1. finance
2. accounting and auditing

HOW
A
TO
MANUAL
AUDIT
INSTRUCTION
OF
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*
"..
.-^
...
^
^^^
^
Originally
under
of, and
a
prepared
certified
member
public
of
of
the
the
the
for
supervision
accountant
Accountants.
The
McArdle
New
by
Press,
York
City.
of
and
tute
Insti-
American
Published
staff
Inc.,
Kp-^y^
f
^^VARO
co^
tt"
Lltt^
Copyright
The
Printed
McArdle
in the
United
1919
Press, Inc.
States
of America.
Foreword
These
inaUy
New
instructions
written
York
based
the
as
firm
Federal
found
book
hence
granted
its statement
prepare
of
only
to
of
of
years
has
who
They
are
recommended
knowledge
a
well-known
a
methods
the
on
orig-
were
accountants.
in its many
accountant
of
examinations
implies, attempts
the
and
public
and
firm
for
name
to
concern
this
by
takes
its
as
and
Bank,
audit
an
staff-members
for financial
Reserve
desirable
The
of
of auditors
perform
to
for the
guide
form
the
on
a
how
on
by
auditing
experience.
and
accounting
structio
give specific in-
to
verify the books
of condition
and
of
a
statement
operations.
The
subject falls
follows.
First
is
the
auditor
and
to establish
The
section
a
natural
section
of
audit
an
is devoted
in
his
safeguard
to
client's confidence
the
which
sections
covering general rules
follow, both
to
second
conduct
four
into
client's
in the
for
interests
auditor's
manufacturing
any
book
of conduct
instructions
to
the
ability.
the
covering
merchandising
or
concern.
Section
the
3 details
books
that
not
of
specific points
business
a
which
business,
looked
in
for
conditions
general instructions
auditing
peculiar
in
Section
2
to
do
cover.
In
Section
4
suggested paragraphs
are
comments
of
a
statement
is
seldom
service
to his client must
the
investigation, but
the
shows
The
to make
be
shown
said,
unskilled
in
comment
sure
that
and
writer
stand, they
are
the
who
in
business
financial
of
is
the
upon
changes
a
most
statement
the
of
scope
accounting
which
the
or
tion
examina-
desirable.
paragraphs
require
of
of
only indicate
will point out
management
to be
comments
writing the
in
use
auditor
will not
which
examination,
in
The
make
for
presentation
mere
enough.
the
even
The
report.
and
to
be
unusual
having
the
to
a
that
highest standing.
say
they
in any
in
They
report.
they
use
Full
the
cover
points which
been
have
accurately and
free
are
profession
by the
is
...
the
carefully edited
clearly
what
the
As
they
likely to fall into.
for
needs
jargon which
staff auditors
instructions
m
from
often
most
using
of
a
firm
them
are
of the
given.
In
had
constantly
it.
use
the
As
auditor
It is the
the
physical shape
it is
with
the
who
of those
referred
to
publishers
to
were
frequently by
of his examinations.
course
belief of the
book
of the
convenience
it will be
manual,
a
in the
can,
the
in mind
field completely
accoimtant
an
the
determining
publishers
in
and
its
that
detail
and
to Audit"
"How
that
aid, acquit himself
any
well
covers
well-posted
in
handling
audit.
THE
December,
McARDLE
PRESS,
New
1919.
IV
INC.,
York
City.
CONTENTS
SECTION
General
Coodnct
Need
1
good
standard
the
rule.
work
butractions
Manofacturinf
the
for
ef
Audit
Preferable
Trial
steps.
balances.
figures.
III.
11
Bank
Accounts
receivable.
Other
Good
will.
IV.
27
Plant
and
Reserve
equipment.
Organization
or
for
development.
charges to operations.
Deferred
CHAPTER
Notes
Securities.
Inventories.
AsseU
depreciation.
Liabilities and
receivable.
Notes
overdraft.
CHAPTER
and
a
5
Assets
Cash.
Hxed
reports.
Cenditien
program.
CHAPTER
Current
time
Care
II.
ef
Preliminary
Comparative
Using
Cenccm
examination
nomenclature.
procedure.
ideas.
new
and
Statement
a
reports.
time.
2-CHAPTER
Merchanduing
er
Using
fer
for
Expense
papers.
SECTION
General
Office
Charging
Watch
write
to
paragraphs.
reports.
slide
How
reports.
Promifflng
of
I.
Rules.
of
Using
1-CHAPTER
V.
Capital
and
33
bills
payable.
liabilities.
Contingent
Bonded
and
Treasury
stock
mortgage
and
bonds.
Accounts
Accrued
debt.
payable.
liabilities.
Capital
Surplus.
stock.
CONTENTS
CHAPTER
Statement
of
VI.
Operatioiis
Sales.
loss.
Profit and
43
Cost
Freight.
of sales.
profit on sales. Selling, administrative
Net profiton sales. Other
general expense.
Gross
and
Deductions
income.
Profit
loss.
or
from
income.
Net income.
Surplus.
Additions
CHAPTER
VII.
and
tions.
deduc-
General Instructions
47
and
purchase ledger balances.
Agreement
for the sharing of profits. Employees' fidelity
and
benefit fimds.
Interest charges between
Anticipated
partners. Partnership agreements.
Surety company
profits. Insurance.
cases.
Form
of statement
Making tests. Clerical work.
of condition and of operations.
Sales
*
SECTION
Bank
CHAPTER
3"
VIII.
Examinations.
Savings
to
59
bank
Bonds
cover.
and
Real
accounts.
General
examinations.
stocks.
estate
Loans.
^banking
"
points
Bank
purposes.
Real
Other
Cash.
assets.
Expense account.
rities
estate
by foreclosure and in posession. Secuof indebtedness.
acquired in settlement
Other
banks.
Form
of report.
CHAPTER
Points
to
Watch
The
in the Unusual
Business.
Gas
billboard business.
mining
companies.
Publishers.
IX.
Fire
Automobile
companies.
insurance
dealers
Spinning and knitting mills.
Hospitals.
vi
74
Water
companies.
and
Lxmiber
agents.
turers.
manufac-
CONTENTS
SECTION
Standard
4"
CHAPTER
X.
Paragraphs for Audit Reports
How
to
use
paragraphs.
the
standard
Plant
Accounts
Inventories.
85
Cash
paragraphs.
and
equipment.
receivable.
Notes
Index
to
ments.
Invest-
receivable.
in bank.
paid
PrePetty cash.
operating expenses.
Capital stock. Surplus.
Reserves.
Notes payable.
Accounts
payable.
Accrued
liabilities. General.
close.
vu
Complementary
SECTION
1--CHAPTER
GENERAL
REPORTS.
The
points
be
to
samples
of
The
considered
importance
clients
soon
the
fiade
from
to
sent
a
great
may
in the
errors
of the
The
of
in
language
been
has
of
of
a
of
If you
report,
a
the
result
the
or
to
be
may
banks.
most
the
to
fully
care-
auditor's
small
through
been
has
make
is
the
phrasing
effective
of
importance
book,
careful
of
shortening
of standard
nxmiber
a
for
using
them.
The
and
every
effort
chosen
complete.
comments
be
following will
the
to
repetition
of vital statements.
carefully
way
importance.
undesirable
an
omission
office force
imusual
writer, and
instructions
them
and
one
apt
are
the careless
of
the
4 of this
by
an
only
reports
him
fluent
a
deaden
to
in section
maintain
the
for
kept
are
and
upon
auditors
though
redoimd
is
is not
tends
to
the
of reports, the
through
or
each
enterprise
auditors,
comments
preceded
made
economical
business
perous
pros-
oilers'
report.
natural
paragraphs,
however,
ordinary
serve
on
by
Moreover,
ridicule
to
rapidly
so
to.
a
the
To
the
and
reputation
performed
the
with
the
is of unusual
particularly
reports,
referred
renders
client.
any
work
of
of
the
of
preparation
his
of
instead, bring
will find
the
auditor
should
paragraphs
You
the
is
to
follow
The
accountant
The
necessary
of
audit,
phrases
work.
and
that
wording
stock
undertaken;
possible circulation
figures
average
audit
stockholders, directors
many
comments
The
outline
seeks
one
contact
performed
credit,
^and
"
principals
of this
Because
skeleton
an
with
mind.
personal
in
come
work
his
or
a
preservation
be often
officers
two
or
provide
report.
average
reports
details
may
RULES
guide
a
^businessevents
"
that
and
years,
the
client
prosperous
the
of
of
continuation
an
are
of the
to
pages
when
statements
character
heels,
CONDUCT
following
principal exhibits
L
handle
the
found
preparation
an
of
reports.
the
When
first
report
has
then
report
the
is received
conmients
goes
to
the
in the
written
out
office
in
principal executive
the
full.
office
The
of the
manager
complete
company.
HOW
Each
for later initialing,
as
and
the
firstbe
unfinished
of such
paragraphs
it goes
individual
to
completed.
for
approval
^'written in/' because
the
cover
form
general
in relation to other
executive
an
space
of lack
points.
the
to
elected
to
provide
report is
prepared
been
to
the
to
executive, as
it goes
have
as
stamped
upon
the
it is to be
Then
paragraphs
Next
work
approved by
reports.
of standard
the
in which
order
AUDIT
of the report is then
section
It must
TO
office manager,
who
gives it to the
do the first tasks.
The
one
typing or
to
type-setting then initials it.
Completely typed rei)orts or printer'sproofs must then be
compared word by word and figure by figure,initials of both
being added, when
comparers
Then
careless
provide against
to
the report is corrected.
all substractions, additions
errors,
Lastly,
a
introductoryletter,and the number
register. The
a
upon
reports, both
so
of their
because
mailed
either
'Special
majority of
audit
companies
of need, when
comparing
superior ability to detect
expedite the work.
occupied on specificwork, staff members
not
expected
of client entered
name
errors
in order to
and
When
is then
report
the field staff in event
upon
in form
and
the practise of the
been
to draw
be
must
by registeredmail.
delivenr*'or
It has
divisions
when
the
by pasting
and
accoimting
or
arranged horizontallyand vertically.
is applied
report is bound, a registry number
numbered
seal to the title leaf, preceding the
refigured,both
the
comparing
themselves
to hold
in readiness
will be
to be called upon
by
office manager
to assist in comparing
completed reports,
in their dispatch to clients.
that no delay will be encountered
It is also
suggested
be surrendered
known
that
as
no
PROMISING
that
promptly
work
can
possible to
as
be
done
specify dates for reports without
Unpleasant experiences sometimes
score,
was
and
delayed
SATURDAY
open
clients
of
are
too
necessity beyond
U
Saturday
afternoon
done, the customary
so
first
the
that
for
accountants
with
of
promised
the
auditor's
the
clients
a
to
office.
on
this
report which
date.
office
be spent with
time.
some
consulting
cUent's
if it is
office,
even
for
occur
the
day should
well
lost because
often
AFTERNOON.
the
them
upon
It is not
REPORTS.
finished in the rough,
reports when
or
plant
work
can
is
be
the client,and
CONDUCT
GENERAL
the client should
be charged for
office or plant closes at twelve
RULES
full day.
a
one
or
If the
client's
p'clockthe staff member
He
nothing more.
should, nevertheless,
to be the
report an entire day against the client. This seems
accepted rule with auditing firms, the assumption being that
his own
the client pays
people an entire day's wage, giving
them half a day; and as the auditor has become
an
employee of
obviously
do
can
the client,the
TRAVELING
when
TIME.
business
business from
When
rule
same
Full time
hours
should
in
used
are
and
office,
the home
be charged
traveling
vice
to
client,
his place of
to
a
versa.
leaves the home
staff member
a
applies.
office at his
ience
conven-
evening, arrivinglong after the starting hour the
for this
ne3ct day, the client is naturally indisposed to pay
leaves at six o'clock
wasted time.
If,however, a staff member
the preceding evening, or before,the time precedingsix o'clock
in the
the start of business next
and the time from
morning
properly
chargeable to the client,all of the otherwise non-productive
lime being utilized in an effort to reach the client's place of business.
The need for this rule is proved by some
of the long
tripsnecessarilymade by auditors.
SUDE
THE
RULE.
are
All auditors
might profitably take
of engineering practise.
a leaf out of the book
have
noticed auditors going over
work
plications
multiWe
papers,
and percentages, with an engineer'sslide-rule,
instead
and pencil.
of by long-hand with scratch paper
The first impression received was that such auditors were
up
USING
to date.
In
a
full of auditors such
room
would
men
be
picked
leaders in the profession.
as
only does a slide-rule or other similar instrument
for accuracy,
but it also makes
time and make
actually save
auditor
to
we
a
good impression. Therefore
every
urge
consider the use of a pocket slide-rule.
Not
WATCH
to be
FOR
NEW
IDEAS.
progressive.
As
a
The
auditor must
professionwe
are
too
satisfied and to stand stilland not experiment.
ive auditor
soon
a
can
he would
"dead
never
become
make
it
a
pomt
apt to be selfAn
unprogress-
hope to be sucessful in the long run; for
mediocre, then old-fashioned,and finally
one."
3
HOW
So
keep
your
eyes
and
if you
find
you
can's
adopt
something
WORK
office
soon
as
office.
the
is
It
not
When
All
working
the
During
the
properly
It
should
and
letters
be
is also
erasing is
the
analytical
so
It is advisable
standard
back
papers
if necessary.
size.
but
the
size
blocks
Use
only
of the
sheet
of
side
one
be
may
himself
It
are
that
made
the
system
is essential
that
he
the
ac-
of accoimts
have
a
list
examined.
are
sheets
separate
number
they
so
can
they should
be
readily
sheet.
that
the
recorded
the
advisable
to
into
with
on
or
examination
the
of
stage
records
on
report.
of uniform
ment
assign-
an
initial their
responsibility
on
on
of
memoranda.
their
by letter
be
made
were
be
is working.
working
in number
of the
in
are
available,
and
working
should
nothing
acquaint
marked
the
a
the
writing
adjustment
to make
quently
Fre-
results
much
as
papers,
distribution
use
all of
analjrses, etc.
Any
work
for
preliminary
books
on
to
critical moment.
a
he
which
foimd
the
all figures
is
should
to
should
When
returned
immediately
accoimtant
ascertain
the
as
at
of all the
that
individuals
the
for
sheet
coimtant
be
they will be legible to the accountant
one
can
paper
the
entries
preparing
papers
overlooked
be
in
accountants
scratch
upon
that
is occasion
there
office
the
forge ahead.
corrected.
so
than
etc., then
work,
and
of
can
completed.
when
not
are
think
to
necessary.
more
and
discovered
are
imx"ortant
ink
use
to be
bound
been
if
see
else.
anyone
Do
has
is good,
you
should
doing,
are
trying
on
that
so
papers
papers
traced
distinctly
to
that
work
especially
written
of
be
cannot
errors
for
If the
new
engagement
in rex"orts
which
keep
not,
work
an
competitors
something
they have
as
what
see
Meanwhile,
All
errors
or
it.
PAPERS.
the
have
they
AUDIT
and
open
that
new
TO
a
in
accoimtant
be
may
journal entry
form
as
called
though
upon
the
books.
incorporate
schedule
making
these
them
entries
a
when
necessary
cient
suffi-
part
2-CHAPTER
SECTION
GENERAL
A MANUFACTURING
AUDIT
OF
USING
THE
have
8 and
6, 7,
The
with
the
report
into
the
office
If
be
returned
"work
accountant
or
the
Whenever
Assistant
and
by
"balance
only the
office for
the
lack
of
sheet"
own
sheet,"
fact
of
to
as
that
a
the
is
the
on
carried,
that,
so
continues
twice.
be
in
followed
an
Accoimtant
Chief
or
is limited, commimicate
Do
not
uncertainty
express
mistake
may
justifiable
a
are
a
of the
combination
by
long standing
instructions.
of condition"
title of the
custom
has
is
has
statement,
the
established
preferred
as
more
Similarly, "statement
intent.
and
profit and
loss
The
As,
for
Reserve
which
interchangeable.
are
form
Federal
the
recommended
condition,"
"income
to
to show
covered
the
client's
of competency.
"statement
and
the
examination
been
to
papers
delivered
the
has
be
client, who
accoimtants,
statement's
preferred
our
be
be taken
if time
or,
instructions.
to
a
as
"statement
the
or
then
work
original examiner
of
arrival
the
examination
"balance
it
program
tjrpewritten
and
procedure
the
to
as
work
will not
following instructions
financial
used
the
examination
will then
the
Accountant,
Chief
uncertainty
Bank,
on
office along
filed under
should
the
than
the
when
care
ground
await
procedure
The
the
after
be
successor,
other
in doubt
your
to
his
to
same
examination,
as
shown
the
to
program
They
point to which
the
work,
the
office to
the
to
accountant
with
should
faithfully recorded
in
and
done,
Particular
the
program
is
papers."
re-conmienced.
an
an
examination.
be
form
office will bind
report,
postponed,
or
as
name
the
work
preliminary
should
of
the
turned
the
written;
copy
to
should
be
auditor
matter.
discontinued,
if
be
to
commencing
it should
and
CONDITION
CONCERN
Every
similar
examination
an
program,
printed
before
9
history of
in the
PROGRAM.
program
OF
MERCHANDISING
OR
EXAMINATION
examinaiion
an
pages
A STATEMENT
FOR
INSTRUCTIONS
IL
are
terms
both
however,
to reconmiend
term,
the
use
of
truly expressing
of
operations"
account,"
or
is
"profit
PROGRAM
EXAMINATION
Gient't
name.
Address
Ph"pertyto
be esamined
Address
Work
to start
Rqwrt promised by
Supervising accountant
Days estimated.^
.^
report in to officeby
Senior
Junior
As seniors
must
turn
assigned
Accountants
As juniors
in column headed do
indicated by checkmark
Audit** carefullyfor procedureon various pointschednd.
1m undertaken
Work
to
Read
your
"How
to
T3o
1. Plant
and equipment:
aporaisal?
additions. Are they
A.
Based
B.
Examine
C.
Ph"perly depreciated?
D.
Titles to property
on
at
cost?
examined?
E.
F.
2. GoodwiU:
A.
created?.
How
B.
holdings:
examined?.
Physically
3. Treasury
A.
B.
4. Securities owned:
Physicallyexamined?
Correspond with holders outside office.
C. Appraise
A.
B.
D
5. Sinking Fund:
A.
B.
Bcang properlyset aside?
Ph"perlyapplied in retiringsecurities?
C
D.
6. Inventory:
A. Count quantities
.^
method
B.
Examine
C
Multiply extensions
D.
additions
Verify
E.
l%ould
of compiling costs
,
inventory be depreciated?
.
all materials
F. Have
been
included
paid for
or
.
.
in inventory
vendors
have
beoi credited'
,
G.
inventory beginning of
operating staement
prove
Scrutinize
rwd
to
R
Verifyconsigned goods by
I.
Consigned goods carried at
pecuracy
ac-
dence
correspon-
^
cost
t
6
Done
by
8
TO
HOW
and
loss
account/' when
which
shows
under
review.
A
the
way
giving a title to the detailed
of arriving at the profit for
audit
of condition
statement
AUDIT
for
statement
the
fiscal year
a
period
other
or
operating x)eriodof an industrial or mercantile
corporation or
firm comprises a verification of the assets and
liabilities,
a
of the profit and
loss account, and,
general examination
of the essential features of the
incidentally,an examination
accounting.
general ledger, both at the beginning
and
end
of the x)eriodunder
review, should be prepared in
comparative form, and checked with the ledger. The items
Trial
in the
trial balances
other things, that
among
omitted
end
should
be traced
before the assets and
condition
been
of the
balances
from
the
liabilitiesare
contra-asset
no
the
with
or
books.
at the
The
prove
been
liabilitieshave
beginning
and
at the
of condition
statements
of
statements
verified,to
has
liability
accounts, that the assets and
grouped in the same
manner
of the period, and that the
accordance
into the
dispositionof
are
in
general
scrapped, sold,
any
have
been
ledger assets and liabilities that may
writtent off,or liquidatedduring the i)eriodunder review should
be traced and noted
in the working papers.
Furthermore, a
general scrutiny of the generalledger should be made to see that
that have been opened and closed during the year,
any accoimts
have no bearing on the company's financial positionat the close
of the fiscal period.
The
should
auditor
obtain
a
of
copy
the
statements
of
beginning and the end of the period to be
audited, and should make a comparison between them, so that
be had by him of the changes in the
a comprehensive view
may
A statement
of the
figuresduring the period under review.
disposition of the profitsshould then be prepared from this
of condition
further aid in impressing
a
comparative statement
as
the mind
the meaning of the figures upon
of the
condition
at
the
auditor.
In
setting up
a
comparative
statement
of condition
put the
earliest date first.
