PU $ L I S H E D $ $

C O M M E R C I A L W O R L D P U $ L I S H I N G C O M PA N $

D E T R O I T , M I C H I GAN , U . S . A .
 C o p yr i
g h t , 1 9 12

$ y R . H . S PE A R

D e tro t , M i
i ch i
ga n

Al l Ri ght s R e s e rv e d
 A U D I TI N G .

w
D u rin g th e p a st t o de cad e s so m a ny v o l u me s ia ve b een
w ritten u p o n th e s u bj ects o f b ookkeep in g a cco u nti ng a u ditin g
, , ,

co st a cco u ntin g an d system ati z ing that it m i ght s ee m di ffi c u l t fo r

any o n e to u n dertake th e s u cce s s f ul a u tho rsh ip o f a n ew vol u m e
c omp l ete w ith u p t o dat e i deas an d s u ggestion s To a certa in
- - .

extent th i s w o u l d b e tr u e i f it wa s n ot fo r th e fact that d u rin g

th i s p erio d a rem arkabl e ch ange ha s b een m a d e in all l in es o f
co m m erci a l en deavo r Su ch m arvelo u s i mp rovem ents h av e b ee n
.

e ff e cte d as to re q u i re a co rresp o n ding d evelop m ent i n th e sci en ce o f

a cco unting an d a u ditin g to m eet p r esent day n eed s Syste m s o f
,
.

a cco u nting o r m etho ds o f a u diti n g e mp l oye d w ith th e h igh est d e g re e

o f e ffi ci en cy twenty or even ten years ago p rov e whol l y in ade qu ate

fo r p re sent u se.

Prio r to entering u pon a d is c u ssi on o f th at parti c ul ar b ran ch o f

t h e s ci en c e o f a cco u ntin g known a s Au diti ng$
it$ i s cons i d ered
,
$

a dvisab l e to co m p r ehen s ively defin e th e p o sition o f th e b ookkeep er ,

a cco u ntant a u dito r co st acco u ntant an d sy stem ati z er i n th e a ff a irs

, ,

o f th e com m e r c ial wo r l d an d th ei r c o rel ati on wh i ch i

-
s si
m il ar to
,

t h e co rre sp on d in g rel atio n s o f b o okkeep in g acco u nting a u diting

, , ,

c o st acco u ntin g an d syste mati z in g .

TH E B O O K K EEP ER .

A p e r so n who keep s th e acco u nt s of another p ers on p artner ,

shi p o r co r p o ration A n o ffi ce r wh o ha s ch a r ge of keep in g th e

.

b ooks an d a cco unts in a p u b l i c o ffi ce i s al so des ign ated a s a

b ookkee p er .

T he duti es o f a b ookke ep e r co n s ist i n keep ing an acc u rate re cord

o f th e b u sin es s t r an sactio n s o f th e p art y b y whom h e i s e mpl o y e d ,

prep a r e statem ents f ro m tim e to t i m e to sh ow th e co nd ition o f

a ff ai rs o f th e b u s in es s an d p rovi d e s u ch other i n fo rm ation a s i s

re qu i re d H e sho u ld b e always on th e a l ert to m ake note o f any

.

s u gge stions o r i dea s fo r fo rm u l ating pl an s fo r i m p roving the stan d

a r d of the work ,
so that h e wi l l accom pl i sh mo re w ith l es s l ab or ,

a n d p ro d u ce b ette r re s ul ts .

In as s u m ing th e res p on s ib il ity o f a new p o sition th e b ook

k eep er i s n ot exp ected to im m edi ately veri fy the enti re a cco u nting
r eco r d s a s h e fin d s them b ut by al l m ean s sho ul d ve r ify th e ca sh
, , ,

2 5879 3
 han d reconcil e th e b ank acco u nt an d take a t ri
‘

on ,
a l ba l a n c e t o
,

asce rtain the eq u il ib ri um of th e ledger acco u nts A n y d i ff erenc es

.

are noted an d cal l e d to th e attention o f hi s emp l oy e r so th at h e i s ,

not he l d resp on sibl e fo r any shortages wh i ch are dis cove re d later .

H e shou l d devote h i s be st e ff orts toward s i m p rovin g th e s y stem

o f a cco u ntin g i n u se an d p erfecting any i deas w h i ch h e posse s se s

fo r s impl i fyin g th e wo rk A bookkee p e r h as n o di ffi c ul t y i n p ro

w
.

vi din g a check up on the acc u racy o f h i s o n wo rk a s it i s a very

,

simpl e matte r f o r hi m to establ i sh m em o ran d u m a cco u nts to w h i ch

h e make s p ostin g s co rresp onding with th e p o stings m ade to t h e
l edge rs If h e i s ope rating a sy stem o f s ectiona l iz ed l edgers it i
. s

u nn ece ssa r y that h e sho u l d h ave th e ent r i es to th e p rivate l ed g e r

o r b a l ances o f th e controll ing a cco u nts th e rei n i n o rder to deter

m ine the acc ur acy o f h i s work .

TH E AC C O U N T AN T .

A n in d ivi d u al who i s to day looked up on by b u sines s m en as a

p erson havin g e xc eptional analyti cal p owe r s an d whos e du t y i t i
,
s

t o certi fy as to th e co rrectn es s and e x actne s s o f tran sacti o n s

recorded up on th e book s o f record .

He i s fu rth er exp ecte d to examin e the di strib u tio n o f charge s

an d to devi s e s p e cial accountin g system s t o me et s p eci a l re qu ire

m ents in o rder that th e bookkeep ing o r a cco un tin g wo rk m ay b e
acc o mpl ished in th e sho rte st p o ssib l e t i m e w ith a m i n i m u m o f l abo r .

T h e a cco u ntant sho u l d b e qu al i fie d to p as s exp ert Op in ion u po n

any m atters in th e s ci enc e o f accoun tin g i n any l in e of b u sin e s s ,

no m atte r what system i s u s ed H i s exam in atio n o f th e acco u nt s

.

sho u l d show any l o ss e s su sta ined th e p artic u l ar dep artment o f t h e

,

b u s in es s in wh ich they are o c c u rring an d to s u g g est sp ecia l m ethod s

,

o r syste m s to p revent su ch l o ss es o r t o in crease th e p rofits o f an y

,

dep artment H e sho ul d b e tho r o u gh ly f am i l i ar w ith b anking an d

.
,

financial m ethod s s o that in o utl ining a sy stem th e m in i m u m

,

amo u nt o f cap ital wil l b r ing th e b est p ro fits i n orde r that th e fu n d s

ma y b e invested an d reinveste d a s freq u ently a s p o ssib l e .

T h e p ro fess ional o r b u siness m an l ook s u p o n th e acco u ntan t

as an u n q u e stioned authority i n th e s cienc e o f acco u ntin g an d ,

fre qu ently th o u sands o f do l la r s are investe d u p on h i s re co m m en da

tion a s t o th e fi n an ci al cond ition o f th e b u sine ss an d the so u n dn e s s
o f hi s knowledge o f bu sine s s a ffai r s .

4
 A care f ul di stin ctio n i s m ad e between t h e p u bl i c ac co u nta n t
an d S p eci al i sts Th i
s i s th e age o f th e S p e cial i st
.
l

an d owin g t o the ,

m an y an d rap i d i m p rovem ents i n th e s cien ce o f a cc o u ntni g p ub l ic

a c coun tants a re b eginn i ng to tr a in them selve s fo r s o m e p arti cul ar
b ran ch o f th e scien ce .

TH E A U D IT O R .

A p erson a p p o i nte d an d a u tho ri z e d to exam in e an acco u nt o r

a cco u nts co mp a re th e charges w ith th e vo u ch e rs ca refu l ly ch eck
, ,

a l l receip ts etc ;
, b ri efl y state d a p erso n a p p ointe d an d a u tho ri z e d
.
,

to exam in e th e a ffairs o f a b us ine ss f o r any s p e c i fi e d p eri o d t o ,

as ce rtain i t s tr u e fin an cial con dition .

’
Th e a u d ito r s investigat io n do es n o t ceas e with m e r ely c he ck in g
th e fig u res o n th e b ooks o f a c c o u nt b u t i n cl u de s an exam in atio n o f
,

the n atu r e an d s u b stanc e o f th e va r io u s acco u nts t o as certai n th e

co rre ctn es s o f th e vario u s charge s as stated T h e d u tie s o f th e .

a u dito r how eve r are govern ed l ar g ely by th e ci rc u mstan ce s u n d er

, ,

wh i ch h e i s ap p o inted .

A u d ito rs a re o f s everal d i fferen t c l as s e s o r k in ds an d thei r gen ,

e ral com p eten cy u s u ally d e signates th e partic u lar c l as s to wh i ch

th ey b elon g D u ri n g th e e xp erien ce o f th e e dito r h e h a s had O p p o r
.

tuni t y to exam i n e th e wo r k o f vario u s a u d ito r s som e o f w ho m he , ,

i s so rry t o state w ere wh ol ly i n comp eten t to p er form th e re Sp o n

,

si bili tie s entr u sted to them .

Th e d u ti es o f th e au ditor rep r esent an i m p ortant resp on sib i l it y

as the inve stment o f tho u san ds o f doll ars so m etim es i s m ad e up o n
h i s certifie d statem ent a s to th e fi n a n cial con dition o f a b u sine s s .

I t m ay b e wel l to state th e p o s sibl e re s u l t fro m th e i nvestm en t o f a

l arge am o u n t o f m o ney u p o n an a u d ito r s i nvestigatio n an d c e rt i
’
fic a
tion wh en h e i s u n q u ali fi e d fo r th e u n dertaking ; th e los s o f n o t
o nly th e greater p art o f th e inve stment b u t th e down fal l o f a b u s i
,

n es s givin g e m p l oym ent t o s co re s o f in divid u al s T h e a u ditors i n .

th i s clas s are u s u ally con sci entio u s b u t afte r f ai

,
l in g to j usti fy th e
con fi den ce rep o se d in them th ey l os e th ei r foothold i n th e s c i en ce
,

an d art an d a r e red u ce d to th e i r p rop e r l evel .

Another cl ass o f a u dito r s i s fo u n d tho r o ugh ly e ffi ci ent i n every

,

d etail who u s u ally emp loy a sta ff o f train ed a ss istants th at enabl es

,

th em to u n de rtak e a u dits that i t wou l d b e im po ssib le fo r an y o n e

m an to p er f o rm The resul t o f an a u d it con du cted by a rep resent
.
ative o f th is c l ass u s ually can b e dep end e d up on a s bei ng tho r o ugh
an d co mpl ete altho u gh the re a r e ce r tai n in stance s w here th e work
,

i s ent r u ste d sol ely to t r ain ed assi stants who do n o t p o s sess th e

excell ent q u al ifi cation s h el d by th e au d ito r p rop ri eto r .

A thi r d cl ass o f au dito r s o f exception a l comp etenc y i s fou n d

wh o are u s u ally engage d to au dit th e acco u nts o f state s an d m uni ci
p a l i
t i
e s,
o r wh o a r e appo inted by th e co u rts to i nve stigate e state s ,

although ap p o intee s fo r th i s l atter p ur p os e are i nvari ab l y law y ers

p os ses sin g a p r acti cal knowl edge o f a u d iting th e s ci ence o f accou nts
, ,

an d l aw .

Anothe r s et o f au d ito r s a r e foun d i n th i s thi r d cl as s n am ely , ,

emp loyes o f national an d state dep a r tm ent s wh o sec u re th ei r p o si

tions th r ough p ol iti cal i nflu ence b u t u pon whom devolves im p o rtant
,

r esp on sib il iti e s p r op erly b elonging to th e wo r k th at sho u l d b e p er

forme d by the au dito r fo r stat e s an d m u n icip al ities .

Fro m clo se ob servati on it woul d seem th at app o intments th u s

,

m ade u su al ly r esul t i n certain r efo rm s o r th e install ation o f d i ff e rent

sy stems o f a c counting wh i c h -is u s u al ly no t ent r u ste d to th e em

,

p l o ye e
. In the in stall ation of a comp l ete acco u ntin g system fo r an y
dep a r tm ent o f a m u n i cip al ity o r i t s vario u s d ep artm ents th e s er ,

v ices o f p u bl i c ac c o untants o f p r o m in en ce u s u all y are so ug ht i n ,

o r de r that t h e system instal le d m ay b e e ff ective an d wo r k t o th e

a dvantage o f all cond ition s B r i e fly stated th e au dito r s des crib ed
.
,

come u nde r th e foll owing cl as si fi c ation s

Fi rs t—The au dito r who i s u n q u al i fi e d an d in co mp etent b ut h o ,
w
accepts th e respon sib il ities wh en h e kn ows th at he cann ot j usti fy
th e con fi den c e r ep o sed i n him
w
.

e n —
S co d T h e au dito r h o em pl oys a co r p s o f trai ne d ass istant s
to ass ist hi m i n la rge u nde rtakings b ut som eti me s ent r usts t o o
,

great r e spon sib il ity to h i s em pl oyee s with ou t givin g p rop e r atten

tion to th e wo r k hi m s e l f .

Th i
rd —Au ditor s fo r ;
states or m un i cip al iti e s a u d itors a p p oin ted
by co u rts for va r io u s estates to i nve stigate an d p a s s u p on th e a c
;
co u nts o f e states i nvari ably l awyers Emp l oye s o f n ational a n d
.

state dep a r tm ents ent r u ste d w ith th e res p ons ib il iti

e s o f an a ud it o r ,

th e n ational an d stat e b an k examin ers i n s u ranc e exam in ers and

,

exam in e r s conn ecte d with th e B u r ea u o f C orpo ration s o f th e de p art

m ent o f C om m erce an d L abo r altho u gh t h i s titl e i s given t o som e
,

ind ivi du al s who act i n th ei r o ffi ci al cap aci

ty a s a u d ito r s .

6
 T H E C O ST A C C O U N TA N T .

A p erson entr u ste d w ith th e resp on sib il ity o ia c c u ra t el y d et er .

m in ing th e cost o f p ro d u ction o f an arti c l e T he s u cces s ful p e r

.

fo rm a n c e o f hi s d u ti e s req u i re s a f ull knowl e dg e o f al l o f th e s u b

j ec t s i nvo l ve d i n th e s ci en ce o f co st acco u n tin g .

T H E SY ST EMATI $ ER .

A p erson en tr u ste d w i th th e re sp on sib i l it y o f a b u sin es s o r f a c

tory o r g an i zation evolvi ng system s an d m eth o d s th e o p erati o n a n d
,

e x ec u tion of w h i ch h ave a tend en cy to in creas e d p l ant e ffi ci en c y at

n o in crea se d cost an d w ith a p rob ab l e saving o f m on ey by the
,

re du cti o n o f l ab o r o r oth er e xp en d it u re .

Th i s b ri e f synop s i s o f th e d uti e s o f th e in divi d u al s e ntr u ste d

with th e resp on s ib il it y o f reco rdi n g b u si n es s tran saction s st u d y in g ,

com m ercial con dition s w ith a vi ew to in creas e d accu ra c y o r e ffi c i

e n cy i n m akin g su ch re cords th e v eri fi catio n o f th e b ooks of re cor d
,

an d co mp a r ative stati sti cal statem ents com p il e d th ere f ro m th e ,

determ i n ing o f acc u rate co sts o f p ro d u ctio n an d a s y stem ati c o r g a n

iz at io n o f any f acto ry or b u si nes s h as a ten dency t o p o in t o u t c l ear ly

th e p o sitio n o cc u p i ed b y th e au d ito r in th e e x e c u tion o f h i s d u ti e s .

A N A U D I T ESSEN T I AL .

T h e re are seve r al re ason s why th e b ooks o f any b u sin es s ,

wh eth er s ingl e p rop ri eto r sh i p p artn ersh i p so ci ety o r c o rp orati o n

, ,

shou l d b e a u dite d u n der a continu ou s o r p erio dical a u d it Pe rh ap s .

th e m ost i mp o rtant r eason i s read il ym ade a p p arent b y a cons i d e r

atio n o f th e m etho ds u s ed b y a g r eat m any b u s in es s ho u s es o r th e
e ffi ci en cy o f th e s e rv i ce ren de r e d b y th e b ook keep er in reco r d i n g -

th e t r an sactions .

M any b oo k ke ep ers i n f act th e m aj o ri ty l ack sci enti fi c trai

-
, ,
n in g
o r p ra cti cal ex p e rien ce a ss u m e too gre at re sp on s ib il itie s in attem p t
,

i ng t o reco rd th e t r ans action s o f a b u si n es s Th e re s u lt g en era lly

,

i s a b a dly tangl e d s e t o f b ooks that re qu i re th e s ervi ce s o f an

a u d ito r fo r the ir ve ri fi cation an d p r op er adj u st m ent .

I n comp eten cy however i s n o t resp on sibl e fo r th e ne ce s sit y o f

, ,

s ec u rin g th e serv i ce s o f an a u d ito r in al l cas e s T h e re a re m any i

. n

stances where t h e bo o k keep e r altho u gh ful ly co mp etent to do th e

-
,

wo rk i s e x p ecte d to do a greater am ount o f wo rk th an a s ingl e i n d i

,
$
v i dual i s cap ab l e o f th e reby forcin g h im to n egle ct a p art o f the
,

wo rk u nti l h e eventu ally lo ses h i s g r i p u p on a cc u rac y an d errors

c reep in .

A divisi on o f th e most i mp o rtant r ea son i s m ade o n e o f which ,

i s in adeq u ate system th e oth er i ne ffi ci ent se rvice Al tho u gh th e

,
.

b ook keeper i
-
s e x p ecte d t o d o th e b e st h e i s ca p ab l e o f h e sh o ul d ,

n ot b e rel ie d up on enti rely f o r ass u r an ce that a p ro p er sy ste m o f

a cco unting i s emp l oyed H e m ay do h i s wo r k in an enti re ly sati s
.

factory manner b ut u nl e s s p rovi ded with p rop e r to o l s c annot g et

,

s ati sfacto r y res u l ts O n th e other h an d th e mo st p er f ect s y ste m

.
,

ever devi s ed wil l not p rod u ce sati sfactory res u lts at th e han ds o f a n
in comp etent book kee p e r l acking n ecessary j u dg m ent an d di s creti o n
-

i n re cording th e b u s ine s s tran saction s T o get the b est re s u lts a .

goo d system o f acco u ntin g an d e ffi cient servi ce a r e es sential .

In co rroborating th e ab ove rem arks extracts f ro m th e report o f

s eve r al p ubl i c acco unting fi r m s u p on th e m un i cip al acco u ntin g rec
o rd s o f a w estern city are s u b m itted .

$
N owh ere i n th e dep artmenta l acco u nts i s any d istin ctio n m ade
b etween cap ital e x p endi t u re s $f o r th e acq u i r em ent o f p e r m anent
p rop ertie s an d eq u ip m ent $ an d reven u e exp en dit u re s The d e p art .

m ental records i ,
n fact a re in m ost instan ces m erely ch ronological
,

l ist s o f ap p rove d disb u rsem ents and a s s u ch are witho u t val ue fo r

,

a dmini strativ e p u r p oses Th e A u dito r i s th e h ea d o f th e fi nan ce

.

dep a r tm ent of th e city i n nam e only Th e r e i s n o sy stem o f a u dit . .

T h e fin an ce comm ittee o f th e B o ard o f Sup ervi so rs emp l oys an a c

c o u n t a n t to exam i ne the vario u s departm ents b u t th e magn it u de o f ,

th e work under exi sting accounting con d ition s i s f a r b eyon d th e

p hys ical ab il ity o f any o n e m an to execute e ffi ci entl y I t f ol lows .

that th e de p artm ent b ooks with som e notabl e excep ti on s are n o t i n

, ,

a greement with thos e o f th e Au ditor— a con ditio n w hi ch op en s th e

d oo r to cha r ges to wron g acco u nts an d t o th e making o f f ra udul e nt
entri e s witho u t fear o f detecti o n .

Even th e cash acco u ntin g i s n ot comp lete T here i s n o ade .

q u ate check u p on al l col l e ction s an d th u s i t has b een p os s ib l e fo r

,

a n emb e zzl em ent o f ove r wh i c h o ccu r r e d i n 1 9 0 6 t o re m ain ,

u n detecte d fo r ove r a year and a h alf A comp ari son o f th e d ep art

.

m ent re ports o f th e A u d ito r an d Treas u rer wi l l s ho w m arke d di ff er

e n c e s both i n recei pts an d exp en dit u res —p os sib l y m ere m atters o f $

b ook keep in g b u t even s o m i sstatements o f f a ct an d i n dicatio n s

-
, ,

o f p o ss ibl e h id ing pl aces fo r er r o r an d f r a u d

-
.

