When a transaction has been recorded but wrongly entered in the books of original entry or the ledger, an error of commission is said to have been made, e.g., incorrect entries in the original records, wrong castings, calculations, extensions, carry forwards, etc. The non-agreement of the trial balance will detect some of such access.
On the other hand, if a mistake has been committed in the invoice for the sale of goods, the error will not be detected as the mistake will appear both in the original books and the ledger.
An error of commission is a mistake made by an accountant or auditor who records a transaction inaccurately, resulting in a falsification of financial facts. These errors might occur when there is a misunderstanding of the transaction or when the individual recording the transaction makes a mistake.
An accounting and auditing error of commission is a mistake that can occur. It occurs when an accountant or auditor records a transaction improperly, leading to a wrong financial statement. This is distinct from an omission error, which occurs when a transaction is not recorded.
These errors can happen for several reasons, including:
- Lack of knowledge or training
An accountant or auditor needs to gain understanding or training in a particular area of accounting or auditing to avoid committing errors. For example, accountants must thoroughly grasp tax regulations to avoid mistakes when drafting tax returns.
- Misunderstanding of transactions
An accountant or auditor may occasionally need clarification on a transaction or its accounting approach, resulting in errors of commission. For example, if an auditor wrongly classifies a lease as an operating lease rather than a financing lease, it can falsify financial information.
- Inadequate review procedures
Errors of commission can occur if an accountant or auditor fails to follow proper review procedures. An accountant, for example, may miss errors if they do not double-check entries before submitting financial figures.
- Fraudulent activity
Errors of commission can occur in some situations due to fraudulent activity, such as embezzlement or incorrect accounting entries.
Commission errors can have significant ramifications for enterprises, such as:
- Inaccurate financial reporting
An oversight might result in erroneous financial reporting, harming a company's brand and undermining investor trust. Incorrect financial statements can also contribute to bad company decisions because stakeholders rely on them to make informed judgments regarding investments, acquisitions, and other financial activities.
- Incorrect tax payments
Commission errors can result in improper tax payments, resulting in penalties and interest charges. Overstating income or understating expenses can result in a tax underpayment while understating income or overstating expenses can result in a tax overpayment.
- Potential legal issues
If errors of commission result in misleading financial statements, a corporation may suffer legal consequences such as lawsuits, fines, and regulatory investigations. This can harm a company's reputation and cause significant financial losses.
Accountants and auditors should adopt the following best practices to avoid commission errors:
- Double-check all entries
Review all entries before submitting financial statements to verify no duplicates, inaccurate postings, or math errors.
- Create an internal control system.
Implement an internal control system that describes the procedures and checks and balances required to assure the accuracy of financial statements.
- Conduct regular audits
Regular audits can assist in identifying mistakes of commission and correcting them before they have serious financial consequences.
- Train employees
All staff should be educated on the significance of accurate financial statements and the potential implications of errors in commission.
Accounting and auditing can suffer from a variety of errors of commission. Here are a few examples:
Example 1: Duplicate entries
This happens when a transaction is recorded twice, causing income or expenses to be overstated.
Example 2: Incorrect posting
This occurs when a transaction is recorded in the incorrect account, resulting in a false financial statement.
Example 3: Math errors
This happens when a calculation is erroneous, resulting in a financial statement that needs to be corrected.
Example 4: Fraudulent transactions
This occurs when a transaction is intentionally registered to mislead stakeholders.
- To avoid unwanted repercussions, it is critical to identify and fix errors of commission as soon as possible.
- Errors in commission can have serious financial consequences, but they are avoidable.