The
verification
be considered
statement
of statement
and
of assets
in the
of condition
aims
order
and
in which
form
to meet
practiseof the
liabilitiesfor convenience
shown
as
the
on
nearly
Federal
10
as
Reserve
items
page
will
in the
appear
This
54.
form
possible the requirements
Bank.
CHAPTER
III.
CURRENT
should
CASH
counted
be
fiscal period to be
of the
with
thereof, together
with
day,
same
funds
In
in
customers'
have
He
checks,
and
from
made
the
the
also
cash
the
shown
by
those
shown
the
bank
or
bank,
The
conciled
re-
cash,
the
on
treasurer
a
make
to
withdrawing
tiable
nego-
They
his
be
home
enclosed
either
as
on
the
books.
to
the
cash
be
must
secured
be
must
certificates
on
12,
closing date
A
for
purpose.
of balance
the
balances
checkbook
consideration
into
registers, taking
directly
reconciled
be
the
self-addressed
The
the
cashbook,
from
mailed
or
stamped,
must
deposit
on
obtained
by,
office.
the
balance
all advances
of
descriptions
page
on
cash
all
descriptions of such
and
recorded
not
are
that
see
prior to the close of the
dates
and
must
part of the
as
cashbook
the
shown
at
him
to
dates
of the
should
envelope
for
the
amount
examined
auditor
hand, the
in the
which
auditor
be
by temporarily
on
note
banks.
company's
to, the
cash
should
evening
must
last day
the
book.
cash
impossible
produced
Certificates, as
on
it
in
be
to
the
by
the
on
audit, and
stated
shown
asset
duly entered
period.
cash
hours
another.
checks
been
by the
investments
one
from
counting
covered
make
to
as
shortage
a
up
so
banking
the
receivable, and
notes
after
balance
the
ASSETS
as
with
stubs,
outstanding
checks.
In
side
verif3mig the
of
way
to
the
cash
backward,
bank
such
for
book
period
outstandings.
should
be
is
made
should
compared
a
later
with
be
the
as
be
list of
date, and
actual
any
not
the
so
11
not
the
fiscal
returned
yet cashed
outstanding
the
dates
returned
returned
the
all
by banks
When
checks
of the
period
for
accoimt
to
credit
from
special inquiry.
of
checks
of
day
factory
satis-
the
compare
necessary
prepared, showing
the
only safe and
checks
checks
old
subject
a
last
the
may
Any
the
completed,
from
the
is to
accuracy
item, with
by
current
work
their
prove
item
checks
outstanding
so
this
tained
ascer-
checks, and
from
the
should
be
bank,
at
specially
JOHN
BUNK
COMPANY
AND
Incorporated
Auditors
Public
and
New
Accountants
York
19..
Dear
Sir:
We
are
engaged
audit
an
upon
19
you
to
Dusuiess;
there
{thdr}""^
credit the
Will
balance
kindly
you
of $.
sum
advise
of.
accounts
.
that (atthe dose of
and it appears
of the
us
.
on
was
on
deposit with
"""""""""""
direct whether
the aforesaid
is correct.
Very truly yours,
BLANK
JOHN
"
Inc.
COMPANY.
By
Please furnish the above
information
as
requested.
No.
19....
No
John Blank
"
Company.,
Inc.,
New
York
certifythat
there
E)ear Sirs:
This
(at the
to
the
is to
close of business)on
was
on
deposit in
this bank
19
the credit of
sum
Dollars.
of
$
By
12
CURRENT
ASSETS
is necessary
investigated Specialcare
.
drawn
cash purposes
are
in the next period.
Where
the currency
bank
that
see
at the close of the
and
in the cashbook, and
to
period and entered
transactions
the auditor
checks for
no
are
does not count
kept together
the cash until
date subsequent to the close of the fiscal year, he must, in
addition to verifying the bank balances as of the close of the
a
verify them as of the date of the count of cash. This is
absolutely essential when it is considered that, althouj^ the
year,
cash
on
of the count
only part of
the balance
be correct, it does not
may
at the date
follow that the total
It is essential that the
is correct.
cash
forms
which
hand
date upon
be recorded, in event of a
should
cash is counted
which
the
discrepancy
arisingafter our departure.
Unfortunately, in all but a few cases, it is not practicableto
verify cash by being present on the last day of the period being
companies close their books
investigated. So many
on
December
phj^ically impossibleto visit
31st, that it becomes
described in
all clients on that day.
However, the method
the preceding paragraph is the one generallyto be followed.
in the cash books
shown
the receipts are
When
as
being
deposited in the bank on the last day of the fiscalperiod,but are
in the
induded
not
being paid
should
reconciliation statement
the bank
into
ask the banks
until the
on
of their
account
day, the auditor
acknowledge the later receipt of the
to
next
deposit,and to advise if any of the checks prove worthless.
in the pass books, or upon
The
the banks'
deposits shown
monthly statements, should be checked in detail for the last
two or three daj^ of the fiscal period, from the books, to prove
that they were
composed of bona fide checks, and that no
check drawn
deposited in a bank without
by the company
was
being credited
to the bank
on
which
it was
drawn, prior to
the
close of the fiscal period.
satisfy himself that deposits are
checks
promptly made in a bank each day, and that the same
received, it is advisable to call for a
as
paid into bank
are
of deposit slipsand
them with the receipts
number
compare
by the cash book for the days on which the deposits
as shown
To
make
such verifications accurate, the deposit
made.
are
So
that
the auditor
slipsshould be obtained
The
senior
accountant
extent
of the
cash
may
from
the banks.
must
examination.
13
use
The
his discretion
method
we
as
to
the
describe
is
TO
HOW
intended
to
secure
considerable
AUDIT
check, but to do so requires
always justifiedor acceptable to our
absolute
an
research,not
clients.
Where
irregularities
are
of
must
to pay all of its cash
practiseof a company
the bank, they should be compared
and reconciled
total deposits as shown
by the bank books, and
it is the
receipts into
with
the
similarly
disbursements
the
total checks
of not
called for and
current
checks
examined
not
having been
traced
be
reconciled
at
a
with
the
returned
the
into
cash
by
book
previous
the
banks
audit
on
must
be
beginning of
at the
audit.
balance
The
should
drawn.
Outstanding
the
thorough check
most
be obtained.
course
When
accoimt
suspected, the
on
hand
in
the
petty
fund
cash
should
be
All tickets,due bills,
represented by either cash or vouchers.
advance
should be presented to the proper
memoranda,
or
authority for approval (an officer,if a corporation; a firm
member, if a partnership). Checks carried as a part of the
balance
should be followed to a proof of their having been
for by the proper authority.
deposited in the bank, or vouched
where
the cash items amount
All cases
to a very large sum,
in charge and
should be reported to the accountant
left to
his discretion whether they should be listed and included in our
final report.
BANK
OVERDRAFT.
Where
deposit, and any bank
deposit should not
on
The
side
of
our
a
has
concern
several
banks
of
overdrawn, the net amount
be presented in our
of condistatement
tion.
total cash on deposit should
be shown
the asset
on
statement, and the overdraft as a liabilityunder
current
liabilities.
NOTES
RECEIVABLE
is
account
A
list of notes
receivable
outstanding
at the end of a fiscal period should be prepared showing the
dates the notes are made, the customers' names,
the date due,
the amounts
of the notes and the interest,if any, contained
in
If
of the discoimtingbank
the notes.
discounted, the name
should
be
noted
and
verification obtained
The
from
the
bank.
with the
outstanding notes must be carefullyexamined
notes
receivable records, and
with the list prepared by or
produced to the auditor,the due dates and the dates of msJdng
14
ASSETS
CURRENT
the notes
notes have been
being carefullychecked, and when
renewed
the originaldates should be recorded.
When
notes
have been paid since the close of the fiscalyear, the cash should
be traced into the books of the company,
and, when they are
in the hands
of attorneys or bankers
for collection,letters of
should
confirmation
be obtained
from the depositariescertifying
to that fact.
When
has
receivable
notes
therefore
liability
a
discoimted
are
which
by banks
should
the company
in the statement
appear
of condition.
The
of collateral,if any,
value
it
ascertained,as
Notes
due
other than
from
trade
the
notes
are
be
for
a
of the collateral.
affiliated concerns
must
though received as
Affiliated companies' notes
even
of current
separate item
a
that
should
notes.
notes,
transactions.
as
for notes
employees as well as received for
must
alwaj^ be stated separately
transactions
from
due
customers'
the value
by officialsand
customers'
Notes
frequently happens
than
greater amount
held
circumstances
assets
or
as
be
not
included
as
result of trading
a
should
other
shown
be
assets
as
the
be
in
fairly included
has ample margin of
current
assets, if the debtor company
quick assets over its liabilities,
including such notes.
The term "quick assets" is used here in the sense
in which it is
used in Federal
assets" is used to
Reserve practise. "Current
designate these assets and other assets which, though current,
for
in determining the eligibility
of the paper
excluded
are
Federal
Reserve
by
the
is
a
bona
client does
written
fide
not
the
age
and
note
each
as
ment
acknowledge-
an
the
The
note.
direct to his home
at the end
is
payor
auditor
letters,inclosing stamped
RECEIVABLE
total columns
in each
for
The
receivable ledgers should
balances
receivable
that
the
obligation. Therefore, if time permits, and
object,it is advisable to obtain the maker's
confirmation
personally mail
repliesaddressed
ACCOUNTS
of notes
party named
the
may
purposes.
best verification
The
note
They
warrant.
to draw
of the fiscal period, and
should
be shown
envelopes
for
office.
book-keepers of
be asked
should
accounts
off lists of the open
distributions
of the
lists
according to the
of the accounts, e.g., not yet due, less than 30 days past due,
than 30 days past due.
The accounts
paid since the
more
on
15
the
the
HOW
close
of the
TO
AUDIT
fiscal period should
be
in the lists before
noted
of past-due accounts
taking up the matter
department, as payment is the best proof that
good at the date of the audit.
The
with
with
accoimt
an
totals of the listsof outstanding accounts
the
controllingaccoimt
ledgers are kept. When
accoimts
they should be
items
separate
balances.
and
Debit
in the
credit
shown
balances
the
on
be treated
in the
lists must
be
footed
and
carried forward
which
have
been
period
of time.
Such
should
be taken
should
The
from
same
agree
if separate
customers'
on
appear
of condition
in the statement
deducted
not
was
should
general ledger
balances
credit
the
total
the
of
as
debit
payable ledgers
accounts
manner.
compared in detail with the
customers'
in the ledgers.
accounts
The
composition of outstanding balances should alwa3^ be
examined!,
as it frequently happens that while a customer
may
be making regular payments
his account, old items are being
on
and
officer,
so
by the
dispute
accounts
for bad
reserve
been established the auditor
in the statement
doubtful
and
If such
a
which
thie credit
shall be sufficient.
company
for
department
correspondence with the
the
that the
items and
with
up
in
or
considerable
are
past due
some
sible
respon-
customers
accounts
an
account
should nevertheless
set up
mined,
exa-
set up
has
not
a reserve
they will be conservative.
Trade
discounts
ceeding
(also so-called "cash discoimts," if ex1 per cent) and freightallowances made by the company
should
be inquired into,and if they have been included in the
that
so
receivable
accounts
a
should
for them
reserve
be set up
in the
be
made
Also, inquiries should
regarding customers' claims for reductions in prices and for
of defective
rebates and allowances on account
materials, so
sta^tement
that
condition.
the auditor
been
certain
make
may
that
a
sufficient
has
reserve
established.
Careful
total of
sum
that
The
inquiry
must
receivable
accoimts
the
of
they
are
accoimts
pledged
auditor should
off have
been
have
to
made
be
been
so
as
to
whether
hypothecated
listed entered
as
or
a
any
of the
assigned, and
liability,
noting
contra-loans.
secure
satisfyhimself
duly authorized
by
that the bad
debts written
for
responsible officials,
which
to write off accoimts
bookeepers have been known
in
order
diverted
to cover
actually been collected
money
their own
pockets.
16
have
into
JOHN
BUNK
AND
COMPANY
Incorporated
Auditors
and
Public
York
New
Dear
Sir:
We
and
a
engaged
are
it appears
that
balance due
from
Will
is correct
to
rectifythe
This
as
of the
there
was
of $
you
and
of
accounts
19
on
the
upon
if not
send
attached
detail
blank
if the
to
enable
statement
error.
letter should
it is
audit
an
upon
please advise
you
amount
us
Accountants
be construed
not
as
a
only designed to establish the
request
for payment,
correctness
of the
COMPANY.
Inc.
books.
Very truly yours,
BLANK
JOHN
"
By
Please furnish
the above
information
as
requested:
19....
John
Blank
"
Company.,
Inc.,
New
Dear
York.
Sirs:
The
correct
balance
due
19
upon
18
was$.
IMPORTANT
As
a
have
we
been
requested
of this institution* we
The
enclosed
upon
the bank's
ham
you,
that
so
Should
we
it be
the
assume
with
kind
a
vAndi
of Directors
Board
assistance.
account
your
Please check
books.
if,however,
by the
make
shows
statement
will
we
to
periodicalexamination
ask your
be correct,
us
of the
part
necessary
If
it.
shown
amount
it appears
as
do
we
as
hear
not
balance
a
diflFerence exists
pleasecommunicate
investigate and
correct
may
error.
correspond, please address:
to
necessary
to
BLANK
JOHN
New
Auditors
and
COMPANY,
"
York
Inc.
City
Public Accountants
IMPORTANT
We
are
that
books
and
given there
it appears
due
was
of the
accounts
their
upon
fom
the
you
shown.
If
to
the date
on
of the
audit
an
upon
this statement
sending
company
sum
engaged
be
do not
we
correct,
with
This
note
as
hear from
if,however,
us
so
should
it is
that
not
we
be
you,
we
will
the
assume
a
diflFerence exists,
may
investigateand
construed
as
a
only designed to establish the
amount
please
correct
request
correctness
municate
com-
error.
for payment,
of the
books.
Should
it be necessary
to
JOHN
correspond, please address:
BLANK
"
New
Auditors
19
and
COMPANY.
Inc.
York
Public Accountants.
HOW
TO
AUDIT
inventory affectingthe profitsof the business,this
rule should invariably be followed by the auditor.
Material shipped on consignment with no obligation on the
part of consignee to pay for it until actual sale is made, should
always be included in the inventory at cost of finished product.
A record of it should be kept and shown
separately from the
receivable until the actual sales
regular inventory or accoimts
question
are
an
made.
Inasmuch
coxmt
is
of
as
the accuracy
of the statement
of
absolutely dependent upon the accuracy
merchandise
at the beginning and end of
operations acof the
tories
inven-
the
period imder review, this part of the verification should receive special
of condition
attention.
When
audit is being made
a statement
for the first time, the inventory at the beginning of the period
should
receive as much
attention
that at the end, and the
as
auditor should take every precaution to satisfyhimself that both
inventories
were
taken
on
the
same
basis.
An
of audit for inventories
follows:
acceptable program
(1) Secure the originalstock sheets if they are in existence and
carefullytest the typewritten copies with them and with tickets,
that show the originalcount.
cards, or other memoranda
(2) See that the sheets are certified to or initialed by the persons
who took the stock,made
the calculations and footings,and
fixed the prices,and satisfyyourself that they are dependable
clear and
and
Obtain
detailed statement,
responsible persons.
a
preferably in writing,as to the method followed in taking
stock and pricing it;also a certificate from a responsible head
of the inventory as a whole.
as to the accuracy
of the footings and
(3) A thorough test of the accuracy
tensions
exshould be made, especiallyof all large items.
(4) The inventories should be compared as far as possiblewith
records
in process
and fijiished stock
the stores records, work
records, as to quantities,prices and values, and any material
discrepancy should be thoroughly traced.
(5) Where stock records are kept and no physical inventory is
the last physical
taken at the time of the audit, ascertain when
inventory
,
was
taken
and compare
it with
the book
records.
If
portance
comparison is possible,select a few book items of imand personally compare
with the actual stock on hand.
stock records
kept, a physical inventory
no
are
(6) Where
should be taken, preferably xmder the general direction of the
After
the inventory is completed, he should
auditor.
apply
no
recent
20
CURRENT
the
tests to
same
taken
verifyits accuracy
as
if the
of
the cost system
a
orders
may
does not form
company
of the financial accoimting scheme
there is
shown
information
a
records
to the
at the end
In
therein.
of the
these
preceding the close of the
compared with the orders in
to see that nothing that
included
in the inventory. Cost
with
cost
system
that
when
ance
reli-
physical
verify the
a
to
sales
for the
fiscal
period should be carefully
ventory,
as shown
by the inprogress
has been shipped is wrongly
which
systems
are
unreliable
are
misleading. Specialattention
the
the
part
of the
out
that
period
cases
the financial accounts
where
extent
a
chance
billed,but not taken
Especially is this the case
month
instance
always
be completed and
work-in-process records.
is placed on
such
inventory is not taken
the
inventory had been
before his arrival.
When
(7)
ASSETS
not
and
ordinated
co-
quently
fre-
be called to every
adequately checked by
should
is not
results of the financial
(8)
Make
accoimting.
that purchase invoices
certain
for all stock
included
Look
for
inventory have been entered on the books.
to goods in
post-dated invoices and give special attention
in the
transit.
nothing is included in the inventory which is not
If goods consigned
owned
but is on consignment from others.
to others are included, see that cost prices are placed thereon,
for loss,damage, or expenses
less a proper allowance
of possible
This does not include goods at branches, as
subsequent return.
the valuing of such stocks will be governed by the same
ciples
prin(9)
See
as
(10)
that
at the head
apply
Make
sure
billed,and
office.
that nothing is included
which
has been
sold
is
simply awaiting shipment.
(11) If duties, freight,insurance,and other direct charges have
been added, test them to ascertain that no error has been made.
and freightare legitimate additions to the cost price of
Duties
and
goods, but
no
other items
should be added
items
except imder
unusual
liquors,piano wood, and others
that improve through seasoning, may
rightlyhave interest and
added to their value, if the total value per imit does
insurance
not exceed the market
price for materials of equal quality.
(12) To prevent obsolete or damaged stock being carried in the
Such
circumstances.
inventory
at
an
excessive
stores, supplies,work
stock should
as
valuation, the
in process,
be examined
21
finished
and
a
detailed records
for
products, and purchased
listprepared of inactive
HOW
stock
should
This
accounts.
TO
AUDIT
be discussed with the company's
officialsand
satisfactoryexplanations obtained.
(13) The auditor should satisfyhimself that inventories are
is the lower at the
stated at cost or market
prices,whichever
This test appliesto each item in the
date of the balance sheet.
been
has
be passed which
inventory. No
inventory must
prices and a profitassumed that has not
is higher than cost,
be realized, If the market
and may
never
the statement
it is permissibleto state that fact in a footnote
on
nuirked
to market
up
of condition.
(14)
It
be
may
found
prices of
average
end of the period.
the latest invoices
in
of the
excess
when
market
materials
are
valued
at
the
supplies on hand at the
If so, the averages
should be compared with
in order to verify the fact that they are not
raw
latest
pricesare
and
prices,and
used, to see
also with
that
they
the
are
trade
not in
papers,
excess
of
values.
market
(15)
inventories
that
Make
to determine
independent inspection of the inventory sheets
whether or not the quantitiesare reasonable, and
an
they accord in particularinstances with the average
normally
consumption and average
purchases over a fixed period. Ablargequantitiesof stock on hand may be the legitimate
result of shrewd foresightin buying in a low market, but may,
in stock taking, or
the other hand, arise from serious errors
on
whether
may
be
an
over-stock
on
which
a
loss has been sustained but not
recorded.
Always attempt
to check
the
totals by the
"gross profit
the percentage of gross profitshown
test" and compare
with
In a business whose
that of previous years.
average
gross profit
remains
fairlyconstant this test is a dependable one, because,
if the rate of gross profitis apparently not maintained
and the
accounted
for by a rise or
discrepancy can not be satisfactorily
fallin the cost of production or of the sellingprice,the difference
will usually be due to errors
in stock taking. This method
was
business conacceptable before the war, but until normal
ditions
very
evidence
not be considered as conclusive
are restored,can
of irregularities.
(17) The best way to verify the prices at which the work in
a general examination
process is included in the inventory, is to make
of
the
In a good cost system
and test
cost system.
little difficulty
will be foimd with the distribution of the raw
materials,stores, and pay roll,but the distribution of factory
(16)
22
CURRENT
overhead
is
should
that
one
ASSETS
receive careful consideration,the
main
points to be kept in view being;
(a) That no sellingexpense or interest charges are included
in the factory overhead, and
istrative
that only that share of adminpertaining to the factory is included.
expense
is distributed
the
(b) That the factory overhead
over
various
fair and
departments, shops, and commodities
a
on
equitable basis.