8
 T h e m etho d o f p a yi ng city e mpl oye e s i s arch ai c waste ful ti m e , ,

cons u m in g an d i s not s u rro u n ded with s u ffi cient Sa f e gu a r d s t o i

,
n

s u re a day s wo rk f o r a day s p ay I t s p eaks vol u m es ei

’ ’
. t h er fo r -
c

th e hon e sty o f sub ord in ate e m pl oyees o r agai nst th e e ffi cien c y o f

th e m etho d s th at th e re have b een n o s can d al s in co nn ecti o n wi th t h e
p a y ro l l s
-
.

T h e rem e dy f o r s u ch a stat e o f a ffa irs as w e h ave re f erre d t o

l i e s a s it ap p ears to u s in th e in stall ation o f a mo d ern an d a p p ro
, ,

r i
p a t e sy stem o f a ccou nts an d th i s s ho ul d p ro du ce res u l t s f ar m o re
,

imp o rtant th an th e m e re reco rdin g o f reven u e an d e xp en d it u res o r

o f m o n e ys re ce ived
. m on eys di
,
sb u r se d an d mon ey s o n han d Su ch .

‘
a system shoul d p r ove an e ss entia l facto r i n th e s a f eg u a r d in g o f th e
a ss ets o f th e m u n i cip al ity an d i n th e e cono m i cal a d m in istration o f
,

it s a ff a irs I t sho u l d a ccom pl i sh f o r th e c ity a ll th at i s e ff e cted b y

.

th e b ook ke ep ing o f a p u bl i c servi ce co rporati

-
o n o r o f a s i m il ar
ente rp ri se an d w e are con fid ent th at i t i s on l y b y a dop tin g s u ch
,

mo dern ac cou nting m ethod s that a sati sfa c to ry s y stem o f m u ni ci p al

$
acco u nts can b e develop e d .

T h e abov e expl anati on s s hou l d su ffi c e fo r a gen eral i dea o f th e

con d ition s m ak ing th e servi ce s o f th e a u d ito r e ss ential .

THE VA L U E O F A N A U D I T .

Th e val u e o f an a u dit s ho ul d n ot b e m eas u re d by th e act u a l

d i screp an ci e s o r i rregula riti e s d i scovered s i nce th ere are oth er c o n
,

s i d erati on s i n d ete rmi n ing th e b ene fits d erive d f ro m th e e xp en d it u re

o f mon ey .

T here are instances whe re a co mp reh en sive a u d it o f th e b o oks

w
o f a b u s in e s c r ep a n c i
s s do es n o t d i sc l o se a n y d i es the a u ditors fin d
,

ing th e record s o f th e b u sin e s s t r an saction s p rop erly m a d e I n .

s u ch case s th e b u sin es s man i s u s u al l y t o o ha sty in h i s j u d g m ent in

decla ring that th e a u dit p rove d o f n o sp eci al val u e to h i m an d th at
th e amo un t h e p ai d the r efor rep res ent s so m u ch mon e y wa ste d .

A s a m atter o f fa ct the re i s a d eep sen se o f s ec u rit y an d sati s

w
,

f action i n kn o m g th at everythin g i n c o n ne ctio n with th e a cco u nt

ing dep art m ent i s O K that n o i rregul a r itie s exist th at n o d e f a l ca
. .
, ,

tions have b e en m ad e that ev ery one i denti fi ed w ith th e acco u ntin g

,

d ep artm ent in a ny mann e r i s co mp letely exonerated fro m al l s u s

p ic io n ,
even tho u gh p ri o r to th e tim e th e a u d it w as m ad e th ey may

h ave b een s u sp ected .

 Is th ere no satisfa cti o n to a b u sin es s m an i n know in g that the
acco u nting d ep artm ent h as n ot m ade expen s ive e rro r s that g oods ,

have not b een sh ip p ed o u t w itho ut b ei ng p rop e rl y i nvo i ced that ,

p u r c hases have b een ret u r n e d w ith o ut h avi n g receive d p rop e r cre dit
the re f o r th at di scounts have n o t b een ove r look ed th at th e b al anc e
, ,

sheet a s p repared p resen ts a tho ro u ghly rel i abl e statem ent o f the
con di tion s o f th e b u sin es s that th e p ro fit an d los s state men t show s
,

a co r r ect statement o f the p ro fits an d l osses $

Th e b u s in ess man emp l o ys a ca sh ie r t o p rop er l y record i n t h e

cash b ook al l ca sh rece ipts an d di sb u r s ements b u t h e i s n o t satis fi e d
,

u nl es s h e has som e ch eck u p on th e accu racy o f t h e re co rd To .

ve r i fy th e t r an saction s reco rded h e cou nts the ca sh i n th e d r aw er o r

till H e employ s a n ight watch man w ho i s rel ie d u pon to p revent
.

bu r gla r y fi re etc an d notwith stan di n g the fact that n o b u rgl ary o r

, ,
.
,

fi re m ay eve r o ccur he regards th e s ervi c e s o f the n ight w atchm a n

i ndi sp ens abl e p erh ap s o n account o f th e s en se o f secu r it y an d s a t
,

i s fa c t i
o n to h i m i n knowin g th at h i s p rop erty i s p rotected D o es .

it n ot nat u ral ly f oll ow that he sho ul d h ave th e sam e sens e o f s e c u r

ity an d sati sfaction in knowing that by having an a u d it o f hi s b ooks
m ade h i s re so u rce s a re p r otecte d $

A n a u dit i s design e d t o s erve a do ubl e p u rp os e nam e ly t h e , ,

d etection o f ir r egul a r itie s o r defal cation s etc an d thei r p reventi o n

,
.
,
.

I t i s m o r e logi cal for a b u s in es s m an to emp l oy an a u d itor to p r e

vent irregu l a r ities an d dis c r ep an ci e s th an fo r h i m to wait u nti l th ey
are s u s p ecte d o r kn own to e x i st b e f ore step s are taken t o l o cate ,

the erro r s o f com mi ssion o r o m is s ion an d pl ac e a safeg u ard again st

th ei r p o ss ibl e recu r r en ce .

D I FF ER EN T K I N D S O F A U DIT S .

A u d its are cl ass ified unde r the h eadings C omp l eted C onti n u o u s , ,

Pa rtial Pe rio di cal an d Sp ecial

, .

A n au di t i s an e x am inatio n an d i nvesti gation of b ooks o f a c

.

coun t fo r th e p u rpo se o f determ ining the acc u racy of the a cco u nts
an d the hon esty o f tho s e intere sted .

T hey are u s u al ly con d u cte d for th e p u rp os e o f dete cting any

f ra u d any err o rs o f a tech n i c al nat ur e o r any m isap p li cation o f th e
, ,

g eneral p rin cipl e s o f accounting wh i ch do e s not a ff ect th e acc u racy

o f th e figu res shown .

The th ree obj e cts ab ove cl a ss i fied h av e a co m mon relation ,

as

10
it i s obvio u s th at a te chn ical e rro r o r an erro r o f p rin cip l e m u st b e
n ecessary to con cea l a f ra u d T h e a u dito r s h o u l d b e con stantly
.

vigil an t an d watch ful i n the m in u te st d etail as f ra ud s are s o m e t i

,
mes
p e rp et r ate d fo r very sm al l a mo u nts alth o ug,
h i n m an y in stan ce s
l arge amo u n ts h ave b een invo l ve d .

C O M P L ET ED A U D IT .

A c o m pl ete d a u d it i s s o ca ll ed b eca u se
-
th e a u dito r doe s not
be g i n h i s wo rk u ntil after th e trial b al an ce h a s b e en taken .

W h en ever p o s sibl e th e b ook s o f ac co u nt sh ou l d rema in in th e

so l e cu sto dy o f th e a u di to r du rin g th e p erio d re qu i re d fo r a c o m
p e t e d a u d it al th o ug h th i s i s h ardl y p r acti ca l e x cep t i n th e case o f
l ,

very sm all con cern s wh e re th e work i s s o a rran g ed th at it re q u ires

ve r y l ittl e d etail ch eckin g b y th e a u d ito r .

The di ffi cu l ty o f al l ow ing th e b ooks t o r em ai n i n th e p o s ses s ion

o f th e b ook ke ep er d u ring the p e rio d o f th e a u d it cannot b e enti re l y
-

overco me w ith p ra cti cab i lity b u t i f th e a u d ito r w il l b ear in m in d

,

th i s s p ec ia l feat u re an d gu ard a g a i nst any f ra u d u l ent intention s o f

the b oo k k eep er h e can u n do u b tedly sav e h im s el f f ro m an y dan g er
-
,

fro m th i s so u rc e T h i s can easi ly b e rem e d ie d i f th e a u dit o r w il l

.

cl o s e th e b ooks o f a cco u nt h im sel f w h i ch i s very o ften don e Any

,
.

c hange s wh i ch m i gh t then o cc u r wo u l d certainl y b e d ete cted .

A ve r y im p ortan t p art o f a co mp l eted a u d it i s th e n eces s it y o f

th e a u dito r i n co mp l eting h i s a u d it on any p art o f th e work wh i ch
h e m a y u n dertake th at i,
s ,
i f h e a u dits th e tota l l ed g e r b al ance s at
any p arti c u lar tim e i t i s v e r y es s ent i al th at h e tak e th e s u m to t a l
o f s u ch b a l an ces at th e s am e ti m e to p revent th e p os sib i l it y o f
change s b ein g m ade p rio r to th e tim e o f making th e add ition o f the
b al an ce s
.

C O N TI N U O U S AU D IT .

A continu o u s a u di t h as several a dvanta g es i n its favo r am on g ,

wh ich a r e th e fol l owing

Pe r iodi cal vi s its o f th e a u d ito r h ave a ten den cy to re mi n d th e
b ook keepe r th at h e m u st keep hi s work u p to d ate s o th at the
- - -

;
au dito r i s not hin dered o n th i s acco u nt f r eq u ent exa m ination s o f
th e b o oks read ily detect any erro rs m ad e s o th at th ey m ay b e c o r
;
,

r e c t e d w itho ut th e n ece ssity o f op ening sp eci al adj u stm ent acco u nts

11
f re qu en t e x am in ati on O f th e b ooks e nabl es th e a ud ito r t o g ive m ore
care ful attention to th e detail s O f th e entri es an d th e g en eral p ri n
ci p l e s O f accou ntin g ,
an d the au d it ma y b e co mp leted ver y soon .

a fte r the b ooks a r e closed w itho u t th e n eces sit y o f th e a u d ito r r u sh

ing th ro u gh t h e e x am in ation sl ighti n g sm a l l e r d etai l s p erh a p s t o ,

t h e d etriment O f th e rea l va lu e o f th e a u d it .

Whe re a conti n u o u s a u d it i s m ad e the b ook -kee p er i

,
s g iven

a n O p port u nity to ch an g e any p o stings o r fi g u res h e m a y w is h ,

igno rantly o r in t entiona l l y p rior to th e d ate O f th e fi nal a u dit T h e

,
.

a u dito r in charge O f the work sho u l d b e v er y care ful to d etect an y

c h anges wh ich m ay occ u r an d t o m ake S p eci a l n ote the reo f .

P A RTIA L A U D IT .

A t e r m ap pl ie d t o a syste m O f a u di tin g wh i ch does n o t cove r

the p rin cip les O f a d etai l e d a u di t n o r to u ch u p on a contin u o u s o r
c ompl eted a u dit .

In condu cting a partia l a u d it it i s c u stom a ry t o veri fy th e cash

an d b ank bal an ce s u pon th e d at e th e exam in ati on i s started b y ,

co m parin g th e sam e w ith th e b alan ces Sh ow n b y the l edgers .

Special r ul e d p ap e r is generally u se d fo r the p u rpos e O f o p enin g

acco u nts w ith th e vari o u s gene ra l o r p rivate l edge r acco u nts wh i l e ,

c ontro l l ing a ccou nt s a r e o p en e d fo r th e s a l es an d p u rch ase l ed g ers .

Po stin g s a r e th en m ade f rom th e ca sh b ook an d j o u rn a l t o th e var

i o u s genera l or p rivate l edge r a cco u nts an d f r o m th e p u rch ase a n d
,

s al es record s p o stings are m ad e t o the contro l l in g acco u nts .

This i s a very s im p l e m atte r wh ere s ectio n al i ze d sal e s l edgers

are u sed an d sp eci al col u mn s p rovi ded th e re fo r i n th e sales reco r d s
, ,

b ut wh en th i s i s not d on e con si derab l e con fu s ion wil l arise f ro m

h aving m any item s O f a d i fferen t n at u re i n a singl e col u mn .

’
T h e b al an ce s th en shown b y th e a u d itor s ab stra ct l e d ge r sh o ul d
’
a g ree w ith th e b al an ce s sh own by th e b ook ke e p e r s tri a l b alan ce
-
,

p rovi de d th e b ook ke ep e r s wo rk i s acc u rate I f an y di ff eren ce s are

-
’
.

d iscovere d sp ecial m entio n sh o u l d b e ma d e o f e ach and al l th e ,

erro rs l ocated It m ay b e n ece ssa ry to Op en a g eneral adj u stm ent

.

a cco u nt fo r th e p u rpo s e o f corre ctin g erro rs wh i ch u s u al ly o cc u r .

Th e b al an ce Shown by the s al es l edge r control l ing acco u nt

sh o ul d ag r ee w ith th e total sal e s a s shown by the sal e s reco rd an d ,

a ll rece ipt s o n c u stom ers accounts d i scounts an d al l owan ce s a s

’
,

s hown by th e c a sh b ook j o urn al an d cred it reco rds

,
.

12
 T h e b al an ce show n b y th e p u rcha se l e d ger co ntro ll in g acc o u n t
sho u l d a g re e w ith th e tota l pu rcha se s a s sho w n b y th e p u rchas e
re co rd an d al l p ay m ents th ereon to g eth er with d i sco u nts and a Jl o
, , w
;

anc e s ,
a s S h own b y th e ca sh b ook j o u rn a l an d c re d it a l l o w an c e rec
,

o rd. O f co u rs e th e b al an ce s mu st th en a g re e with th e l ed g e r b a l
,

a n e c s a s s h o wn b y th e tri a l b a l a n ce .

A sim p l e m eth o d O f m akin g thi s co mp ari s o n i s to take f r o m

the tria l b a l an ce at th e co mm en ce m en t O f the a u d i t th e d eb it an d
cre d i t b a l an ces s howin g s al es an d pu rcha se a cco u nts f o r tota ls T h e .

’
d eb i t an d cre d it p o stin g s a s sh own b y th e a ud ito r s a b stra ct l ed g e r
,

fo r th e a u d it p e rio d sho ul d then b e l i ste d wh i ch w h e n a d de d t o an d

,

d e d u cte d f ro m th e p revio u s tri a l b a l an ce sh o u l d p re sent th e tria l b a l

an ce at th e c l o se o f th e a ud it p erio d wh i ch s ho uld i n every w a y
,

a g ree w ith th e figu re s a s p re sen te d b y th e bo o k -keep e r O f c o u rs e .

,

the cas h o n han d at th e co mm en ce m e n t O f th e p eri o d sh o uld b e

a dd e d t o th e am o u nt o f cas h rece ive d du rin g the a ud i t p erio d Fro m .

thi s am o u nt S ho ul d b e d ed u cte d th e a m o u n t d i sb u rs ed b al a n ce re p ,

re sen ti n g th e cash o n h an d at c l o se o f th e p e rio d

'

I n c l o si n g th e a u di t a l l reven u e a cco u nts sh o ul d b e c l o se d i n to

,

p ro fit an d l os s an d a state m en t o f a ssets an d l iab i l iti es p re p are d

,
.

I n a d d iti on to th i s th e gen era l veri fi cation o f the va rio u s acco u nts ,

p a y rol l p etty cash fo otin g s b i ll s p a y ab l e etc sh o u l d b e m ade i

, , , . n
, ,

o r d er th at th e a u dit m ay b e correct .

P ERI O D I C AL A U D I T .

A term g iven t o a n a u dit con d u cte d at certai n s p eci fi e d ti m es ,

o r a seri e s o f a u dits covering c ertai n p res crib e d p erio d s Pe rio d i ca l .

a u d its u s u ally a s s u m e th e n atu re o f a com p lete d a u d it .

SP EC I A L AU D ITS .

A term som eti me s app l ie d to th e sp ecia l con si de rati o n s i n d i f

fere n t c l asse s o f a u d its s u ch as $ p u bl i c s ervi ce co rp oration com m e r
, ,

cia l acco u nts an d th e a ccou nt s o f vario u s i n stit u tions

, .

A U D I T O RS C ERTI FI C AT ES
’
.

Au ditors h ave n ot a d opte d any p arti c u l ar f o r m O f certi fi cate a s

c o n d iti o n s to b e m et vary sl i g ht ly i n d i ff eren t b u s in es se s an d y et
th e g e n era l p rin cip l e s o f ce rti fi catio n s are p racti cal l y th e sam e .

13
 Two o r thre e f o rm s O f a u d ito rs ’
certi ficates are given wh i ch
m eet o rdin ary requ i
rem ents .

$
I h e r eb yrt i fy t h at I h a v e c are f u l ly e x a m i n e d t h e bo ok s O f acc o u n t
ce

o f Fre d A n d rew s C o mp an y a nd th at th e abov e s t at e m ent o f a ss et s a nd

,

l i abi l i t i e s a n d b a l a nc e sh eet is a t ru e a n d c o rr e ct s t a t em ent o f th e p r es ent

c o n d i t io n o f t h e b u si n e ss a s o n t h e 3 oth d a y o f J u n e 1 9 0 8 a cc or d i ng t o t h e
, ,

s a id books O f ac c o u nt d at ed t his 9 th d ay o f J u ly 1 9 0 8
, ,
.

$S i g ne d $
W e h e reb y c ert i fy th at w e h a v e c a re f u lly a u d i t e d th e a c c o u n t s o f t h e

W o l v eri n e M a nu f act u ri n g C o mp a n y f or t h e fis ca l y e a r en d i n g J u n e 3 oth 1 9 0 7 , ,

a n d t h a t t h e s a m e a r e a pp a r en t l y c o r r e c t W e f u rt h er c e rt i fy t h at t h e s t at e
m ent o f a ss et s a n d l i abi l i t i e s a n d b a l a nce sh eet a bov e sho w
.

n i s a c cu r at e ly

p rep a re d f r o m t h e a cc o u n t s a s sho w n b y th e boo k s o f t h e c o mp an y a n d t o

t h e b e s t o f o u r kn o w
,

l e d g e a n d b el i e f a n d i s a c o rrect s t at e m en t O f t h e
,

fin anc i a l c o n d i t io n o f t h e c o m p a ny a s O f t h e d a t e ab o v e m en t i o ne d
$
, .

I h er eb y c e rt i f y t h a t I h av e a u d i t e d t h e abov e b a l a n c e sh e et O f t h e
L a n d Im p r o v em ent C o mp a ny d at e d th e 3 l s t d ay o f D ec em b er 1 90 7 a n d i
, ,
n ,

my O p i n io n s u c h b al a n c e sh e et ex hibi t s a t ru e a n d c o rr ec t s t a t e m en t o f th e
a ff a irs O f t h e s a i d c o mp an y a s sho w ,
n b y t h e ir boo k s o f ac c o u nt a s o f th e ,

d a t e m ent i o n ed .
$

A U D IT O R S D U TI ES ’
.

The duties O f th e a u d it o r a r e gove r n ed very l argel y b y th e

.

ag r eements set f orth i n hi s contra ct fo r th e a u d it o r i nvesti g ati o n

un dertaken .

Th e duti es O f an a u d ito r in b eh al f o f a co m p an y ab o u t t o b e
am algamate d o r sol d t o a comb ination d i ff er greatl y f rom th e d u t i es
o f the au d ito r empl oye d by a large c o r p o rati on fo r th e pu r p o se o f

w
con d u cting a contin u ou s a u dit an d f u rth er d i ff eren ce i n th e nat u re
,

o f th e exam ination s an d investigation s ca u se i de d i ff e ren ces in th e

’
a ud itors d u ti es u n der va rie d con d iti on s .

