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Advanced Auditing

Notes (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 nullifying the net effect
of the error.

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.

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

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