The difference between fraud and error in the auditing environment relates to intent. Fraud is typically an intentional act wherein one or more persons attempt to gain an advantage over others (Pratoomsuwan & Yolrabil, 2020). For example, fraudsters may forge signatures, falsify documents, or abuse trust. Financial fraud is the most common type of fraud. Auditors should be vigilant when conducting a financial audit, as fraud can be challenging to detect.
Errors usually occur unintentionally and can be caused by factors including lack of knowledge, bad decision-making, or technical issues. It can be linked to incorrect information, decision-making, or understanding of procedures and rules. Errors can have different causes, so the auditor must be attentive and identify the cause of the error. Errors can occur due to carelessness, incorrect interpretation, or application of wrong rules.
Scenario Analysis: Classifying Fraud or Error in an Audit Environment
Consider the following scenario in an auditing environment: the auditor examines a balance sheet for cash flow. He discovers that the last two months of receipts were overstated by $50,000. The auditor further investigates and finds that a company representative manipulated the data to gain a bonus.
In this case, the scenario can be classified as fraud. This is an intentional act done to gain an unauthorized advantage. The data was manipulated deliberately to alter the documentation and provide the auditor with false information. In this situation, the auditor will need to note the fraud in the report and take measures to carry out further investigations.
In contrast to fraud, an error in the auditing environment can be linked to incorrect information, incorrect decision-making, or incorrect understanding of procedures and rules. For example, if the auditor gets confused with the knowledge or presents erroneous information about the cash flows, that can be an error. In this case, the auditor must review his documents and provide the correct information.
Reference
Pratoomsuwan, T., & Yolrabil, O. (2020). Fraud and Error Misstatements and Auditor Liability: The Moderating Role of the Evaluator’s Auditing Knowledge. DLSU Business & Economics Review, 30(1).