Th e a u ditor fo r a la rge co rporation wh en em pl oyed f o r the p u r ,

p ose O f m aking a co nti nu ou s a u d it i s expe cted to ve r i f y a l l o f th e

,

acco u n ting work O f th e co rp oration an d p r ep are p eriod i ca l co m p ar

ative stati stical statem ents O f th e finan c ia l con d ition O f th e b u s in es s ,

after havi ng v erifi ed th e fig u res p re sente d H e i s fu rth e r e xp e cted .

t o endo r s e the sy stem O f acco u nts i n u se an d t o make s u ch ch an g es

f rom tim e t o t i me a s in h i s b est j u d g ment i s deeme d a d vi sab l e an d ,

s u gg es t a n y l abo r s aving imp rovem ents o r short c u ts

-
.

T h e re is con si d erabl e di ff e r enc e b etween th e a u dito r o f a c o r

~

p o r a t i
o n an d the p u bl i c acco untant o r a u d itor in asm u ch a s th e fo r ,

14
m er do es no t h av e th e p rivi l e ge O f a fre e han d i n h i s r e c o m m e n d a
tion s o n acco u nt o f ce r tai n rest r iction s an d l i m itati on s b ei n g pl ace d
u po n the extent o f h i s s uggestion s r ecom m en dati o ns
, ,

l i c acco un tant o r a u dito r i

s not b o u n d by any p e rson al resp on s ib i l it y

an d con du cts an a u d it fro m an i mp arti al an d u nb i ase d stan dpo int .

T h e p erman ent a u dito r em p loye d by th e corp o ration u s u al ly

con side rs wh ethe r o r n o t h i s reco mm e n dation s w il l m eet w ith th e

a p p roval O f th e h igh e r auth o r iti e s a n d w h ethe r o r no t s u ch r ec o m

,

m e n da t i o n s will cau se p ersona l emb a r ra ssm en t as regard s th e p er

m an e n c y O f h i s p o sition Th is restri ctio n o r l i m itation pl aces the

.

p erm anent a u dito r i n a r ath er u n de si rabl e p o s ition an d give s h i m ,

very l ittl e a dva n tage ove r th e exp e rt b ook ke ep e r -

.

Th e p ermanent a u dito r i s govern ed i n h i s wo rk by the b a si s o f

the contract w ith th e p ri n ci p al s fo r th e work u n dertak en an d in as ,

m u ch as non e o f th e co u r ts o r legi sl atu re s have attem pte d to de fi n e

an a u dito r s d u ti es th e r e Sp o n s i li
bi ti
’

, e s O f an au dit re st with th e

in d ivi du al I t wo u l d b e im p racti ca l fo r an y co u rt o r l egi s l at u re t o

.

reg ul ate th e du tie s O f th e a u d ito r as s u ch reg u l ati on s m igh t re s ul t

,

i n f ail u r e in m any cas es .

A U D I T O R S LIAB I LITI ES
’
.

There a r e wi d e d i ff e ren ces o f Op in io n a s regard s th e l iab il iti e s

o f the a u d ito r an d n o d e fin ite concl u sion can b e ga in e d a s to th e
’
a u dito r s l i ab il ity i n conn ection w ith ac cou nts certi fi e d by h i m .

A n a u d itor i s exp e cte d to b e hon est an d t o exerc i s e a rea son

ab l e am o u n t O f care an d ski l l to determ in e that h i s certi fi cati o n i s

tr u e an d corre ct an d to exerci s e a reason ab l e a mo u n t O f care an d

,

ski ll i n dete r m in ing the tr u th It wo u l d b e u nfai r fo r th e a u d itor

.

to ass u m e the l iab i l itie s o f th e d irecto rs o f a co rpo ration a l tho ug h ,

it i s h i s d u ty to exam in e a ny an d a l l f eat u re s i n conn ect ion w ith

th e b ooks O f acco u nt va lu ation s etc an d to sp eci fy a n y d i ff eren ce s
, ,
.
,

fo u n d .

Sho u l d any val u ation s ca u s e s u sp i cion inve stigation s ho u l d fo l

low ,
b u t i f su ch val u ation s a r e u n reasonab l e an d th e d i re cto rs are
n o t i n acco rd with th e a u ditor a s to th e amo u nt o f s u ch va l u ati ons ,

th en h e can h ardly b e h el d resp on s ibl e b u t h i s ce r tifi cation sh o uld

,

e m b o dy th e tr u th .

T h e a u dito r i s expe cted to kn ow an d to certi f y to th e tr u th an d

acc u r acy o f the fi gu re s shown u po n th e b alan ce sh eet a f te r ex erc i s

15
in g reason ab l e care to satis fy h i m sel f th at the figu re s sho w n are
correct alth o ug h i f h i
,
s s u sp i cion is a r o u s e d i nve sti g ation S ho ul d
r es u l t an d in m akin g h i s rep o rt to sh arehol ders the de tail s Sh o ul d

b e SO e xpl ain e d an d il l u strated that they m ay take w h ate ve r a ction

in the m atter th at the y m ay s ee fi t .

T h e l iab il i ti e s O f an au dito r b e co me a m atter o f se rio u s re g ar d

when th e a ffai rs O f a comp any are wo u n d u p o n acco u nt O f d i vi den d s
havin g b een dec l a r ed an d p ai d o u t o f cap ita l O f co u rse th e dir c e
.
,

tors i n s u ch case s are re s p o ns ibl e an d it wo ul d se em that an a ud ito r

,

s ho ul d b e hel d eq u al ly res p on sibl e with th e di recto r s p rovi de d h e

sho u l d di scover thi s f act an d f ai l t o sp eci fy i t s imp ortan ce i n h i s

certi fi cation altho u gh an a u di to r sh o u l d n ot b e p ers on al l y l iab l e fo r

,

innocen t m i stake s o r igno ran ce C o rp o ration s Sho u l d e x ercis e d u e

.

care to cove r thi s l atte r p oint in en g agin g th e s ervi ce s o f an a u dito r .

It ma y b e cons idere d th at u n der ce r tain oth e r co n d iti o n s s u c h ,

a s th e f ol lowin g the a u dito r m i g ht b e p erson al ly l i ab l e

,
.

Su p p o se the a u dito r h as a contract w ith a la r g e cor p orati on fo r

th e p e r io d ica l a u dit O f its b ooks o f accou nt an d i n stead o f a u d iti ng
,

the b ooks p romptly u p on th e sp eci fi e d d ate al l ows h i s a u dit t o f al l

in arrears fo r a p erio d o f ten da y s o r t w

o w eeks wh en h e th en d i s

w
cove rs th at d u rin g th e p ast t o m onth s o r p e rha p s a l on g er p erio d
contin uo u s de f al cation ha s b een p racti ced th e qu estio n then aris e s
'

a s t o th e l i ab i l ity O f th e a u d ito r fo r not d etecting an d p reventi n g

s u c h de f al cation u p on th e sp eci fied contract a u d it date in stead o f t e n

days or two we eks the rea f te r

In s u ch an in stan ce th e a u d itor sho u l d b e h e l d l iab l e fo r de fa l
cation s occ u rrin g b y reason O f h i s n e gl igen ce a l th o ug h the d e fi n ite
,

concl u sion on thi s q u e stion i s con dition al in as m u ch a s i t m i g h t

,

reason abl y b e ex p e c t e d t h a t som e el asti ci ty S ho u l d b e en du re d at

certain p erio d s fo r exam p l e J an u ary l s t when th e a u d itor i
, , , s g en

e r a l l y expected to u n dertake a f ar greater amo u nt O f w o rk tha n i s

p os sibl e f or h im to d o w ith in a li m ited p eri o d .

AU D IT O R S R ESP O N SIB I LITI ES

’
.

Altho u gh a great dea l ha s b een p u b l i sh ed concernin g th e a u

’
d ito r s r e sponsib il iti es an d l i ab il itie s i t W oul d b e h ardl y cons i d er ed
,

j u stifiabl e fo r an a u ditor person al ly t o b e h e l d resp on sibl e fo r h i s

f ail u re to dete ct o r e x po s e errors o r f ra u d s in h i s e x am in ation an d

i nvestigation u nl ess in add ition to n egligence s u ch erro rs o r f ra u d s

, , ,

16
whi ch i s ex p res sed by th e wo r d c u ltu re i s mo st i mp o rta nt fo r those
who wo u l d achi eve th e greatest su c ces ses .

A cco u ntan cy deman ds a wi dth an d depth O f gen er a l kn owl edge

u pon wh i ch it i s i mposs ibl e to place a l im it and any l ead ing a c
,

c o u n t a n t will gl adly adm it th at so m eth in g n ew is l ea r ne d eve r y day .

ESSEN TIAL S O F A N A U D IT .

Th ere are many con s i deratio n s u n de r th is h ead ing i n add ition

t o an o utl in e Of what an au dit sho u l d cove r o r contain .

The twenti eth cent u r y w il l ever b e known as an e r a O f lar g e

corp oration s amalgam ation s tru sts an d comb i nation s o f cap ita l
, , ,

s om e o f wh i ch a re con du cted u p on goo d b u sines s p rin cip l es wh il e

oth e r s attempt an d too freq u ently carry o u t lawl ess practi ce s a im
, , ,

ing fo r s u ccess i n th e m onop ol iz ation Of t r ade o r i n dece ivin g th e

p u bl i c into b uying the i r se cu riti es at fi ctitio u s val u es T hos e co r .

p o ra t ions con du cte d up on so u n d b u sine ss p rinc ipl e s en de avor to

keep thei r flo ating as sets eq u ival ent to th ei r floating l iab il iti es wi th ,

a m argin O f p r ofit wh ich rep r esents th e excess O f th e form er Over

th e latte r
.

T hat a co rp oration i s rega r de d as h on est w hi ch attem pts n o

l awl e ss p racti ces i ss u e s o r sell s n o watered sto ck cal c u l ates i ts
, ,

earn ing p ow er f ro m a p ro p er an d con servative b asi s an d decl ares

divi den ds o u t o f p r o fits p ayab l e i n cash The sto ck O f su ch a co r
.

p o ra t i o n i s usu al ly wo rth th e valu e at wh i ch it i s Sh o wn up o n th e

b ook s o f acco u nt .

Th e advan ce in a c co unting m eth o d s an d p r i n cipl e s h as b r ought

w
e nl ightenm ent to th e inve stor h o do e s n o t now r ega r d favorably
an investm ent i n any ente r p ri se u nl es s th e ann u al r eport i s p r e
p a r ed in a cl ea r an d com p r eh en sive m ann e r the r eb y m aking it u n
n e cessary for h i m to employ co u n s el or the advi ce Of a credit man
w
,

acco u ntan t o r an atto r n ey to dete rm in e o f h a t t h e ass ets c on s ist

an d wh at con stitu te s th e l i ab il ities A com p lete and comp reh e n sive
.

r ep o r t accom p anyin g a d ivi den d ch e ck greatly in crea se s th e c o n fi

den ce o f th e i nve sto r in the p ro p os itio n an d is n atu r ally p ro d u ctive
O f th e v e r y b est re su lts,
wh il e o n the othe r h a n d an an nual repo rt
, ,

in accurately o r i m prop e r ly p rep are d an d sub m itted to a sto ckhol der

a r ou s es s u sp i cio n an d c au se s dis sati sfaction .

A corp oration r eq u i r e s no sp e c ial an alysi s I t i s su ffi ci ent to

.

say th at i t i s a c o mb in ation O f cap ital It i s the r es u l t Of a few o r

.

18
 ’

m any investo r s p u tting the i r fu n ds into an ent e rp ris e a n d o bt a i ning

co r p o rate powe r f r o m t h e state u nd er the l aw s o f wh i ch th e co r

p o r a t i
o n i s o r gan i z ed I n m any
. i n stanc es a l a r ge corp o r ati on in a $

c om mun i ty dep e n d s up o n t h e b est c itiz en s o f that l o cal ity for th e

s al e Of its s ecu rities .

It i s u n iv e r sal kn owledge th at th e p r im a ry Obj e ct o f th e i

h
v e s t o r is a divi d en d f r o m th e m on e y inve sted W hil e it i s n atu ra l
.

for an i nvesto r to r e gard th e d ivi den d ea r n i n g p owe r O f a co r pora

ti on a s its p ri ma r y p ur po se h e Shoul d n o t ove r look the fact th at a
l arge bu s i ne s s e nterp r i se i s un qu estion ab ly an eno rmou s p owe r fo r
goo d i n a com m u n ity T he al t ru i sti c b e n e fit derived from th e e m
.

p loy m ent O f th ou san ds o f l ab o r e r s m ay b e r e ga r d e d O f mo r e i m

po r tan ce th an th e s mal l d ivi den d th e i nve sto r exp ects A c o r p o r a
.

tion h aving an an n u al p ay r oll O f m ight retu r n to its sto ck

hol ders d ivi den d s n ot exce e ding Th e ci r c u l ati on O f th e
l abo r ex pen d itu re i n th e co mm u n ity amo ng the fam il i es gro cers , ,

m e rch ants dr u ggi sts etc m ight b e con si d e r e d the exi st e n ce O f th e

, ,
.
,

co m mu n ity .

Th e in v e sto r wh o r eceiv es a r e gul ar ann ual d ivi den d up on h is

i nvestm ent accomp an ie d by an ann u al stat e m en t fo r a p e r io d Of a
few years m ay take it fo r g r ant e d that everything i s all r ight an d

b ecome n egl igen t in h i s r ega r d fo r p r otection o r the s afety O f h is

investment I n t h e sm all e r co mm u n iti e s th e p o sition s O f t r u st an d
w
.

re sp on s ib il ity w ith co r p o ration s Shou l d fal l to r eputabl e citiz e n s h o

are r el i abl e an d m ay b e d epen ded u pon in any cri si s to saf e g u a r d
t h e inte r e sts O f the l ab o r e r an d th e investo r al ik e Ve r y seldom do
.

w e h ea r o f de fal cation s in s u ch cas e s T h e l a r ger c o n c e r n s fi nd it

.

n e ces sary to em pl oy au dito r s to che c k u p cash r e ceip ts an d di s

b u rs e m e n t s i n f act at l east an annu al au di t by a di sinte r est e d pa r ty
w
, ,

i s n o b e co m in g th e p r evail ing c u sto m .

As al ready stat e d an au dit i s e s s enti al ;

,
n ext fo r c on si deration
i s t h e e ss e ntial s o f an a u d it an a u d it th at will p r otect th e intere sts
,

involve d .

In th e fi r st pl a c e i t sh o ul d b e co n ducte d a s exp ed itiou sly as

p o ss ibl e t o avoi d u n duly di stu r b ing t h e r egul a r r outin e o f th e wo r k .

Sal es are r ega r ded a s th e fo u n dat io n an d th e fo rce w hi c h move s t h e

w h e e l s o f any ente r p ris e th e refore th e y con stitute th e m o st i
a

,
m
p o rtan t fa c to r a s an accru ing as s e t o f th e b u s in es s to b e dealt w ith
by th e au dito r T h e amount O f th i s a c c ru in g asset o r sal e s Shoul d
.
, ,

I9
fi rst b e defin itely estab li sh ed T hi s i s a co mp aratively e asy und e r
.

taking whe re p r o pe r sal e s r e co r ds a r e k ept esp e c ially wh e r e an

, ,

add ing mach in e i s u s e d H aving e stabl ish e d th e defi n ite amou nt o f

.

sal es next fo r consi d e r ation i s the amoun t o f cash rece ipts r ec e ive d
f r om th i s a sset an d th e op en a c counts remai n ing un collected .

M a r ketab l e goo d s p l ac e a resp ons ib il ity u pon th e sal e s m an

age r wh il e goo ds p arte d with sol d t o a cu stom er O r i nvo i ced an d
, ,

th e a cco u nt p l aced u pon th e l edge r pl ace a re sp ons ib il ity u p on th e

,

treas u r er o r co l l ecto r The t r ea su r er i s e x p ecte d t o b r in g into th e

.

b u s in e ss i n cash th e eq u ival ent fo r th e good s sol d I f th e sal e s

.

ma n age r disp o se d o f wo r th o f good s i n a day an d th e t r eas

u r e r rece ive d fro m th e d i ffe r ent c u stom e r s re m ittances amou ntin g

to an d th ere w ere wo r th O f accoun ts un coll ected th e

b u s iness m igh t p r op e r ly r e ga r d it s inte r ests p r ote c ted Th e t r ea s
.

u r e r can vou ch fo r h i s cash rece i p ts by depo s iting th e fun ds in th e

ban k an d taking the p a ss b o ok ent r ie s as recei pt the r e fo r .

The comp any itsel f a s fa r a s th e p r otection o f it s i nte r ests i s

,

con c e r ned ca r e s to p ay l i ttl e o r n o atten tion to th e m ann e r o r

,

m ethod s o f making th e coll e ctions its inte rest lyi ng in the a ctual
,

cash retu rn s Th e c u sto m ers may b e rel ied u p on to s e e that th e

.

goo ds a r e p r op e r ly invo i c e d an d t h at they re ceive p r op er cre dit f o r

rem ittan c e s sin ce they wo u l d n eith e r allow them selve s to b e ove r
,

cha r ge d no r Woul d th ey p a y an accoun t a se con d tim e .

I n st r i king a bal anc e b etween th e accr u ing a ssets o r sal e s an d

, ,

t h e a c tu al cas h rec e ipts an d op e n accounts u n coll e c t e d a s a t i s fa c

to r y a ccou nting of th e fi r st c o n si deration o r e s sen ti al of an au d i t

i s m ade W h en th i s e qu il ib r iu m i s e stab li sh e d i t i s cons i de r ed
.

unn e c e s sary fo r th e au dito r to exam i n e each in divi dual invo i ce ,

al though in al l ca ses th e b ill ing d ep a r tm en t of an ente r p r i s e i s

u su ally the he avi est item in an au d it .

H aving r ece ived th e cash an d dep o s ite d it in the b an k m any

saf e gu a r d s a r e pl aced a r ou n d the d i sbu rs e m ents whil e th e t r eas u rer
,

r e ga r ds the en do r s e m e nt u p on t h e b ack o f th e che c k a s su ffici en t

r e c e ip t fo r the d i sbu r s e ment an d e vi den ce o f p aym ent In other .

wo r d s the cl o se d t r an sacti on s a r e th e on es wh i c h b r i ng th e r e s p o n
,

si bili ties t o the t r easu r e r H i s r espon sib il ity m ay b e c on sid e r ed

.

-
two fold W hen th e s ale s manage r has c reat e d t h e a c co unt by
.

making th e s al e h e i s exp e cte d t o g e t th e r eturn eq u ival e n t i n cash ,

an d wh en h e h as receive d t h e cash h e i s h el d r espon sib le fo r a

p r op e r acco u nting th e r eo f .

20
 A sp e ci al col u m n sho ul d app e ar up on th e l eft han d o r deb it -

s i de O f the cash b ook i n wh ich to ente r th e a mo unt o f al l cash

rece ip ts f rom s al e s T h e s al e s r eco rd Sh ows th e amo u n t o f t he
.

accr u in g ass ets It i s un n eces sary to tak e the cash b alan ce i nto
.

c on si de r atio n in o rde r t o p rove t h e rel i ab i l ity o r u n rel iab i l it y o f

the tre asu r e r i n h i s fi rst re spo ns ib i l ity Th e total s al es Sh own b y
.

th e sales r eco r d m in u s cas h r e ce ipts s hown by th e sp e cia l col u m n

u p on th e deb it si d e O f th e cash b ook m u st ag r ee w ith th e o u tstan d
in g acco u nts un col l ecte d u p on th e l edge r I f th e sal es fo r th e .

m onth are th e t r eas ur e r s h o w s b an k depo sits u p on h i s

p as s b ook o f th e cas h rece ip ts f r om the s al e s am o u nting to
a nd i n o u tstan d i
n g acco unts u n co ll ecte d it i s s u ffi ci ent th at
’
th e c o mp any s i ntere sts are p r o tecte d T h i s p r i n c ipl e appl ie s to
.

th e tran s a ction s fo r o n e d ay o n e w eek o n e m onth s i x month s o r

, , ,

o n e yea r . Th i s p rin cipl e i s o u t l in e d i n its s i m pl est f o rm that it

m ay b e p rop erly u n d e r stood H oweve r expl an ati o n i s n e cessary to
.
,

p r ovi de fo r ret u rn e d m erchan di se u np ai d dra f ts o r erro rs i n invoi ces

,
.

