Question

How does double-entry bookkeeping and the accounting cycle contribute to the accuracy of financial reports and reduce the risks of fraud and error?

Answer 1

Double entry system in accounting means that each transaction with a debit balance corresponds to a credit balance. The total of debit side must be equal to the total of credit side. It ensures that there is accuracy in recording all transactions.  

Fraud is more difficult to detect in comparison to error. Fraud is an intentional act of manipulating the data to deceive the users of financial statements. Errors on the other hand are unintentional mistakes. Both frauds and errors can have material impact on financial statements.

Contributions of double-entry book keeping in reduction of frauds and errors

1. Accuracy - Since the amounts on debit side matches the amounts on credit side the chances of inaccurate data being processed is minimal.

2. Leaves an audit trail - When a transaction is posted it impacts two ledger accounts. Accordingly, an audit trail is created wherein the entire scenario of the transaction can be traced.

3. Detection of human error - Since a transaction impacts two ledger accounts, an error can be detected easily by mismatch of balances in general ledger.

4. Complete System - It ensures that all the transactions are recorded thereby reducing chances of frauds / errors.