(18) No profit should be included in the price of finished
products or stock in trade. The price list should be examined
to see that the cost prices of stock are below the selling
prices
If they are not, a reserve
after allowing for trade discounts.
should
be set up
the balance
on
takes immediate
goods
which
have
may
to the date of the
the
steps to increase
of this
the amoimt
pany
com-
ever,
sellingprice,how-
be limited
may
reserve
been
If the
sheet for this loss.
to the
loss
on
sold since the close of the period
discovery.
manufacturing
large contracts frequentiy
make
partial shipments of orders. The question then arises
whether
it is permissible to include the profitson these partial
As a matter
of fact,
shipments in the profitand loss account.
(19)
Companies
it is evident
the actual cost
that
on
be known
not
can
until the
be estimated
that a profit will
completed. It may
ultimately be made, yet unforeseen
conditions,such as strikes,
arise to increase the
delays in receiving material, etc., may
estimated cost.
It is better not to include the profits
on
partial
have
shipments, but information of this character which may
its influence in the decision of the banker upon
a proposed loan
which accomproperly be laid before him, in the comments
pany
may
the report. Of course,
an
exception should be made
where
the profit on the partialshipments largely exceeds
the
sellingprice of the balance of the order.
(20) The sellingpricesfor contract work in progress should be
order
is
ascertained
there will be
of the
from
a
estimated
loss
by settingup
(21)
If
company
products the
a
and,
if
a
it is apparent
where
the
on
loss
audit
of its
contracts, and
the
completed contract
should be charged to
reserve
for losses
has discontinued
particular items
unsalable, an amount
on
the
a
that
due proportion
period under
the
in progress.
of any
manufacture
contracts
should
should
all but the scrap value of the articles.
(22) The inventory should be scrutinized
be
carefullyscrutinized
be written
off to
cover
23
to
see
that
no
HOW
machinery
received
Partial deliveries
(23)
charged
plant
to
or
therein.
is included
property account
AUDIT
that has been
material
other
or
TO
of
account
on
purchase
tracts
con-
material, etc.,should be verified by certificates from
the contractors, both as to quantitiesand prices.
for
of purchase contracts
pajonents on account
(24) Advance
future deliveries should never
appear in an inventory, but should
sheet under a separate heading.
the balance
be shown
on
from
be
deducted
discounts
should
inventory
(25) Trade
for
prices,but
cash
to deduct
it is not customary
ever,
How-
discounts.
it is the trade practice to do so.
be done when
this may
the auditor should
(26) While the inventory is being verified,
due
been
may
have
men
dislike to sell below
of old
big stock
stock
The
at
to
a
stock
poor
of
dispose of
The
slow
unseasonable
the old and
stocks
in other
and
considered
are
holder
the
to
be considered
as
or
the
been
a
as
porarily
tem-
"quick
in event
of need.
material
interest
of which
from
aside
carries
more
or
thereon, they
return
fixed assets.
should
list of investments
Dates
connection.
available
into money
represent control
bonds
or
goods.
new
have
firm
or
enterprises,the ownership
less value
should
which
company
be readily turned
assets,"i.e.,can
When
of the
fxmds
invested
comes
stock be-
is that the
usual outcome
a
this caption shoiild be listed securities in
Under
surplus
business
accumulate
rather
unwieldy and fimds are lacking to purchase
inventory and the gross sales may have a direct
which
turnover
Some
goods.
would
cost, and
than
goods
sacrifice.
a
SECURITIES.
A
A
the aggregate sales for the last year.
ascertain
prepared showing:
be
of
purchases
Description of the investments
Par
value
of the investments
of the shares
Denomination
of shares
Number
or
capitalstock of
Amounts
paid for the
Total
dividends
Interest
and
Market
values
The
surplus
of the
owned
bonds
the various
companies
investments
received
of the investments
or
deficit shown
companies,
by
where
no
the
statements
market
with whom
hjrpothecated,
24
and
for what
dition
con-
quotations
available.
K
of
purpose.
are
HOW
that
properly recorded, and
made
out
If any
amount
statement
to the
AUDIT
TO
the insurance
policiesare
correctly
company.
been
of the securities have
(book value)
must
be
of condition.
26
hypothecated,
stated
imder
the fact and
liabilitiesin the
CHAPTER
FIXED
GOODWILL.
Where
examination,
show
under
and
comment
AND
should
present
it
the
on
of
be
an
of condition
statement
accounts
the
either
in
plant
and
under
these
property,
created.
was
The
value
should
shown
is encountered
goodwill
actual
cost
captions
investment
permanent
rights, buildings, machinery,
estate, property
value
ASSETS
directly below
EQUIPMENT.
the
of
amount
how
to
OTHER
item
caption
as
PLANT
the
the
separate
a
AND
IV.
or
tools,
in real
The
etc.
properly appraised
a
value.
Where
capital stock
"water,"
be
accounts
under
charge
should
the
have
be
item
of
amount
the
be
and
profit, the
of
this
The
the
are
book
coal
to
proportion
based
In
under
on
the
the
this heading,
of the
the
cost
of
mined
the
original
while
xmder
item
course,
the
sideration
con-
reserve.
less
if the
item
loss
account.
profit and
cost
ciation,
depre-
chargeable
amount
an
tion
deprecia-
equipment
item
the
any
original
depreciation
rights, such
is
standing
owned,
timber
the
from
output
is sold
to
at
a
Profits
such
as
at
as
and
coal
timber
only, should
veins, where
tracts, where
be
This
property.
reduced
in
should
be
appraisal.
leading schedules
balances
for
account,
the
on
for
the
plant and
a
asset
the
is
with
First,
to
Of
to
of
values
however.
engineering
preparing
etc, the
a
be
the
to
an
debited
of property
is in
ownership
called
in any
reserves
follows:
charged
credit
rare,
value
foimd
agrees
sale
to
account.
is
commonly
ledger
Where
selling price,
loss
profit
kind
the
only
as
credited
be
the
is
to
credit
the
on
between
and
profit
loss
depreciation
difference
the
such
determined
should
The
applied
proportion.
must
what
it when
upon
been
that
see
carried,
for
caption.
its proper
or
are
of
this
sold,
property
item
to comment
sure
credits
Where
is issued
for
the
accoimts
grouped
real estate, buildings, plant, machinery,
the
beginning
27
of
the
period,
the
ad-
HOW
ditions
to
or
the balances
TO
deductions
from
at the
of the
end
AUDIT
the accounts
during
the year, and
period must be shoNvn.
The
total of the balances of the period must
with the
agree
cost of property figuresgiven in the balance sheet at that date,
and the balances at the end of the period with the amount
shown
in the balance sheet that is being audited.
The charges entering
the additions
into
the following notes
connection
Authorizations
(1)
for the
be examined, and
should
the
overrun
The
them.
be
must
sums
verified
are
in
detail,and
of value.
expenditure made
where
during the
the costs of the additions
authorized, inquiriesshould
should
authorizations
in this
show
be
made
the accoimts
year
have
about
to which
expenditures are chargeable, the amounts
thereof, the
and descriptionsof
approvals of the comptroller and manager,
the authorizations
the jobs. When
not specificas to the
are
work done, the actual additions should, if possible,be inspected.
ditions
(2) The auditor should satisfyhimself before approving admade
with the object of increasing the
that they were
ture
earning capacity of the plant, and that they are not of the naof either renewals
or improvements, and in this connection
ceive
changes in the production and capacity of the plant should rethe
consideration.
(3) To verify the pay roll and store and supply charges to
jobs,one or two pay roll distribution reports should be examined
in detail,and also one
storehouse reports. If large puror two
chases
from outside partiesfor capitalconstruchave been made
tion
work,
the
vouchers
usual precautions taken
therefore
to
see
that
should
they
be
are
examined
and
the
properly approved
receiptof materials,prices,etc.
(4) For purchases of real estate the title deeds should be
examined, together with the vouchers, and it should be seen
that the deeds have been properly recorded.
(5) While it may be considered permissibleto make a charge
for the
factory overhead to additions to property such as time of
superintendent and his clerical force employed on construction
conservative
business practise,
work, etc.,it can not be deemed
the probabilities
that the overhead
inasmuch
are
as
charges of
to any
extent even
tions
though addia plant will not be decreased
not xmder
and, therefore,the absorption of part
are
way,
has the effect
additions are in progress,
of these charges when
the
of reducing
in
operating costs, as compared with months
for
which
no
construction
work
is under
28
way.
AND
FIXED
OTHER
ASSETS
work in progress at the end of the fiscal
(6) Construction
in the statement
of condition under the
I)eriodshould be shown
heading of fixed assets and not as part of inventories. This is
work is not an
important to bear in mind because construction
while everything
be quickly turned into money,
asset that can
in the inventory is supposed to be capable of ready conversion
into cash.
due
are
auditor should
The
(7)
carried
being
have
may
by outsiders.
on
whether
work
a
direct
If so, the
bearing on the
any
installments
in progress
which
is
liabilitiesfor these
should be included in the statement
installments
they
of construction
accoimt
on
determine
of condition,as
of available cash
amount
hand.
on
When
(8)
should
be
leasehold
uses
company
and
be examined
a
notes
made
of
properties the leases
the periods covered, so
that
improvements, etc.,on such properties
written oflfover
the periods covered
by the leases.
are
for
(9) The auditor should satisfyhimself that the reserves
depreciation of buildings, machinery, equipment, etc., are
that
it may
seen
adequate to reflect the deterioration in the value of the fixed
shown on the balance
properties. If in his opinion the reserves
he should call attention
sheet are insufficient,
in
to the matter
the
comments
(10)
Make
that
are
part of the report.
sure
that property destroyed by fire or otherwise
a
out of service is
correctlytreated in the books.
Any portion of the originalcharge for such property which is not
recoverable through insurance, salvage or otherwise, and has
been
not
provided for by the depreciation scheme, should be
prematurely put
oflf.
written
It is to be observed
that the
foregoing notes are to be applied
only to cost of properties incurred during the period under
In addition, information
well be obtained
audit.
on
may
broader lines in regard to the composition of the real estate,
what
principal
building, and machinery accoimts; to show
have
property is represented thereby; and how the accounts
time past if not
year to year for a reasonable
The
information
thus
inception of the business.
built up
been
the
from
derived
from
is valuable
the concern,
only
the extent
plant, etc. Beyond
ordinary discounts or
looks
more
to the
indicatingthe progressivepolicy of
to which
in its
for
in
quick
it reinvests
these facts the
short-term
assets for his
29
loans
undivided
banker
is not
security.
who
surplus
is asked
interested;he
TO
HOW
When
be made
under
as
calling for
of
extent
action
become
may
a
quick
assets
reliable verification
the
priorto
period
to
even
necessary
appraisal by
an
the
suggest that
to the cost of the property
Such
audit.
is greater than
should
justify,the auditor
to
seem
which
is asked
loan
a
AUDIT
disinteresed
the
outside
experts.
DEPRECIATION.
FOR
RESERVE
A
depreciation is
impairment in
provide for the
and
to physical wear
the value
asset due
of an
tear, and
be avoided, reserves
it can
should never
Where
obsolescence.
that
be credited direct to the capital accoxmts, for the reason
a
in
division
of
doing
this
is credited
amount
nothing but
warrant
known
to
account
an
values.
for
reserves
provided, reasons
judgment should be
depreciation which
be given and
the
should
It should
stated.
be
borne
mind, however, that the rates of depreciationare reallymore
engineering proposition than an accounting one.
an
OR
ORGANIZATION
of
to
been
not
examiner's
of
estimated
conditions
Where
have
an
reflect
should
which
in
surplus set aside
for
reserve
startinga
new
business
be distributed
condition
DEVELOPMENT.
over
or
a
of the business, or
The
developing an
period of years,
a
pro
extraordinary costs
old
one
may
ably
reason-
determined
by
the
of such expenses
In the meantime,
the undistributed
rata amoimt
charged annually to operations.
the balance sheet as a
on
portion should be shown
deferred charge to operation.
The
Internal Revenue
Department has arbitrarilyruled that
the extraordinary cost of startinga new
business or developing
be charged off either at one
old one
time or over
cannot
an
a
from income.
As a result thereof,
period of years as a deduction
such cost should be segregated into an account
classified as
"organizationexpense,''which should be treated as an asset and
should be considered as such in the computation of invested
Its place on the statement
of condition
capital for tax purposes.
should be immediately after the settingup of the so-called
For the company's own
"fixed charges" section.
convenience,
from the point of conservatism, this account
be written oflf,
can
there is nothing to prevent such operation, but it must
be
as
borne
in mind
deduction,
Income
in
that
whatever
computing
net
is written
income
Tax.
30
oflfis not
subject
to
an
allowable
the
Federal
AND
FIXED
DEFERRED
in the
CHARGES
OTHER
TO
ASSETS
OPERATIONS.
Under
this
such
items
of condition
heading
are
as
grouped
expired
unapplicable to a future period,
experimental charges, etc. After the clerical
prepaid royalties,
of the deferred
charges has been verified the auditor
accuracy
should
satisfyhimself that they are properly carried forward
to future operations.
Whenever
possible,dociunentary proof must be produced in
For example, with unexpired
support of the items carried forward.
the policiesmust
insurance
be examined
to verify the
dates of expiration,the amoimts
covered, and the proportion of
the premiums carried forward; with royaltiesthe agreements
be examined; with experimental charges the vouchers and
must
statement
insurance, discounts
particularsof the work done must be looked into.
Many concerns
inventory stationery,advertisingmatter, and
items
other
of
periods. Do
salesmen
not
miscellaneous
of
a
current
for salaries
or
under
under
nature, and
operation,shoidd be shown
prepaid operating expenses.
as
Bills for
should
merchandise
paid
be presented under
of the
fiscal
the
items
which
expenses,
end
ventory,
general head of inprepaid operating expenses.
in the
up
at the
nature
treat such items
present them
but
Postage
a
on
will
as
advances
to
eventually be taken
the statement
in advance
current
such
of
tion
of condi-
receipt of goods
assets.
to individuals in
or
Large advances to subsidiary concerns
anticipation of the division of profitsor dividends, should be
It is
carefully investigatedto ascertain their exact nature.
often well to present advances
caption
current
The
of
of this sort
"advances," which
should
under
a
separate
follow inventory
and
assets.
examination
of deferred charges will usually furnish
the
.
auditor with
the
valuable
information
in
regard
to the
accounts
of
For
example:
(1) The verification of experimental charges carried forward
give information as to the production and future policy of
may
company.
the company.
(2) Royalty vouchers will sometimes
give a check on the
production of mines.
(3) An examination of the insurance policieswill show if the
properties are mortgaged or covered by lien,and will thus be
for mortgages on real
additional verification of the liability
an
of condition.
in the statement
estate, buildings,etc.,shown
31
HOW
(4) The
if any
The
insurance
of the latter are
auditor
TO
should
not
AUDIT
be checked
against the
covered, the omission
will often find included
assets and
should
in deferred
be
tioned.
men-
charges to
operations the item of coal inventory. This is not a prepaid
is it a deferred charge to operations. Any inventory
nor
expense
such as this should be classifiedas such, for coal when
used
in manufacturing is just as important an element of operation
material which is being fabricated*
as the raw
82
HOW
TO
and the stub
the blank
or
AUDIT
to bear identical
copy
or
signing the
officer,
officers,
the
stub
the
notes
being
care
has
the
When
balances
due
to
that
see
of
terms
with
open
accounts
the ledger
counts,
ac-
the ledger
on
open account
It should
be ascertained
no
list.
the
from
on
represent specificand
recent
items
not appear
regular a statement
If there are many
such
be obtained.
only.
from the
accounts
as to affect aplarge a sum
preciably
the general causes
the total of current liabilities,
for
ter
disputes should be inquired into and note made of the mat-
dispute, and
the
initial
of bills payable
does
account
any
creditor should
in
taken
omitted
been
auditing
carefully checked
and
prepared
list of balances
A
PAYABLE.
be
case,
and
payees,
the
done,
were
such
greatly facilitated.
be
ACCOUNTS
that
If this
issued.
would
must
certificate to the amounts,
a
as
could, in
notes
The
numbers.
they
amount
of the
for the consideration
In
with
concerns
payable
a
to
modem
banker.
charge registersystem,
as
easilyverified,
are
so
all liabilitiesare
Care
should
accounts
then included
in
be
taken, however, to
that all goods received on the last day of the fiscal period,
see
as shown
by the receivingrecords,and also all goods that were
in transit and belonged to the concern
that date, are included
on
ventories.
and the corresponding assets included in the inliabilities,
as
the
books
when
This
incurred.
test is necessary
as
an
increase
in the accounts
have
important bearing on the financial
payable may
a very
if the cash on hand is small.
position of the concern
outstanding can usually be ascertained by
Monthly expenses
of the fiscal
of the last month
of the expenses
a comparison
period with previous months, and those of the year with the
The
mined
charge registershould, however, be exaprevious year.
for the months
subsequent to the close of the fiscal year,
to find out if any
expenses
fiscal period under
When
must
additional
liabilitiesare
are
applicableto
the
audit.
first-class system
a
take
mentioned
included therein
included
is not
precautions
in the
in
to
operation, the
satisfy himself
accoimts,
among
which
auditor
that
may
all
be
:
subsequent to the date
Payments made in the months
of the fiscal period as shown
by the cashbook, which should be
of them
applicable to
are
carefullyscrutinized to see that none
the period under review.
(1)
34
BUNK
JOHN
AND
COMPANY
Incorporated
Public
and
Auditors
New
Accountants
York
19
Sir:
Dear
We
engaged
are
audit of the books
an
upon
and
accounts
of
and
that
it appears
there
due
was
Will
amount
to
19
on
balance of $
a
you
please advise
you
the
upon
is correct,
as
of the date
payments
or
increases
please send
a
detailed
blank
attached
of subsequent
shown, irrespective
of indebtedness?
statement
if the
to
enable
us
If it is not
to
rectifythe
error.
The
work
we
are
being audited
condition
engaged
and
of the books
is
designed for
of the
pany
com-
the verification of the
only.
compliance with
Your
is in behalf
upon
request
our
will be appreciated.
Very truly yours,
BLANK
JOHN
"
COMPANY,
Inc.
By
19
John Blank
"
G"npany,
Inc.,
New
Dear
York.
Sirs:
The
correct
balance due
us
by the
19
upon
85
was
$.
HOW
The
(2)
should
TO
file of bills not
be
exammed
to
AUDIT
vouchered
that
see
entered
or
on
of them
none
books
the
to the
belong
period under audit.
ther
fur(3) A careful perusal of the minutes of a company
may
assist the auditor in determining liabilities.
has large purchase contracts
in force for
When
a company
be examined, for if the contract
future delivery they should
prices are greater than market prices,it might be necessary to
for this loss.
set up
reserve
Any debit balance, due to
a
advance
to any
payments
condition, under
of
statement
other
under
If the business
audit
should
cause,
be down
the
on
separate heading.
is
one
in which
there
is any
sibility
pos-
goods having been received
consignment, and
on
a liability
part or all of such goods having been sold without
in the books, the auditor must
be
therefore having been shown
the point fully. This may
to cover
readily happen, as
sure
are
usually treated as memoranda
only.
consignment accounts
that goods have
been received on consignIf inquiry shows
ment,
If the goods
all pertinent records shoud be called for.
should show
the fuU
have all been sold,the consignor'saccount
wiU
amount
due, and if the debt is a current one, the amount
accounts
Where
payable due to trade creditors.
among
appear
only part of the goods have been sold, the net proceeds due to
of condition
the statement
the consignors should be shown
on
imder the caption of "accounts payable to consignors."
of liabilities,
As an additional precaution against the omission
of
a
should be obtained
statement
of the
the proper officer or member
statingthat all outstanding liabilities for purchases
concern
and
expenses
also advisable
been
have
review, or
period under
to obtain
from
of former
a
in the accounts
included
of the
In many
it is
cases
the president stating
periods.
certificate from
all liabilitiesfor
legal claims, infringements of patents,
claims for damages, bank
loans,etc.,have been^ included, as he
officer of the company
be the only executive
to know
the
may
extent of such obligations.
that
Every
in the
and
of the
date
book, during
that
and
to
the
where
present
we
see
month
all liabilities
that
that
all liabilitiesare
such
tered
en-
is
liability
curred,
in-
reflected upon
the records as
period under review.
Especially
of closing of the
is this necessary
audits
be made
effort should
are
called
are
monthly
upon
statements
operatingstatements.