I n sp eakin g o f s al es n et sale s a re u n d e rstoo d that i s gros s

, , ,

s al e s l es s r etu r n e d m e rchan di se o r d ed u ct io n s fo r err o rs in i nvo i cing ,

etc C ash recei p ts h ave referen ce to n et cash rece ipts i r r esp ective
.

Of u n p ai d d r afts etc A n a u d it give s p rotectio n to th e b ookkeep er

,
.

o r t r ea su r e r
,
an d to the d i re cto rs an d st o ckho l ders .

I n s u p p o rtin g the i deas sugge ste d attention i s di rected to th e

system o f accou nting em pl oy e d by p racti cal ly all o f th e ra i l roa d s
o f th e U n ited States T h e ti cket agent at e ach station i s s u pp l ie d
.

w ith a ce rtain n u mb er O f ticket s fo r vario u s d estin ation s A t the

. .

e n d o f each m onth o r oth er s p e ci fi e d p erio d th e agen t i s call e d u pon

to p ro du ce th e e q u ival ent in cash fo r al l ti ckets sol d wh i ch a dde d to ,

th e val u e o f the ti ckets o n h an d u n sol d m u st ag r ee with th e va l u e

,

o f th e ti ckets o rigin al ly giv en to h i m T h e freigh t agent is su e s way

.

b ill s fo r all sh ip m ent s o u tgo in g an d p r o s fo r al l s h ipm ent s incom i ng .

Th e travel ing au dito r vi sits th e freight agent at varying i nte rval s

u nan noun c e d an d i nve stigate s m erely to dete r min e i f the f r eight
agent has a c c o u nte d fo r i n ca sh th e di ff e r e n ce b etween the su m
total O f t h e way b ill s an d p r o s i ss u e d and th e outstan ding acco u nts
fo r f r eigh t cha r ges .

Th e se rem ark s a r e fo r con si de r ation s ep arate an d ap art f rom

th e in str u c tion s fo r au diting outl ine d in s u ccee ding p ages .

21
 A PRA C TI C AL SY ST E M O F A U D ITI N G .

T he system Of au diting d esc r ib e d i s d es igne d to cover th e fu llest

r equ i r e m e nts O f a com p lete d au dit showing th e p rogre ss O f th e a u d i t
st e p by step as well a s an o utl in e o f the many s mall er con s id era
,

tion s in c id e ntal to an exam inati on an d i nv estigation of the ac cou nt

ing r e c o r d s o f a b u s iness .

THE A U D IT O R S C ON TRA C T
’
.

W hen e m ploy ing an a u dito r fo r th e exam ination an d investiga

ti on o f th e a cco unting r ecords O f a b us i ne ss th e m anagem e nt sh o u l d
e nt e r i nto an ag r eement w ith t h e au dito r u n d e r w hi ch h e is to car r y

o u t ce r tai n p e r fo r man ces

. U nl ess th e con tract sp eci fically state s th e
extent to whi c h th e au dito r shall go in maki ng h i s investigation s an

u nl im ite d opp o r tu n ity fo r di sag r eem ent an d di s sati sfacti on ari ses
b e c au se the e mpl oye r may cl ai m th at th e au dito r was e x p ected to
m ake a com p r e h en s ive investigatio n even to t h e m in ute st d eta il ,

whil e th e au dito r m ay c l ai m that h e was e xp e cted t o m ake a general

au d it w itho ut go ing to th e ext r em e in all ca ses .

T h e contract shou ld al s o state i n wh at m anner th e au dito r i s to

b e p ai d fo r h i s se r vi ce s th at i s i f he sh al l b e p ai d so mu c h p e r
, ,

hou r o r day fo r t h e ful l amount o f tim e r equ i r ed to c o mpl ete the

au dit o r if h e sh al l r e c e ive a stip u lat e d su m for the wo r k Sp e c i fi ed
,

i n th e cont r a c t i rr e sp e c tiv e Of t h e amou nt o f tim e r equ i r ed by h im

t o c o mpl e te it It i s an easy m atte r fo r th e ave r age emp loye r to
w
.

ov e r look th e im portan ce o f th i s detai l b e c a u s e s o fe un de r stan d

’
th e exact n atu r e an d exten t o f th e au dito r s i nvestigation s .

Th e cont r act sho ul d al so cl e a r ly set fo r th th e p erio d to b e c o v

e r e d by t h e au dito r i n h i s inve stigati on th at i s if he shall v e r i fy
, ,

the reco r ds Of t r an sa c tion s a s r eco r de d fo r a p e r io d o f Si x m onths

p r io r t o t h e date up on wh i c h th e w
o rk i
‘

s com m en ced o r fo r t h e

p r eviou s o r cu r rent fi s c al yea r Of th e c o mp a ny s existen c e etc H e

’
.

may b e emp loye d fo r the p u r po s e o f m aking a p ay r ol l au dit only ;

,

o n th e oth e r han d h i s investigation mav b e c on fine d sol e ly to a

ve r i fi cation Of t h e cap ital sto c k Of a co rp o r ation an d th e nu mb e r o f
sh a r es sol d i ssu ed u nsub sc r ib ed un is su ed sh a r e s i n th e t r e asu r y
, , , , ,

etc H e m ay b e empl oye d to inve stigate th e natu r e o f a rese r ve

.

sh own u p on th e b al an c e sheet that i s h e m ay b e expe cte d to deter

, ,

22
m ine to h i s enti r e sati s factio n if th e r es e r v e i s an actu al ava il ab l e
fu n d o r if it i s m e rely a b oo k r e serve .

H oweve r ex p eri en c e h as p r ov en th at p ra c ti cally all b us in e s s

$

ho u se s dem an d a com pl eted au di t coveri n g ev ery dep artm ent O f the i r

bu sin es s in vo lvi ng an e xam in ation an d i nve sti gation o f th e reco r d s
s

aff e ctin g al l dep a r tm ent s as w ell a s th e va r i ou s fo rm s Of reco r d s

,

kep t i n tho s e dep artm ents .

A M EA N S O F C C O P ERATI O N
- '
.

Up o n co mpl etion Of a cont r act b etwe e n th e empl oyer an d th e

au dito r setting fo rth th e deta il s o f the p e r fo rm an ce s requ i r e d to b e
car r ie d o u t by the a u dito r an d th e agreem ents m a de by th e e mp loye r ,

both O f wh i c h are i n m utu al a cco r d an d enti r ely sati s facto ry to b oth

p a r ties to th e ag r eem ent th e a u d ito r i s th en i n a p os iti o n to tak e
,

up hi s w ork ,
c on d u cting the i nvestigatio n p erson ally o r th r o u gh h i s
sta ff Of t r ain ed a s si stants .

One O f the ve r y fi rst thi ngs whi ch th e au d ito r Sho ul d do i s to .

cu ltivate t h e acqu ai ntan ce Of th e i n d ivi d u al wh o h as b een in a bs o

l ute ch arge O f the a ccou ntin g d ep artm ent Of th e b u sin e ss an d who
has b een h el d resp on s ib l e fo r a p rop er reco rd O f th e transactio ns o f
th e b u s in ess du r in g the p erio d whi ch th e au d it i s to cove r Th e .

p r in cip al p ur po s e Of th e a u dito r i n f o r m ing su ch an acq u ai ntan ce i s

o n e O f p r o fit ,
sin ce the r e i s n o o n e e l se who reason ab ly m ay b e
exp ected to know a s m u ch ab o u t th e t r an saction s o f the p e rio d in
q u estio n as th e in d iv i du al in cha r ge o f th e r e co r ds AS a m atte r o f
.

fact th e au d ito r Sho u l d cu ltivate h i s acq u ain tan ce with th e i dea o f

,

getti n g any c o op erati on wh i ch h e m ay n eed to satis fy h i msel f

-

b eyon d reasonabl e do ub t that wh en h i s wo r k i s fin i sh e d h is investi

g a t i
o n ha s b ee n tho r ough an d co mp r e h e n sive
,
an d th e re sults O h
tai n ed co rre ct an d acco r ding to th e act u al t r an sacti on s o f th e
b u s ine s s as made .

It i s i n th i s p a r ti cu l ar that th e au dito r i
s exp ec t ed to exe r ci s e

h i s v e ry b est j u dgm ent an d d i screti on i n o rde r th at n o m i s u n d er

stan ding sh all ari s e b etwee n th em w hi ch m ight h inde r h i s m aking

rapi d p r ogre s s i n th e a u dit o r de c r e as e th e val u e o f th e re su lts
obta in ed even in th e sl ightest deg r ee T O a c e r tai n exten t th e
.

attitu d e of th e au dito r toward s th i s i n d ivi d ual m ay m ake h i s wo rk

com p aratively easy o r ext r em ely di ffic u l t an d u n sati s facto ry b e cau se,

o n t h e o n e h an d th e c o Op e r ation O f th e in d ivi d u al who h as m a d e

-

23
the record s is unqu esti o n ab ly very b enefi cial whil e on th e oth er ,

h an d hi s attit u de O f a ntagon i sm m ight ca u s e an u nl im ite d amo u nt

o f troubl e .

Th e mo st val u abl e in f ormation sought by th e a u d ito r f ro m th e

i n divi du al in cha r ge o f the accou nting dep artment i s a c o m p re h en
s ive un derstan ding o f th e n atu r e o f the b u sin es s t h e man ne r in ,

w h i ch th e bu sine s s i s con du cte d th e nature O f th e tran sactio n s th e

‘

, ,

meth o ds of do ing b u sin ess th e m etho ds employe d by the accou ntin g

,

d ep artment i n reco rding the transaction s an d th e m etho ds empl o y ed

by th e i n divi du al s i n all other dep artm ents o r b ran ch es o f th e b u si
n es s p a r ti c u larly th e exec u t ive en d o f t h e wo rk in stead O f th e
,

m an u factu r in g .

I f a c o mpl e ted a u dit i s m ade the au d ito r desi r e s to fa m i h a r iz e

h i m sel f w ith th e methods em ploye d fo r han dl ing in coming remit
t an ces an d m aking dep o s its di sb ur s em ents by ch e c k an d p etty cash
,

d isb u rs e m ents confi rmatio n o f o rders 1 n v 0 1 c 1 n g p ur cha sin g p ay

, , , ,

r oll reco rds ,

di scountin g n otes o r bi ll s accepting or d raw ing d r a ft s , ,

taking o r allowin g disco unts m etho d s o f taking i nv ento ri es etc

, ,
.

The au dito r Shoul d al so u se hi s b est e ff orts to d eterm in e w h at

r ecord s are kep t Of the t r an sa c tion s that i s th e n atu r e o f al l b oo ks
u s e d o r ca rd i n de x record s Of any n at u re l oos e l eaf m
, ,

eth o d s e t c , ,
.
,

vo u ch er ch ecks p u rchas e o rders acknowl edgm ents etc

, , ,
.

B O O K S A N D R EC O RD S F O R I N V ESTI GATI O N .

In the maj ority o f case s th e b ooks an d record s fo r investigatio n

c onsi st O f the cash book ch eck regi ste r o r vo u che r r egi ste r p etty ,

cas h blotte r o r re ceip t b ook b il l s receivabl e r eco r d o r 1 eg i

,
s t er b ill s ,

p ayabl e reco rd o r regi ste r i nvento r y r eco r ds p u r ch as e reco r d p u r

, , ,

chas e o rder s al es r e co rd contain ing c o p i

,
e s o f invoi ce s ren dere d o r i

sal e s r e c ap it u lation r e co rd confirm atio n O f o r de r s re ceived o r sh ip

,

p ing re c o rd j ou rnal for c r o s s ad j u sting an d cl o si n g e nt r i es $in

, ,

som e i n stan c e s a p r ivate j o u rnal $ gen eral o r p rivat e l edger $in ,

some instan c e s th e gen e r al l edger se r ves al so th e p u r p os e O f th e

Dri v a t e l edg e r $ p u r chase l edge r secti on al i zed sal e s l edge r s re c ords
, ,

o f ret urn ed g o o ds from s al es

’
reco rds O f r etu r n ed goo ds p u rc ha sed
w
, ,

s ystem Of c r e dit m emoran da fo r r eb ates a ll O an c es ov e r cha r ges -

, , ,

ra i l r oa d c l ai m s et c d ivi den d r egister co r p o r atio n reco rd c ontai ning

, .
, ,

m in utes O f r egul ar an d annu al meeti ng O f sto ckhol de r s an d d irectors ,

b y la w s sub s c r ipti on re c o r d s sto c k l edge r contai n in g a c count s with

-
, ,

s to c khol de r s etc
,
.

24
makes note Of thi s fact a s h e w ill have o c ca sio n to fu r the r veri fy
,

th e cash t r an saction s as r e c o r d e d as he p r o c e e ds w ith h i s a u dit .

H e then tu r n s to the p etty cas h fun d wh ich i s u su ally fo un d

,

i n ev e r y b u si n e s s H e fi rst dete r min es t h e o r igin al amount O f th e

.

fun d and th e n d e du c t s th e amou nt Of th e p etty cas h di s b u rse ments

as e vi d e nce d eith er by a p etty c a sh bl otte r o r p e tty cash r eceipts

t aken fo r t h e s e v e r al di sbu r sem e nts T he d i ff eren c e b e tween th e

.

a m ou nt Of th e o r iginal fun d an d th e d i sb u r s e m en ts give s th e amo u nt

o f p etty cash whi ch s ho ul d be o n han d Th e au dito r then m ake s a

.

l i st o f the p etty cas h showi ng t h e n umb e r Of eac h d en o m inatio n O f

b ill s gol d silve r an d f r a c ti on al c o in m aking extens ion s an d taking
, , ,

t h e total v e r ifying t h e amou nt Of a c tu al p e tty cash o n h an d a s shown

b y h is l i st with th e amou nt th at th e r e i s supp o se d to b e o n h an d ,

a c co r d ing to t h e p e tty c ash r e c o r d If th e r e i

. s any sho r tage th e

a u d ito r m akes not e o f th e fa c t . I f fo r any r eason th e r e i

, ,
s more

c ash o n han d th an i s call e d fo r by t h e reco r d h e al so m akes n ote

t he r e of
,
a s th e b ookk e e p e r o r ca sh i e r may h ave mad e an e rr o r in
hi s favo r i n han dl i ng th e m oney .

V ERIF I C ATI O N O F TH E BA N K B A LA N C E .

In v e r i fyi n g th e b ank b al an ce the au dito r s e cu re s f r o m each

ban k w ith wh i c h t h e c om p any t r an s acts b u s in e ss a c e r ti fi cate show
i ng th e b alanc e o n d e pos i t t o th e c r ed it O f th e comp any at th e clo s e
o f t h e p e r io d th e au di t cove r s a c c ord ing to h i s cont r a c t Each b an k
.

Shoul d al so b e r eq u i r e d t o ce r ti fy to a reco r d O f al l notes w h i ch ,

t h ey h ave di sco unt e d fo r the comp any w h i c h they a r e holdin g a s

c oll ate r al s e cu r ity o n lo ans an d any l iab il i ty o f the co mp any known

’
t o th e b ank by r e a son o f the comp any s h avi ng endorse d notes fo r

anyon e els e wh ich thu s b e c om e a c ontingent l iab il ity o f th e b usin e ss .

‘
A r e c on cil iation O f th e b an k b al an c e at th e date u p on whi ch .

th e a u dit clos es natu r ally i n c l u de s a r e c o r d Of al l dep osits made

d u r ing th e p e r i o d a r e co r d o f al l c hecks i s s u ed p ai d an d r etu rn ed to
, ,

th e c o mp any an d t h e fin al stat e m ent Showing th e n u mbe r s an d

amounts O f all c h e c ks i ss u ed outstan d ing an d u np ai d T h e d i ff e r
, .
'

e n c e b e tw e e n th e b ank b al an ce a s shown by the ce r tifi c ate fu r n i sh e d

by th e b an k an d th e amou nt O f o utstan din g ch e cks un pai d shoul d

ag r e e w ith t h e b ank b al an c e shown by th e che c k b ook stub o r ch e c k
r egiste r .

Th e au dito r shoul d be a r in m in d that th e m aj o r ity O f l a r ge b u s i

n e s s hou se s Of th e p r e s ent day ca r ry accou nt s with t o o r m ore w
26
b an ks m aking it n ece ssa r y f o r h i m t o sec u r e a ce rti fi cate fr om each
,

o n e s etting fo r th th e i n fo rm atio n ab ove sp e c ifi ed an d re qui ring a

recon c il i ation o f th e b al ance at t h e b an k .

T RIA L B A LA N C E .

H aving verifi e d th e b alan ce Of cas h o n han d p etty c as h and ,

e ff e c te d a r e con cil i ation o f th e b an k b al an ce the a u dito r then t akes

,

a tri al b alan ce from th e b oo ks as o f th e date up on whi ch th e au dit

p e r io d cl os es I f a t r i al b al an ce i s al r eady taken h e Obtain s the
.

sam e r e su lt b y ch ecki ng th e item s ap p ea r in g up on i t w ith t he b al

an ce o f th e acco u nt s l i st e d to p r ov e th e e q u il ib r i u m o f the l ed g e r .

V ERI FIC ATI O N O F F O O TI N G S .

I t i s th e d uty Of t h e au d ito r to veri fy th e footings ap pea r ing

i n al l b ook s O f r e co r d e sp e ci ally tho se r eco r d s in volving cash t r ans
,

a c ti on s I n con du cting an au di t it i s u n de r sto o d th at th e au dito r s

.
’

i
nve stigation s an d resp o n s ib i l iti e s ap ply wholly w ith in th e p e r iod
cove re d by th e au d it acco r d ing to contract u nl es s th e condition i n
w
,

h i ch h e fi nd s th e r eco r ds n ecessitates h i s inve sti g ating p reviou s

records fo r th e p u r p o se of arrivin g at th e p rop er an d co rr ect resu lts .

I n ve r i fyi ng th e fo otings O f th e d i fferen t re co rd s s u ch as th e ,

cash b ook check r egi ste r j o u r n al p urch as e r eco r d s al e s r e c o r d o r

, , , ,

r ecap itul ation b ill s r e ceivabl e an d b il l s p ayab l e record etc he finds

, , .
,

i t n e c e s s a ry to ad d th e a mou nts entere d in th e sp ec ial col u mn s fo r

‘

each m onth Thi s p ro ce ss i s n eces sary th at h e m ay g u a r ante e that

.

th e footin g s a s shown are co rr e ct an d th at the bo okkeep er has made

n o e rr o r s i n ad dition Fu r th e r r eason fo r a veri fi c ation o f the foot
.

ings i s evi d e n c ed by an expl an ation O f a v e r i fication o f th e po stings

t o th e p r ivate ledge r Erro rs freq u ently o cc u r in t r an sferrin g foot
.

in g s fro m o n e p age t o an oth er .

V ERIFI C AT I O N O F PO STI N G S T O P RIVAT E L ED G ER ‘

.

Th e p rivate an d gen e r al l edge r w hi ch a r e som eti me s i d e nti cal

, ,

cu sto m a r ily contai n control l i ng accounts with cash p u r cha se ledger , ,

s e ction al iz e d s al es l edge r s b ill s re ceivabl e b ill s p ayabl e p ersonal

, , ,

a c co u nts w ith O ffi ce r s s al ary accounts exp en s e cont r oll ing accou nts
, , ,

et c Po stings a r e m ade t o th es e account s di r ect fro m t h e footin gs

.

o f th e sp eci al c ol u mn s in th e ca sh b ook j ou r n al an d p u r chase an d

,

s al e s r ecords m onthly .

27
 I n ve r i fyin g th e postings to the p r ivate l edger th e aud itor
ch eck s th e am o u nt o f th e footings o f the Sp ecial col u mn s w ith th e
entries m ade i n th e controll in g a ccou nts H e fi r st veri fies th e p o st
.

i ngs f r om th e cash b ook wh i ch a r e u su ally m ade to th e cash ac c o u nt

, ,

i nterest account d is co u nt accou nt b ill s receivab l e acco unt accounts

, , ,

r ece ivabl e ac c ount etc H e th en ve rifi es th e p o stings to the p rivate

,
.

l e dge r a c cou nts f r o m th e ch eck register esp ecial ly p o stings to th e

,

b an k account d i s count acco u nt interest acco u nt b ill s p ayabl e

, , ,

a cco unt acco unts p ayab l e acco u nt etc H e th en ve r i fi e s th e post

, ,
.

