Types of Errors in Accounts

Concealed  and  Unconcealed  Errors: As a general rule, mistakes are unconcealed but frauds are deliberately concealed. This proposition does not need any elaboration; but exceptions are in both cases. Mistakes become concealed if compensated by another or more mistakes in the opposite direction; or it may even be greatly minimized by that chance happening. For example, by mistake one or more accounts were short debited by an aggregate figure of Rs. 30,000 and this short debit is compensated by chance error or

say short casting or one or more credit accounts to the tune of say Rs. 30,200 the dimension of the error would apparently be Rs. 200 by which the trial balance would be thrown out of agreement and there may be a temptation to think, “the error is small, let us ignore it”. This attitude towards apparently small errors is dangerous because its true dimensions remain concealed and that may render the statements of account totally unacceptable. Mistakes may as well be concealed for wrong arithmetical calculations or for a faulty process of verification. Depreciation and stocks are examples which immediately come to one’s mind. Wrong calculation of depreciation or omission to include certain stocks in the inventory or wrong valuation of stocks are not apparent. Petty cash defalcation is often unconcealed because petty cash is an item which on many occasions is left out of checking.

Procedural  Errors: Sometimes we become so obsessed with the general ledger and its supporting records that we neglect other important features of the accounting system. An accounting system includes both records and procedure. Errors can appear in either or both. Whatever errors occur in the implementation of the procedures may be termed as procedural errors (which include frauds also). For example, the sales procedure of a company may include the following steps:

(a) Receipt of an order through salesman.

(b) Review of order by the credit department to determine whether the customer should be given credit as requested.

(c) Clearance with inventory department to be sure that the order can be executed.

(d) Preparation of forwarding note with copies to obtain the customer’s acknowledgement of the receipt of goods.

(e) Preparation of invoice and dispatch of the same to the customer.

If the procedure requires that these steps should be taken in the order indicated and if, for any reason, the second step is omitted, or is not completed before subsequent steps have been taken an error in procedure has been made and this may lead the company into financial loss caused by non-recovery of the money. Procedures are established to maintain control over resources and over transactions; any failure to follow the

established procedures lessens the control and may permit errors which do affect ledger accounts. Any breakdown in established procedures thus suggests not only the presence of a procedure type error but also of other consequences.

Other errors of this type include the approving of transactions of documents by some one other than the person authorized to do so, failure to ensure that all preceding steps have been taken before approving a document and substitution of one person by another in a procedural function without proper authority. It is the normal procedure that goods, when received should be inspected for quality by the inspection department staff. If the storekeeper carried out this function it is indeed risky. Similarly, if the procedure requires that the timber go-down should have been given periodical insecticide treatment and management has ignored that, a great loss may be caused to the timber by white ants.

What is needed to be emphasized here is this that a procedural error, which is neither a defalcation nor misappropriation, may involve the company in a sizable loss. This type of error or fraud cannot be located by any rigorous examination of the books of account. All these errors discussed above may be grouped in the following categories in terms of their accounting incidence :

(i) Errors of omission - where a transaction has been omitted either wholly or partially.

(ii) Errors of commission - where a transaction has been mis-recorded either wholly or partially.

(iii) Compensating errors - where there are two or more errors which exactly counter balance each other, so that the trial balance agrees in spite of them.

(iv) Errors of principle - these are errors arising as a result of transactions having been recorded in a fundamentally incorrect manner; for example, a distinction not being made between capital and revenue income or expenditure.

(v) Procedural errors.