Question

What are the differences among errors, frauds, and illegal acts? Give an example of each. Why does the difference matter to us as auditors?

Answer 1

Errors : These are mistakes that have taken place unintentionally and with no acknowledgement of any benefit. These mistakes could be due to oversite, no information or mechanical. These mistakes can be corrected. Eg. posting of any entry in a wrong account.

Frauds : These are mistakes which takes place with the objective to have unauthorised and unlawful gain or to avoid certain punishment or penalties. Thus, these mistakes are done intentionally. Eg. Fraudulently taking away of money by treasurer.

Illegal acts : Whether intentionally or unintentionally, any careless unlawful act done not following the rules and regulations under the law of the land. Any uncareful act done, leading to mistake under law involves penalties and punishment. Eg. Not depositing the due tax on or before scheduled date will lead to penalties.

As an auditor, it is necessary to have difference between these acts because line of action under all these acts are different. The errors requires no investigation or enquiry but only correction. Whereas frauds requires investigations and enquiry and will lead to penalties and punishments and likewise in illegal acts which lead to corrections with heavy penalties and punishment with the legal proceedings.