$ings to t h e p r ivate l edge r a c o u n t s f r o m the j o ur n al coverin g vario u s

sun d r y an d nom in al accou nts u se d wh en makin g cro ss adj ustin g ,

an d clo sin g entri e s H e th e n ve ri fies th e po stings as made f r om

.

any O f th e other reco rd s su ch a s p u rch a se s sal e s etc

, , , .

It i s r ea dily s een th at h i
s wo r k thu s far p ro d u ce s th e foll ow

i ng res ult $ A ve ri fication o f th e cas h o n h an d p etty cash an d ,

r e c on c i l i ation O f the b ank ac c ount By veri fy ing th e foot i ngs O f

.

th e va r io u s b ooks o f o r iginal ent r y an d checkin g the p o sting s o f

tho s e footings to th e r e sp ective c ont r ol l ing a c counts in the p r ivate
l e dg e r h e knows th at th e co nt r oll ing ac c ount s are co rr ect e x cep t
‘

fo r whateve r adj u stm ent m ay b e n eces sa r y wh en h i s wo rk O f check

in g p r og r es ses an d the au di t n ears c om pl eti on .

V ERI FI C ATI O N O F T RIAL B ALA N C E .

In ve r ifying th e f ootings Of th e b o ok s o f origin al entry an d

ch ecking p ostin gs to th e private l e dge r c o ntrol li ng accou nts t h e
au dito r m ay fin d e rr o r s fo r a dj u stm e nt o r h e m ay fin d t h e wo rk
h as b e e n don e accu rat e ly H ow eve r h e p ro ceed s to v eri fy th e t r i al
.
,

b al ance taken afte r p r oving th e ca sh an d re con cil ing th e bank b al

an c e If t h e wo r k ha s b e e n don e ac cu rately there s houl d b e n o
.

d i ffi cu lty what e v e r in ch e ckin g u p th e t r ial b al an ce bu t i f e rr ors

h ave b een m a de an d the b ookke ep er h as fo rce d h i s t r i al b al an ce th e
a u dito r m ake s n ote Of al l di fference s that they m ay b e p r op erly
adj u sted s o that hi s fin al rep o rt m ay contain a tr u e statem ent O f
,

th e con dition O f th e b u s ines s up on th e d ate o n w h i ch th e a u dit

pe r io d cl os es.

It is som eti m es n e ce ssary fo r h i m to Obtain a copy o f th e tri a l

b alan c e fo r th e fi sca l year o r oth e r b u si nes s p eri o d im m ediatel y

,

p r eceding th e date up on wh ich h i s a u dit p erio d comm ences i n fact , ,

thi s i s o ftentim e s es senti al 1 n o rder th at h e m ay g et co rrect re s ul ts .

28
 V ERI FI C ATI O N OF P O STI NG S —A C SH R EC EI PT S .

A co m pl ete d au d it i nvolve s a carefu l an d s y stemati c c h ec king o f

each an d ev e ry i nd ivid u al ca sh tran saction d u ring th e p e r io d un der
au d it T h e c a s h re ceip ts vary i n nature f r o m p aym ents o f s u b s c ri
.
p
tion s fo r cap ital sto ck O f th e o r i ginal i s su e f r o m th e sal e s O f t r eas u r y
,

sto ck an d th e s al e O f cap ital r eso u rces to the reg u l a r reven u e r e

,

c ei p t s de r ive d f ro m th e sal e s O f th e p ro d u ct o f the ente r p ri se .

I f the sto ck O f a co rp o r ation i s sol d ab ove p ar th e com p an y

receive s a ctu al cash i n exces s o f th e p ar val u e of the sto ck whe n ,

th e p r em iu m thu s obtain e d i s n o t con si dere d a gai n o f the b u si nes s

p r op er an d al tho u gh i n s o m e i n stan ce s it i s carri e d di r ectl y to p ro fit
,

an d l o ss th e p ractic e i n th i s resp ect va r ies cons i de r ably in th e

man ne r o f con d u ctin g th e acco unt s .

I f the b u s in e ss u n d e r au dit i s not comp a r atively n ew an d h a s

b een con du cte d fo r a co n si de r ab le p e rio d o f tim e p r actically all o f
its reven u e i s de r ive d fro m th e sal e O f its p rodu c t o f whateve r form .

I n o t h e r wo r ds p r a ctically al l O f th e recei pt s w il l co me in t h e fo rm
,

Of rem ittance s f r o m cu sto m ers the r e f o r e b u t v e r y f ew p ostings o f

,

i n d ivi du al amo u n ts a r e ma d e f r o m the ca sh b oo k d i rect to cont r oll

in g a cco unt s in th e p rivate l e dger th e m aj o r ity o f al l in d ivi du al
,

p ostings b eing m ade di rectly t o acco u nts with c u stom e r s i n t h e

s ectional iz e d sale s l e dgers .

W here s ectional iz e d sal e s l edge r s a r e u se d sp eci al col umn s

app ea r o n the deb i t si de O f th e cash b ook t o p e r m it a ve r i fi c ation O f
p o stings to ea c h l edge r sep a r ately In a c o m p lete a u d it th e au d ito r
.

i s exp e cted to check eac h i n d ivi du al r em ittan ce r eceived f r o m c u s

t o m e r s f r o m sal e o f sto ck o r p r op erty et c
, ,
to th e accou nt in t h e
.
,

p r ivate ledge r o r i n th e s e c tion al i z e d sal es l edge r to wh i c h it i s

p ost ed Th e aggregate o f al l p ostings to th e p r ivate an d s ecti on

.

al i z e d sal es l edgers fro mth e ca sh b oo k shoul d agr e e with th e total

c a sh re ceipts fo r th e p e r io d u n der au dit .

A qu esti on i m m ed iately ari se s w ith r e ga r d to th e m anne r o f

making p o sti ngs to t h e s al es l e dge r that i s i f th e amo un t O f t h e
, ,

r e m ittan c e i s p o ste d in o n e item a n d the amount o f th e d is count

u po n th e i nvo i c e tak e n by t h e cu stom e r i s p o st e d i n anothe r item .

It i s re com men ded that the p o sting t o th e s al e s l edge r a c count sh all

be an amo u nt equ al to th e s u m o f th e a c tual rem ittan ce r eceive d pl u s
th e d isco unt dedu cted i n , w hi ch cas e th e aggregate of all p o sting s
f r o m the deb it s i de o f th e cash b oo k to th e p rivate l edge r an d se c
29
ti
o nali
z ed sal es l edg e r s shoul d ag r e e with th e total cash r eceipts as
Sh own by the cas h b ook fo r the p e r i o d u n de r au dit pl u s t h e di s counts
al lowed to c u sto me r s du r ing th e sam e p e r io d .

It i s suggeste d that in c h ecking th e wo rk th e au d ito r u s e som e

'

d isti n gu i she d ch e c k m a r k s o th at by r e fe rr ing to an account in any

O f th e sectional i z ed s ale s l edge r s h e can readily d e te r min e wheth e r
I

a p o sting con si sts O f ca sh o r O f cash an d di scount also th at t h e

,

p o stin g i s mad e from the cash b ook a s di stingu ish e d f r om j ou r nal

,

p ostings .

Th e a u d ito r shoul d always r eco mm en d to any c omp any that

the i r enti re c a s h receip ts b e depo sit e d i n the b an k an d th at al l d i s

b u rs e m e n t s Of wh atev er n at u r e b e m ade by c h eck e ven th ose m ade

,

f rom th e p etty ca sh a vou che r b e ing d r awn fo r th e o r igin al s u m

,
.

W he r e thi s syst e m i s u s ed the total cas h r ec eipts fo r th e au d it p e r io d

shoul d ag r ee with th e total d e p osits fo r th e s am e p e r io d all owan ce,

b e ing m ade fo r cas h o n han d at th e c o m men cem ent o f th e p eri od ,

al so at the en d O f t h e p e r io d that i s the cash o n h an d at th e c om

, ,

m e n c e m e n t O f th e p e r io d added to the t otal cash r eceip ts du r ing th e

p e r io d l e s s c ash o n han d at th e cl os e Of th e p e r io d S houl d agree
,

w ith the total d ep o s its shown by th e b an k p as s b ook o r statem ent .

Th is p l an i s e q u ally simp le an d e ffective wheth e r d e p os its a r e m ade

in o n e two o r any n umb er Of b ank s

, .

V ERI FI C ATI O N O F PO STI N G S—C A SH D I SB U R SEM EN T S .

A co mpl et e a u dit i nvolve s a ca r eful an d system ati c ch e ckin g O f

each in d ivi du al t r ans a c tion 1 n v o l v i
n
g a d isbu r sem en t Of c ash T h
. e

maj o rity o f b u sines s hou s es a r e n ow takin g advantage o f t h e s i m

p ci
l i t y e ffectivenes s an d c onven i e n ce Of a c h eck register for reco r d
,

ing the i r di sb ursem ents In n ea r ly ev e r y ca se a gen e r al p l an i s

.

adopted u nd er wh i ch ea c h d i sb u r sem ent i s m ade b y che ck ex c ept in ,

th e c ase Of sun d r y disb u r sem e nts O f p etty cash fo r wh i ch r e c eipts

a r e taken .

T he che c k regi ste r shows u po n th e o n e s i de a r e c o r d o f b ank

dep o s its wh i c h sh o ul d ag r ee w ith t h e r e c o r d o f d e p os its ent e r ed in
th e b ank p as s b ook d u pl i cate dep o sit ti ckets o r statem e nts an d
, ,

u p on t h e othe r Si de a r ec o r d o f all check s i ssu ed l i sted i n n um e r i c al

o r de r Th e n u mbe r O f each che c k i s given i n whos e favo r it i s
.
,

drawn an d th e acco unt to b e cha r ge d C h a r ge s a r e m ad e to accounts

.

p ayab l e an d to control l ing accounts i n th e p rivate l edg e r a s w e ll as

,

30
p e r sonal a c co unts w ith O ffi cers o n ac cou nt O f sal ari es et c Po stings
,
.

to acco u nts payabl e an d p r ivate l e dg e r a c co unts are d istingu ished by

s ep a r ate co l u mn s Ad dition al col u m ns ap p ear i n h i
. w c h t m e n t e r th e
‘

amou nts o f dis cou nts u p on p u rch as e s .

The au dito r i s exp ecte d to ch e ck ea ch in div i du al amo unt p o sted

t o th e acco u nts p ayab l e acco u nt i n th e p u rcha se or accounts p ayable
l edge r I n ch ecki ng the se po stings h e Sh oul d us e s om e d i stingu ish
.

ing m a r k SO that i n r e fe r ring t o th e a c co unts p ayabl e ledge r h e can

,

readily tell w hich Of th e deb it a mo u nts p osted to an a ccou nt re p r e

s ent cas h p ay m ents an d wh i ch a r e p o stings fro m th e j ournal be c au s e
O f any adj u stm ent o r r eb ate o r allowan c e fo r ret u rne d goo d s .

I t i s read ily see n t h a t t h e s u m total O f al l Of th e p ostings to th e

l

acco unts p ayab l e l edg e r fo r the au di t p e r io d sho ul d ag r e e w ith the

total cash di sb u rsem e nts to c r e dito r s wh o se a cco unts a r e c a rr ie d in
t h e p u r ch as e o r a c c o u nts p ayab l e l e dger fo r th e sam e p e r iod .

Th e q u esti o n i mme di ately a r i s e s r el ative t o d is cou nts ea r n ed .

It IS r eco mm en ded that p ostings t o the p u r cha s e l e dger b e made i n

s in gl e am o unts th at i s th at t h e ca sh disb u r sem ents shal l n o t b e
, ,

p o st e d s ep a r ately f r om th e d i s co u nts e a r n ed T h e au ditor then fin ds

.

that in o rde r to ch e ck th e d isb u r s e m e nts he m u st e ffe c t an ag r ee

ment b etw een th e ac c o u n ts p ayab l e an d d is co u nt col u mn i n the
check r e gi ster an d th e total p o stings th e r e fr o m t o th e ac c o unt s w ith
cred ito r s i n the p u r chase o r ac counts p ayab l e l edge r .

I t i s suggeste d th at h e u se a d istingui s hing ch e ck ma r k fo r

d i s cr im in ating b etw e e n p o stings r ep r esenting cash only an d thos e
m a de u p Of c ash an d d i s c o unt H e s ho ul d th e n e ff ect an ag r e e ment
.

b etwe en th e total di sb u rs ements p o ste d t o a cco u nts i n the p rivate

l edge r an d th e am o u nts p o sted t o the d eb it s ide of t h e p r ivate l edger
accounts fro m th e c h eck regi ste r Afte r v e rifying all Of the p o stings
.

f r om th e ch e ck r egi ste r to th e acco un ts p ayabl e an d p r ivate l e dge rs

$

th e au dito r Shoul d m ak e a statem ent fo r his own i n fo r m ation s how

i ng that t h e total d isb u r s em ent s p e r c he c ks is su e d an d r eco rd ed i n
th e ch e ck r e gi ster du rin g th e au dit p e r io d agr e e with t h e total po st
ings t o ca s h an d d i scoun t to th e a c c o unts payabl e l edge r an d d eb it
p o stings f r o m th e c he ck regi st e r to the acco u nts i n th e p r ivate
l edge r
.

V ERI FI C ATI O N O F P U R C H A SES D I STRIB U TI O N .

A com p r ehen siv e au d it involves a careful an d systemati c ch e c k

ing o f each a n d eve r y i nvo i ce r e ce ived by th e b u sin ess fo r goo ds
31
p u r ch ase d an d receive d d u r i ng th e au di t p e r io d that is e a c h i nvo i ce
, ,

i s comp a r e d with the ent r i e s r eco rde d u p on t h e p u rcha se r e c ord ,

j o u r n al o r facto ry vo u che r r e gi ste r i n ord er th at th e a u d ito r m ay

know th at th e goo ds covere d by each invo i ce h ave b een ch a r g e d to
th e p r op e r accou nts Thi s p rev e nts an invoice Of goo ds cove ring
.

su n d r y s u p p l ie s Of an exp en s e n atu re b e ing charge d to a p rop erty o r

as set account o r vi ce ve r sa I n som e i n stan ce s th e p u chase in vo i ce s
,
.
r

a re ch ecke d again st th e Origin al p u r ch ase o rde r s o r q uotation s b u t ,

th i s is not a s e ss ential as c he cking sal e s invo ice s again st t h e Sh i pp i ng

r e cord .

'

W he re a l a r ge n u mb er O f i nvo ice s are received daily w eekly o r ,

m onthly th e maj o rity Of b u sin es s hou s es empl oy a system O f n u mb e r

i ng i n nu m e r i cal s equen c e A s m any i nvo i ces f r om each c r edito r a s
.

can b e conveni ently a s semb l e d an d ente r ed u p on th e p u r chas e r eco r d

are n u mb ered in o r de r b e fo r e reco rd ing W h en t h e invo ices a r e
.

p ai d they a r e u su ally fi led eith e r by nu mb er or b y th e n am e o f th e

c r e dito r I f by n u mb e r it i s a co mp a r atively easy m atte r fo r th e
.

au dito r t o c heck th e i nvoi c es agai n st the p u r ch ase r e co r d I f fil ed .

un de r t h e nam e O f th e c r edito r th e p r o cess i s mo re di ffic ul t al thou gh ,

n o great amount O f tim e i s lost b e c au s e th e i nvo i c e s fo r each c r ed ito r

a r e fil e d i n b oth ch ron o logical o rder an d n u meri cal s eq u en ce .

V ERIFI C ATI O N O F P O ST I N G S—P U R C H A SE I N V O I C ES .

When the a u dito r ha s co mpl e ted che cking th e invo i ces aga in st
th e p u r ch ase re co rd an d i s th e r efo r e positive th at th e am ounts o f
, ,

th e v a rl o u s 1 n v 0 1 c e s a s e n t ei
e d u pon the p u r chase reco r d a r e c o r r ect
'

an d that th e go ods c ove r ed by t h e invo i ces h av e b een d ist r ib u te d o r

cha r ge d to th e p r op e r a cco u nts h e th en un de r tak e s a c areful an d
,

system ati c che cking Of the p o stings f r om th e p u rchas e re c o r d to th e

a c c ounts with c r e dito r s i n the p u r chas e o r a cc o unts p a yabl e l e dge r .

Wh en h e ha s checked each p o sting to th e credit Si de o f th e accou nts

p ayabl e ac c ou nts h e shoul d e ff ect an ag r e ement b etween the total
amou nt o f all o f th e invo ice s re c o r de d i n th e pu r chas e reco rd d u rin g
th e au d it p e r io d Th e total pu r chase s fo r t h e au dit p e r i o d as Sh own
.

a re a c redit to th e acco u nts p ayab l e controll ing ac cou nt T h e foot .

i ngs o f th e Sp e c ial c o l um ns o f th e p u r c h as e l edge r h av e alr e ady b e e n

ve r i fied as well a s th e p osti ngs th e r eo f t o th e a c c o unts with m a t e ri
, als

pu rc ha sed wh i ch are som e tim e s c a r ri e d i n a s epa r ate sto r es l edge r

, ,

a l th o ugh f r eq u ently m ade a p a r t O f th e p u rch as e l edg e r .

32
 T h e maj ority o f b u s in ess ho u ses no w u se the m an ifol d b ill ing
syste m an d th e a u dito r w il l i nva r i ably fin d th e m an ifol d cop ie s O f
the invoi ce i n a b inde r arranged in chronologi cal an d nu m eri cal
o rder I f a rec ap it u l ation h as not b een mad e th e au dito r sho ul d pro
.

c e e d to m ake a re cap itul ation O f th e sal es for the entire a u dit p erio d

u p o n a m onthly b as is I t i s n o t c o n s i
. d e fe d th e d u ty o f the a u dito r
to m ake a co mp reh en siv e a nalysi s Of th e s a l e s a c c o r d i
. n
g to
'
thei r
n atu re altho u gh i f the b u sines s i s u sin g a sal e s r ecap itulation wh i ch
,

shows a c l as si fi cation O f s al es an d th i s cl as si fi c ation i s to h ave any

i m p ortant b earin g u p on th e final statem ents to b e p r ep are d an d su b
mi t t e d b y th e au dito r then h e Sho u l d ch eck the s al es i nvoi ces w ith
the r ecap it u l ation S heets f o r th e p urp o se O f n ot only veri fying th e
amoun t Of the i n v 0 1 c e s p rop er b u t fo r ve ri fying th e class i fi catio n o r
,

distribution .

U p on compl etion o f th e re cap it u lation o f s al es by m onth s th e

a u dito r Sh oul d veri fy th e po stings o f the amo u nt o f sale s fo r the
variou s m on th s w ith th e co r r esp o n d in g amo u nts ent e r ed to th e d eb it
o f the a cco u nts rece ivabl e controll ing acco unt in th e p rivate l e d g er .

Th e amo u nt i s als o cred ite d t o an acco u nt with s al e s .

V ERI FI C ATI O N OF P O STI N G S —SAL ES I N V O I C ES .

A comp r eh en sive a u dit involve s a care fu l an d sy stem ati c check

i ng O f th e am o unts O f al l i nvo i ces a s entere d u p o n th e recap itul ation
O f sal e s fo r th e di ffe rent mon th s th e co rresp on di ng a m o u nts p o ste d
,

to t h deb it o f th e accou nts receivabl e accou nts in th e s ection aliz e d

e
l edgers .

W h e r e s ectional i z e d l e dge r s are u se d th e sal es r ecap it u l atio n

contain s sp ecial col u m n s co rres p on din g w ith th e d i ff e r ent s al e s
l edgers i n orde r th at p osti ngs t o each l edger may b e p rove n sep ar
ately W h en the a u dito r h a s ch ecked ea c h i
. vi
n di u a l p osting f ro m

the recap itul ation O f sal e s to th e acco u n ts in the sal e s l e dge rs h e

s houl d then e ffe ct an agreem ent b etween th e total s al e s fo r th e a u d it
perio d th e c u sto m ers who se a ccounts are ca rr ied i n o n e o f th e s ale s
,

l edgers an d the tota l d e b it p o stin gs to thei r accounts from th e sal e s

record Th e sam e ag r e em ent i s e ffected i n t h e s am e m ann er f o r
.

each o f th e s ection al i z e d s ales le dge rs wh il e th e aggregate sal e s

,

o f th e enti re b u sine ss fo r the a u d it p eri o d sho u l d agree w ith th e

ag g regate O f al l s al e s p o stings to cu sto mers a ccou nts fo r all o f the

i
’

s al es l e dge rs fo r th e s a m e p e r i
od .