36
to make
of
monthly
condition
and
LIABILITIES
CONTINGENT
LIABILITIES.
to show
condition
as
The
what
auditor
and
discover
the
will be found
Inquiry
made
as
made
and
Such
have
may
officers
to be
paid.
audit, must
description,not
of outside
should
interested
are
be taken
of
of the statement
reason
sale, but
be
has been
pax)er
in the
in other
matter
for delivery of goods contracted
of
large sums
materials, for
should
concern
security received to protect the concern.
be particularlystrict if it is known
that any
partners
or
action
partners of the
indorsement
any
to any
as
Contracts
and
forms
set forth with
lowing
debts, but possibledebts. The folunder which
contingent liabilities
officers or
to whether
Similar
statement
of condition
of
statement
:
of the
inquiry should
of the
date
actual
usual
it should
liabilitiesof every
report upon
only liquidated and
are
a
a
be
paid;
possible what
makes
who
It is not enough for
must
particularityas
much
CAPITAL
AND
short time.
a
enterprises.
guaranties.
for before
call for the payment
condition,may
within
money
of
In the
of
case
the
of
raw
manufacturer, this might be a perfectly legitimate
for seeking a temporary loan,pending production
a
for
merchant
a
whose
of
statement
condition
large stock of goods on hand, it might indicate a real
impending, with assets of a doubtful character to offset
liability
it. In every
audit, therefore, the auditor should call for
copies of all orders for future delivery,and if such orders call
shows
a
for stock
in
and
should
mention
demand,
of the
excess
be made
the
report submitted,
a
and
current
reasonable
the statement
on
details
prospective
of condition
depending
the
upon
circumstances.
other
Items
than
footnote
arisingfrom
assets to be listed
of current
a
those
as
the specifichypothecation
liabilitiesshould
appear
as
of condition,the
side of the statement
liability
tional
being stated for each subheading and such addi-
the
on
total amounts
report made
as
will convey
clear
information
to
the
banker.
it is
Wherever
liability,
a
statement
possible to
note
of condition
should
ascertain
be
somewhat
the
placed
as
amount
at the
of
a
bottom
gent
continof the
follows:
of $
for indorsement
contingent liability
notes
discounted
receivable,claims, damages at law
or
including incomplete contracts, guaranties and agreements."
be assigned the contingent
exact
Where
figure cannot
an
the
auditor
make
should
to
a comprehensive comment
liability,
"Subject
to
a
37
or
Otherwise, add
effect.
that
footnote
interest,taxes,
as
until
a
be
should
of the
Many
the
given
comment
have
and
items
records.
and
accrued
due
not
are
grouped such
are
verification of such
liabilities which
Such
the
obviously do, but
to the
to the
payable
be
can
curately
ac-
Special attention
followingpoints:
interest.
carry
etc.,which
the books
from
made
this caption
audit, but
The
later date.
involved
sum
preceding paragraph.
wages,
period under
of the
end
the
Under
LIABILITIES.
ACCRUED
items
in the
shown
as
AUDIT
TO
HOW
on
appear
items
bonds
as
and
notes
also consider
auditor should
of
statement
a
the
dition
con-
payable
lity
possibi-
bearing interest,as enough book accounts,
when
inquiry being made.
past due, do bear interest to warrant
of partners and officers of corporations almost
Loan
accounts
invariably bear interest; also judgments, overdue taxes, and
also
of accounts
other
liens.
The
of accrued
amount
State
and
local taxes
be
can
tained
ascer-
of the latest tax
examination
receipts;although
sometimes, as the period for which the taxes are paid is not
the receipt,it may
be necessary
to inquire of the
shown
on
taxing authorities as to the period covered.
proper
Tax
the Federal Income
Under
Law, a tax is imposed upon
of a corporation,which must
if the
be paid even
the net profits
corporation is dissolved before the end of the year during which
based upon the net
the tax is imposed.
As the tax is specifically
months
profitsof a particularperiod,although payable some
throughout the specifiedperiod, and
thereafter,the tax accrues
if a net profitis disclosed upon^the closingof the boolra,a reserve
from
must
be
tax.
An
was
an
shown
the
exception was
made
in 1918
and
as
an
accrued
1919, for Congress
of the rate" of taxation
that
set
completed before the tax rate was
regulations issued by the Treasury Department.
audits
many
the
normal
however,
years,
a
reserve
statement
no
for Federal
being established,for the
Taxes
When
the
date
has been
and
involved
of condition
In
should
Excess
be
Profit
is seldom
does not
consequenti
in-
cide
coin-
the last payroll of the period under
calculated,the amount
of condition
of condition
Income
sum
of the statement
with the date to which
statement
and
were
issued without
audit
of condition
statement
in its determination
tardy
so
on
must
accrued
be ascertained
38
to the date of the
and
entered
as
a
LIABILITIES
unless
liability,
niunber
the proper
a
wages
trifling. It
a
full week's
roll
pay
temporarily
unclaimed
to
to
reach
considerable
a
such
expenses
monthly, the auditor must
proportion since the last bill as
proper
It is important to note whether
the
received and
been
auditor
The
closed.
Where
they should
ledger account
a
be
titled
en-
should
the
enter
of all traveling
accounts
before the books
and
list,
a
of the
accrual
liability.
a
entered
secure
not
water, gas, etc., are
as
rendered
have
being diverted
wages."
bills for
salesmen
stated to be
amount,
credited periodicallyto
"unclaimed
its
prevent
of unclaimed
in the petty cash fund.
shortage
cover
re-deposited and
Where
examined
be
wages
(sixdajrs)
possibledaily variations.
to
should
to take
will sufSce
large business, where an accumulation
is in the custody of the cashier,the amount
hand
on
is
amount
of sixths of
reference
without
In
such
CAPITAL
AND
if any
are
report
was
the
for it unless
entered, provision should be made
is likelyto be trifling.
amount
for all commissions
tually
evenAmple provision should be made
payable on sales which have been billed to customers.
As commissions
until
are
frequently not payable to salesmen
not
so
the accounts
been
have
commissions
are
often
collected from
from
omitted
the
customers, accrued
As
the books.
they must,
paid out of the proceeds of the sales of which the
full profithas already been taken into the accoimts, they should
be
however,
be
set
on
up
the
condition
of
statement
as
accrued
an
liability.
All
are
concerns
have
more
or
closed the lawyers should
date.
If
is not
due
found,
and
be
the
litigation. Before
requested to send
auditor
set it up
If the
advance
in
suits for
as
"deferred
charges." But
other damages not covered
the auditor finds any evidence which
he
be liabilityof this nature
may
informed
should
the
in
a
books
bill to
ascertain
the
accrued
liability.
for damages to emis insured against liability
ployees
concern
the public, a proportion of the premimns
paid in
or
will
for the unexpired time covered by the insurance
probably
amount
appear
one
less
of
all the
facts.
to the amount
opinion as
liability,
or, if the
possibleloss.
outcome
He
can
that should
is
an
there
by insurance, and
leads him
should
then
or
where
to suspect there
insist upon
form
be set up
uncertain, as
39
claims
be
may
a
acciu^te
an
as
being
an
reserve
accrued
against
HOW
BONDED
be examined
must
the terms
and
authorized, issued, and
of the bonds, should
duration
certifying the
company,
standing, unissued
in
shown
bonds,
the
and
the
in
of
statement
interest
bonds,
on
unissued
operations. Bonds
be
To
such, they must
sense
treasury holdings.
certified and delivered by the trustee.
the
in
of
statement
noted
and
for in the
care
redeemed
to
have
they
see
been
obtained
from
Funds
to
that
see
and
are
default
any
no
been
carefully
provided
be
they
in
are
noted
in
of condition.
the statement
examined
taken
of the company,
accounts
Bonds
be
be
shown
as
have
Sinking-fund provisions in mortgages should
should
the
on
should
condition
the interest
the trust
from
authorized, outof the liability
The
of condition.
reconciled with
and
calculated
be obtained
verification
retired,as
the statement
on
of bonds
amount
statement
shown
as
be shown
certificate should
A
of condition.
of interest,
in treasury, rate
of bonds
and
A copy
of the mortgages
The amount
thereof noted.
DEBT.
MORTGAGE
AND
AUDIT
TO
during the period or previously should be
that they have been properly canceled, or, if
certificate should be
destroyed, a cremation
the trustees.
securities
or
deposit with a trustee or agent forverified by a certificate received direct
on
should be
this purpose,
from the depository.
applied periodicallyto the cancellation of
bonds thereby actually reducing the bonded
debt, instead of
cash or bonds
being carried in the sinking fund, show the
this fund
Where
of
amount
issued
and
on
is
bonds
liabilityside
the
verify
retired
so
the
as
of
a
the
of such
retirement
from
reduction
statement
bonds
by
a
of
bonds
the
operations
certificate from
the trustee.
maintained
be
at
and
liabilities,
matters
any
and
As
and
stipulatethat
sometimes
Mortgages
a
certain
the auditor
any
other
a
due
must
thereof,that may
that they have been
mortgage
in
amount
current
excess
derives
of the
complied
must
current
to such
to the accounts,
be referred to in the
its chief value
assets
consideration
give
stipulationin regard
audit
see
the
trust
or
deed,
with.
from
the fact that upon
verifythe existence
registryit becomes a lien,the auditor should
of such an obligationby inspectingthe public records,not only
the company's
be found
with reference to such
on
as
may
the public records
on
books, but also any that may stillappear
40
j
HOW
In
the
of condition
statement
stated, givmg
amount
the
has
company
note
must
in the
accrued, but
should
each
class of stock
authorized, issued,and
cumulative
preferred stock
be made
If stock has
AUDIT
TO
sold
outstanding, a
of the
dends
divi-
installment
the
on
plan, the auditor
properly extended to
been
the calls have
ascertain that
If
yet declared.
not
been
in treasury.
of condition
statement
be
must
Approval of the board of directors is necessary
and the minutes should be examined
accordmgly.
If any
stock has been sold during the period under audit,
the auditor should verify the proceeds of the sales.
the stockholder.
TREASURY
STOCK
AND
BONDS.
treasury holdings, after it has
and
has been
stock
returned
is donated
company.
Bonds
to the
for
become
capital
holdings
for value
is true
as
company
treasury
certified by the trustees
issued
been
working
after
be shown
themselves,
if in other
they
at not
used
at
all times
to
see
examinations, always
them
mailed
direct
by
or
to the
been
have
less than
par.
proper
hands.
an
Care
should
be
genuine.
In
bank
independent certificates
and
have
that
secure
capital
by the
inspection
receipts,or by certification,
the owners'
than
when
purchased
or
Securities held in treasury should be verified by
securities
received
delivered.
and
Securities in treasury should
of the
becomes
Capital stock
receipts are
oflSce.
This
is not
cable
always practi-
work, but independent certificates should
where
the receiptson file do not
be secured in all possiblecases
contain
seal of the holding parties,as in the case
a commercial
of insurance
and bankmg
departments.
in commercial
SURPLUS.
The
auditor
should
consider
the
surplus
at
the
lated
beginning of the period. This item represents the accumuprofitsprior to the beginning of the fiscal period under
review, and should be compared with the surplus shown on the
of condition
and with the
of the previous year,
statement
ledger account, to see that it corresponds. If it does not, a
should
be prepared, giving full details
reconciliation statement
of the
differences.
42
CHAPTER
OF
STATEMENT
PROFIT
LOSS.
AND
The
of operations for three
audit, and
the
past
satisfactory form
A
in
under
concern
ledger
form.
comparative
information
the
with
This
to the banker
as
to
audit.
of statement
of
operations is shown
on
56.
page
be
it would
While
all the
of
operations
reconciled
with
the
end
inventory
periods
Additions
then, instead
materials
consumed
in the
good
records
will
auditor
should
and
in the
no
operating
closed
were
and
should
be
are
date
so
of
goods.
more
force, the sales
is in
nevertheless, the
of the
last day
shipped after that
goods
process"
that
shipping records
the
a
in
system
the
Where
and
of
from
on
period,
beginning
shape, but
good
satisfy himself
of the
being "purchases"
manufacture
in
the
be
at the
statement,
of
accounting
be
probably
sales books
that
and
cost
should
period.
"goods
only
comprise
worded.
a
of the
inventories
stock," and
Where
end
at the
the
during
purchases,
"finished
the
main
hand, at the beginning
or
exists, the
system
the
of
hand
on
sold
quantities
on
production,
inventory
cost
proper
of the
briefly outlined
are
possible, the
period, plus the
less the
check
certain
are
an
pages.
Whenever
SALES.
which
detailed
a
composition
there
account,
principles to be kept in view
following
audit, to make
the
in
useless
somewhat
entering into
transactions
statement
and
impracticable
of condition
ordinary statement
of
by comparison
valuable
of the
progress
the statements
least,including the period under
at
statement
will furnish
obtain
should
auditor
years
a
prepare
comparison
OPERATIONS
verifying them
after
account,
VI.
fiscal year,
in the
included
are
transactions.
When
should
period
Such
an
audit
is
that
satisfy himself
were
recorded
verifications
comparison
of the
for
being made
the
sales
in accordance
can
be
made
shipping memoranda
43
first
the
with
at
the
the
beginning
dates
conveniently,
with
auditor
time, the
the
of
the
of shipments.
by
a
invoices
direct
billed.
HOW
Allowances
to
TO
AUDIT
for
customers
in
freights,reductions
sales in the statement
trade
discounts, outward
prices,etc.,should be deducted
of operations,as the amount
from
the
of net sales
is the only figure of interest to the bankers.
bookings at the
into, as a comparison
The
future
looked
periods of other
idea of the concern's
FREIGHT.
close of the jBscal year
of orders
furnished
years
business
on
hand
should
with
the bankers
be
ponding
corres-
with
an
outlook.
and
shipments to customers
for freightpaid by them (where
deductions made
by customers
from
the
the shipments have been delivered),
are
a deduction
gross sales and should be treated separately from freight paid
Freight prepaid
on
The former reduces the amount
of the
incoming material.
of the inventory
sales,while the latter increases the amount
purchases.
on
inventory at the beginning of the
period,plus purchases during the period, less inventory at the
end of period,gives the cost of sales. In a manufacturing concern
the factory cost of production takes the place of purchases.
As has already been stated, if a good cost sjrstem exists,the
form of operatingreport will differ vastiy,for it is then possible
The
to show, not only goods purchased but sJso consumption.
is briefly:
preferredform for that part of an operating statement
OF
COST
SALES.
The
CStmdard Headmg)
(Detiib as
COST
OF
to
tales,deductioiis,
etc.)
GOODS
Inventoryat
SOLD:
beginningof period:
Goods in process
Fiiushed goodson
$
$
hand
On hand
Purchased
beginning durins
Materials:
of period
materials)
(Ust of principal
$
$
$
$
On hand
end of
$
$
$
$
Ccnsumed
period
period
$
$
$
$
$
$
$
$
$.
$.
$.
Total materialsconsumed
Total materialsconsumed
Productive labor,etc, etc.
Most
in
of the items
auditing the
under
statement
'"costof sales" will have
of condition, but
44
been verified
nevertheless,care
STATEMENT
taken
be
should
OF
to
dumping
ground
embraced
under
that this heading has not
see
for charges which
would
be
the heading of specialcharges.
of the items
been
PROHT
a
properly
The
tion
composibe traced
accounts.
or
SALES.
ON
made
more
entering into the cost of sales should
into the cost records
GROSS
OPERATIONS
This
is obtamed
by deducting the
cost of sales from the net sales. The ratio of gross profitsto net
sales should be calculated and compared.
AND
GENERAL
EXPENSE.
Under
SELUNG, ADMINISTRATIVE
the expenses,
be set down
these general headings should
itemized to correspond with the titles of the ledger accounts
kept in each division. In checking the totals of each account
for the period under
with the statement
audit,specialattention
should be given to see that none
to credits in these accounts
for the sale of capital assets and for items
have been made
should
in expense
of the totals of each division and
which
not
net sales should
Where
good
a
of overhead
appear
be calculated
The
accounts.
tages
percen-
of the aggregate total to
for each year
for comparison.
exists,only two general divisions
will be found; that is ''factory'^
and
cost system
expense
"selling."
General
after all,exist for
expenses,
distributed to the
be
is served.
This, however,
showing fundamental
Administrative
can
and should
purpose
sales department
be done
only
when
ever
^which-
"
a
system
influences upon
is in operation.
expenses,
similarly, is distributable upon
expense,
for the administrative
analjrsis,
or sales policies.
Financial
the
factory or
some
executives
are
a
officialsdirect either the
distributable
factory
cost, for they
are
by both of the principaldivisions.
When, however, a reliable cost system does not exist,set up
separate headings for "factoryexpense," "sellingexpense" and
"generaland administrative expense."
needed
NET
PROHT
ON
SALES.
This
is obtained
by deducting
and
selling,administrative
from the gross profit on
sales, and shows
expenses
its principalbusiness.
The
on
earnings of the concern
aggregate
net
to
total
of
the
profitto sales should be calculated for each
give comparative figures.
45
year
the
general
the
net
ratio of
in order
HOW
OTHER
Under
INCOME.
that
be
may
from
income
should
derived
this
from
heading is embraced
outside
sources
of
be prepared of each item, and
of the
and
income
any
sales,such
investments, interests,discounts,etc.
himself of their accuracy
as
AUDIT
TO
as
Schedules
the auditor should
satisfy
propriety of including them
income.
FROM
DEDUCTIONS
grouped such items
payable, etc. The
should
income"
NET
Under
INCOME.
interest
as
same
on
bonded
procedure
this
heading
debt, interest
of verification
as
on
are
notes
for "other
be followed.
INCOME-PROnT
OR
LOSS.
Adding
"other
income"
to
and
from
deducting "deductions
income,"
"gross income"
gives the "net income" or "profitor loss" for the period, which
that should be carried to the surplus account.
is the amount
AND
SURPLUS^ADDITIONS
DEDUCTIONS.
Items
of unusual
extraordinary profit which do not belong strictlyto the
period under audit, or can not be said to be the legitimate
results of the ordinary transactions of the concern,
should be
Deductions
entered here and verified with the surplus account.
should be similarly treated.
Also, dividends declared should
and
this
item under
be entered in the surplus account
as
an
to declare dividends
caption, inasmuch as it is the usual custom
from net earnings and surplus. After adding special credits
have
to and deducting specialcharges from the net income
we
all sources,
the total profit or loss for the whole period from
at the beginning of the
to the surplus balance
which, added
gives us the surplus at the end of the period, which
period,,
of
should agree
with the surplus as stated on the statement
or
condition.
The
miscellaneous
information
preserving the
condition, for in some
without
statement
of condition
order
cases
in the next
of the
the
headings.
46
items
on
chapter
is added
the statement
suggestion applies to
of
several
CHAPTER
INSTRUCTIONS
GENERAL
SALES
in
a
of
both
of
statement
In
amount.
ties, and
classified
The
likewise
in
the
payable."
Whenever
verify correctness
of items
and
should
verification
AGREEMENT
managers,
concerns,
as
the
examined
(in the
effective
define
An
the
of
method
factor
the
to maintain
as
a
is the
agreement
to
CHARGES
exists
in
of such
of
in
be
to
book)
minute
of
division
of
cost
the
agreement
the
arriving at such
on
percentage
a
business, should
a
of
employees
of
form
in the
recorded
operation
capital, which
be
to
profits.
under
should
expense.
and
deducted
amounts
funds
caption of "trust
should
from
be
wages
presented
funds."
PARTNERS.
partnership providing
47
deposited
Amounts
benefit
BETWEEN
a
tors
credi-
Agreement
corporation, such
accident
the
lack
the
other
or
defining the
fidelity funds
sick
from
PROHTS.
OF
ANDBENEHTFUNDS.
and
correspond
due
or
on
upon.
interest
ordinary
liabilityunder
INTEREST
of
in
EMPLOTEES'HDEUTT
by employees,
a
balances
should
we
permitted
eammgs
be
usually
proper
to
net
being included
"debit
due
compensation
on
arrangement
added
shown
SHARING
case
should
immediate
such
be
sales
gross
ledgers should
balances
possible,
as
liabil-
able."
receiv-
accounts
on
as
superintendents,
extra
to
current
creditors'
of
commented
THE
FOR
between
on
be
from
receivable
in the
balances
this is not
When
debtors.
net
due
balance
included
classified
and
assets
the
of
instead
accounts
separately, the debit
shown
current
accounts
to
be
balances
aggregate
be
under
"credit
as
amount
gross
by general ledger controlling
shown
should
balances
Credit
net.
be
not
the
show
aggregate
shown
not
or
balances,
These
columns,
the
words,
other
should
should
credit
and
whether
customers,
BAUNCES.
condition,
debit
the
accounts,
LEDGER
PURCHASE
AND
VIL
If
for
an
unequal
mterest
capital
HOW
the
invested, and
alike,the
smaller
TO
AUDIT
interest in the
business
and
is share
share
chargeable against the partner having the
of capital can
be for one-half of the actual
interest
amount
difference in capital.
