Advantages of Linear Model of Communication

 There are different types of Errors that will be going through when it comes to the rectification of errors what kind of errors we have and how to do we analyze these errors. When it comes to rectification of errors there are four types of errors.

Types of Errors

Errors of Omission 

When any transaction is completely omitted from being recorded in the primary books of accounts, then such an error is known as an error of omission. In case a businessman completely forgets to record a transaction in the primary books of accounts, then the question of posting the entry doesn't arise at all. Hence, an error of omission has no effect on the Trial Balance as the entry doesn't appear in the books of accounts. Hence, despite the fact that the Trial Balance is tallied, the books of accounts remain incorrect. 

For example, we purchased goods worth 3300 from Ramesh but did not record the same in our books of accounts. In such a case, even though the Trial Balance will tally, each side of the Trial Balance will contain an inaccuracy to the extent of 300. The error of recording a transaction in the primary books of accounts may be a complete omission or a partial omission. An error of complete omission is much harder to locate since in such a case both debit and credit sides of the transactions are not recorded in the books of accounts.

Errors of partial omission are easier to locate as the two sides of the Trial Balance do not tally in such a case.  In order to detect errors of omission, it is necessary to have a good system of internal checks and also an in-depth examination by the auditor.

Errors of commission

 Such errors occur when a transaction is wholly or partially recorded wrongly in the books of accounts.  These errors include wrong entries, wrong totaling, wrong posting, errors in carrying overbalances or totals from one page to another, etc.  Such errors may also be complete or partial. 

Partial Errors 

Partial Errors are usually thrown up by the Trial Balance, however, a complete error is more difficult to detect as the Trial Balance remains tallied.  If while making entries in the daybook or in any account an error is committed, then the same error is likely to continue during a posting in the Ledger Account.  Hence, even though the Trial Balance is tallied, the error will remain in the books of accounts. 

 For example, if we purchase goods worth 35,400 / and make an entry of * 4,500 / - then this is a major error.  However, this error will not affect the Trial Balance and both sides of the Trial Balance will tally.  Hence, it requires a great deal of caution, alertness, and intelligence on the part of the auditor in order to detect errors that do not affect the Trial Balance.  Such errors are fewer in the case of companies employing a self-balancing system of managed accounts.  

Compensatory Errors

Two or more two such errors usually occur at a time, and in such a manner that they balance out the effect of each other.  Hence when the error in one account balances out an error in another account, then such errors are referred to as compensatory errors.  

Such errors do not have any effect on the Trial Balance, even though they may have an effect on the Profit and Loss Account.  Such errors may be different in nature but they are always the same in amount.  For example, if Mohan's account is debited with 20 instead of 200 and in Vinod's account instead of 20.  * 200 are debited, then even though both the accounts will be incorrect, it will have no effect on the balancing of the Trial Balance Compensatory errors can be detected only through an in-depth examination by the auditor, as such errors, can sometimes go undetected for long periods.

Errors of Principle

 Such errors occur due to the lack of knowledge about the Double Entry System of bookkeeping and standard accounting principles.  Such errors include the wrong classification between income and capital, entering items of income and carefully in personal accounts, wrong valuation of assets, etc. 

For example, if 1000 / spent on the extension of the building are debited to Repair Alc.  In the same manner, 500 / paid to the Landlord are debited to the Landlords account instead of Rent Alc.  Such errors have no effect on the Trial Balance even though they may affect the Profit and Loss Account.  Normally, such errors are committed unknowingly even though they may be committed intentionally with the aim of manipulating the account.  

The nature of such errors depends upon the specific situation.   ​(e) Errors of duplication: Such errors usually occur when the same transaction is entered twice in the primary books of accounts and is also posted twice in the ledger For example, if <1,000 / - are received from Mohan and the same entry is recorded twice in the books of accounts and is also posted twice into Mohan's account, then such an error.

The above-mentioned errors can be detected in the following ways : 

 Location of Errors: 

Detection of errors when the total of the Trial Balance does not tally is not the job of the auditor. His job is mainly to examine the truthfulness, fairness, and accuracy of the books of account. Tallying the Trial Balance is the work of the accountant. Only if the accountant is incapable of tallying the Trial Balance can this work be entrusted to the auditor. In such a case, the auditor works in the capacity of an account and is entitled to additional remuneration for doing such work. When the accounts which the auditor is to audit contain errors due to which the Trial Balance does not tally, the auditor should take the following steps in order to tally the Trial balance.

Checking the Totals of the Trial Balance:

 In case the Trial Balance does not tally it maybe because of an error in totaling, hence, first of all, he should total both sides of the Trial Balance very carefully.

 ( ii ) Finding the Amount of Difference:

 If the total of the Trial Balance does not tally then the first step should be to find the difference between the two sides, that is amount with which the Debit side exceeds or falls short of the Credit side and vice versa.

 ( iii ) Halving the Amount of Difference:

 The amount of difference should be halved and it should be checked if there is any balance equivalent to the amount. It may be possible that an amount may have been entered on the wrong side by mistake. If even then the difference cannot be located, then the amount of difference should be divided by 9. If the amount is completely divisible by 9 then it means that there is an error in the transportation of digits.

 For example, the difference between 928 and 289 is 639 which is exactly divisible by 9. Hence, the error is an error of transportation of numbers. Such errors occur very frequently.

( iv ) Checking of Journal:

 Each and every entry in the Journal should be checked so as to ensure that the debit and credit sides of each entry in the Journal are equal and that all entries in the Journal are entered in the Ledger.

( w ) Checking of Subsidiary Books:

All the subsidiary books should be examined so as to ensure that there is no amount that has been entered in the subsidiary book from the waste book. Apart from this, the totals of subsidiary books should also be checked.

( vi ) Checking of Posting of Subsidiary Books:

 All the subsidiary books should be checked so as to ensure that there are no entries that are remaining to be posted. This can be ensured by checking the LF ( Ledger Folio ) column of each entry as entries that have not been posted would not contain any ledger folio in the LE. column.

 ( vii ) Checking the Balances of Ledger:

 The ledgers should be examined so as to ensure that all the ledger balances have been included in the Trial Balance. It may happen that the trial Balance was not tallying due to the non-inclusion of balances of one or more accounts. The balances being carried forward should also be checked.

( viii ) Checking of Opening Entries:

While examining the primary books of account, it should be ensured that all the opening balances brought forward in the current year are tallied with the Balance Sheet of the previous year since opening entries are passed only on the basis of financial statements of the previous year.

 ( ix ) Comparison with Last Year's Trial Balance:

 If there is a lot of difference in the Trial Balance then it should be examined in comparison with the Trial Balance of the previous year, and if there is a major difference in any amounts in the two Trial Balances, same should be examined in detail.

If any balance has been omitted from being recorded in the Trial Balance, the same can also be thrown up during the comparison of the two Trial Balances Here, it should be kept in mind that a tallied Trial Balance does not mean that there are no discrepancies in the books of accounts. In order to detect the discrepancies, the auditor should conduct an in-depth examination using his competence and intelligence.

 Detection of Frauds:

The detection of fraud is also one of the objectives of auditing, Frauds are those inaccuracies and errors which are committed intentionally and with the aim of harming the organization, Mistakes, and errors in the books of accounts that have been committed in a planned manner and with the view of deceiving others are known as frauds.

Frauds are always committed by intelligent and scheming people, and hence it is very difficult to detect frauds. It is necessary for the auditor to have knowledge about the various kinds of frauds.