Name: William Andrew G.

Bulaqueña Course: MSA-IA

Subject: MMA 605 Date: August 23, 2018

Accounting Errors

As defined by PAS 8, an accounting error is an omission from, and misstatements

in, the financial statements arising from a failure to use, or misuse of, reliable information
that was available and could reasonably be expected to have been available. These
errors might be a consequence of mathematical mistakes, wrong application of
accounting policies, oversights or misinterpretation of facts, and fraud.

According to an article on CPA Journal published by Alali and Wang (2017) 1, the
leading categories of financial restatement are due to debt and equity accounts or quasi-
debt/equity instruments with conversion options, expense recording, and revenue
recognition. There were other restatement issues which were due to changing accounting
rules, discovery of industry-wide improper accounting practices, descending
macroeconomic trends, or increased regulatory scrutiny. Majority of these accounting
errors resulted from a failure in judgment since the previously mentioned areas involved
a significant degree of judgment.

I had the opportunity to work as an external auditor of several small and medium-
sized entities, of which are mostly cooperatives. Accounting errors revolved mostly on the
investment, revenue, and expense accounts.

On the investment side, the accounting errors were mostly found on valuation and
derecognition during sale. Short-term investments were not valued accordingly, i.e. at fair
value through profit or loss, and were recognized only at historical cost. During sale, the
selling price of the asset was deducted from the same account. Hence, the account had
a negative balance and an income was not recognized. Some noncurrent investment
accounts also had negative balances due to crediting the asset accounts for the total
amount of cash received, of which an income was also not recognized. This was mainly

1
Alali, F., & Wang, S. (2017). Characteristics of financial restatements and frauds. The CPA Journal. Retrieved from
https://www.cpajournal.com/2017/11/20/characteristics-financial-restatements-frauds/
due to the unawareness of the accounting/finance team of the new memorandum
circulars issued by the Cooperative Development Authority, for cooperatives.

For revenue, accounting errors were committed through offsetting other income
earned with an expense account. This happened when income was not derived from
normal operations. A cooperative recorded rent income from non-members as credit
entries to the repairs and maintenance expense account. Another cooperative also
recorded the amount received as registration fees as deduction from the expenses
incurred in conducting the seminar.

For expense, accounting errors were mostly found on depreciation, outright

recording of assets into an expense account, and vice versa. These were frequent among
businesses who have no policy for the recognition and depreciation of noncurrent assets.
Misclassification of expenses was also common.

In my current occupation as internal auditor, we have found accounting errors

mainly on construction-related transactions, amortization, depreciation, and recognition
of other income.

Based on my assessment, a majority of the accounting errors I have encountered

were results of the lack of appropriate people that are either involved in making the
judgments where there is financial reporting risk or provide a detective control through
their review activities that would identify in a timely manner any potential material
judgment errors. Thus, to avoid the risk of poor judgment which would lead to accounting
errors, these people should be sufficiently trained and experienced.