TAILIEUCHUNG - THEME: DETECTING ACCOUNTING ERRORS

Assume a policy with a $2 million premium that reimburses the policyholder when aggregate losses for the calendar year exceed $10 million. Assume that the losses covered by the policy are generally low severity/high frequency, with minimal catastrophe potential (., the policy is meant to cover mostly pricing risk, not large loss risk). Also assume that the expected losses are $8 million, and that the expected losses normally occur evenly throughout the year. After one quarter, losses would have to be 500% of expected for attachment to occur. After two quarters, losses would have. | THEME DETECTING ACCOUNTING ERRORS By John W. Day MBA ACCOUNTING TERM Transposition Error A transposition error occurs when two or more numbers are reversed or transposed for each other. For example if the number 48 is written as 84. FEATURE ARTICLE Detecting Accounting Errors Anybody who works with accounting knows that errors are made by everyone. That means even the brightest and the best succumb to making errors from time to time. It s just a fact of life. The axiom that is drilled into the heads of accountants is to always prove your work . This is usually learned the hard way until it is demonstrated clearly that proving your work is the shortest path to reaching the goal. The pain of having to redo hours of work because of sloppy habits gets burned deeply into the nervous system. Okay so you are proving your work as you go. What happens when you find that an account doesn t balance Or that a balance simply can t be right At this point it s time to don a detective s hat and start an investigation. There is a culprit or two lurking in those books and it s your job to smoke em out . How to proceed Where to begin It seems like the error or errors could be hiding anywhere. The first thing to do is to start looking for clues. Before you get started it helps to know the face of your adversaries for there are a number of them. The following is a list of the main types of errors with some examples 1. Errors of principle - When a transaction is recorded against the fundamental principles of accounting. - Purchase of a fixed asset that should be capitalized gets expensed instead. - Recording a personal expense as a business expense. - Recording a capital contribution as a loan when there is no intention to treat it that way. 2. Errors of omission - A transaction is either wholly or partially not recorded in the books. - Forgetting to record the depreciation for a given period. - Failing to record some out-of pocket expenses. - Not recording a required adjustment to .

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