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Auditing Errors and Corrections Guide

This document discusses the correction of accounting errors, providing examples of different types of errors that may occur. It describes errors that affect one period or multiple periods, such as omitting accruals or deferrals, inventory misstatements, and failure to properly record long-term assets. Specific cases are presented showing the effect of errors like omitting accrued expenses or revenues, recording a prepaid expense as paid or revenue before earned, overstating inventory amounts, and expensing a capital expenditure. The key impacts of errors are misstated net income, retained earnings, and balance sheet account amounts for one or multiple periods depending on the type of error.

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Jess Siazon
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118 views3 pages

Auditing Errors and Corrections Guide

This document discusses the correction of accounting errors, providing examples of different types of errors that may occur. It describes errors that affect one period or multiple periods, such as omitting accruals or deferrals, inventory misstatements, and failure to properly record long-term assets. Specific cases are presented showing the effect of errors like omitting accrued expenses or revenues, recording a prepaid expense as paid or revenue before earned, overstating inventory amounts, and expensing a capital expenditure. The key impacts of errors are misstated net income, retained earnings, and balance sheet account amounts for one or multiple periods depending on the type of error.

Uploaded by

Jess Siazon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

 

       GENSANTOS FOUNDATION COLLEGE, INC.


Bulaong Extension, General Santos City 9500
BSA/BSAT/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
CORRECTION OF ERROR
Reference: PAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
I. Errors in classification affecting only one period.
a. Error affecting balance sheet accounts only.
i. When these errors are not discovered until a subsequent period, corrections must be made and
balance sheet data are restated for comparative purposes.
b. Errors affecting income statement accounts only
i. These errors do not affect the Net Income of the subsequent period and do not require
adjusting entries, but the misstated accounts should be restated for comparative purposes.
II. Errors affecting both income statement and balance sheet accounts
a. Counterbalancing errors in adjusting entries (e.g. an error in ending inventory of one period) affect two
periods and are known as self-correcting errors.
For example, overstating ending inventory of 2015 will overstate the income of 2015 and understate the
income of 2016.
The effects of this type of error are:
 Net income amounts of two successive periods are incorrectly stated.
 Certain account balances in the balance sheet at the end of the first period are incorrectly stated,
but
 The account balances in the balance sheet of the succeeding period are correctly stated.
Examples of errors
 Omission of adjustments for prepaid, deferred and accrued items at the end of the period.
 Misstatement of inventories
 Errors in purchases cut-off
 Errors in sales cut-off

1. OMITTING ACCRUALS
Case #1 Omitting Accrued Expenses
12/31/16 12/31/17 1/1/18
Expense (wages)
Net Income
Payable (wages)
Retained earnings, end

Case #2 Omitting Accrued revenue

12/31/16 12/31/17 1/1/18


Revenue (interest)
Net Income
Receivable (interest)
Retained earnings, end

2. OMITTING DEFERRALS (Prepaid Expense and Unearned Revenue)

Case #3 (Recorded as Expense when cash was paid)

12/31/16 12/31/17 1/1/18


Expense (insurance)
Net Income
Prepaid Asset
Retained earnings, end

Case #4 (Recorded as Revenue when cash was received)


12/31/16 12/31/17 1/1/18
Page 1 of 3
        GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSAT/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
Revenue (earned)
Net Income
Liability (unearned rev.)
Retained earnings, end

3. INVENTORY ERRORS
Inventory errors could be:
 A misstatement of the ending inventory balance, which is followed by a misstatement of the beginning
balance for the next period, or
 A misstatement of purchases for the period (improper cut-off)
Case #5 (Overstated Inventory count)

2016 2017 2018


Beginning Inventory
+ Purchases
Goods available for sale
-Ending Inventory
Cost of goods sold
Net Income
Retained earnings
Accounts payable

Case #6 (Overstated purchases**)


2016 2017 2018
Beginning Inventory
+ Purchases
Goods available for sale
-Ending Inventory*
Cost of goods sold
Net Income
Retained earnings
Accounts payable
*Determined by physical count; **Vendor shipped goods FOB Destination. Goods were not received by 12/31,
but recorded as purchases and not included in the physical inventory count.
4. Another type of error that will affect the income of one period only and affect the balance sheet account for all
periods.

Case #7 (failure to record depreciation or amortization)

2016 2017 2018


Depreciation
Accumulated Depreciation
Net Income
Retained earnings

5. Other errors will affect the income for several periods, such as misrecording the cost of a long-lived asset (i.e.,
depreciation will be misstated for all periods).

Case #8 (capitalizable expenditure of P150,000 – life 3 years – was expensed as repairs and maintenance)

2016 2017 2018


R&M
PPE
Depreciation
PPE, Net of Accum. Dep.

Page 2 of 3
        GENSANTOS FOUNDATION COLLEGE, INC.
Bulaong Extension, General Santos City 9500
BSA/BSAT/BSMA Department
AUDITING PROBLEMS E.J. SEBUA, CPA
Net Income
Retained earnings

Page 3 of 3

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