CHAPTER 16: ERROR CORRECTION

 Introduction
o Can arise in respect of recognition, measurement, presentation or disclosure of
elements of financial statements
o Potential current period errors discovered are corrected before the financial statements
are authorized for issue
o Material errors are sometimes not discovered until a subsequent period
 These prior period errors are corrected in the comparative information
presented in the FS for that subsequent period
 Prior period errors
o Omissions and misstatements in the entity’s financial statements for one or more
periods arising from a failure to use or misuse of reliable information that:
 Was available when FS for these periods were authorized for issue
 Could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those FS
o Include the effects of mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretation of facts and fraud
 Treatment of prior period errors
o Shall correct material prior period errors retrospectively in the 1 st set of financial
statements authorized for issue after their discovery
o Shall be corrected by retrospective restatement
 If comparative statements are presented, the prior year statements are restated
to correct the error
 Adjustment of the beginning balance of retained earnings of the earliest period
presented
 Statement of Financial Position errors
o Affect the statement of financial position or real accounts only, meaning the improper
classification of an asset, liability and capital account
o Entry is made to reclassify the account balances
 Income statement errors
o Affect the income statement or nominal accounts only (improper classification of
revenue and expense accounts)
o Have no effect on the statement of financial position and on net income
o Reclassifying entry
 Necessary only if the error is discovered in the same year it is committed
 If error is discovered in a subsequent year, no reclassifying entry is necessary
because the nominal accounts for the current year are correctly stated
 Combined statement of financial position and income statement errors
o Affect both statement of financial position and income statement because they result in
a misstatement of net income
o Ex. If accrued salaries payable is overlooked, the effects are:
 Salaries expense understated (income statement error)
 Liability understated (statement of financial position error)
  Net income overstated (income statement error)
 Retained earnings overstated (statement of financial position error)
o Classified as counterbalancing and noncounterbalancing errors
 Counterbalancing errors
o Errors which if not detected are automatically counterbalanced or corrected in the next
accounting period
o These errors will be offset or corrected over 2 periods or these errors correct
themselves over 2 periods
 Effects of counterbalancing errors
o Income statements for 2 successive periods are incorrect.
o The statement of financial position at the end of first period is incorrect.
o The statement of financial position at the end of the second period is correct.
- Normally include the misstatement of the ff.:
o Inventory, including purchases and sales
o Prepaid expense
o Accrued expense
o Deferred income
o Accrued income
 Noncounterbalancing errors
o Errors which, if not detected, are not automatically counterbalanced or corrected in the
next accounting period
 Effects of non-counterbalancing errors
o Income statement of the period in which the error is committed is incorrect but the
succeeding income statement is not affected.
o Statement of financial position of the year of error and succeeding statement of
financial position are incorrect until the error is corrected.
o Ex. Misstatement of depreciation