PARTNERSHIP
Partnership agreements should
be examined
division
to verifythe basis of arrivingat the proper
of profits. The capitalaccounts
of partners should be analyzed
for the full knowledge that the respectiveaccounts
showonly the
investment
contributed as such, and not other items, such as
from
the outside, upon
which the interest is
borrowed
money
Such items should be deducted
from capital
paid by the firm.
and shown as ""loans payable."
accounts
Operating charges should not be entered in partners^drawing
accounts,
AGREEMENTS.
or
It will be
applied
as
that
seen
reduction
a
should
of their capital accounts.
partners desire to show
inflated
profitsfor any period,for the purpose of disposingof the business
advantageously to themselves, they could, by charging costs
of conducting the business to their capitalaccounts, make
an
excessive showing of the profitsof the business.
ANTiaPATED
Charges agamst customers, which are
treated as accounts
receivable can
only be for goods delivered
income.
Charges should
or services performed; in fact,earned
PROFITS.
be made
not
hand, unless
for unexecuted
contracts
the
unexecuted
cost
of the
or
orders
contract
shown
as
or
order
on
is
prospective liability.
As already stated,inventories
should
always be presented at
an
inventory be taken at a
a live inventory cost price. Should
sellingprice,it would have the effect of anticipatingprofit.
at its full present and
shown
INSURANCE.
If
such
materials
tobacco, sugaiv hemp,
chemicals, etc. are used, where yearly policiesof insurance are
is subject to
merchandise
in warehouse, which
written on
of all cancelled policiesshould
consumption, an examination
be made
to verify the proper returns on cancellation.
SURETY
COMPANY
first thing
to do
CASES.
is to visit the
services and obtain
and
or
any
When
a
copy
the detective's report.
are
loss,the
requiring our
notified of
a
policy,with all riders attached,
regard to the insured, the loss,
in
The
we
surety company
of the
further information
as
claimant
48
should
then be visited
HOW
is
TO
be determined
of course,
genuine, cannot,
AUDIT
at
a
glance; but
they have traveled through one or more
is fairlyestablished
banks the authenticity of the indorsement
by the banks' action. This precaution is necessary as supposed
if the checks
show
that
checks
been
drawn
have
canceled
and
to hide
abstraction
of
cash.
For
the
same
false additions
not vouched
All deductions
be added
that
so
conceal losses.
not
may
should
records
cash
reason
for
by
returned
not
prove
paid checks, must
be examined.
The
drawing of
disbursement.
a
or
There
been
have
bills.
of
cases
propriety
of
a
against dishonesty is to
entries of disbursements, with
Where
such
exist,careful research should
not
the
check
checked
the originalinvoices and
do
does
further
A
the checks
compare
check
than
more
be conducted.
check
one
of purchase
evidences
drawn
to pay
cers
Petty offiinvoice,the later check being diverted.
have often purchased personal articles through company
the owners
not
charge accounts; and particularly where
are
have
been known
to operate automobiles,
active, executives
renovate
homes, etc.,at the company's expense on the assimip-
the
same
by direct checks would not be detected.
The auditor must, therefore,decide after studying a bill,
if the
purchase is in the company's interest.
Obviously, in a professionin which countless books have been
written we cannot
exhaustively all the ramifications
attempt to cover
tion
that
payment
of
the auditor
from
must
guard against
insurance
It is only
by the
every
exercise
to
suit
of every
the
of
loss,ranging
the taking of
on
needs
and by
intelligence
be assured
safety can
event, before
reproduced
program
fashion
every
premiums.
alertness that reasonable
In
all circumstances, for
materials for cash, to
the sale of unchecked
returned
under
conducted
audits
work
is
to clients.
undertaken, the
6 should
page
of the current
be
constant
studied
situation.
printed
and
Upon
lified
amp-
the
completion of the work, the situation should be
reviewed and omissions
sought.
In the preceding instructions, we have spoken dogmatically,
is in accordance
with that of the
but the practiseas laid down
It
Federal Reserve Bank.
must
always, however, be borne in
that auditors are
the clients' employees.
mind
At the same
time the auditors must be bound by the ethics of the profession,
presumed
50
INSTRUCTIONS
GENERAL
for they
public characters.
Nevertheless,
auditor cannot
and even
when
an
prosper if he affronts clients,
of a third party'saffairs,
sent to make
examination
suffer
an
can
by over-insistence.
told what
have
constitutes
Though
we
an
examination,
examination
be carried only as far as the client will permit.
can
A
client's decision not
his
to permit correspondence with
debtors
to verify his accounts
not
receivable, may
mean
that the accoimts
of questionable value.
The client may
are
to
are
certain extent
a
of the effort to be imjustified;may
believe the expense
not
his customers,
want
to risk misinterpretation by stirringup
have
for limiting the work.
These
good reasons
limitations must be accepted gracefully,and without suspicion,
if they originate with the proper
authorities of the client's
may
other
company.
In
the
must
be
the
extent
This
given
to the
will
warning
that, if they
so
examination
the
work, by stating
and
others,reading the
satisfied with the extent
not
to
carried
been
has
heed
carried.
to bankers
are
report, however,
of the
character
public
a
serve
the
to
it has been
to which
statement,
which
attached
comments
struct
they can urge or inthe client to permit further investigations.
The
following pages contain samples of the forms used in
corresponding with an audit client'sdebtors or creditors or with
his banks.
REPORTS.
Junior
it is when
prepare
any
he
able;
ordinarilyreadily obtain-
are
becomes
senior
a
of report beyond
sort
of real value
are
accountants
to himself
or
his
accountant,
criticism, that
employers.
a
Such
able
man
to
comes
be-
auditors
in demand.
such
Ordinary business documents,
are
given passing scrutiny and
are
files. Auditors'
from
subjected
reports travel
to minute
scrutiny by
from
the
with
the affairs described
clients' executives
who
than
many
are
the
letters,
telegrams, etc.,
then generally lost in the
hand
to hand, and
are
as
competent
men.
Aside
usually better acquainted
auditors, the reports are
lectors,
colanalysed by bankers, note-brokers and Internal Revenue
in
of whom
equals
accounting practise.
are
many
your
Reports must therefore,be not only arithmeticallycorrect,
and informing
but care
to provide proper
be taken
must
related
titles of account, to group
figures,and to check all
51
HOW
references
and
accounts,
Undesirable
story.
observed.
TO
One
AUDIT
that
so
exceptions
report the
to
writer
they will tell a consistent
this policy repeatedly are
recalls gave
different
ventory
in-
of condition
figures,for the same
date, in the statement
of operations. The accountant's verbal explanaand statement
tion
that
was
the
of condition
statement
total
the
was
gregate of all inventories,while the operating statement
a
ag-^
carried
part in the closingof the section entitled ""cost of goods sold,''
inventory at the end of the period was
deducted,
the balance having being deducted
from various
figuresbefore
they were
used, such as coal, to provide a "coal consumed"
figure,etc. Though explainable,such a report is not accurate
where titles and differingfiguresare so shown
or logicalsave
where
the
that the connection
can
be traced.
Similarlysubjectto suspicionby
an
outside
reader
another
was
report giving depreciationdeducted on the operating statement
of
approximately $110,000 but speaking in the comments
as
depreciation taken as $112,000. The difference was found to
be branch office fiuniture depreciated and charged into selling
The
charge is properly a sellingcost but the report
expense.
of error,
explained
by conflictingand ungiven the appearance
was
figures.
The principalexhibits and the introductory letters have been
their use
in a
by universal custom
as to nmke
so standardized
fore
The following should theregiven fashion almost mandatory.
not be deviated from except for very good reasons.
OF
FORM
CERTIFICATE.
certificate should
The
be connected
statement
of
with the accounts
they
will be used
that
cannot
and
condition
in such
a
way
only conjointly. This rule
containing any
applies also to any report or memorandiun
reservations as to the auditor's responsibility,
qualification
any
reference to facts materiallyaffecting
as to the accounts, or any
the financial positionof the concern.
is to place conspicuously on each statement
The
of
custom
the sentence, "this statecondition and operating statement
ment
the examination"
is subject to our
comments
(if
upon
to
as
ensure
that
comments
many
letter,are
the
appended)
contained
comment
in
well be
; or
in
one
cover,
and
in
statement
is
an
ductory
intro-
subject to
introductory letter."
our
Introductory letter, comments
bound
"This
contained
the
52
and
absence
statements
of
any
are
one
then
when
INSTRUCTIONS
GENERAL
will
the report is examined
the
reader's
suspicion.
The
certificate when
invariably appended to the
The formal certificate,
however
foot of the introductory letter.
when
is added
requested.
only
A complete introductory letter with a somewhat
different
is
if
certificate, a form be preferred, given below.
arouse
issued
certificate should
The
with
consistent
a
be
is
concise
as
of the facts; and
statement
correct
and
short
as
possible,
if qualifications
clearlyand concisely.
If the audit has been complete and conforms
to the general
the statements
of condition
outline given hereinbefore, and
and
of operations are
all minor
correct
and
qualifications
of condition,
fully covered by the foot-notes on the statement
are
state
are
necessary
the
following form
have
We
audited
them
is proper:
the accounts
of
from
for the period
to
of condition and statement
and certifythat the attached statement
in
financial condition of the
forth
the
of operations
our
opinion set
and the results of its
at
company
operations for the period under
review.
SHEET
INTRODUCTORY
FOR
THE
USUAL
made
an
EXAMINATION
COMMERCIAL
Sirs:
Dear
In accordance
of the books
and
with your
accounts
request,
have
we
examination
of
for the period from
(or for the year ended
to
).
results of this examination, together with our
comments
thereon, are presented in the following exhibits and their related
The
schedules:
"1."
EXHIBIT
Schedule
''A.''
Securities Owned.
Schedule
"B.''
Accounts
"2."
Statement
EXHIBIT
We
of Condition
Statement
certify that, subject
as
of
Receivable.
of Operations for the
to
our
comments,
the
statement
of
of
and related statement
operations,presented herewith,
and
e:diibit8 of the accounts,
correctly set forth the
of
and
financial condition of the company
as
the operations for the period stated.
condition
are
true
Very truly yours,
JOHN
BLANK
AND
COMPANY.
By
C. P. A., M.
53
A. I. A.
TO
HOW
AUDIT
EXHIBIT
"1"
COMPANY
STATEMENT
OF
CONDITION
As of
19
ASSETS
Current Assets and loTentoiies:
Cash:
Cash on hand
and coin
currency
Cash in bank
$
"
Total cash
Notes and Accounts Receirable:
hand (not past due)
Notes receivable of customers
on
discounted or sold "dth indorsements
Notes receivable,
or
0.00
0.00
0.00
0.00
0.00
guaranty
receivable,customers,
past due (cash value
$
)
Accounts
receivable,customers,
past due (cash
value $
)
Notes
0.00
0.00
.0.00
Less:
Provisions for bad debts
for discounts,
Ph"visions
$
allowances,etc
0.00
Total Notes and Accounts
Inventories:
Raw material on
Goods in process
Uncompleted
Less payment
Finished goods on
0.00
Receivable
0.00
hand
.0.00
0.00
$
contracts
on
0.00
freight,
account
thereof
0.00
0.00
0.00
hand
0.00
Total Inventories
Other Current Assets:
0.00
(Describedfully.)
0.00
0.00
Total Current Assets and Inventories
Securities Owned:
Securities readily marketable and salable without
impairingthe business
Notes givenby the officers,
stockholders,or employees
0.00
0.00
"
.0.00
...0.00
Treasury Stock
0.00
0.00
0.00
Plant Propertyand Equipment:
Land used for plant
Buildingsused for plant
00.0
0.00
Machinery
0.00
0.00
0.00
Tools and plantequipment
Patterns and drawings
54
INSTRUCTIONS
GENERAL
Plant,Properlyand EquipflMiit
(Coniimud)
Office furniture and fixtures
Other fixed assets, if any (describe
fully)
0.00
0.00
0.00
Total
Less
Less:
.0.00
0.00
0.00
Reserves for depreciation
0.00
Total,Plant, Propertyand Equipment
OperatingExpenses:
expenses,
Prepaid
insurance,taxes,
interest,
etc.
0.00
0.00
Total PrepaidOperatingExpenses
0.00
Good-WiD
Total Assets
$
LIABILITIES
AND
0.00
CAPITAL
Liahilities:
Current Liabilities:
Liabilities
Unsecured
Bills,
notes and
accounts
Unsecured bills
and
payable;
for merchandise or raw
notes: Acceptances made
material purchased
$
Notes given to banks for money borrowed
Notes sold through brokers.
for machinery,additions to plant,
Notes raven
etc
Notes due to stockholders,officers,
or
employees.
Accounts payablefor purdiase,
(not yet oue)
Accounts payablefor purchase,(pastdue)
Accounts payable to stockholders,officers,
or
ployees
em-
0.00
0.00
0.00
0.00
0.00
0.00
0.00
$
0.00
Secured Liabifities:
Notes receivable,discounted
or
sold "dth indorsement
guaranty (contra)
discounted or assigned,
Customers' accounts
(contra)
secured by liens on inventories
Obligations
eral
secured by securitiesdepositedas collatObligations
or
..........
..
Accrued
liabilities
(interest,
taxes, wages, etc.)
Other Current Liabilities:
0.00
0.00
0.00
000
0.00
(Describedfully)
.0.00
.0.00
0.00
Total Current Liabilities
Mortgages:
Mortgages on plant,(due date)
Mortgage on other reidestate (due date)
Chattel Mortgage on Machinery or Equipment, (due
date)
Bonded debt, (due date)
0.00
0.00
0 00
0.00
0.00
.0.00
0.00
.
Other Faed Liabilities:
(Described fully)
Total Liabilities
0.00
55
HOW
TO
AUDIT
Capital:
Pk'cferredStock: (Par value $
Authorized shares
Unissued shares
per
share)
0.00
0.00
$
Issued shares
Stock: (Par value $
G"mmon
Authorized shares
Unissued shares
.0.00
per
share)
0.00
0.00
Issued shares.
.0.00
Total CapitalStock.
Surplus:(or lessdeficit)
.
.
.0.00
.
Total Capital
(Ifan individual or partnership)
.0.00
Capital
deficit.
Undistributed profits
or
Total
.
Total Liabilitiesand Capital
This statement
When
so
that
form
.0.00
$.
issubject
to
our
comments
the examination.
upon
Plant, Property and Equipment has been divided
for each
asset exist,the preferred
separate accounts
the
section
for that
of the statement
PLANT,
PROPERTY
AND
of condition
is:
"
EQUIPMENT
EXHIBIT
OPERATIONS
OF
STATEMENT
FOR
THE
SIX
THE
PERIOD
(OR. FOR
Gross
THE
.
.
TO
FROM
YEAR
"2
ENDED.
MONTHS
.
FOR
(ENDED.
((""*"
ENDED.
.
.
)
.)
Sales:
Classify
source
of income)
$
Total Gross Sales
$...0.00
Deduct:
All allowancesfor returns, freight,
trade discount,etc
Net Sales
Cost of Goods
....0.00
$...0.00
Sold:
Inventorybeginningof period
Purchases duringperiod
Productive labor
....0.00
0.00
0.00
56
TO
HOW
AUDIT
""9""
"3
EXHIBIT
STATEMENT
OF
ACCOUNTS
PARTNERS'
For the Tear Ended
31, 19
December
accoant of A. B.
Capital
Balance at beginningof Period
$0.00
withdniMrals:
Deduct
Pertonal income
taxes
$0.00
paid
0.00
Other personalwithdrawals
Other
0.00
withdrawals
personal
$
Total withdrawals
0.00
0.00
Balance
Add:
Share of net profits
0.00
Balance at end of period
(See Exhibit "1")
$
0.00
="
=
'
Capitalaccount of C. D.
Balance at beginningof Period
$0.00
Deduct vrithdrawals:
Personal income taxes paid
Other personalwithdrawals
^Interest on withdrawals
$0.00
0.00
0.00
0.00
Total withdrawals
0.00
Balance
Add:
Proceeds of sale of securities0"fned by partner.
^Interest on additional capital
Share of profits
.
$
0.00
0.00
0.00
$
Balance at end of period(See Exhibit "1")
*
Dependentupon
lama
0.00
rfpartnership
agreemenL
68
0.00
SECTION
BANK
BANK
SAVINGS
written
it is best
though
of
extent
reports
beyond
which
Much
that
of
part
he
be
after
On
the
entering
If
of
any
written
request,
manager
of the
of
the
at
once
all
No
assist
ofiicer
in
the
accountant,
was
first
bank,
examined,
been
or
assisted
a
printing
variations
owned,
by
an
no
should
those
employee
a
held
or
diately
imme-
the
be
oflScer
have
of
or
of
the
the
bank,
to
the
to open
securities
those
a
the
boxes
kept in
examine
cannot
they
are
send
Securities
and
be
can
is
amined.
ex-
finished,
have
which
sealed.
the
bank
audit
employees.
69
should
unless
tell in his statement
by officers
books
pass
should
until
of the
be
and
take
once
collateral,
as
accountant
sealed
which
of
latter.
statement
accountant
notif3ring him.
should
at
books, and
be allowed
one
examination
should
either
by its books.
which
examination
who
is also
are
we
commenced
prepare
vaults, the
vaults, that
securities, both
not
be
shown
as
approved
the
the point
later, add
accountant
entering should
Until
entity and
should
securities
of the
on
the
and
without
bank,
vaults
the
bank
outside
in
deposited
truthfully
day's business, preferably the
a
bank
the
he
examination,
securities, cash, check
of the
condition
client, the
to penetrate.
should
audit
banks,
depository
when
Therefore,
an
the
banks.
before
or
as
if possible, the
clearly states
savings bank
a
formula
possession of the
of
allowed
examination.
bank
A
GENERAL
and
and
extremes,
by
public ending
nation
exami-
examination
audit
an
immediately
in the
to
even
predetermined
examined
not
provide for other
to
has
was
bank
any
conmiercial
the
complete
the
to
applies to
the savings bank
he
must
he
what
upon
Like
complete,
so
obligation
to instruct
are
make
audit
the
auditor's
to
paragraphs
designed
were
details
instructions, the
The
bank.
savings
a
VIII.
EXAMINATIONS
EXAMINATIONS.
following when
of
CHAPTER
3"
so
the
be
allowed
desired
extent
by
to
the
to which
HOW
The
TO
should
AUDIT
make
complete verification of each
item of the assets and liabilitiesas shown
by the general ledger
at the date of the audit and the period under
examination.
accountant
and
STOCKS.
AND
BONDS
should
accounts
and
accounts
in
examined
and
The
and
par
be listed from
should
stocks
a
the
value
of all bonds
subsidiary or individual
in total with
agree
general ledger.
the
book
The
the
controlling
proper
securities
should
be
with the par value shown.
It should be
attached
that all unmatured
to coupon
are
coupons
ascertained
checked
bonds.
All entries in the
general ledgerrepresentingbonds, stocks,or
in value should be checked
notes purchased, paid or reduced
to the general ledger,from the cash book or journal also with
in connection
the bill of sale furnished by bankers
with such
transactions,which should be kept on file in the office of the
bank.
The
should
accountant
exhibited
bonds
are
also be satisfied that
the
of the
property
bank.
only by insistingthat the numbers
purchased shall be specifiedin the broker's bill of
ascertained
in the
be entered
of the
accounts
class of notes, when
Each
LOANS.
individual
the
""bearer''
This
can
of the
be
bonds
sale and
shall
respective issues.
aggregated, should agree
general ledger. All partial
controllingaccount in the
loans
payments of principalendorsed on the notes, and all new
taken and old loans paid since the last audit, should be checked
with
its
with the cash book
In the
that
see
of mortgage
case
the
recorded,
entries.
mortgage
and
deeds
loans the fileshould
deeds
not
accounted
for
accountant
should examine
through
are
on
in the
hand, properly signed and
files of the
correspondence
and
be inspected,to
report
on
or
bank
should
otherwise.
the insurance
be
The
policies,
expired,
held is sufficient,
has not
ascertainingthat the amount
and is payable to the bank in case of loss. If the accoimtant
so
of mortgage deeds and
desires he may
delegate the examination
of the auditing committee,
insurance policiesto the members
and
their
certificate should
be
annexed
to
the
accountant's
report.
Amounts
advanced
on
construction
loans should
borrower
receiptsgiven by
checks given in payment by the banks.
with
the
the
60
or
with
be verified
the
canceled
BANK
borrower
Each
with the form
of
be
should
collateral which
the
with
ACCOUNTS.
the
Each
in
items
bank
holds.
or
pass
book,
the
balance.
With
reconcile
The
transit.
the
with
Replies
should
should
at
and
return
of the bank
account
amount
be
in the bank.
depository bank
certificate from
should
accountant
for
envelope
a
showing
bank
the
the collateral found
requested to balance the
together with
requested,
and
directly to the auditor's office,
sent
accountant
be
67, to verify the date, rate and
page
carefullychecked
BANK
collateral security should
on
on
and
note
EXAMINATIONS
the canceled
cashier of the
be
once
to the
checks,
depository
these in his possession,the
bank account, and account
each
dates
of
deposit credited
by the
depository bank should be checked with the records of the bank
It is not sufficient to accept a previous statement
being examined.
the date
of a depository bank, as proof of the account
on
audit.
of the
REAL
BANKING
ESTATE"
in the
examined
same
and
contracts
ACCOUNT.
