Different Methods of Error Detection While Auditing

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1 Different Types of Errors

1.1 Error of Commission

1.2 Error of Omission

1.3 Error of Principle

1.4 Error of Duplication

1.5 Compensation Errors

2 Various Methods of Error Detection

2.1 Check for Unusual Transaction

2.2 Brainstorming Session

2.3 Comparing the Historical Data

2.4 Checking with other Financial Documents

2.5 Checking Changes in the Accounting Process

2.6 Read More About Auditing

Mistakes are made by every business entity but detecting and understanding their mistake and then taking remedial action at the proper time should be focused on more. Error detection is significant for any business as even a small error can wreak havoc over the company. These errors may or may not be caused intentionally. An auditor should be very careful about financial mistakes as a good understanding of the errors will help in taking the decisions for the future of the company.

Being proficient in finding errors in the financial books of the company is one of the most important quality that an auditor must-have. If the auditor can find out the error in the books of the company, he can prove himself as a significant asset of the company.

There are different types of errors that an auditor should look for in accompany. These are explained below.

Different Types of Errors

There are majorly five different types of errors that should be taken care of by the auditor.

Error of Commission

This type of error is caused if the accountant has not been paying complete attention to the work. In this error, the accountant knowingly or unknowingly places the entry under the wrong account. E.g. let’s suppose a purchase was made for 20,000 but was mistakenly added in the books of accounts as 2,000.

Error of Omission

This error occurs when a particular transaction is not recorded in the books of accounts. It is possible that the transaction is not recorded in the reports or is only partially recorded in the accounts. In case the transaction has not been recorded in the accounts, there will be no entry of debit or credit in the ledgers. This means that there will be no effect on the trial balance.

Error of Principle

This error occurs when the transactions are not correctly recorded and are in the wrong place in the false accounts. For E.g. a transaction of 45,000 as income received has been entered into the payments column. This transaction will affect the values of the trial balance.

Error of Duplication

An auditor requires all his powers of understanding and observation to notice the presence of this error. When a transaction is recorded twice in the books of accounts, it is said that a failure of duplication has occurred. This error is also said to have happened if the totalling of any of the statements is done twice. This will make the balance askew.

Compensation Errors

If an auditor finds a compensation error in the financial books of accounts, there is a fraudulent activity that someone is trying to hide. It is also challenging to find such errors as in this error, the debit side is well balanced with the credit side, and no effect can be seen in the trial balance.

These are the errors that an auditor should find out in the books of accounts as any error can affect the company in a very drastic manner.

Various Methods of Error Detection

An auditor may use various kinds of error detection methods, and the use of such a method depends upon the nature of the business. Some of the means by which an auditor detects error are as follows:

Check for Unusual Transaction

An auditor should check the transactions of the business and see if there is any transaction that has not occurred earlier or there is a discrepancy in the cost previously mentioned. If such a transaction is found, then the auditor must do a thorough background check if the transaction happened or was the number used to hide something.

Brainstorming Session

Before finding the error, the auditor should brainstorm on the situation and figure out how an error can happen considering the size and nature of the business. By brainstorming it is possible for an auditor to reduce the time taken for auditing and can find the error quite early. In this method, the various ways in which an error can be conducted should be mentioned and thought upon.

Comparing the Historical Data

Checking the historical data of the company and comparing it with the present information is one of the easiest and effective methods of finding an error in the accounts. Historical data of the at least the last five years is taken and is compared to the present information, which helps in finding out if the transaction was real or not.

Checking with other Financial Documents

An auditor should compare the data with complementary documents and check the veracity of the various transactions. This will allow the auditor to understand the present financial situation of the company correctly and is there any discrepancy in the accounts.

Checking Changes in the Accounting Process

Sometimes, the accountant of the company changes the accounting method, which results in a difference between the present result and the anticipated results of the transaction. The process of accounting has a huge bearing on the financial aspect of the business.

The methods given above are some of the primary techniques which help an auditor find any error while conducting an audit. The complete process can become very complicated in the case of specific companies, and these companies should avail themselves of the services of an audit firm which will ease the process.

JAXA Chartered Accountants are one of the most known firms in UAE and are also approved in many of the free zones. JAXA will not only manage the finances of your company correctly but will even understand the future requirements of your company and work accordingly. To know more about the services provided by JAXA do contact us, we would be happy to help.