Error Correction

Question 1

Define prior period errors.

Answer 1

Prior period errors are omissions or misstatements in the financial statements for one or more periods arising from a failure to use or misuse of reliable information that:

A. Was available when the financial statements for these periods were authorized for issue
B. Could reasonably be expected to have been obtained or taken into account in the preparation and presentation of financial statements.

This encompasses effects of mathematical mistakes, mistakes in applying accounting policies, oversights, or misinterpretation of facts, and fraud.

Question 2

What are the two requirements for the recognition of prior period errors?

Answer 2

Prior period errors are omissions or misstatements in the financial statements for one or more periods arising from a failure to use or misuse of reliable information that:

1. Was available when the financial statements for these periods were authorized for issue
2. Could reasonably be expected to have been obtained or taken into account in the preparation and presentation of financial statements.

Question 3

What are the events from which prior period errors may arise?

Answer 3

Prior period errors encompass the effects of mathematical mistakes, mistakes in applying accounting policies, oversights, or misinterpretation of facts, and fraud.

Question 4

Explain retrospective restatement of prior period errors.

Answer 4

Retrospective restatement of prior period errors involves restating prior year statements to correct the error, when comparative statements are presented.

Question 5

What is the treatment of a correction of a prior period error?

Answer 5

An entity shall correct prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by:

A. Restating the comparative amounts for the prior period presented in which the error occurred (retrospective restatement).

B. Restating the opening balances of assets, liabilities, and equity for the earliest prior period presented if the error occurred before the earliest period presented.

The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered, but it is an adjustment of the beginning balance of retained earnings of the earliest prior period presented.

Question 6

What are statement of financial position errors?

Answer 6

Statement of financial position errors affect the statement of financial position, or real accounts only, meaning, the improper classification of an asset, liability, and capital account.

In such a case, an entry is simply made to reclassify the account.

Question 7

What are income statement errors?

Answer 7

Income statement errors affect the income statement or nominal accounts only, meaning, the improper classification of revenue and expense accounts. These errors have no effect on the statement of financial position and on net income.

Thus, a reclassifying entry is necessary only if the error is discovered in the same year it is committed.

Otherwise, if the error is discovered in a subsequent year, no reclassifying entry is necessary because the nominal accounts for the current year are correctly stated.

Question 8

What are the two classifications of combined SFP and I/S errors?

Answer 8

1. Counterbalancing errors

2. Non-counterbalancing errors

Question 9

Explain counterbalancing errors.

Answer 9

These are errors which, if not detected, are automatically counterbalanced or corrected in the next accounting period. These errors correct themselves over two periods.

EFFECTS

1. I/S for two successive periods incorrect
2. SFP end of first period is incorrect
3. SFP end of second period is correct

USUAL EXAMPLES

1. Inventory, purchases, sales
2. Prepaid expense
3. Accrued expense
4. Deferred income
5. Accrued income

Question 10

Explain non-counterbalancing errors.

Answer 10

These are errors which, if not detected, are not automatically counterbalanced or corrected in the next accounting period. If net income of one year is understated or overstated, the net income of subsequent year is not affected.

EFFECTS

1. I/S in year of error is incorrect; I/S in succeeding year is not affected
2. SFP year of error and succeeding SFP are incorrect until error is corrected