34
 I t i s s ugge ste d th at the a u dito r sho u l d u s e s o m e disti n gu i sh in g
ch eck m ark when v eri fyi ng p o stings fro m th e sal es reco rds to the
a cco u nt s rece ivabl e acco u nt s that h e m ay know in r eferring to the
—
—
s al e s ledger w h i c h O f the d eb it p o stings are m ad e f rom the sal es
re co r d s an d wh ich c o me f ro m the j o u rn al b eca u s e o f any adj u stm ent .

TRIA L B ALA N C E O F SAL ES L ED G ER A C C O U N T S .

T h e p rogre s s O f th e a u d ito r i n m aking h i s invest i gation u p to

thi s p o int has i nvolve d a ca r efu l an d system ati c checking o f the
po stings to th e ac co u nts receivab l e a cco u nts f rom th e sales re c a p i tu
l ation f r o m th e cash b ook sh owing cred its fo r cash rem i ttan ces
,

received an d di s cou nts all owe d an d f r o m th e j ou rnal for returne d

,

g oo ds all owan ce s reb ate s an d a d j u stm ents T h e footings o f th e

, ,
.

va r io u s re cords a ffectin g sale s have b e en veri fi e d an d a v e r i fication

O f p o stings O f th e se am o u nts to the contro l l ing acco unts i n the
p r ivate l edge r comp l eted .

H e i s n o w i n a p o sitio n to take a tria l b al an ce o f th e sal es

ledger a cco un ts to s e e i f th e aggregate Of t h e b al ances o f the accou nts
rece ivabl e i n th e sal e s l edger ag r e e w ith the aggregate b alan ce o f
th e corresp on din g sal es l edge r co ntroll ing acco u nt in th e p rivate
led ge r I f h e h a s don e h i
. s work th o r o ug hl y an d acc u rat e ly h e shou l d

have n o d iffi culty in e ff ectin g thi s agreem ent taking i nto con si de r a
,

t ion Of cou rse al l n otation s m ade by h i m fo r e r ro rs di scovere d

, ,

d uring h i s i nvesti gation I n oth er wo r ds the total d eb its to cu s

.
,

t o m e r s fo r good s sol d l es s cash rem ittan ces receive d fro m them

, ,

d is co u nts allowe d allowan ce fo r retu r n e d goo d s an d oth e r d e du c

,

ti o ns o f wh ateve r n atu re sho u l d agree w ith th e b al an ce Of the sal e s

,

l edger controll in g acco un t wh ich show s the amo u nt th e c u sto mers

w
still o e f or goo d s f u rn ish e d .

V ERI FI C ATI ON O F I N V O I C ES W ITH SH I PM EN T S .

Th e r e i s o n e op po rtun ity i n co nn e c tion w ith an a ud it o u tsi de

o f th e ve r i fi cation o f cash w here th e au d ito r m ay p rove h i s service s

to th e co m p any worth m any ti me s th e amou nt h e i s to re c eive f or

h i s wo r k a c c ordi n g to h i s cont r act Th i s op p ort u n ity l i e s i n a com
.

p a r i son Of th e reco rd O f Sh ip ments with th e i nvo i ces ren dered .

It i s n ot u n u s ual fo r an au dito r to d i s cover shi pm ents m a d e to

cu stom e rs for w hi ch n o b il l i s ren d ered T O p revent th e sh ip ment
.

O f goo ds with o u t p rop er i nvo i cing t h e a u ditor Sh oul d ca r eful ly an d

35
sy s t e mati cally c h e c k e ach i nvoi c e r e n d e r ed du ring th e au di t p e r io d
against th e C o p y O f t h e con fi r m ation o f th e o r d e r m ail e d to t h e
cu stom e r when hi s o r d e r i s r ece ived .

In th e m aj o rity o f b u si n e s s e s at th e p res ent tim e th e r e i s an

e stab li sh e d cu sto m o f c on fi r m ing o r a c kn owl edging o r de r s fo r goods ,

th e con fi r m ati on o r acknowl e dgm ent al so statin g when d el ive r y m ay

b e e xp e ct ed It i s agai n st th i s a cknowl e dgm ent o r c o n fir m a t i
On th at
w
.

th e au dito r ch e c ks th e invoice W he r eve r a system O f a c kn o l e dg

.

m e nt s o r con fi r m ation s is n ot u sed th e b u s in e ss i nva r i ably u se s a

m anifol d sy st e m Of r eco r din g Sh ip ments th at i ,
s wh en eve r a sh ip
,

m ent O f goo d s i s m ade to a cu stom er a n u mb e r i s as sign ed to th e

Shi p ment an d a li st Of a l l O f th e goo ds contain e d i n th e s hip m ent
stat e d up on thi s sh i pp ing r e co r d Th e man ifol d b l ank s b ea r c o n
.

s ecu t i v e n u mb e r ing .

Wh ere th is system i s emp loye d an d p r op e r d i scr e ti on u sed it i s

p r acti cally i mp o ss ible fo r t h e s hip p ing d epartm en t to shi p o u t a b ill
Of good s without m aki ng a p rop e r sh ip p in g r e c o r d th e r efo r Th e
$
.

au dito r Ob tain s sati sfacto r y re sults by m aking a c omp a r i son o f th e

s al es invoi ce r en de r ed with th i s man ifol d Sh ip p ing r e co r d I n oth e r .

wo r d s hi s au dit Of thi s p a r ti c ul a r ite m fo r investi gati on i nvol ve s

,

ch e c king the sal es invo i c e again st the a c knowl edgm ent o r c o n fir m a

tion O f t h e o rder o r t h e m an i fol d C opy o f th e s hip p ing reco r d .

TRIAL BALA N C ES O F SU B SI D IA RY L E D G ER S .

Not i n f r equ e ntly th e au d ito r w ill fin d in u s e seve ral s ub si di a r y

l edgers i n a dd ition to th e p u rc has e s al e s an d p r ivat e l e dge r s c on
, ,

t r oll ing a c co u nts with whi c h wil l b e ca rr i e d i n t h e l atte r Afte r.

p r op e r v e r i fi c ation Of th e footings an d p o sti ngs to th e va ri o u s

accou nts i n t h e sub si dia r y l edge r th e au dito r th e n p r o c e e ds to take
a trial b alance o f t h e a c c oun ts i n each sub si d iary l e dge r to e ffect a n
ag r e e m ent b e tw e e n t h e agg r egat e b alan c e s o f su ch ac c ounts an d th e
b al ance o f th e c o rr esp on ding c ont r ol l ing ac c oun t in th e p r ivat e
l e dg e r Th e sam e m e th o d is follow e d o u t as o utl in e d fo r taking a
.

t r i al b al an c e f r om th e p u rc h as e an d sal e s l e dge r s .

V ERI FI C AT I O N O F I N V EN T O RY .

In o r d e r th at th e wo r k o f th e aud ito r may b e a c cu r ate an d tho r

ough it i s n e c e ssa r y th at h e b e g i ve n an Op p o r tun ity to audit t h e
r e c o r d o f th e invento ry tak e n at t h e cl o s e o f t h e p e r i o d u n de r au dit .

36
H e sho ul d al so have a reco rd o f th e inventory take n a t th e c o m
m en c e m e n t o f th e perio d u n der a u dit It i s regarded as th e d u ty o f
.
$

th e a u d ito r to v e r i fy th e invento ry e x ten sion s H e sho u l d al so .

i n sp ect th e sto ck l i ste d o n th e inventory record to s e e th at th e va l u es

a re n o t fi ctiti o u s o r i n flate d b r i efly t o s ati sfy hi ms elf b e yon d all
, ,

rea sonab l e do u bt that th e i nvento ry a s f u rni s he d to h i m is a p p ro x i

m atel y co rrect .

The i nvento ry a u dit sho ul d not on ly cal l fo r a thorough i n ve n

to ry re cord a ve r i fi cati on O f exten s io n s a footin g o f th e ent i re

, ,

i nventory an i
, n sp e ctio n o f th e sto ck a v e r i fi c ation O f q uan t iti e s
,

w hereve r p os s ibl e b u t a ca r eful c o mp a r i so n Of th e p r ic e s Of th e

,

vario u s arti cl e s as l i sted u p o n th e i nven to ry wi th the p r ices p ai d

fo r tho s e a rticle s by th e co mp a ny a cco r d i ng to p u r chas e invo i ce s
,

cove r in g the s am e T h i s co m p a r i son o f th e invento r y p ri ce s w ith

.

th e p r i ce s upo n the o riginal i nvo i c e s s ho ul d conv i nce the au dito r

that th e invento r y as cal cu late d contai n s n o fi cti tio u s o r in flate d
p r i ces
.

N otwithstan din g th i s opp o r tun ity fo r verifying th e i n vento ry it

i s con si de r e d an ex cel l ent p ol icy fo r the au dito r t o s ecu r e f r om th e
se creta r y of th e co mp any o r f r o m so m e o the r o ffic i al with p ro p e r
,

a u tho r it y a certi fi cate spe c i fi cal ly stati ng th at the p ri ces u sed in

,

making the invento r y cal cul atio n s are co r r e c t Su c h a ce r tificate .

Sh ifts the r e s p o n s i
bih t y of th e val u e s shown fro m the au dito r to th e
’
co mp any its el f w hil e the a u dito r s re sp ons ib il ity l ies i n a c o rrect
,

c al cul ati o n O f th e exten si on s an d ve ri fication o f th e total .

Even tho u gh th e c erti fi cate m en ti on e d i s se c ur e d it i s n ot suf

fic i
en t r e aso n to cau s e th e au dito r to n egl ect a tho rough i nve stiga
.

tio n O f the invento ry a s there are m any in stan ces whe r e th e s ecre
,

tary o r o th er o ffi ci al h as certi fi e d to i n co r r ect val u ation s i n co n s e ,

q u e n c e o f w hi ch th e fin a l r ep o r t p rep ared an d s ub m itte d by th e

a u ditor to the b oa r d Of di r e c to r s has b een i n ac cu rate an d m isl eadin g .

A U D ITI N G PAY R O LL .

The exact natu re O f t h e pa y roll a u dit d ep en ds l a r gely u pon

th e agreem ents s et fo rth i n the au d ito r s cont r a ct p e r t a ini
’
ng thereto .

Wh e r e n o Sp ec ial stip ul ation s a r e m ade i t i s c u sto ma r ily u n de r stoo d

th at th e p ay roll au dit co n si st s in a ve r i fi c ation of th e labo r ex p e n
di t u r e fo r th e last p a y r oll date Th
. e au ditor cal l s for the l ast c o m
l e t p ay ro ll an d che cks th e tim e clo ck cards O f the vari o u s wo rk
p e

37
men emp loyed u p on a day wage b asi s again st th e ent r i es r ecorde d
u po n the p ay rO l l r e co r d Pi ece wo r ke r s a r e u s u al ly re q u i r ed to S ig n
.

p r o p e r receipts fo r th e i r p ay wh i ch th ey are obl ig e d to s u rr en der

b efo r e th ei r envel op e i s h and e d t o them Th ese receipt s are che cked
.

again st th e p ay r oll reco r d fo r ve r ifyi ng th e l ab o r exp en dit u re fo r

;
,

p i ece workers e m p l oye s w o r kin g u n der b on u s syste m s a n d p ro fit

sh a r ing pl ans etc B ri efly stated a veri fi ca tion o f th e l ast p a y rO l l
,
.
,

p rece din g th e date upon wh i ch th e au dit u nde r con si derati o n cl os es

con s i st s o f ch eckin g b on a fid e r eceip ts O f th e empl oye s again st th e
entrie s reco rd e d u p on th e p ay r O ll re co rd T h e au dito r i s e x p e cte d.

$
to exercis e reasonab le care an d j u dgm ent to d ete ct dead m en
so m etimes carri e d up on p ay roll s an d to con d u ct hi s i n ve stigation
,

in s u ch a m an n e r th at he can ce r ti fy th at a p rop e r receip t h as b een

taken from each wo rk man fo r th e m oney p ai d out an d that th e re ,

cei p t s e x am i ne d an d ap p rove d a re gen u i n e Ab so l ute ce rtainty .in

th i s resp ect g u a r ante e s p rop e r vo u ch er fo r th e p ay rol l exp en dit ur e ,

p reventing the car r yin g Of fi ctitiou s nam e s u p on th e record s an d t h e

fal si fi catio n o f receip ts .

In s om e in stan ces t h e a u d it o r s con t r act cal l s fo r a c o m p r e h e n

' ’

sive i nvestigatio n o f all th e p a y roll s during the p e r i o d u n der a u dit

an d an exha u stive an alys i s o f th e l ab o r exp end itu re Th e p r o ces s .

O f v erifi cation fol low s cl osely th e o u tlin e u se d fo r ch eckin g u p the

l as t p ay rO l l i t be ing u n derstoo d th at the a u dito r p ays no attention
,

to accu racy O f th e p ay rol l calcul ation s with r e sp ect to th e ho u rs ,

rates an d am o u nt s o r i n p i ece wo r k th e n u mb e r Of p i e ce s an d rate s

p e r p iece o r b o n u se s an d divi si on o f p r o fits i t i s con sid ered s u ffi c i,

en t fo r h i m to m e rely ve rify th e ent r ie s up on the p ay rO l l r eco r d .

A p rop er analysi s O f the l abo r exp en di t u re c on si sts i n its cl as s

i fic a t io n u n de r th e he adings P r o d u c tive N o n P r odu ctive C on stru e
, ,
-
,

tion M ainten an ce Exp e r im ental etc a s wel l as a dep artm ental

, , ,
.
,

d ist r ib utio n I n a c o mp l et e d a u d it it i s sel do m that any at tention

.

1 5 gi v e n to any o f th e p ay roll s except th e l a st an d u s u ally a l ab o r

an alysi s i s n o t r eq u i r ed It i s w e ll fo r th e au ditor to c a r efully
.

gl an ce th rough th e p r eceding p ay roll s as h e might n otice som e i rr eg

u l a rit y wh i ch wo ul d fo r m the b a si s of com m ent in h i s final rep o r t .

Th e p e r man ent a u dito r em pl oy e d b y a b u sin es s fo r m aking a c o n

ti n u o u s au dit i s exp ected to h ave all p ay roll ex en d it u res ro p er ly
p p
vou ch e d fo r by genu i n e rece ipts an d to m ake a p r op e r an alys i s an d
cl ass ifi cation depa r tmental ly an d un der the h eadings above m en
ti
on ed .

38
 STAT E M EN T O F B I LL S R EC EI VAB L E .

I n m any l ine s O f b u si n e s s th e b ill s re ceivabl e co ntroll i n g a c

co u nt i n th e p rivate l edge r req u i r e s con si de r ab l e tim e fo r i ts p r op er

analy si s T h e b alan ce o f th is acco unt re p res ents th e amou nt of b ill s

.

r eceivabl e hel d by a b u sin e s s an d i n thi s conn ection th e a u dito r

sh oul d exe rcis e h i s best j u dgm ent in deter m
,

in in g th e e x tent o f th e
l i ab il ity o f th e b u sin es s fo r b ill s r ece ivabl e di sco u nte d deposi te d a s ,

coll ateral se c u r it y etc It has al r eady b een state d th at h e req u e st s

w
.
,

o f each b an k w ith whom a ccou nts a r e carrie d statem ents s h o mg

th e contingen t l i ab il ity o f th e b u si nes s fo r notes di scounte d stil l ,

u np ai d .

Th e state men t O f b ill s receivabl e a s p rep are d by th e a u dito r

show s a h i sto r y o f ea ch note p rop e r calculation s b eing m ad e fo r i
, n

t e r e s t accu m u l ation s Each n ote i s u s u al ly a s sign e d a n u mb er as

.

’
a m eans o f i d enti fi cation T he a u dito r s statement Show s the n u m
.

b er dat e O f th e p ap e r nam e o f th e m aker with a d dres s wh e r e i t i s

, , ,

m ad e p ayabl e th e n am es an d a ddre s se s o f any en dors ers l ength o f

, ,

tim e th e note i s to r u n date u p on whi ch i t m at u re s amo u nt o f th e

, ,

note i f i nt e re st b e a r in g th e rate p e r c ent the amount O f accr u ed

, ,

inte rest an d any other i n fo rm ation O f a sp e cial natu re O ccas ion ally .

th e a u dito r fin d s th at som e o f th e n otes h ave al r eady b een fo r wa r de d

f o r co ll e ction an d h e in cl u de s th es e i n h i s r epo rt with p rop e r nota

ti on h i s re co rd th e r eo f b ein g ma de as comp l ete as p o s sibl e f r om

,

in fo rm atio n r eco r d ed u po n th e b il l s rece ivabl e re c o rd .

H e may al so di s cov e r that som e O f th e note s h av e b een d e p o s

i t e d a s col l ateral s ecu rity an d tha t b ill s p ayabl e h ave b ee n i ss u ed
,

fo r th e m on ey b orrowe d u pon th em U nl ess th e i nte r est h as b een

.

p ai d in advan c e u pon th e mon ey b or r owe d h e wil l h ave to calcul ate

th e a cc r u e d int e re st du e th e b an k i f it ha s b een p ai d i n advan c e
’

the r e m ay b e q u ite an i tem o f i nte rest p ai d b ut un earned Sep arate .

statem ent s are p r ep a r e d for b il l s receivabl e c u rren t an d b ill s r e c e i

v
’
ab l e p a st du e Wh en th e au dito r s statem ent s a r e compl ete th e
.

t otal amo u n t o f b ill s receivabl e cu r r en t a dde d to t h e b i lls r ec e i v

ab le p ast du e as sh own the reon shoul d agree with th e b al an ce O f

the b ill s rece ivab l e control l ing acco unt in th e p rivate l edge r .

STA T EM EN T O F B I LL S PAYAB L E .

Th e b al an ce O f th e b il l s p ayabl e control l ing acco u nt i n th e

p r ivate l e dger show s th e am o unt o f b ill s payab l e i s su ed by a b u si
39
n ess ou tstan din g an d u np ai d In p r e sentin g a stat e m ent o f b ill s
.

p ayabl e th e a u d ito r sh ows th e n u mb e r date O f th e p ape r n am e O f

, ,

the p ayee with ad d r e ss wh e r e it i s made p ayab l e nam e o f en dorse rs

, ,

i f any l en g th o f t im e it i s to run date Of matu r ity am ount o f note

, , , ,

rate p e r ce nt o f i nte r est i f int e r e st b ea r in g t h e amou nt of accru ed

,

i ntere st an d any o t he r sp eci al in fo r mation W h en hi s statement i s

.

'

co mpl ete d th e total amo u n t O f b ill s p a yabl e outstan ding a s S hown

the rei n agre e s with th e b al anc e O f t h e b i l l s p ayabl e controll in g
a cco u n t i n th e p rivate l edger Prop er m ention s ho u l d b e m ade of
.

a ccum ul ate d i nte res t d u e an d the amo u nt i n co r p o r ate d in th e b al

a n ce sh eet a s a l iab il ity o f th e b u sin es s .

E$ H I B I T O F LA ST O FFI C E PAY R O LL .

T h e a u d ito r in co r p o rate s i n hi s statem ents a copy o f th e l ast

o ffi ce p ay rol l fo r th e p u rp os e o f s howi ng th e am ounts o f th e sal
a ri e s d rawn by the o ffi cers o f th e com p any th e m anage r s u p e rin
, ,

t en dent an d othe r O ffi c ial s en gaged in t h e a dmin i st r ation pf th e co m

,

a n y s a ff ai rs
’

p .

A ccess i s p erm itte d to th e reco r d O f m in u tes O f th e m eetin gs

o f th e d i re cto r s an d th e au dito r sh ou l d p eru se th es e care f ully t o
.

a scertai n th at th e sal aries drawn by th e O ffi cers a re a u tho r i z ed b y a

vote o r b y vote s O f th e B oard o f D i r ecto rs In th e event O f any .

o ffi cer drawing a sal a r y more than th e s u m a u tho ri z ed f o r p aym ent

p rop e r co m m en t sho ul d b e m ade .

