What Are Errors Of Principles In Auditing?

Question

What Are Errors Of Principles In Auditing?

2 Answers

Answer Question

Answer 1

There are different types of errors of omission which are as follows:Incorrect Allocation: this occurs when correct distinction between revenue and capital is not strictly maintained for example capital expenditures charged to revenue expenditures and vice versa.

Omission of outstanding assets and liabilities for example prepayments are ignored and that mount charged off to the profit and loss account, outstanding expenses in respect of rent, salaries, and commission are ignored and not accounted for. Incorrect valuation of assets: current assets are not valued at cost or market price whichever is lower. Fixed assets are not valued at cost less depreciation as required by the act.

The above errors can only be detected by an intelligent vouching and a complete verification of the assets and liabilities. If an auditor has agreed to locate errors the following steps would be taken by him to discover the difference in the trial balance.

• Check casts of the trial balance and lists of debtors and creditors.
• Establish the amount of difference.
• Check balances from personal and impersonal ledger into the trial balance.
• While checking the balances care must be taken to ensure that the closing balances are correctly entered in the right column.
• Check balances from personal and impersonal ledger into the trial balance.

Answer 2

The errors of principle consist of wrong allocation of expense between capital and revenue items. The capital items can be treated as revenue and vice versa. The carriage paid on machinery can be charges to carriage account. These errors can not affect the trial balance. The errors of principle relate to omission of outstanding assets. These assets include prepaid insurance, prepaid taxes, prepaid rent, prepaid interest and salaries plan in advance, accrued income, rent, receivable, interest receivable and so on. It is an error of principle. These liabilities include wages unpaid, carriage outstanding, rent due, tax payable, commission payable, interest payable and unearned income.

The error of principle related to wrong valuation of floating and fixed assets. The current assets may not be valued at cost or market rule. The fixed assets may not be valued at cost less depreciation. Such valuation does not affect the trial balance. The error of principle relates to recording of expense as income or vice versa. The commission expense can be recorded as income. The interest expense can be stated as income. The errors of principle relates to concealing title of expenditure account. The repair to machinery may be charged to depreciation account. The advertising expenses may be recorded as repair to assets. The actual head of expenditure is not disclosed.