EXPENSE
then
and
book,
as
Vouchers
charged
to
of
be
alteration,the
examined.
rental
proper
or
The
bank
for the quarters
cupied
oc-
for every expenditure, should
entries in the cash book or petty expense
canceled
in order
entered
for foreclosed property.
of construction
should
should be
Vouchers
the
with
be checked
a
This account
suggested
as
expenditures
charge itself with
by it.
should
expense
way
is in process
building
If the
PURPOSES.
to
in
form
some
preclude the
to the acsatisfactory
countant
of again being
possibility
vouchers.
should be numbered
this account
or
should
filed
consecutivelyand items
represent only the ordinary
conducting the business
of the bank.
since the last audit
Changes in these accoimts
should be investigated. Tax receiptsand insurance policieson
OTHER
ASSET
S.
mortgaged propertiesshould be examined
be assured that the bank's interests
should
bond
semi-annually
value
or
to
the auditor
protected.
The
may
auditor
premiums on bonds, carried either in
in a premium
accoimt, are being reduced
correspond with the declining investment
ascertain that
accounts
the
are
so
of the bonds.
61
HOW
AUDIT
been
has
the cash
After
CASR
TO
counted
all checks
found
in
should, under the direction of the accountant, be
with the request that if any are returned
deposited for collection,
should
unpaid the collecting bank
notify the accountant.
and
other than checks, foxmd
items
in
Receipts, memoranda
the cash should be listed in detail,and the genuineness and
the
cash
The
cash "over-and-shorts"
propriety of each established.
the propriety of the
should
be investigated, to determine
entries.
should
accounts
be kept with
IN
POSSESSION.
each
piece
arate
Sep-
of real estate
by foreclosure or in posession,either in the general ledger
should satisfyhimself
auxiliarybook, and the accountant
held
or
AND
FORECLOSURE
BY
ESTATE
REAL
an
that
examine
should
is vested
title thereto
the
not
these
only
all tax
notes, deeds, etc., and
carried
represent assets
in the
the
on
of foreclosed property
bank.
The
accounts, but
all the
original
receipts,which
assessment
or
The
books.
be
should
accountant
income
checked
and
with
the
penses
ex-
cash
receipted bills,and inquiry should be made
as
thereof.
to which estates produce income, and the amount
The
and
values
assessed
should be obtained
incorporated in the
and
book
the
report.
SECURITIES
securities
The
in their book
covered
by
the
them, either
it should
OTHER
same
course
commenced
made
has
money
on
book.
whether
during
been
the
any
period
received
account
of
from
principal,
Securities of value not
be
entered
and
Trust
thereon
at
a
of record.
Banks
except that in the cash
of checks
and
been
INDEBTEDNESS.
ascertain
to
should
In National
the
OF
interest,or,
or
books
is followed
clearing house
if any
matter
as
have
to the cash
the
BANKS.
greater number
has
dividend
upon
value
value
audit; and
be checked
appearing
nominal
as
be examined
should
changes
SETTLEMENT
IN
ACQUIRED
which
must
following morning.
checks
that
are
Companies, the
will be found
be traced
through
a
the
After the examination
to clear the next
morning
listed,they must remain in the custody of the auditor until
is to prevent the
That
delivered, the following forenoon.
substitution of a good check for a bad one, etc.
The form of
inquiry of the Clearing House Banks is shown on page 63.
are
62
JOHN
BLANK
AND
COMPANY
Incorporated
Auditors and
Public Accountants
New
York
19....
Dear
Sirs:
We
find
and
These
are
amounting
Please
to
advise
aggregating
the
drafts
assets,
checks
or
upon
your
$
to
this letter under
drafts accompany
directed
of the
examination
an
their
among
institution
you
making
are
our
seal,which
break.
the
upon
sum
attached
above
blank
mentioned
are
if the
items
charges
proper
against you.
Very truly yours,
BLANK
JOHN
"
Inc.
COMPANY,
By
Please furnish
the information
requested.
"
19
John Blank
"
Cimpany,
Inc.,
New
Dear
Sirs:
Drafts
or
checks
through clearinghouse
by
York.
amounting
with
your
to
letter of
the
against
presented
$
are
us.
Very truly yours,
63
proper
charges
TO
HOW
Many
be verified by mail.
must
to be followed
The
form
outstanding for collection, and
found
will be
notes
AUDIT
The
to be used and
forms
the
are:
shown
on
page
accompanies checks found in
representativeof the auditor
63 also
cash, to the Clearing House, a
to prevent substitution.
accompanying the messenger
On page 67 is the form, already referred to, which
the
all makers
of notes, to prove
the correctness
The
form
on
course
genuineness of
the
the
is sent
notes
to
and
of collateral.
in order to
68 is sent
page
verify open
account
deposits or certificates of deposit.
When
they
Many banks now
operate monthly statements.
tion
sent out on the last day of the month, and if the examinaare
is made
the same
date, check all balances to the ledgers,
on
the top of page
19 and
on
ledgers^enclose the form shown
mail the envelopes personally.
sent elsewhere for
When
notes belonging to the banks
are
collection,their existence is verified through the forms which
add
on
appear
Accounts
the
use
69 and
pages
70.
banks
between
of the form
shown
Pending physical examination
doors.
on
Seals seldom
A
banker
have
and
broker
collateral with
has
the
be checked
to his books.
FINANCIAL
Dear
account
wrapping.
customers
page
on
who
73 should
CUSTOMARY
THE
EXAMINATION
REPORT.
Sirs:
In accordance
of
with
your
request,
we
together with
accompanying
examined
as
of
the
tion
the condiclose
of
."
results of this examination
EXHIBIT
have
the
business
The
on
latter in turn, must
The
FOR
LETTER
INTRODUCTORY
door
with
shown
broker's statement.
accompany
lateral,
col-
the vault
and
the inner
accounts
blank
reserves,
packages
Hence
many
The
him.
72.
well to the vault
adhere
steel surface.
of the cold smooth
the
through
be sealed in packages
should
66, on
page
reconciled
of notes, cash
etc.,all of these evidences
with the seal shown
71 and
pages
on
and
checked
are
in
comments,
Schedules:
our
"1."
presented, attached hereto,
the following exhibits and their
are
of
Statement
and
business
64
condition
accrued
items
exclusive
as
of deferred
of the close of
HOW
Due
to
TO
AUDIT
individuab:
DqxMits: Check
0.00
0.00
0.00
0.00
0.00
0.00
accounts
Interest accounts
Certified checb
Certificatesoi deposit
Cashier's checks
Postal savingsfund
Total due to individuab
0.00
0.00
0.00
Unpaid dividends
Reserve for taxes
Total capital
and liabilities
This staUmenl
INCOME
AND
PROFIT
is suhfeet
to
AND
0.00
our
LOSS
eommenb
the examinalion
upon
ACCOUNT
FOR
THE
PERIOD
FROM.
.TO.
.
(Seealternative and commercial form)
Income:
Interest received:
when possible)
jCClassify
Total income
Deductions:
Interest paid:
$
$
$
0.00
when possible)
(Classify
0.00
Total Interest PaW
.0.00
...
Income
for the periodbefore deductingexpenses
Expenses and General Charges
Classify
0.00
.0.00
...
Total Expensesand General Charges
0.00
Net Income for the Period
Balance of Undivided Profits at the Beginningof Period
Add:
Adjustment items applicable
to previous
period
beduct:
Adjustment items applicable
to previous
period
AdjustedBalance Beginningof Period
0.00
0.00
0.00
.0.00
.
0.00
.
.
....0.00
.0.00
...
Dividends
.0.00
.0.00
...
Un"fivided ProfiU
(See Exhibit 'TO
This statement
is subjectto
.
.
.
....0.00
our
comments
66
upon
the examination.
JOHN
BLANK
AND
COMPANY
Incorporated
Auditors
and
Public
New
Accountants
York
19..
Sir:
Dear
We
are
amounting
to
an
their
find among
and
our
making
examination
assets
To
and
certifyto
please acknowledge
the
upon
j
note
$
examination
you
of the
attached
Your courtesy
the
.
enable
the condition
existence
[byyou
,
to
us
complete
of the bank, will
of the
indebtedness
blank?
will be appreciated.
Very truly yours,
BLANK
JOHN
Memo:
"
Inc.
COMPANY.
By
Following collateral is attached:
19.
John
Dear
Blank
0)mpany,
New
York.
Inc.,
Sirs:
Your
with
"
under
statement
reference
to
date of
and
note
67
collateral is
correct.
JOHN
BUNK
COMPANY
AND
Incorporated
Public Accountants
Auditors and
New
have
We
to
make
a
been
thorough
York
requested by
of their books
examination
in behalf of their customers
on
To
to
as
they hold for
enable
us
to
securities shown
for that
the
per
your
the close of business
account,
enclosed
ment;
state-
the
securities
and
to
the statement.
complete
the firm's condition, will
and
at
you
$.
listed
records
themselves.
and
Their records show due
also that
and
our
please advise
you
correct,
are
examination
using
the
if the
attached
certify
amount
blank
purpose.
Very trulyyours,
JOHN
BLANK
"
COMPANY.
Inc.
By
No.,
19....
John
Blank
"
New
The
No
0)mpany,
Inc.,
York.
statement
submitted
with
is correct.
Very truly yours.
68
your
letter bearing
JOHN
BLANK
COMPANY
AND
Incorporated
Auditors and
Public Accountanb
New
To
the Cashier,
York
of the,
Treasurer,
You
earliest
asked
are
convenience,
the
to
forward*
to
undersigned,
the
at
your
information
for in this circular.
This
information
reconcilingthe
bank
respectfullyrequested
at
An
account
the date
addressed
is
requested solelyfor
bank
of the within-named
purpose
with
of
your
of the former.
of examination
and
the
stamped envelope
is enclosed for your
reply.
Respectfully,
BLANK
JOHN
"
COMPANY,
By
Please give the information
69
requested:
Inc.
tf CbMtf
As
Answers
die
to
foDowoig
"gufrtiotis
If.
Hie
we
show
raqiKSted:
rcqpectfuUy
I. Did
under diseoimt
bank haTe
your
named
biOs receivable of the bank
it %vas
odier
in any
please furnish
way
liable?
list.,giving
a
any
bank for foHfcHon.
on
verifythis listand
attest
below the
on
any
followingitems
correctness
under
enminatioa
forwarded
to
or
over
your
ngnatur^
incorrectness
of same.
If to,
and
names
amounts.
I.
2. Did
any
for i^uch
or
bdonpng
to the bank
named,
If any
it
other
in any
was
held, give listand
were
or
or
appeared
%vhidk iu olfidalcndoncment
on
any
hold bills receivable
bank
your
securities
way
liable
how
sUte
they
held.
were
'*""-
bank,
your
any.loans then outstamfiag
there
3. Were
by
to
the bank
named,
other party for wfaidi the bank
liable?
If
whether
bills
deposit, open
each
4. Had
loam
accounts,
bank,
your
of borrowers
give
names
how
the notes
not
the
at sud
were
securitywas
etc
date, etfe^ed
and
secured
held by
In
otherwise.
or
time,
3four
sa
state
amounts,
and
any
If
of the bank named?
for account
^iiy
way
payable,certificates of
specifyamount,
case
to
of loan"
specify chAacter
ao,
upon
or
in any
%vas
whether
or
banL
4.
S. Please state
bank named
was
whoB
wilhlbt
last racsncilad.
Cashier.
,19
..Treasurer.
70
your
the d*tes given. Hease
aiipearedor for
which iU ofidal endorsement
i^uch
or
books of the bank
the
JOHN
BLANK
AND
and
Public
Auditors
New
To
COMPANY
Accountants
York
the Cashier, of the
Treasurer,
You
are
respectfullyrequested
earliest convenience,
to
the
forward,
to
undersigned,
the
at
your
information
asked for in this letter.
*
This
information
reconcilingthe
bank
at
An
account
the date
addressed
is
requested solelyfor
of the within-named
of examination
and
the
purpose
bank
with
of
your
of the former.
stamped envelope
is enclosed for your
reply.
Respectfully,
JOHN
BLANK
"
COMPANY,
By
Please give the information
71
requested:
Inc.
72
CHAPTER
POINTS
THE
TO
the
to
auditor
acquainted
with
make
scrutinized
he
them,
service
whether
which
concern
signs
billboards
on
covered
is
by
audit, all of these
all of the
that
sure
poster
presents
unless
he
is
and
contracts
should
be
to
carefully
charges for advertising
been
bulletin, have
or
tracts
con-
easily overlook.
might
advertising
to make
BUSINESS
peculiar conditions, which,
comprehensive
a
The
painted
or
certain
billboard
All
UNUSUAL
THE
BUSINESS.
place posters
to
IN
WATCH
BILLBOARD
IX.
charged
the
to
customers.
The
A
great number
lots for
make
cost
of operations.
fences
depreciation
must
construction
entirely of wood,
of
10%
per
The
in
the
ammonia
is
as
company,
depends
upon
cbnstructed
taken
on
the
years,
basis
a
board
will
important
and
over
the
employee
in
of
record
The
proceeds
gas
developed
are
that
so
a
fair
sure
to
annually.
5%
a
and
painted
be
company
in the
of
process
coke, toluol, holder
making
oil,oxide,
tar.
very
an
be
auditing
principal residuals
and
rapidly,
so-called
on
money
thoroughly
depreciate
not
In
some
when
boards
sale of residuals
appliances.
otherwise
be
of ten
spending
depreciation would
the
Another
gone
are
do
condition,
The
gas.
board
a
should
end
the
at
These
COMPANIES.
consider
If
board.
included
the
by
Depreciation
depreciation
for
owned
should
replaced.
for
estimate
the
of
the
boards."
kept
GAS
considered.
auditor
been
have
rent.
in vacant
space
The
or
are
be
larger companies
"metal
are
boards
or
annum,
to be
have
charges
is fence
rent
anniun.
per
all rent
the
examined
be
to
advertising companies
that
part of the
Where
of
stipulated amount
a
sure
the
of expense
principal item
his
item
these
profit from
may
pocket,
of
appliances
the
sale
easily enough
and
74
is
revenue
never
should
of them
make
report
the
a
the
sale
be
tested
of
fully
care-
out;
sale,deposit
sale.
If
a
UNUSUAL
THE
stock record
is
kept,
auditor
the
incoming merchandise
for
In past years,
BUSINESS
should
well
scrutinize
the entries
outgoing.
was
companies to install
customary
of charge, but they now
usually make
an
record
of the installation
should
charges
as
as
for gas
it
meters, etc., free
charge. A
be carefullyscrutinized to see that all expense
attributable to
the jobs has been
entered
in the
charged. The amounts
as
job registershould coincide with the job orders.
kinds
of service; that of the orGas companies have
two
dinary
which
is read monthly
and a bill for the gas
meter
rendered
consumed
accordingly, and the prepa3nnent meter.
initial
It is well
collect the
who
ascertain
should
cash
from
than
used
than
require more
to
districts
will automatically check
inclined
way
them
very
collectors in
Most
one
to
gas
committees
withhold
the
In
other
and
of the
up
rule devote
not
was
size,have
any
this way,
if they are
one
in
to
proceeds, it will serve
found, by the switching of
increased nearly $17,000
consumed
of gas
a
as
then.
greater.
their
auditing
own
directors.
These
mittees
com-
the necessary time to a complete
and records submitted
for
to them
this is true, it is
Where
thoroughly
passed
upon
been
the books
credit
were
and
was
obtained.
who
yet the
dollars from
alteration
an
director
some
committee,
several thousand
voucher
instance every
one
by
good practise to examine
it has
been
passed upon
though
even
In
directors.
made
This
and
was
the concern,
after the
naturally
necessitated
the
should
be
taken
75
to
see
by
had
the
been
of the
by reason
approval of
tied up the transaction
In several of these
concerned.
all data
mining
exa-
able to abstract
was
which
Special care
check
member
a
cashier
originalrecord had been altered
-passed by a director unnoticed.
that
to
approval.
their
had
the
against
of the vouchers
examination
and
now
companies of
generally made
do not
one
quickly. It was
city,that the revenues
the amount
although
that
also
enough prepa3nnent meters
that the collectors
collector,
well to suggest, where
be given different
catch
men
district may
contain
naturally the receipts
one
district and
another
and
meters
prepa3anent
of the
be greater.
It is often
any
records
the
to compare
districts covered, for
the
meters
more
are
auditor
for the
as
far
cases,
and
that
such
a
as
it
of the fact
the
officer
change
debit and
was
found
change
items
in
was
properly
HOW
chargeable
Even
a
to construction
share
rata
pro
applicable
to
the
considered
been
cost
of
of
considered
not
are
executive
any
new
of many
as
an
expense.
salaries and
expense
construction
which
is allowable
has
the
Public
course,
varies
by
This, of
states.
is
usual good accounting practise.
the
COMPANIES.
WATER
AUDIT
legitimate and
as
Service Conmiissions
from
TO
Water
companies
be
can
classed
as
and power
water
kinds, natural water pressure
pressure.
Natural
water
companies are usually very small and serve
The
only limited communities.
auditing of such companies is
These
simple, the principalitem of expense
being wages.
very
be readily checked by a close examination
of the payroll.
can
of both
The
principal other item is, that of maintenance
reservoirs and mains.
Such companies usually have a fiat per
two
rate for their water
anniun
service.
Large companies now
as
a rule charge for the water
actually
used as registeredon a water meter.
An item worthy of consideration
is bad debts.
The auditor,
in examining a water company's accounts
should scrutinize the
If the water company
their age.
accounts
closelyto determine
is owned
in arrears
is sometimes
by the municipality, an account
deemed
as
a
MUNICIPALITIES.
A
"
form
the
paid should
Taxes
in
arrears
the property.
mimicipality
and
^taxes,rent, franchises
Taxes
as
first lien upon
has
of
sources
enue
rev-
licenses.
greatest part of the
be checked
several
against
the
should also be examined
and
revenue,
entry
on
the
the
taxes
tax
to ascertain the
list.
reason
such
delinquency, as
in that the taxpayer was
nected
cona deliquency was
a friendly one
with
the municipality's office m
These
some
way.
if
be
tion
brought to the attenshould, they aggregate a large sum,
it has
for such
of the
been sometimes
foimd
that
Council.
Common
Rents, franchises
and
licenses make
up
a
considerable
amoxmt
rule,they consist of
roads
renting city-owned property or granting franchises for railto run
through the principalstreets of the town, or the
of dog licenses.
issuance
be obtained of the number
While a complete check cannot
of dogs in a village,the comparison of the receiptsof one
year
of
indicate
whether
the
all
have
another
will
receipts
against
of income
in the
course
of
a
year.
76
As
a
THE
been
UNUSUAL
Another
deposited.
BUSINESS
of check
is that
of
comparing
dog licenses issued at the beginning and at
the end of the period under
review.
It is very
often found that the city ties up a considerable
of its funds
for improvements,
the assesments
for
amount
which
not promptly met
tion
by the tax-payer. Special attenare
should be brought to bear on this subject and the auditor
the reason
for the delinquency in meeting
should ascertain
these claims, which
the property taxed.
are
a first lien upon
numbers
the
means
of the
All vouchers
for it has
for disbursements
found
been
for grafters. It
that
should
be very
this may
be
a
closelyexamined,
wonderful
melon
often
happens that the people elected or
ledge
appointed to office are purely politiciansand have no knowof business whatsoever, that often,though they may
not
billswill be passed or 0. K.'d by them which are
be in collusion,
noted
where electric light bulbs
over-priced. One case
was
paid for by a city at the rate of 85c.
costing 40c. apiece were
so
each.
to see that the sinking
scrutiny should be made
fund provisions are fullycarried out.
In the change of political
from one regime to another, this matter
of sinking
management
the case
often overlooked, as was
with one
funds
is very
city
which had issued a twenty year bond with a specifiedsinking
foimd that nothing had been set aside
fund provision. It was
or
put into such sinking fund, until one year before the bond
When
issued was
to be redeemed.
discovered, it had a very
dampening effect upon the city'scredit and when it had occasion
it had
borrow
to pay
to
a
higher rate of
more
money,
A
careful
interest.
THEATRES.
tickets
audit
The
are
of
theatre
a
sold for cash, and
in many
is
a
cases,
cash
the
audit,
for
of the
wages
paid in cash.
of checking up the receiptsdepends upon
The
the
manner
class of patronage served, that is,whether
the theatre shows
continuous
"10-20-30
performances," or whether it is a theatre
which
high class productions, the seats of the
only shows
theatre
being numbered, and specialtickets being printed for
the play
each production and for the specificdates on which
employees
and
actors
are
is shown.