TRIAL B A LA N C E FR O M ST OC K L E D G ER .

T h e sto ck l edge r sh a re s m in ute i nvestigation wi t h al l O f th e

oth e r i m po r tan t reco rds o f a co r p o r ation du ring th e au dito r s wo rk ’
.

I n th e m aj o rity o f in stan ce s even th e small e st corpo rati o n w il l keep

a sto ck o r S ha r ehol de r s l e dger contai n in g acco un ts with stockhol d
’

'

e r s W he re a s e p arate l edger is n ot u sed fo r thi s p u rp os e t h e l e dger

, .

recor d u su ally ap p ea r s i n a stan da r d fo r m O f co rpo rati on reco r d

com m only u se d by s mall co rp oration s A co r p orati on record gen
.

e ra l l y conta in s bl ank reco r d s o f m in ute s Of th e fi rst m eeting Of th e

sto ckh ol ders first me eti ng of th e d i r e ctors by laws r eg u l ar m eetings

, ,
-
,

o f sto ckhol ders an d d i r ecto r s sto ck sub scription registe r stock l ed

, ,

ge r O f o r igin al certi ficates i s s u e d sto ck l edger O f r e i ss u e certi fi cates

,
-
,

d ivi den d regi ste r stock ce r ti fi cate tran sf e r regi ste r etc etc
, , .
, .

A s ep a r ate stock l edger a s u s ed fo r la r ge co r po ration s havin g

40
of sh ares O f sto ck o u tsta n ding an d t he d ivi den d rate p e r cent as ell w
a s th e amo u n t Of the total d ivi dend s p a i d Sp ecial divi den d checks
.

a r e gen e r al l y u se in stea d o f th e regula r ch eck o f the co rpo ration .

Each d ivi den d d ecl are d i s as signe d a n u mb er con s ecu tive l y th ere ,

b ei n g p rinte d u p o n the S p ecial che cks th e fol low ing $ D ivi den d N O
$
.

etc T he a u dito r sho ul d total al l che ck s fo r each d ivi d en d t o

.

m ake c ertain th at th e d ivi den d act u al ly p ai d corresp ond s with th e

entri e s ap p earing u p on th e reco r d s an d to ve r ify th e amo unt O f o u t
stan ding di vi den d ch ecks u np ai d i f any wh ich are l i ab il itie s o f th e
, ,

b u sin e ss .

A p ro p e r au dit O f th e b u si ness will s erve to s af eg u ard the i n

t e r e s t s O f the bu s in e s s again st any divi den d b eing d ecl a r e d o u t o f

cap ital in stea d o f earn ings T h e latte r p r o ce du re i s ill egal an d th e
.
,

dire cto rs m ay p erson al ly b e hel d l i ab l e fo r any divi den d s o declared

S in c e th ey are exp ected to p u rs u e a reasonabl e an d p rop e r c o u rse to
asce r tain i f s u ffi ci ent a ct u al p rofi t ha s b een m ade to wa r rant a div i
den d b efo r e p as sing a re sol ution decl a ring o n e an d auth o ri z ing th e
trea sure r to p ay th e s am e o u t o f th e fu n ds Of th e co m p any .

TRIA L BALA N C E FR O M P RIVAT E L ED G ER .

A f te r h aving caref u lly ca r r i ed o u t th e p l an O f a u diting o utl ine d

in th e p recedi n g p age s th e a ud ito r w il l hav e p racti cal ly co mpl eted
h i s work O f inve stigati o n an d b e p rep are d t o p re s ent accu r ate state
m ents sh owin g the actu al con dition o f the a ff ai rs o f th e com p any
an d make s u ch recom m en dati ons as i n h i s b est j u d g m ent h e deem s
a dvi sabl e an d n ecessa r y fo r s i mp l ify ing th e m etho ds Of han dl ing th e
wo r k an d m aki ng mo r e e ffi ci ent the accou ntin g re co r d s .

T h e fi r st step i s th e taking of a tri al b al an ce from th e p rivate

l edger after al l a cco unts the r e in hav e b een p rop e r ly i nvestigated ;
an d th ei r accu racy p roven Th e deta i l s O f th i s tria l b al an c e w ill
.

vary acco rding to th e cu sto m O f th e m anagement in keep in g thei r

p rivate l edger C u sto m n ow p r evail s m ak i ng i t a dvi sabl e to ca r ry
.

i n th e p rivate l edge r controll ing acco unts w i th th e s ub si diary l ed

ge r s s al es p u rch ases e x p en ses etc a n d in som e in stan ces a con
, , , , .
,

t r ol l ing acco u n t w ith what i s te rm e d a Gene r al Ledger altho u g h ,

the l atte r i s freq u entl y i denti cal w ith th e p rivate l edge r .

A D J U STI N G EN TRI ES .

A f ew wo rds o f e xp l an ation regard ing adj u sting ent r ie s m ay

s erv e to ai d in giving an exa ct o u tl in e O f th e d u t i es o f th e au dito r .

42
A s th e wo rk p ro g ress es h e fi n ds erro rs in a d d itio n p o sti n g s made t o ,

wr o ng acco u nts in co rrect d i strib u tio n O f p u r ch as es or analys i s o f

,

s al e s etc I t is evi dent th at wh ere n u m ero u s errors o cc u r th e bO Oks

, .
,

even tho ug h they a re i n b a l an c e do n o t p re sent a cor r e ct reco rd o f

,

th e transaction s m ade n o r do e s th e b alance s he et exhib it a tr u e

,

conditi on O f th e a ff ai rs o f the co mp any AS each erro r i s d iscovere d

.

th e a u dito r makes a co rre cting j o ur na l entry giv in g a n expl anatio n

an d referrin g to th e reco rd an d p age u p on wh i ch it o cc u rs I f a .

ver y exte n s iv e a u d it i s un de rtaken an d th e b ook s hav e b een kep t

by an in co mp ete nt i n d ivi d u al i t i
s n o t u ncom mo n fo r the a u dito r to

di scover s co r es O f e rrors an d in som e i n stan ces th e y h ave b een

,

kn own to n u mb er into th e h un d red s .

A l th o u gh th e au d ito r sub m its w i th h i s fi n a l rep ort a l i st O f a l l

adj u sting ent r ies neces sa ry to p l ace th e b ooks in p rop e r shap e h e i s
not e x p ecte d to act u ally m ake th e entr ies u p on th e b oo ks T h i s i s .

le f t to th e in divi d u al re s p on s ib l e fo r th ei r p r o p er ke e p i ng H owever .
,

in p res enting tra din g an d p ro fit an d l o s s statem en ts an d a b al ance

sh eet he m u st tak e i nto consi deratio n al l a dj u stm ents covered by
th e en tri es oth erw is e h i
,
s fi n a l statem ent wo ul d not b e co r r ect
’
It .

i s s u ggeste d that t h e a u d ito r m ake con s i derab le com m e nt u p on th e

adj u stin g entri e s if th ey are n u m e r o u s an d i n any event give th em
, ,

th e attention i n hi s rep o rt wh i ch th ey de serve H i s comm ent S houl d

.

n o t only cove r th e e x tent o f th e erro rs di scovered b u t th e n at u re

,

o f the m a s wel l So m e O f th em m ay hav e b een com m itted i

. nten

ti o n a l l y w h il e o th ers were d u e to n egl igen ce

,
ca r el essn es s o r p ro p er
,

l ack o f interest i n th e wo rk .

Th ere i s o n e criti ci sm wh i ch m ay b e m ad e by th e au dito r a ff ect

in g arb itrary entrie s O f ten tim e s a b ook ke ep er du ring th e co u rse
.
-

o f h i s wo r k w i l l di s cov e r that h e h a s p o ste d an item to th e wron g

acco unt an d to co rre ct the m atte r m e rely make s a p o sting O f the

, ,

s a m e a m o u n t u n der th e sam e date on th e op p os ite s ide o f th e a c

co u nt an d th en posts th e i tem to th e p rop e r s i de o f th e right a cco u nt

witho u t g oi n g to w hat h e m ay con s ide r th e tro u bl e O f m akin g a $

‘
cros s entry in h i s j o u rna l It i s o n e, o f th e fi rst p rin cipl e s o f acco u nt
.

in g that n o entry sh al l b e p o sted u pon any reco rd e x cep t f r om so me

reco rd O f o rigin al entry A rb itrary entri e s re s u lt in en dle ss c o n
.

f u s ion m akin g it al mo st im po ssib l e fo r an a u ditor o r anyon e else , ,

t o a ffe ct a n agreem ent b etw een sales an d p o stings to acco u nts w ith

c u stomers i n s ectional ize d s al e s l edgers etc , .

43
 P R ESEN TATI O N O F TRA D I N G STAT E M EN T .

A trading st atem ent i s p rep a r ed i n th e p r op e r mann e r fo r t h e

p u rp o se O f S howi ng the g r os s p r ofit O f th e b u sin es s fo r th e a u d it
p e r io d T he p rep aration of a t r a ding stat e m e nt i nvolves an exact
.

knowl edge O f th e foll ow in g facts

A m o unt o f invento r y at co mm en cem ent Of au d it p erio d .

P u rchase s m ade d ur in g th e p e r i o d l es s al l retu rn s an d al

w
l o a n c e s O f any n at u re
'

Pro d u ctive l ab o r .

M an u factu ring an d othe r t r ading exp en se s .

In -
fr e ight an d drayage .

P r opo rtion team ex p en se fo r h au l ing goo ds p u rch ase d .

Sal es m ade d u rin g p erio d cove red b y th e a u d it l es s ret u rn s

an d all owan ces o f any n atu r e .

A m o u nt o f inventory at cl o s e O f th e p eri o d .

I n Sp eak in g o f sal es it i s u nde r stoo d that thi s item covers

the s al e s p rop erly i nvo i ced an d charge d to c u stom ers o r ders o n h an d ,

u nfi ll e d a r e not in cl u ded .

Af ter dete r m in in g the amo unt o f th e g r os s p ro fit fo r the p e rio d ,

w h i ch i s the d i ff e ren ce b etween th e n et sal e s an d th e co st Of getting

th e goo ds i nto a m arketab l e con d ition th e au d ito r Sh ou l d cal c ul ate
,

th e ratio O f p ercentage b e tween th e g r oss pr o fit an d th e n et s al e s .

That i s i f th e g r o ss p r o fit i s
,
an d th e s ale s amou nt t o $ 1 0 0 ,

0 0 0 th e rati o i s a ten p ercent p ro fit o n th e n et sal es

, H e the n estab .

li sh e s i n simil ar m ann er a ratio b etween th e g ro s s p ro fi t an d th e

tu r nove r a te r m u s e d to rep r e sent th e cost O f getting th e goods i nto
,

a m arketabl e c on d ition It i s u nnece ssary to prepa r e a statemen t o f

.

tu r nove r as th e tra di ng state ment su ffi ces al tho u gh i f su ch a state

m ent wa s shown it wo u l d b e f o un d th at th e am o u nt Of gro s s p r o fit
sh own th erein w o u l d agree w ith th e a mo u nt a p p earin g u po n th e
trad ing statem ent .

Whether O r n ot th e au d ito r sh al l p r ep a r e dep artmental tradin g

stat em ent s d ep en ds enti r ely u pon th e con dition s O f h is contract w ith

the com pany covering th e au dit although when not sp ecifie d a gen
e ral t r adin g stateme nt is con s idere d s u fficient .

44
 P R ESEN TATI O N O F P R O FIT A N D L O SS STAT EM EN T .

I n th e p r ep aratio n o f t h e p r o fi t an d l os s statem en t -th e gro s s

p rofi t f r o m th e t r adin g a ccou nt i s b r ought down to th e c r edi t s i de o f
th e p r o fit an d l os s statem en t an d al l e x p en ses i n cl u ding general
O ffice ex p en ses man age r i al exp e ns es sel l in g exp en se s et c a r e e u
, , ,
.
,

t e r e d up on th e deb it s id e th e di ffe r en c e b etw e en th e two s i de s O f th e

,

statem ent the n show s th e n et p r o fit o r l o s s I f th e exp en se s exceed .

the gro s s p ro fits th e d i ffe r en ce i s a l o ss i f th e gros s p ro fits exceed

,

th e exp e n s e s then th e d i ffe ren c e i

,
s n et p ro fit .

In a p r ofi t an d l os s statem en t it i s d es i r ab l e t o cl ass i fy th e s ell

in g exp ens es an d th e adm in ist r ative o r general exp en se s sh owin g ,

th e amoun t O f ea ch c las si fi catio n s ep a r ately as th e total s a r e fre ,

q u ently u s e d i n p rep a r ing th e statisti cal statements Sell ing exp en se .

m igh t b e p ro r ate d ove r sal e s b ut thi s i nvolve s con si derabl e labo r

-
,

an d do e s not r esul t in any p a r ti c u l a r b en efit A co mp a r ative state .

m en t O f s al e s an d s el l in g exp ens e s i s d e sirabl e i n o r de r that an a bs o

l u te check m ay b e p rovi d e d u pon an ab normal in creas e i n th e s el l in g
exp en se s A d ep a r tm ental p ro fit an d lo s s statem ent c l ea r ly exh ibi t s
.

th e n e t p r o fit o r lo ss Of e ach dep a r tm ent O f the b u s in ess o r each lin e

o f goo d s han dl ed .

The p r o fit an d los s statem e nt c ontain s n um e r ou s item s Of a c

c r u e d l iab il iti es o r flo ating as sets a s l at e r exp l aine d i n conn ection
,

with t h e p r ep a r ati on O f th e b al an ce sh eet .

All j ou r n al adj u sting ent r i e s m ad e by th e au d ito r a r e tak e n into

, ,

con si de r ation p r ior to p re senting t h e t r adin g an d p r o fit an d l os s state

m ent an d b al an c e sh eet T r ading an d p rofit an d l os s stat e m ents con
.

t ai n valu abl e in fo r m ation w hi c h i s u se d by th e a u dito r in p r e p a r in g

co mp arative stati sti c s .

The r e a r e va r io u s l i ne s O f b u sin ess in wh i ch it i s p r a c ti cally i

m
p o ss ib l e fo r t h e au d ito r to e stab li sh a un it o f p r o du ction unl e s s the
a u d it i s ve r y b r o ad an d fa r r ea c h ing i n its s c op e i nvolving th e m ost ,

d etail e d e xa min at io n an d the p r ep a r ing Of dep a r tm ental o r c l assi fie d

statem ents b alan c e sh eets etc M any l in es o f b u sin e ss h av e a stan d
, ,
.

ard u n it O f p r o du ction su ch as a ba rr el Of b ee r i n th e b rewery b u s i

,

n ess b a rr el s Of flou r i n the flou r m ill in g e nterp r is e an automob il e i n

, ,

th e auto mob il e i n du stry et c ,

.

Pe rhap s th e most val ua b l e in fo r m ation embo d i e d by th e au dito r

in hi s rep o r t i s a tabl e O f c o rr ect p e rc en tages fo r the i mp o r tant item s

45
u n der con s i de ration cal c u l ating u p o n a b a si s Of a un it O f p ro du ction .

The r e are few in stan ce s wh e r e a m anu factu r in g ente r p ri se do es not

keep an a ccu r ate re co rd O f th eir u n its o f p ro d u ction a b rew ery a l
w
,

ay s m aintain s a recor d o f th e n u mb er O f b arrel s o f b eer b rewe d

d u ring any g iven ti me wh il e sim il a r i nform ati on i s gen eral ly at h an d
,

fo r al l oth er l ine s o f com m er ci al en deavo r . Th e au dito r accu rately

e stab l i sh es fig u re s showi ng th e total ou tp ut o f th e b u s in es s du r in g
th e p e r io d cove r ed by h i s au d it .

A s s um ing that a b rewe r y h as an o u tp ut Of bar r els during

the au dit p erio d an d that th e p r o fit an d lo ss statem ent p r e pa r e d by ,

th e au d ito r show s the total exp en s es at

,
i t i s very evi d ent
—
that th e av erage co st p er b a r rel i s twenty fiv e cents Th i s do e s n o t
.

in cl u de th e co st Of m aterial m an u factu rin g an d trading exp en ses

,
.

He the n establ i sh es th e ave r age s el l ing p r i ce p e r u ni t by divi ding

th e n et s al es fo r th e p e rio d by t h e a ctu al n u mb e r o f u n its sold Si m .

il a r c al c u l atio n s a r e m ad e showin g the exa c t amoun t O f Op e rating

expen se s fo r each u n it O f p ro d u cti on I n s om e l in es O f b u si ness al l
.

manu fact u ring an d t r ading exp en s e s are de sign ate d O p eratin g Ex

p ens es whereas thi s term i s a l so u s e d i n a m u ch b roader s en s e i n
,

som e instan ces coverin g not only co st O f ma intenan ce rep ai r s m an

, , ,

u fa c t u r i
n g an d t r ad ing e x p e n s es b ut adm i ni st r ative exp en se s
,
etc , .

Th e a u d ito r m ay a rr ange h i s c a l c u l ation s s o a s to e ffect an

agreem en t among th e foll ow ing item s u si n g as a b as is fo r h i
,
s cal

c u l at i
o n s th e u n i t o f p ro d u ction $ The ave r age n et s ell ing p r i ce p er
u n it m i nu s th e ave r ag e co st p e r u n it give s t h e ave r age n et pr o fit per
u nit In fu r the r c on si deration Of th e se th re e item s th e a ve r age n e t
.
,

s el l ing p r i ce p er u n it mu ltip l ie d by th e n u mb er o f un its sol d gives

t h e n et sale s fo r the p eri o d th e ave r age cost p er u n it m u l tipl ie d by
,

the n u mb e r o f u n its sol d gives th e total exp en se s fo r th e p erio d an d

th e av e rage n et p ro fit p e r u n it m ulti p l i ed by th e n u mb er o f un its
sol d give s th e total n et p ro fit f o r th e p eri o d .

Thes e stateme nts are b a se d u p on the fa c t th at a p ro fit i s not

ea r n ed u p on a man u factu re d a rti cl e u ntil t h e a r tic l e i s p l ace d u pon
th e m arket an d sol d Th e au d itor m ay establ i sh h i s cal c u l ation s i f
.
,

h e s o de si re s u p on th e b asi s o f u nits O f p r o d u ction

, .

P R ESEN TATIO N OF $ ALA NC E SH EET .

Th e p re p arati on O f th e b a l anc e she et i s p erhap s the m o st i m

p o rtant d u ty o f the au dito r an d it r eq u i r e s a p r acti cal knowl e dg e O f
'

46
th e sc ience o f a cco u nti ng t o exh ib it a co rrect statem ent O f the assets
an d l i ab i l iti es o f a b u s in es s Th e b al an ce sh eet i s a statement o f th e
.

a ctu al a ssets an d l iab il iti e s de sig n ed to Show th e tru e fina ncial con
d iti on O f the b u sin e ss at th e t im e th e au d it i s compl ete d The follow .

ing d iagra m i s con s ide r e d ve ry goo d fo r m fo r a b al an ce sheet as the

as sets are cl as si fi ed u n d er the h ead ings A ctive Fixe d an d Pass ive
, ,

an d th e l i ab il iti e s un der th e h eadings Fl oating Fu n de d C ap ital an d

, , ,

Re se rv e

A S S ET S L IA $ I L I TI E S
A CT I VE FL O A T I N G
C a sh o n H a n d A cc ru e d W a g e s
C a sh i n $ a nk A cc ru e d I n t e r e s t
A cc o u n t s Rece iv ab l e A c c o u n t s Pa ya b l e
C i t y L e dg er $ i l l s Pa y a b l e
W ho l e s a l e L e dg e r
FU N D E D
Pen n s yl v a n i a L e dg e r
I nv e n t ori e s F irs t M ort g a ge $ ond s
C o ff e e S ec o n d M O it g a g e $ o n d s
Am m o n ia D eb e nt u r e s
S u ga r C A PI T A L
$ l u ei ng
C o m m o n S t o ck
F I $ ED Pre f e r r e d S t o ck
Re a l E s t a t e S u rp l u s
$ i l d i ng s
w RE S E RV E
u

Po e r E qu i p m e n t S i nki n g F u n d
H o r s e s and W a go n s
PA S S I V E
S u s p e n s e A cc o u n t
Goo d W i l l
F ra n c his e s
Pa t e n t s
C o p y ri g h t s
Pr o m o t i o n E x p e n s e

T he n atu re o f th e a ss ets cl a ssi fi e d u n der ea ch o f the th r ee s ep a

rate an d d i stin ct h eadings i s c l early s hown by th e di agra m and doe s
n ot r eq u i r e f u rthe r e x pl an atio n s i nc e p rop e r attention i s given to
th is subj ect i n p r evio u s instru ction s Th e sam e i s t ru e o f th e lia
.

bi litie s cla ssi fi e d u n de r ea ch O f th e fo u r sep arat e an d disti nct di

v i si on s A s a m atte r o f fact th e a u dito r i n cor p o rates in hi

. s bal an ce

Sh eet al l a ss ets an d l i ab il it ie s acco u nts app earing up on the g eneral

o r p rivate ledge r as wel l a s any sp e ci a l acco u nts n eces sary o n a c
’

co u nt Of h i s p rop erly h an dl ing acc r u ed a ss ets o r floatin g l iab i l ities .

