Errors means unintentional mistake in financial information.

It is an innocent
mistake done by the employee in the books of accounts.

Errors are of two types

1. Errors of Principle

Errors of principle means errors in following the basic principles of accounting such as
concept of

separate legal entity, materiality concept, etc

2. Clerical errors

Clerical errors are further classified into:

a. Errors of omission in this the journal entry is omitted unintentionally. E.g. paid
rs.5000 cash for purchase of goods not recorded at all. In this case the trial balance will
tally but this error can be detected by vouching.

b. Errors of commission in this there is an error due to mathematical mistakes,

casting errors, posting errors. E.g. error in totaling the subsidiary books. In this case the
trial balance will not tally

c. Compensating errors in these two wrong entries compensate each other. E.g.
received rs.400 from A, recorded as received rs.4000 from A. and received rs.4000 B
recorded as rs.400 received from B. In this case the trial balance will tally such kind of
error is difficult to detect but it can be detected thru vouching.

d. Error of duplication in this a transaction is recorded twice unintentionally. E.g.

cash paid to creditor recorded twice. In this case the trial balance will tally to detect the
error vouching should be done.

A Fraud is a deliberate or intentional mistake. Purposely done by employees,

management or third party for personal benefit.

Frauds may be of the following types:

1. Manipulation, Falsification of records

This can be done in following manner:

a. Not recording transactions transactions may not be recorded at all. E.g. good
purchased not at all recorded in purchase book, such fraud occurs when the error of
omission is done intentionally

b. Recording dummy transactions dummy (false) transactions are recorded. E.g.

goods sent on consignment recorded as goods sold.

c. Misapplication of accounting policies accounting policies may be applied

wrongly. E.g. income received in advance shown as income accrued.

d. By Window dressing it means showing better picture of the concern when

actually it is worse.

e. By creating secret reserve it means showing worse picture of the concern when
actually it is better.

2. Misappropriation of cash

Cash may be misappropriated or stolen out of cash received, cash paid, cash balance. It
is done in following ways:

a. By not recording the cash received at all or only recording a part of amount as
received this fraud is done mainly during cash sales, sale of scrap, sale of old furniture.

b. By pocketing the receipt from X and showing it as a receipt from Y and so on and
using the money meanwhile this is also known as teeming and lading

c. By recording dummy transactions or showing excess amount of payment.

d. Cash is usually stolen from cash box i.e. the cash balance lying in hand.

3. Misappropriation of goods

Goods may be misappropriated out of goods received, goods dispatched and closing
stock on goods. It is done in following ways:
a. Goods received not recorded at all or recording only a part of goods received and
misappropriate the balance

b. By recording excess sales or dummy sales transactions

c. By stealing goods from the stock in hand.