When
as
a
the theatre
rule,tickets
are
is
run
on
printed up
the
so-called
in rolls.
77
To
"10-20-30"
check
up
basis,
receipts,
TO
HOW
at the
the numbers
be taken
to
When
the
only
turn
with
the
and
at the end
all of the tickets have
that
see
is of the other
show
receipts,and
is easy enough to
cash
the
as
of the rolls should
been
used.
general rule,they
or unsold
tickets,together
seating capacity is always
type,
of unused
number
in the
it
known,
beginning
AUDIT
"check
as
a
the
house."
The
cipal
prinsalaries,followed in
order by music, printing and advertising,employees' and stage
crew's wages,
moving picture rentals if moving pictures are
shown, and other general upkeep items.
is that
of expense
item
up
of actors'
Where
salaries
important item.
the actors in cash, with a specialproviso that a
to the
percentage is to be withheld, which in turn is remitted
that a
actors' booking agents, special notice must
be taken
and that an extra 5% is not added
double entry is not made
to the actors' salaries and
deposited in the pockets of a
on
Booking
are
paid to
fees
are
cashier.
dishonest
very
This
was
found
a
written
obtained
the cashier
where
a
to be
in
true
theatre
one
receiptfor the full amount
the actor actually obtained
salarypaid to the actor, while
The receipt was
for the
entered as a disbursement
only 95%.
which
full 100%
and the 5%
supposedly withheld, was
was
other place than
the companjr's bank
deposited in some
of the
It meant
account.
examined
in
thousands
COMPANIES.
MINING
COAL
many
coal mine
a
audit
The
are
of dollars
a
year.
principal records
the payroll,sales and
be
to
cash.
in it the wages
of all the paid
payroll book has embodied
of
the
laborers and employees
company.
be
given to the classification of the
Special attention must
employee, for his wage depends entirelyupon this. All matters
of compensation are covered by stipulated contract
prices; a
receives
at
miner
present day prices,$1.06 a ton, while a
pick
The
machine
received
miner
out
naturally
impossible for
turn
a
more
machine
entitled to, if he should
mining
A
of
coal
miner
a
A
ton.
than
a
machine
miner
pick miner,
to receive
much
and
more
accidentallybe compensated
can
it is not
than
at
he is
a
pick
rate.
great
many
they supply
companies as
of
75c.
the
mines
have
their
miner
with
all the
own
stores
necessities
through which
of life.
Such
rule,give credit to the miner generally in sums
$5 or $10 or multiples thereof,depending upon the amoimt
credit the miner has for coal already mined
by him*
a
78
THE
These
deductions
paid
are
UNUSUAL
every
after his
withheld
are
from
the
weeks,
two
charges
BUSINESS
miner
deducted.
are
houses
built for them
entries
as
the miner's
The
receiving a
miners
which
wages,
very
amount
net
often
live in
by the operating companies, and pay a
small rent, which
is also deducted.
They also use the company
coal which
is generally sold to them
at about cost
Tests should be made
of different payrolls to see that the
made
and
correct
are
to prove
that
there
be
can
no
collusion.
An
item
is that
of
royalty, especiallyin connection
with concerns
operating leased properties. An operating
will contract
to pay a certain royalty,generally from
company
2c to 15c a ton on every
ton produced, and further stipulate
that
it will produce a minimum
the
quantity per annum
royalty on which is payable monthly.
When
is newly opened or developed, the production
a mine
very
important
seldom
comes
up
to the
estimated
tonnage,
so
that
in
a
short
in
time, the operator has paid a considerable amount
royaltiesfor which he has received little or nothing. Where
this occurs, the royalty cost should be considered as a deferred
charge to income, except where a royalty is paid for a piece of
property which
it should
is held
it is
inoperative. Then
only right that
off
be
charged
as an
expense.
anywhere from $15,000 to $75,000 to develop a mine
coal can
be abstracted.
before any
Operators, as a rule, to
be conservative
consider everything as an expense
so that their
records usually show a deficit.
and where such cases
This is wrong
are
found, the auditor
clear
should take the trouble to make
enough analysis to
a
determine
the cost of such development work and set it up as a
This
that such a capital item
does not mean
capital item.
should
be allowed to stand there indefinitely.
When
the mine
begins to produce enough coal to offset the
It costs
cost
of
through
operation, the
amortization.
but it
tract
seems
to be
of
There
and
divide
thereby getting the
tonnage
months, the tonnage
mined
will
give the
amount
development
are
practicalto
most
mined
cost
as
should
methods
many
estimate
Then,
each
month
of amortizing,
the tonnage
the cost by estimated
rate.
be reduced
in
the
in the
tonnage,
succeeding
at the estimated
rate
of amortization.
This is very often classified as depletion. It cannot properly
of the fact that when
be classified as depletion by reason
the
79
HOW
land containing the
TO
AUDIT
bought for a stipulated amount, a
value then exists before the slope or shaft has been put in; but
in the case
of leasingcompanies, the money
is expended in the
development, therefore a distinction is made as between depletion
of development costs.
and amortization
The Government
Depreciation is worthy of consideration.
has arbitrarily
allowed 10% which, as a whole probably seems
mines
to be the fair average, although in some
a complete mine
ment
The Governequipment must be replaced every eight years.
only allows 25% on mules, and in the majority of cases,
will hardly last more
than two years, although where
a mule
last ten years.
electric equipment is used, a mule may
The
sales records should be very
and
carefully checked
several tests should be made
of the record as against the weight
sheets returned
by the railroad, for often, even
though a
ore
is
difference of 100 lbs. exists,it will
dollars
in the
of
run
into many
of
hundreds
if the
practise continues.
The accounts
are
generallypaid promptly and as most of the
coal is sold through coal brokers
or
jobbers, shipments are
seldom more
than 45 days old. If claims more
than 45 days old
for the delay in pajonent should be ascertained.
reasons
appear,
FIRE
course
INSURANCE.
a
year
fire
of
a
auditing the accounts
insurance
should be paid to the
special attention
company,
of
balances due from agents, for as a general rule,the amount
premiimis due from such representatives aggregate a large
amount, especiallywhen specificagreements are entered into
In
and
the company
the insurance premiums.
between
Vouchers
the
agents
for all losses should
that the loss is authentic
and
as
be carefullyscrutinized to
that the voucher
been
of
a
properly authorized.
Furthermore, any
settlement
should be looked
adjustment or
for them
reserve
is set up
the books.
on
of
to the remittance
see
has
for payment
losses in process
into to see that
If the loss has been
has been made
the payment
at the end of a closing
the books
period, the liabilityshould be expressed upon
as
settled and
well
as
in the report.
Insurance
funds
examined
a
good
market
companies,
as
a
rule,generally invest
in first class securities.
to see
asset
that
and
no
defunct
also that
80
should
issue is carried
they
value.
These
are
not
on
be
their
plus
sur-
carefully
the books
carried above
as
their
HOW
parts and
acessories
AUDIT
TO
amounting
to
a
lost money,
because it was
report all sales,and to pocket the
a
year
SPINNING
AND
KNITTING
quarter of
million dollars
a
for the salesmen
easy
not
to
proceeds.
MILLS.
It
is
important to
which
is developed in
watch
the accounting for the waste
It is possible for a fraudulently
spinning and knitting mills.
inclined
concern
its executives, to
or
use
this
as
a
of
means
waste
personal profit. The
developed has a certain value
other
because of the possibilityof its use with, or in, so many
which buy every
products. There are waste concerns
pound
of waste developed in the spinning or knittingmills,and by the
of pickers, gametting machines, etc, are
able to make
use
by-products, such as wadding for packing in cushions, etc.
these sales, as the
Therefore, the auditor should examine
price is generally constant, because a contract is made to cover
the supply of waste developed in the mill for a year or more.
There
should be very littlefluctuation in the price.
LUMBER
MANUFACTURERS.
in
a
accounting
of lumber
similar
that
is somewhat
measure
A
mining.
The
lumber
to
generally buys
company
a
panies
com-
of
coal
tract
of
stipulatedamount, or leases the land to cut off the
lumber on a rojraltybasis. When
the land is bought outright,
and is inventoried among
the company's assets, the estimated
number
of board feet should be obtained, so that the asset can be
of board
feet
with the number
reduced annually in accordance
lumber
The auditor,in examining a
cut.
company's accounts,
should
the
check up
production report to verify it,and to see
land
for
that
the proper
been
has
the
store
other
or
lumbering is that of labor,
lath mills,logging and hauling,
such
as
incidental
should
stores
should
camp
lumbermen
records
is located
be
gone
usually buy
should
be gone
on
over
away
credit
to
see
82
small.
The
over
as
to^see
is very
from
As
store, so that
company
scrutinized
far
very
carefullyaudited.
be
stock is not being carried, which
a
are
expenses
registershould be very
generally have a
camps
accounts
and
when
land
in
of expense
other expenses,
planing
payroll book
a rule,lumber
dead
of the timber
made.
and
the
in the asset value
reduction
principal item
The
as
a
well.
that
The
a
lot of
apt to be the
any
against their
that they are
town.
wages.
correct.
ventories
in-
case
The
These
THE
HOSPITALS.
UNX^SUAL
As
BUSINESS
ho^itals
most
porting, the collection ci acooimts
A complete history is takoi of each
which
is Altered
is added
discharge
a
upon
the
for the auditcH- to compare
ascertain
to
whether
dmation
proper
more
is
or
an
statistical record
when
in the office.
patient leaves.
this record
each
class
with
has
accoont
of stay and
less
self-sl^"important feature.
patioit upon admission,
are
Date
It would
of
be weD
pati^its'aocomits
heeai charged with
of treatmait
under
which
the
Private, ward, part free and
patient has been admitted.
be common
free patients may
dasafications.
Unpaid accounts appearing on the books whoi patients have
be questioned. This
is often tracebeen discharged should
able
to ne^ect on the part of the bookkeeper to present the bill
at the proper
time, which is an impcMiant point, as accounts of
this kind are difficult to collect after the patient has left the
institution.
for at least
Treatment
bills being rendered
the
remain
a
is
usually paid
sufficient amount
Should
in
advance,
patient not
a
is refunded
in
for petty cash
of refunds,
the payment
to meet
week
weekly thereafter.
week, the difference
entire
It is well to set up
one
so
this item
cash.
ments
disburse-
need
not
be
the
daily cash receipts.
of recording cash receiptsis in a book
A customary
method
consisting of small receipt forms, with perforations between,
which
rendered
in duplicate,the originalbeing given to the
are
A
patient and the duplicate remaining in the cash book.
cashier
issue
dishonest bookkeeper or
a patient'sreceipt
may
for
another.
for one
book
and
amount
an
Unpaid
entry
paid
from
balances
on
accounts
may
be traceable
to such
an
occurrence.
patients, such
telephone calls,
Extraordinary charges
as
should
for visitors and special nurses,
be carefully
etc.,
of dollars may
be
checked from the daily record, as hundreds
lost for the institution if the bookkeeper fails to make
proper
to
meals
charges.
disbursements
Cash
against the
or
does not
taken
invoices
board
know
should
be
most
representing them.
carefully checked
Too
often
the individual
of managers
who passes invoices for payment
bills are legitimate or not, much
whether
being
for granted.
83
Standard
Paragraphs
for
Audit
Reports
INDEX
TO
CAPTIONS
Series
and
Plant
Equipment
100
Investments
200
Receivable
Accounts
300
Receivable
Notes
400
Inventories
Cash
Petty
Prepaid
Capital
500
in
Bank
600
Cash
700
Operating
Expenses
Stock
800
900
Surplus
1000
Reserves
1100
Notes
Payable
Accounts
Accrued
J.200
Payable
1300
Liabilities
1400
General
Complimentary
1500
Close
1600
SECTION
HOW
These
TO
standard
of
comments
We
reproduce
not
our
to
reproduced
instance
well
may
It is
obviously
will
cover
made
in this
auditor
such
is
only
copy
of this
them
to
On
in
the
the
by
is
that
in each
be
or
in
a
On
which
use
any
one
each
the
out
which
been
The
ones.
then
needed
write
to
It
for.
by
by referring
in
comments
is
number;
essential.
seems
who,
stenographer
The
to
her
sends
full and
one
in
Buildings,
auditor
the
the
or
the
87
it
may
be
Assets,"
Machinery,"
Equipment."
and
a
key
should
"depositories"
use.
caption
sometimes
must
and
Buildings
to insert
in the
captions, "Fixed
four
auditor
to write
series, where
100
Machinery
"depository"
by
typed
as
caption
same
"Land,
600, the
report
notes.
of the
necessary
be turned
they might
as
is the
89
for the
Equipment,"
it is at times
to
is
in
has
calls
case
paragraph
that
usual
fit and
as
special
auditor's
diflferently as
and
words
of these
page
the
using paragraph
the
It
this
used
attempt
all of the
set of comments
sample
from
to
"Land,
Also
a
instance; this because
necessary
each
letter.
paragraphs
The
cover
the
as
it is necessary
stated
"Plant
to
such
writes
auditor.
stenographer
Note
the
printer.
88
page
beforehand
information
to
book,
that
language
The
comment.
specify the
go
sure
of these, and
wording
to write
use
other
any
then
comments
to
paragraphs
in
writing
varied.
conceivable
to
in
of introductory
model.
a
book, however,
necessary
writing
be
expected
other
as
make
to
two
clearly expressed.
and
the
impossible
every
second,
for
up
accountants
single example
solely
drawn
been
for
and
standardize
PARAGRAPHS
have
accurately
a
idea
STANDARD
time
save
report,
a
will be
comment
THE
paragraphs
first, to
purposes;
is
USE
IV.
For
word.
write
to
show
example,
either
the
one
of
typist
How
Another
mstance
paragraph,
BANK"
601"
date
t\i
is t^
They
are
Where
are
in
(voy
he
covered
loi
I o
-
\
n^J^tUjfljuu^
i
3o^-30U3o;a,
"UidUor
fillsin
the
by
a
IN
1, 1919."
/cro-
longhand, using
needed
not
t^
such
use
fI
^e.
/IcoKwXo ^Axyu^^cJ^
7%is
blank
a
example, ''CASH
for
/I/
^^f ^-"MA)ci"uy
G"
write
^^t*. "IAaX(/*"i^
^^^^^
To
insertion.
other
depository-^an.
^jL^Ubn^ StdXo
to
or
would
auditor
the
Paragraphs
in paragraphs like 601, where
comes
is left for the
space
Standard
the
Use
to
sends
3cy5
his report
the standard
words
or
in to the office.
comments
paragraphs
figures and
printed paragraphs.
On
adds
the
as
far
such
as
possible.
comments
as
and
opposite page
4
on
90, the
page
audit
report,
above.
The
auditor
who
clearness
"Mnunents
are
shown
after having been
comparison
uses
standard
shows
as
they would
"translated"
clearly how
paragraphs.
of the report is also improved.
88
The
from
much
appear
the
work
in the
printed
longhand
is saved
notes
by
quality of English and
the
the
How
to
shown
amount
on
with
correspond
debtors
to be
Paragraphs
of condition.
statement
our
your
shown
amounts
the Standard
Use
due
for the
from
We
did
not
of
verifjdng the
By thorough tests of
purpose
them.
books
of original entry affecting accounts
postings from
of the accounts.
receivable,we established the clerical accuracy
completed substantiallyall of
By the time our examination
was
the accounts
review
had
at the close of the period under
open
been
paid.
"We
noted, however,
balances
remained
of instances
returns
or
after payment
that
in several
they represent
by the debtors, small
of the
accounts.
items
in
In the
dispute, such
majority
as
claims,
cash discounts.
"We
suggest that
duty
of
taking
which
do
a
items
not
of your
member
up
staff be
for adjustment
reflect
a
and
assigned
write
off the
possibilityfor collection."
90
to
the
counts
ac-
Fixed
Assets
100-107
be vsed under
The 100 series of paragraphs
of the
any
may
following captions: Fixed Assets/' Plant and Equipment/*
nery
''Land, Buildingsand Machinery/' ''Land,Buildings, Machiand Equipment.
**
*'
* '
These
assets
carried
are
for
setting reserves
and
and
On
for
reserves
extended
originalcost with
at
depreciation to provide for
obsolescence.
aplied the
the books
on
the
statement
and
wear
condition
of
offtear
have
we
depreciation against the respective costs
the net book
value
the asset value.
as
reviewing all charges to these accounts
during the period
covered
by our examination, together with all vouchers
porting
supsuch
but capital expenentries,we found that none
ditures
Upon
during the
items properly
By carefullyscrutinizingall charges to these accounts
that
period under review, it was determined
included.
chargeable to operations were
this
forth the
caption
cost
the statement
on
values
carried
condition, we have set
ledger for the respective
set up
amounts
depreciation and carried the balance out
charges to these accounts
no
of
in the
accounts, applied against them
All
101
included.
were
Under
100
as
during the period
103
for
reserve
the net book
as
102
value.
supported
were
items
invoices
of the vendors.
No
properly authorized
properly chargeable to operationswere included in those charges.
by
There
to
charged to
were
for depreciation account,
reserve
opinion, adequately
the period.
We
strongly recommend
account
be
ot different
be set up
and
analysed
in separate
practise would
book
value
of any
wear
and
that
your
the amounts
classes of assets
This
the
cover
reserve
and
for
reserve
105
accounts.
time.
be
require that such information
Tax
Returns.
correct preparation of Federal
Revenue
of the net
91
to
reserve
of Internal
available
for
106
Furthermore
for
the
depreciation
operations for the period, represent
credited
to
for
(such as buildings,machinery, etc.)
rulings of the Commissioner
following amounts
accounts, and charged
104
our
depreciation
depreciation
for
permit the ready determination
The
in
obsolescence
reserved
class of fixed asset at any
regulations and
which
amounts
tear
credited
and
operating accounts
your
107
Fixed
108-118
Assets
the stated percentages of the cost of the respectivedepreciating
^*""*"-
ASSET
Amount
Percentage
of Cost.
believe the amounts
We
for the
obsolescence
108
The
deeds
period
to be in order.
found
We
have
tear and
(adequate" inadequate.)
We
made,
Clerk's
examined
were
also examined, and
found
factory,
satis-
of land and
buildings separately on
of condition.
the statement
Buildings depreciate in value
The true book
and tear but plant land does not.
through wear
value of the depreciating asset is more
readily ascertained by
and
of
for
the accounts
application of the reserve
separation
depreciation against the account
that the land and buildings account
During
period under
the
amounted
accounts
review
affected.
be
We
separated
additions
on
books.
your
fixed asset
to your
Amount
{lAst
vrithout consider^
amounts
ation of reserve
All of the
recommend
to:
ASSET
110
and
wear
policiescovering the property.
the value
shown
cover
recording had been
title insurance
109
are
to
Depreciation
property, together with the County
to your
certification that proper
and
reserved
so
for
Reserved
covering these
entries
increases
together with the voucheis
for depreciation)
carefullyscrutinized,
were
supporting them,
and
found
to be capitalcharges.
111
The
of
for
reserves
$
yearly rates
of
increased
depreciation were
by the
during the period. The following
depreciation applied
and
representing the wear
for tiie respective classes of
tear and
as
These
entries
resulted
believe
cover
113
The
scope
net
a
that the amounts
the
wear
of
our
of all entries
and
tear
in your
the
set aside
for the year
Amount
Rate
for
Reserved
Depreciation
(increase decrease)
reserved
and
examination
obsolescence
Yearly
in the net book
period of .$
We
in
the amounts
are
assets:
ASSET
112
and
amount
"
value
of your
for
the
fixed assets.
for
depreciationadequately
of
obsolescence
properties.
your
precluded analysis and
capitalaccoimts
92
from
the
tion
verificadate
of
Fixed
Assets
114-117
their inception.
We
reflect the
of
cost
believe,however, that the values carried
the
original properties and
subsequent
additions.
