opinion of the auditor on the financial condition and the
working results of the organization. Therefore, it is necessary for the auditor to exercise
utmost care to detect such frauds. It can be committed by the top management or by the
employees of the organization. Frauds could be of the following types:
(a) Misappropriation of Cash: Since the owner has very limited control over the receipt
and payments of cash, misappropriation or defalcation of cash is very common
specially in big business organizations. Cash can be misappropriated by various
ways as mentioned below:
(i) Recording fictitious payments

(ii) Recording more amount than the actual amount of payment
(iii) Suppressing receipts
(iv) Recording fewer amounts than the actual amount of payment.
There should be strict control over receipts and payments of cash known as “Internal
check system” to prevent such frauds. The auditor should check the Cash Book with
original records, bills register, invoices, vouchers, counterfoils or receipt books, wage
sheets, salesman’s diary, bank statements etc. in order to discover such frauds.
(b) Misappropriation of Goods: Companies handling with high value goods are prey to
this kind of misappropriation. Without proper records of stock inward and stock
outward, it is difficult for the auditor to find out such fraud. Periodical and surprise
checking of stock and maintaining the proper record of inward and outward
movement of stock can reduce the possibility of such fraud.
(c) Falsification or Manipulation of Accounts: In order to achieve certain specific objectives,
accounts may be manipulated by those responsible persons who are in the top
management of the organization. They prepare accounts such a manner that they

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