An
appraisal of
under
date
of
following favorable
the net book
with
of
as
Replacement
As the difference between
114
affords
comparison of current
values
ASSETS
value
(Name) ,'.
propertiesby
(Date)
your
the
replacement values
(date)
Net
Value
the appraised value and
Book
Value
the net book
115
unearned
increment, and good accoimting
practiseprecludes its recognition as a profitof the business,the
represents
of condition
statement
We
note
books
an
with
reflects the net book
approval that
of account
the
value
(Name)
comparison between
The
value is favorable
to your
have
you
placed
in
values
carried
not
upon
only.
into
your
116
properties by
your
appraisal dated
an
the appraised value
and
the net book
Good
accounting practise,
however, precludes recognition of a profituntil a sale is made.
in value indicated by an appraisal should be
Any enhancement
but should not be
recognized chiefly for insurance purposes
reflected in the books
of
the
appraised
company.
of account.
values
with
We
show
the
net
below
book
a
comparison
values
as
of
(Date)
ASSET
Replacement
Net
Value
To
be vsedfor
recommend
We
that
Book
Value
specialinvestigationsonly.
discontinue
you
the
present practise of
writing down the value of your depreciableassets by the amoimt
of depreciation charged to operations. You
using fixed
are
annual
depreciation rates against the balances appearing in the
accounts
which
results in
a
off each
smaller
cost
being written
that
the originalcost of the assets
while
for
be retained
in the
the yearly depreciation provision is credited
depreciation. Under
would
asset
year.
proportion of the original
best practise requires
The
this
practise the
be sufficient to amortize
the
reserve
a
for
reserve
ciation
depre-
originalcost of the
completely at the expiration of its estimated
93
to
accoimts
life.
117
Fixed
118-119
118
We
examined
County
made
are
119
the
Clerk's
deed
to
property
your
certification that
proper
of your
institution.
We
insurance
title
policy.
protected by a
in the
name
As requested, we
and
undertook
liabilitiescarried
that all assets owned
on
below
phases of
our
the books
also found
and
94
that you
to
presented at
upon,
certify
a
true
liabilitiesare
of condition.
of, and relevant conmients
examination.
been
of the assets
All valid ascertainable
statement
the
recording had
of account
are
found
and
verify the accuracy
by the company
''going concern'' value.
correctly included in our
the extent
to
Assets
We
recite
the various
Investments
We
200-202
investments
credit
Interest
Your
account.
for
in
found
and
examined,
but
income
dividends
interest and
accrued
order, the securities carried
received
not
account
earned
at
reflected
date
proper
of
period.
closing is
carried
as
Note."
all bonds or all stocks^changes
If the securities were
in the above paragraph accordin/gly.
should be made
The
securities
made
asset.
current
a
are
200
the
during
the
in your
We
have not
your books at cost.
to bring the book value into agreement
201
carried
202
carried
on
adjustments
market values, although, as indicated on Schedule
would
result from the sale of the
a (profit ^loss)
Law
Tax
securities. Federal
Regulations do not recognize a
profit or loss on securities until a bona fide sale is made.
This is in agreement with good accounting practise.
any
with
current
"
,
We
on
examined,
your
amount
from
at your
books.
We
of notes
held
employees
on
depository, the Liberty
have
applied against the
by the bank
account
and
Bonds
par
the amount
of their subscriptions.
95
value
the
received
300
A
listingof the balances
proved the
did not
We
By the time
our
the accounts
examination
them.
of original entry
the
clerical
completed substantiallyall of
was
in several
remained
period under
review
had
cash
or
which
a
dispute, such
of your
member
do not
for
up
reflect
investigated these
good condition.
in
claims,
as
discounts.
suggest that
accounts
by the debtors, small
In the majority
of the accounts.
they represent items
duty of taking these items
We
for the
from
established
we
noted, however, that after payment
returns
304
books
at the close of the
open
of instances
We
debtors
your
paid.
balances
303
statement
our
to be due
shown
receivable,
on
accounts
of the accounts.
accuracy
We
correspond with
of postings from
By thorough t^ts
affecting accounts
802
shown
amount
of verifying the amounts
purpose
been
appearing in the individual
of the
accuracy
of condition.
301
Receivable
Accounts
800-808
Aside
a
staff be
adjustment and write off the
for collection.
possibility
exhaustively and
from
assigned to the
found
them
listingthe detailed
the total shown
to be
in
and
accounts
the statement
of condition,
on
proving against
to all debtors with a printed
prepared and mailed statements
we
pancies
inquiry, so worded, that we would be advised of any discreoffice. The exceptions taken were
few
through our own
in nxunber
and consisted of only the customary
questionings of
claims, discounts
trifling
disputed.
305
Any
306
We
concessions
necessary
covered
by
the
proved the
of condition
and
reserve
accuracy
other items
believe, be
will, we
for bad
debts
frequently
adequately
established.
of the amount
by listingand
of the type
shown
the statement
on
totaling the detailed accounts.
A
thorough test of postings from the books of originalentry was
did not, however, correspond with the debtors to
We
made.
verify the authenticity of the accounts.
307
Except for the items listed in Schedule
all of recent origin.
were
308
From
the tenor
the accounts
of repliesto inquiriesdirected
requesting verifications of the balances
96
shown
to your
on
your
debtors,
books,
Notes
400-405
400
We
examined
the notes
represented by this account
the total to be in agreement
of condition
statement
the
401
period between
our
visit.
The
notes
Receivable
with
the
and
shown
amoxmt
after considering the notes
the date
found
of the statement
on
our
paid during
and
examined
were
representing this account
We are attaching a schedule of the
to be in order.
date
the
and
of
found
notes
part
as
of this report.
402
In support
we
of the amount
attaching
are
ing between
checked
were
notes
403
the
date of
hands
The
We
and
from
Notes
the date
of
matur*
visit
our
balance
The
cash
bank
and
statement
our
proper
your
condition,
of the
to be in order.
represented by this
notes
have
the
date
were
of
our
prior to
our
obtained
receipt. We
that the balance
checked
of the notes
were
those in the hands
of the latter
we
account
statement
verified the balance
maturing between
visit
receivable.
statement
found
for
of
statement
in their
were
for collection.
between
405
of notes
our
and
checked
were
our
receiptsor renewals.
for cash
acknowledgement
404
on
maturing after the date of
Notes
visit
schedule
a
examined
were
shown
the date
for cash
and
the
of
date
of
statement
our
and
receipt or renewal.
our
and
of your
bank
an
found
to be in
for collection.
the date
The
paid
were
representing this account.
examined
obtained
and
matured
visit.
Notes
of
order, excepting
In verification
appropriate certificate from
bank.
98
our
remainder
the
Inventories
The
500-506
stated
values
inventories
to
the
accepted
As
were
we
taken,
we
however,
together
represent
by your representativesas
carefullytestingprices,footings and
of the
extensions
of the
clerical accuracy
work,
we
represented at the time the inventories were
We
had no opportunity to verify the count.
did,
test the prices applied to the major items listed,
not
with
have
and
extensions
of the
the
footings, and
assured
and
accepted
satisfied ourselves
way
ourselves
inventories
We
as
to the
represented at the time your inventories were taken
but accepted your
tests of the extensions
figures after exhaustive
and footings. We
also tested the prices applied against
with market
the major items and found them to compare
values
as
503
date of the inventories.
of the
On
phjrsicalinventories
(Date)
material, goods in process
togather with an inventory
(Number)
count
502
clerical accuracy.
not
were
501
inventories.
prepared by your staff.
verification was
to test the prices,extensions
extent of our
We
in that
footings appearing on the inventory sheets.
The
500
figures.
of the clerical accuracy
We
condition
of the close of the
ourselves
assure
of
statement
our
taken
After
period.
in
and
finished
and
of the other
of the
aid
articles.
raw
in the
actual
of
(Number)
assigned the more
we
representatives,to whom
tasks, have been for years intimately associated
those
504
taken,
assigned
were
supplies. We
representatives to
tabulation
stock
of the
difficult
with
the
industry.
Pricing
each
at
Goods
case.
conservative
extensions
Our
done
was
at
cost
or
in process
market,
and
whichever
finished goods
The
mathematical
figures.
and footings was
thoroughly
cost
representatives
inventories
were
taken
were
and
was
were
lower
in
accuracy
of
tested.
the
time
present
at
assured
themselves
the
physical
of the accuracy
extensions and footings
by thorough tests. The
also carefullytested.
We, accordingly, believe that the
were
figuresstated correctlyreflect the value of the inventories as of
of the count
the date of
our
statement.
99
505
extended
506
Cash
600-608
Note"
Indicate when
the
singular
In
Bank
vsing the following paragraphs whether
phiral form of 'bank* arid 'depository*
*
or
*
'
*
is to be used.
600
After
taking into
reconciled
cash
your
checked
and
We
secured
of
from
your
(date)
checks
602
We
were
statement,
examined
with
the
for
dorsement
en-
proper
of entry.
books
your
as
deduction
after
company's
outstanding
account.
entry and
endorsement.
cash
to proper
of
as
of
the
canceled
date
of
depositories, which,
considering outstanding vouchers,
we
as
All
certificates of balance,
from
we
certified to by
depositories,certificates of balances
scrutinized
obtained
outstanding checks,
the balance
were
into the
which,
checks, reconciled
all
with
account
depository. All checks
your
601
consideration
found
our
after
to be in agreement
with the records.
603
Statements
the
balances
which
were
on
received
hand
after consideration
to
from
your
your
depositoriescertifjringto
credit
as
of
of outstanding checks
ledger accounts.
100
(date)
agreed
with
,
the
Petty Cash
700-704
cash and
The
to be
Our
vouchers
in agreement
hand
on
with
This
the cash and
the total to be in agreement
counted
was
the
with
by
amount
shown
amount
sufficient to
on
your
in cash
fund
The
vouchers
should
or
be
cash
on
hand
and
and
may
be adopted.
system
An
was
with
found
other
703
period should be
be required to have that
vouchers
on
hand
at
by the actual amount
all times.
of disbursements
require.
that receiptsfrom
cash
702
a
cash
sales
passed through
We
suggest that such receipts should be
petty cash.
your
and deposited daily
credited through the regular cash book
It
701
records.
would
he
reimbursed
occasion
as
700
the ledger.
requirements for
cover
charged to the cashier and
amount
visit proved
our
suggest that the "imprest cash"
We
our
representative,and, after consideration
receipts and disbursements, the balance agreed
of unentered
with
of
the records.
representative counted
foxmd
at the time
receipts.
101
were
704
Prepaid Operating Expenses
800-807
800
The
in
accrued
this caption represent
under
accoxmts
period
the
under
review
applicableto the operations
801
The
paid
of expenses,
or
We
as
The
by
We
as
a
subsequent period.
subsequent operations.
the insurance
policiesand found
to
be
a
the value carried
proportion
correct
of
the
paid.
carried for "interest
amoxmt
discount
prorating
the
by
on
paid
in advance"
discounted
notes
over
was
obtained
the
period
notes.
the insurance
examined
"unexpired insurance"
premiums
806
to
"unexpired insurance''
covered
805
to
examined
premium
804
properly
subsequent periods.
Of the expenses
paid or incurred during the period under review
this caption, the proportion properly
have set up, under
we
chargeable
803
are
or
caption represent the proportion
incurred, in the period covered by our
examination, chargeable
802
pdd
expenses
which
this
under
shown
amounts
of
but
policiesand found
to
be
a
correct
the value carried
proportion
of
the
paid.
Upon examination
the balance, as
of the unexpired insurance
shown
on
our
statement
policies,
we
found
of condition, to
be
correct.
807
We
found
chargeable
the
to
proportion of insurance
subsequent periods
the books.
102
to
premiums
properly
be correctly set forth on
Capital Stock
900-906
Your
examined
capital stock records were
outstanding certificates indicated thereon
shown
amount
We
checked
We
our
to the
All
reconciled
900
the
with
capital stock certificate stubs and found that
of the capital stock issued and outstanding agreed
901
of condition.
statement
found
of
amount
of condition.
statement
our
the
the
the amount
with
on
and
that the
required Federal
certificate stubs and
certificates turned
Tax
stamps
were
aflSxed
902
their
903
canceled.
in for transfer
attached
were
to
respective stubs and properly canceled.
The
minute
book
scrutinized
was
orization for dividends
We
examined
the
salaries
and
minute
issued.
This
found
of dividends
foxmd
and
on
our
therein
statement
proper
of
never
been
condition
as
is
foxmd, however, that the amount
stock."
of
account
being carried in your books
"treasury
as
The
latter term
is applied to stock, which, after being issued
for legalconsideration,is returned to the treasury by purchase,
"unissued
donation
has
stock."
or
been
never
to
an
We
As
otherwise.
issued
"unissued
we
the
amount
of
firmly recommend
capital stock"
103
904
account.
905
oflScers' salaries.
has
capital stock, $
is reflected
to provide auth-
paid.
and
book
authority for the payment
Of the authorized
and
stock
mentioned
that it be
ferred
trans-
906
Surplus
1000-1008
1000
1001
Appended
to
our
statement
of the
surplusaccount
under
review.
The
items
as
of operations is
beginning and
of the
affecting the surplus account
of that account
appended
reconciliation
a
end
of the period
detailed
are
to
reconciliation
our
in the
statement
of
statement
of
operations.
1002
We
have
stated
in detail, at
condition, the items
period.
1003
the
end
of
affectingthe surplus
our
account
during
of condition and statement
By foot notes on our statement
operations we have called your attention to the fact that
for Federal
Income
surplus is subject to a deduction
Excess
Profits Taxes, for which
As the amount
of tax payable had
no
reserve
had
been
the
of
the
and
created.
definitelycomputed
visit,we thought it inadvisable to convey
of the business
a possiblymisleading conception of the condition
by charging surplus with an estimate of the tax.
at the
time
of
our
104
not been
Reserves
1109-
1109
The
reserve
for taxes, other than
last year's tax
of the estimated
rates.
tax
The
Federal
amount
chargeable
106
to
Taxes, is based
reserved
the
upon
is the proportion
period under
review.
Notes
Payable
trade
No
1200-1209
is included
paper
ting accommodation
obtained
extended
from
by your
verified the accuracy
them
By corresponding with the payees
listed
of the
verified the
accuracy
1200
represen-
cates
depositories. Certifi-
record
we
the notes
in this amount,
on
of your
your
records.
pajrable
notes
due
amounts
1201
those
creditors.
all note-holders
corresponded with
We
listed
on
records
your
1202
exception, received their acknowledgments that
of your notes held
stated represented the amount
and, without
the amounts
by them.
A
of the
schedule
notes,
they appear
as
upon
records,
your
1203
accompanies this report.
Our
verification of the amount
payable
records
The
limited
was
to
a
as
careful check
for
liability
your
notes
1204
of all entries in your
affectingthat account.
of outstanding notes
amount
entries affectingthe account
canceled.
of your
stated
We
notes
was
verified by checking all
examination
and
of notes
1205
paid and
correspond with the recorded holders
for the purpose
of verifying outstanding obligations
did
not
of that nature.
record
Your
and
checked
therein
on
our
of
the
found
was
and
notes
trade
total of the
payable
was
1206
outstanding obligations listed
to be in agreement
statement.
acceptances
with the balance
We
did not attempt
we
listed your
records.
to
appearing
verify the items by
correspondence.
On
Schedule
they appear
upon
your
have
outstanding notes
as
According to the information
appearing in your records, the
the notes
outstanding as of the date of our
following were
1207
1208
statement:
Date
The
Issued
following notes
In favor
were
of
outstanding
Date
as
due
of the
Amount
date
of
our
statement:
Date
Issued
In favor
of
107
Date
due
Amount
1209
Accounts
1800-1805
1300
did not undertake
We
to
Payable
verifyby correspondence the accuracy
of the liabilitiescarried in your open
accounts.
We
in
the balances
the individual accounts
appearing
the total to be
appearing
1301
not
attempt
A
balance
individual
accounts
with
to agree
the
were
in
balance
the creditors.
scope
of
examination
our
in the inventory
1303
found
listed upon
We
statement.
did
our
verification of the balances
by correspondence
controllingaccount
The
the
their total found
the
with
in
appearing
and
and
control account
the
of condition.
statement
our
balances
The
examined
1302
on
with
in agreement
scrutinized
satisfied
us
that all items included
properly reflected in this liability.
were
listingof all invoices
entered
in
your
(charge register
"
payable register) and
register ^accounts
unpaid
at the close of the period agreed in total with the balance
voucher
"
carried in the
1304
We
examined
for proper
controllingaccount
the invoices
entry
verify the
checked
distribution.
and
accuracy
and
appearing
of the
record
We
them
did
We
did
not
correspond with
verifying the amounts
balance
shown
is that
detail of which
due
to
by correspondence with
the
them
on
stated
for the
open
appearing upon
your
tested.
thoroughly
we
108
record
undertake
the creditors
to
into the
not
creditors,but are satisfied that the amount
reflects your liability
on
open accounts.
1305
statement*
our
on
correctly
purpose
accounts.
of
The
lying
records, the under-
Accrued
Liabilities
items
These
were
1400*1401
set up
in order
that
the operations of the period might be
entries
We
were
examined
examined
the
and
entries
to reflect correctlyaccrued
to the
period imder
foimd
to
all incurred
properly included.
accounts
items of expense
109
1400
The
to be correct.
these
review.
charges to
and
foimd
them
properly chargeable
1401
General
1500-1506
1600
We
entry, verified the
the
All
disbursements
accuracy
of
authenticity of
The
established
The
were
and
the
of
amounts
for
proper
checked
were
and
against
further
the
pay
rolls and
footings by thorough
appearing on the payrolls
an
internal
checks.
The
tests.
were,
at verification.
attempt
of
of the most
payrolls is one
The
imsatisfactory tasks confronting a public accountant.
the
well
executive
devised
must
efficacyof a
chieflyrely upon
of
in
occasional
connected
employee,
no
way
of
to be present
payrolls,
or
prepared and disbursed, together with a
disbursement
unclaimed
We
entries
In
the
checked
a
checks
in the
course
and
well merit
might
wages,
also made
Canceled
cash
of
thorough
were
book
our
and
footed, the
entries
The
wiien
the
payroll is
close
follow
up
books
on
of all disbursements.
against their corresponding
for proper
all books
then
ment.
endorse-
of original entry
being followed
through
the
of your
a
with the preparation
also examined
examination
of
attention.
your
examination
matched
assignment
general ledger for verification of correct entry.
in turn
of
footed and the accuracy
general ledger was
accounts
thereby established.
to
1606
the
examined
the
accuracy
competent
1606
checked
were
examined
scrutinized
the
of
Verification
system
1604
footed
and
record
We
accuracy
and
period
for the
however, accepted without
1608
in turn
the
carefully examined.
were
examined
disbursement
cash
names
results into
disbursements
the
record
endorsement.
proper
original
of
thoroughly tested
footings. No attempt was made to verify the
and amounts
entered on the payrolls.
names
checks
canceled
entries in the
for
the
in
Payrolls
for accuracy
the
ledger were
period
supporting
entry
endorsement.
1602
the
for
checks
against the
in the
accounts
books
established.
and
Canceled
checked
footings and
general ledger. The
1601
detail in the
the
examined
thoroughly
of accounts
established
The
the
by
examining the entries in the books of originalentry, checking
them into the general ledger to see that the appropriate accounts
affected and by verifjdng the accuracy
of footings in the
were
records.
and
subsidiary
ledger
accuracy
110
was
General
1507-1514
made
We
a
detailed examination
the
and
traced
The
accm*acy
We
also made
postings of the
of all footings was
each
we
of the
to
attempt
a
purchase invoices
of original entry,
in your
care
1607
the general ledger.
for
examination
verify the
fileswere
being taken
entry of invoices
cursory
computations appearing
mathematical
The
into
of originalentry
established.
Beyond
expenses.
did not
entries
check
thorough
a
purchases and
invoice
of the books
1508
of
of the
accuracy
thereon.
checlced into the books
that
the
proper
1509
accounts
affected.
were
supporting purchases
Invoices
review
under
examined
were
and
and
expenses
checked
for the
into
the
period
book
1510
of
originalentry.
The
footings
checked
in the
into the
re-footed
and
books
verified and
were
which
in turn
were
which
were
footings in the books of original
entries into the general ledger, the
later re-footed and proved.
of the
practice of making entries in the
journal without the review and approval of an executive
we
be used which
that a form
of journal voucher
recommend
of
review
executive before
would
and approval
an
require the
In
place
of
1511
proved.
verified the accuracy
the
entry and checked
in
originalentry
respectiveledger accounts
We
accounts
of
the
present
1512
1513
entry.
do
We
from
and
not
believe that
you
are
accounting records in the way
reports. Comparative statistics
your
and we
busy executive
easily be prepared by your
would
be pleased to outline
to
a
getting the maximum
have
of
are
in mind
of value
monthly statements
of inestimable
several that
value
could
accounting organization. We
specificallyupon
request.
these
Ill
1514
Complimentary
1600-1608
1600
We
wish
extended
staff
1601
to
to
appreciation of the many
representatives by your executives
express
our
Close
courtesies
our
and
office
during the examination.
extended
cheerful assistance
and
representatives were
staff during the conduct
of the
hearty cooperation by your
Our
examination.
1602
We
our
found
the
accounts
to
appreciation for the
be
well kept and
courtesies
many
representatives during the period devoted
1603
Our
representativesagain found
the
examination
at
your
it
office.
a
We
appreciation of the courtesies extended
112
wish
to
extended
to
our
express
to
om
examination.
pleasant duty to conduct
desire
to them.
to
express
our