T h e intention O f th e i n str u ction s h ere given cove r ing th e detail s

o f th e b al an ce She et i s to p re sent an o u tl in e o f the d u ty o f th e a u d i

w
to r h o i s con scienti o u s an d p a in staking in h i s e ff orts to p r esent a

47
 b al an ce s heet ab sol u tely a c cu r ate It i s t r u e that m any au dito r s
w
.

fully a a r e o f al l o f th e m ino r con s i d e r ation s e ssential to th e p r ep

aratio n o f a co mp rehen sive b alan c e s heet do n ot always apply th i s
knowl ed g e to thei r b est ab il ity b ut are n egligent thu s m aking th ei r
, ,

fi nal statem ent i n co mp l ete .

An exam inatio n O f th e a s set s O f any b u sin es s by an audito r

sho u l d b e t ho r o ugh an d comp reh en s ive e nou g h t o convin ce hi m be
yon d al l reason ab l e doub t that the a s sets in cl u ded i n th e b al an ce
sheet are wo r th th e su m at wh i c h th ey are val ue d In oth e r wo rd s .
,

h e Shoul d e x e r ci s e r eason abl e care an d di s cr etion to g u a r d against

in corp o rating i n h i s statem en t any assets at inflate d val u es H e i s .

not exp ecte d to re c o rd the val u e O f th e a s s ets f ro m the stan d p oint

w
of h o m u ch they wo ul d b ring un de r fo r ce d sal e u nl es s h e i s a u d it
ing th e b ooks o f an in solvent b u si n es s i t b eing s u ffi ci ent fo r h im
,

to co ns i der the i r valu e f r o m the stan dp o in t O f th e i r a ctu al co st an d

thei r worth to th e b u sin es s u n der investigation H e i s exp e cte d to .

s e e that p r op e r p rovi sion i s ma d e fo r th e d ep reci ation o f fixe d assets

an d th at all accou nts r eceivabl e k nown to b e u n col l ectib l e a r e el im

, ,

in a t e d f r o m th e statement I t i s som etimes des i r abl e fo r hi m to

.

e stabl i sh a re s erve fo r b ad an d doub tfu l acco unts .

T h ere i s al so the qu esti on O f r ep ai r s up on wh ich th e r e i s a

vast d i ffe r en ce o f op in io n among b u s in e s s m en ma n u fa ctu r e r s a c, ,

w
c o u n t a n t s an d a u dito rs.Som e regard th e amou nt exp en de d fo r re
p ai r s a s a cap ital exp en ditu re oth e r s con s i de r that thi s item shoul d
,

b e p rop e r ly cha r ge d against reven u e fo r th e p e r io d i n h i ch th e e x

p e n d it u r e i s m ade.

Th e a u dito r c on du c ts h i s inve stigation s w ith th e i ntentio n O f

e stabl ish ing i n hi s m in d ab sol ute ce r tainty as to wheth e r o r n ot the

n atu r e O f th e r ep ai r s m akes th em cap ital o r r evenu e exp en ditu re .

Th e au dito r s hou l d s e e th at al l ass ets an d l i ab il iti e s o f th e b u sin es s

a r e i ncl u d e d i n t h e bal an ce she et Th is at fi r st m ay s eem an u n
.

n e c e s s a ry p r e c a u t i al thou gh p rop er exp lan ation give s it con s i der

'

,on

ab l e imp o r tan ce Among t h e a ssets fo r w hi ch m any b u s in e s s hou ses

.

ca r ry n o accou nts a r e foun d su ch item s as u ne arn ed in s u r an c e a c ,

c r u e d inte r est
,
un e xp i r ed tax es et c among the l iab il iti e s accrued
,
.
, ,

wages a c c r u ed rent acc r u ed inte r e st et c

, ,
In expl an ati on O f the
,
.

floating a ssets r eferen ce i s ma de t o u n ea r ne d i n su r an c e as f ol lows

If a c o r p o r ati on p ays in su ran c e p r em iu m s O f u p on Ju ly l s t
cove r in g p ol i c ie s u po n th ei r pl ant an d equi p m e nt an d stock fo r the
48
 t may seem that th e s e two i
At fir s t i tem s wil l p r acti cally O ff s et
each other b u t u p on fu r th er consi deration it m u st b e a dm itted that
,

any b u sin es s op e r ating at a p ro fit m u st m ake sal e s g r eatly i n e xc es s

'

Of i t s pu r chas e s co n seq u e ntly the s al es d i sco u nts taken by cu stomers

,

w ill natu r al ly ex c ee d al l p u r chase d i sco u n ts tak e n by th e b u s in es s

i ts el f .

A C O N D EN SE D A U D ITI N G P R O GRAM .

Th e A u d ito r s C ont r act

’
.

C ove r s sp e c i
fi c d e tail s O f th e au d it amo u nt an d m etho d o f re
;
,

m u n e ra t i
on p e r iod t o b e cove re d by th e au dit n atu r e o f a u dit
, ,

—
wh ethe r com pl ete p ay rol l capital sto ck r eserve etc
, , , , .

- er t in
So l ic i
t Val uab l e CO p a o
o - .

C u ltivate acqu a intan ce Of in divi du al h el d r e spon sibl e fo r a c co u nt

ing r ecord s d u ring p e r io d u n de r a u dit A s ce r tain m anne r o f .

con du c ting b u s in e ss an d r e cordin g t r an sa ction s .

B o o ks an d Reco r ds fo r I n v estigation .

As certai n th e i dentity an d p u rp o se Of all r e c o r d s Of o r igi nal en

t r y an d all sub si d ia r y l e dgers an d reco rds .

Ve r i
fy C ash B a l anc e .

C omp a r e actu al ca sh o n han d w i th a mou nt wh ich cash records

sh ow n ot yet d epos ited that i s d i ff e r en ce b etw e en ca sh r ece i pts
, ,

an d d e po s its C o mp a r e actu al amo unt O f p e tty cash o n hand

. ,

with d i ffe ren ce b e tw e en o r igin al fun d an d di sb u rs em ents p rop

e r ly v ou ch e d fo r .

Ve r ify B ank B a l ances .

Se cu r e fro m b an ks with w h o m a ccounts are ca r ri e d ce r tifi ed

stat e m e nts o f b al an ce s o n d ep o sit n ot e s dis counte d o r d epo site d ,

as coll ate r al an d any co ntingent l iab il ity fo r a c commo datio n e u

,

d o rs e m e n t s etc ,
.

T a ke Trial B al a nc e .

T ake trial b al an c e f ro m gene r al or p rivat e l edge r or veri fy tri al

b al an ce al re ady taken .

C h e ck and
Verify al l F o o ting s .

A d d al l col um n s i n sp e ci al col u mna r a cco u nt b o ok s Fo ot cash .

b o o k check regi ster j o u rn al p u rch as e re co r d s s a l es reco r d o r

. , , ,

50
 re c ap itu lation b ill s receivabl e an d b il l s p ayab l e r e co r d etc
, , .
- N ote
pa rti cu la r ly t r an s fe r o f f ootings ca rr i ed fo r ward .

C h e ck i
ng Po stings O f Fo o tings etc ,
.

Ve r i fy all p ostin gs to a ccou n ts i n the gen eral an d p r ivate l e dg

e rs ,
b oth deb its an d c r e dits .

C h e ck Tri a l $ a l anc e Pr evi o u sl y T a ken .

At th i s p o i n t co mp are b a l an ces Of accou nts in gen e r al an d p ri

v ate l edge r w ith b a l an ce s ent e re d u p o n t r i a l b alance .

C he c k Posting s O f C as h R e cei p t s .

C heck in d etail al l p o stings f ro m cas h b ook to s ectional iz ed sale s

l e dge r s to p e rson al acco unt s in gen eral an d p rivate ledge r s etc
, ,
.
,

an d i n ca s e O f receip t s f r o m s al e o f sto ck to accou nts i n sto ck ,

hold ers l e d g e r
’
.

C hec k Po stings o f C a sh D i sb ur s e ment s .

C he ck i n d eta il al l p o sti ngs f r o m cas h bO O k o r ch eck regi st e r to

‘

p ur chase o r ac cou nt s p ayab l e l edg e rs wh e r e ac c o unts w ith c r ed

it o r s a r e carri e d A l s o che ck al l p o stings to acco u nts in the
.

gen eral o r p rivate l edge r s Exam i n e an d che ck vo u che r r egiste r

. .

C h eck P ur ch a s e s D i strib u tio n .

Exam in e al l p u rch as e i nvoi ce s com pa r e a mou nts w ith e nt r i es

,

u p on p u r cha se r e co r d o r vo u ch e r regi st e r In som e i nstan ce s .

c o m p ar e invo i ce s w ith o rigin al q uotation s o r p u rc hase o r de r s .

Ve r i fy di strib u tion O f ch arges .

C h ec kPo stin g s o f P u r ch ase s .

C h e c k in d e tail al l p o stings f r om p u rch as e reco r d or vou cher

regi ster t o a ccou nts p ayab le credit , .

T a ke T r i a l $ al anc e o f P u rch as e Le dge r Acco u nts .

Total cr e dit s t o ac c ounts p ayabl e fo r p u r ch ases m ade l e ss cas h ,

rem ittanc e s t o c r edito r s di s c ou nts ea r n e d an d allowan ce s an d

,

r e b a t e s o f whatever n atu re giv e s an am ou nt wh i ch sho u l d ag r e e

,

with b alance O f a c co u nts p ayabl e c ont r olling ac c ou nt in general

o r p r ivate l edger .

C h eck Sa l e s An a lys is .

Exami ne al l sal e s invo i c e s ch e ck aga in st sh ip p ing r eco r d t o

‘

p r event o v e r sight i n b ill ing sh ip m en ts c h eck against sal e s re c o rd

,

o r r e cap itul ation she e t . V erify s al e s analys i s o r cl assification .

51
 C h eck Postings o f Sa les .

C heck i n d etail all p o stings f r om t h e sal e s r e co r ds o r recap it u la

tion s heets to accou nts w ith cu stom e r s in t h e s ecti on aliz e d s al e s
l edge r s d eb its
,
.

T a k e Tri a l B al anc e Of Sa le s Ledg e r Acco u nts .

Total d e b its to accounts r ece ivab l e fo r sale s m a de l es s tota l

cre dits fo r c ash r e m ittances r ece ive d fr o m c u stome r s d i sco unt s ,

allowe d an d r eb ates an d al lowan ce s o f any natu r e gives a n

amoun t wh i ch sho ul d ag r ee with th e b alan ce Of the acco unt s
r ec e ivabl e cont r ol lin g a c c ount in th e general o r p r iv at e ledger .

W h e re se c tional i z ed sal e s l e dg e rs a r e u s ed an ag r eem ent i s ef

fe c t e d b e tw e en t h e it e m s th e r e in a s s e t fo r th ab ove an d the b a l
ance o f the co rr e sp ond ing co nt r oll ing ac c o u nt in th e gen eral o r
p rivate l edger .

C heck Sa l e sI nvo ces Against Sh ip m ents

i .

Exam in e sal e s invo i ces an d ch eck again st a c knowl edgm e nt or

c onfirmati on Of o rde r o r m an ifol d ship p in g record .

T a k e T ri a l B alan ce s o f Su b si d ia r y Ledge r s .

Effect an agreem e nt b etw e e n th e aggr e gate b al ances o f the a c

cou nts i n ea c h sub si d i a r y ledge r an d th e b alan ce O f th e co rre
,

s p o n din g cont r o ll ing a c c o unt in th e g e n e r al o r p r ivate l edger .

C h e ck I nv ento r y .

C o mp a r e p r ice s w ith p u rc hases i nvo i ces cove r ing g o o ds a n d

veri fy exten sion s an d additio n s Se c u re certi fi cate O f ass uranc e
.

f r o m s ecreta r y Of c omp any th at p r i ce s are co r r ect .

C heck Pa y Roll.

Exam in e l ast p ay r ol l C he c k ti m e clock ca r d s an d p i e c e wo rk

-
.

er s
’
r e ceipts again st e nt r i e s u p on p ay rol l an d v e r i fy total Ef
-
.

fe e t an agr e ement b etw e e n total l abo r exp en ditu r e an d p ay rol l -

d isb u r s emen t p rop e r ly vou ch e r e d b y clo ck c a r ds an d re c eipt s .

I f lab or dist r ib ution i s mad e v e r i fy t h e s am e

, .

C h eck B ill s Receiv a b l e .

Exam in e e a c h ite m c a r e f u lly an d e ffe c t an ag r eement b etwee n .

t h e total am ou nt o f b i ll s r e ce ivabl e o n han d dep o site d a s co l

,

l ate r al secu r ity o r otherwis e u s e d a n d stil l unp aid an d t h e b al

anc e o f th e b ill s r e c e i vabl e c ont r ol ling a c co unt in th e gen e r al o r
p rivate l e dge r .

52
C h e ck B il ls Pay a bl e .

Ex am in e carefu lly th e o r iginal r e c o rd o f ea ch item an d e ffect an

agreem ent b etween th e total am o u nt o f al l b ill s p ay ab l e i ss u e d
an d stil l u np a i d an d th e b al an ce Of th e b ill s p ayabl e cont r oll ing
acco u nt in th e gene ral p rivate l edge r .

Pres ent a tio n Of L a st O ffi ce Pa y Rol l .

I n co r porate i n fin a l rep o r t a copy O f last O ffice p ay r oll As c e r -

.

tain i f sal ari e s p ai d to O ffi ce rs a r e autho r i ze d by m inute s Of m eet

ings o f B oard O f D i re cto r s .

Ta ke Trial B al an c e f r o m Sto ck Le dger .

Eff ect an agreem en t b etw een th e total n u mb er share s i ss u ed of

an d o utstan din g a s Sh own b y deb its t o accou nts with sha r e

h ol d e r s i n th e sto ck l edger an d the total n u mb er o f share s o f
autho riz ed cap ital wh en the fu ll n u mb er O f S h are s are s u b sc r ib ed
an d i ss u ed I f th ere i s any tre as u r y sto ck it m u st b e adde d to
.

th e total d eb its to sto ckho l de rs acco u nts to ag r ee with total

’

s hare s o f ca p ital sto ck Exam in e ca r ef u l ly th e stock c e r ti ficate

w
.

b oo k C heck stub s ith d e tache d ce r ti fi cate s again st ent r i es to

.

accou nts wi th sharehol ders i n th e sto ck l edger .

C h ec k D ivi den d A cco u nt .

M ak e l ist O f al l d ivi d ends d ecl are d an d p ai d . As certain amo u nt

o f any d ivi den d checks o u tstan ding u np ai d .

T a ke T ri a l B a l anc e fr o m Priv a te Le dger .

A s ce r tai n e q u il ib ri u m o f p r ivate l e dge r afte r m aking p r op er al

l owan ce fo r all co r r e ction s an d a dj u stm ents .

P r e p are T r a ding St a teme nt .

Pre sent statem en t contain in g al l t r ad ing a ccount b alan ces an d

show p ercentage o f g r o ss p r ofi t up on n et sal e s and t u r nove r .

P r e sent dep a r tm ental o r cl as s i fi e d t r ad ing statem e nts an d cor

r es pon ding p e r c e ntages when opp o r tu n ity i s a ff o r d e d an d c o n
t r act call s fo r th em .

P r e p a r e Profit and Lo ss St a te m ent .

Pre sent stat e m e nt contain ing al l p r ofit an d l o ss b alan c es incl u d

in g g r os s p r o fit s f ro m t r ad i n g stat e m e nt ente r ed as a c r edit .

53
 Sh ow net ro fit e stabl ish u n it of p ro du ction a nd th e fol lowing
p , ,

statisti c s
Total o utp u t in units ,

Av e r age n et s e ll in g p r i c e p er u n it ,

Ave r age Op e r ating exp e n se p e r u nit ,

Total ave r age c ost p e r u n it ,

Av e r ag e n et p r o fit p e r un it .

P r e p a r e B al anc e Sheet .

P r es e n t stat e m e n t conta in ing all ass e ts an d l i ab ili ti es acco unts .

D O n o t Ov e r loo k floatin g ass e ts o r floating l iab il iti es Ex e r ci s e .

p rop e r p r e cautio n t o p r e v e nt i nfl ate d val u ation s $ e su r e all .

l i ab il iti e s a r e i n c l u d ed C on s i d e r p u r cha se an d sal es d is counts

.
,

dep r eci ation re se r v e s et c

, ,
.

P r e p a r e Sched u l e o f A dj usting Entr ies .

Pr e sent li st o f al l a dj u sting ent r i es n e c es sary to p ut b ooks up on l

a c o r r e c t b as i s.C o mm e nt u p on e nt r i e s when n eces sa r y th at , ,

th ey m ay b e r eadily u n de r stoo d I n c orpo r at e in fin al rep o r t any

.

sugge stion s fo r i mp r ov em ent i n m etho d s u s e d et c ,

.

G EN ERAL I N F O RMATI O N .

A ft e r h aving ca r e fully stu di e d t h e com pl ete au d it p rog r am c o y

erin g al l O f t h e i mp o rtan t an d m ino r detail s e ss e nti al t o th e s u cces s
o f a tho r ough an d co mp reh e n s iv e au dit an d ca r eful ly revi ewin g th e
c on den sed au dit p r og r am i t m ay o ccu r to th e r e ad e r that there
,

shoul d b e n o d ive r s ion f r om th i s pl an N otw ithstan ding th i s fa c t .

th e r e a r e n early a s many w e l l d e fine d p lan s o f au dit a s there a r e

,

fi r st clas s au d it co mp an i e s u n d e rtakin g th e wo r k Th e fin al res u lts .

a r e ap p r ox i mat e ly th e sam e b u t thei r m et ho d s Of gettin g th e final

,

r e sults di ffe r mat e r i ally Th e p lan s e l e c t ed an d exp l ain ed i s c o n s i

. d
er e d co mp l e te an d com p r e hen siv e an d it i s safe to s a y that i t gu ar
a n t e e s a c c u r a c y an d con se r vati s m w h i c h m ak e th e aud ito r s p o s ition
’

ve r y s e c u r e It i s a p lan whi c h read ily m e e ts w ith p op ul ar favo r

.

b e c au s e it IS easily u n de rstoo d an d its tho ro ughn es s p arti cu larly

comm en ds i t .

It is a n e x c e l lent pol i cy fo r an au dito r t o p ro c ee d with an a u d it

ve r ifyi ng t h e r e co r ds e t c u p on a m onthly b as i s u s ing the b alan ces

, .
,

wh i c h h e know s to b e co rr e c t fo r th e p r evio u s mo nth i n c onn e c tion

with t h e e n tri e s r e c o r d ed u pon th e b oo ks i n t h e su c c e eding month ,

54
 fo r t h e p u r p o se O f a rr ivin g at th e b al an c e to b e u se d i n conn ectio n
’
with th e n ext su ccee ding m onth s wo rk etc I f th e au dit covers a
,
.

p e rio d o f mo r e th an a y e ar o r a p e r io d Of ye a r s h e w il l fi n d it a d
, ,

v a n t a g e o u s t o p re sent m onthly co mp a r ative stati stical repo rts .

The acco u nting r e co rds i n the m aj o r ity of b u s in es s hou se s

c l ai min g even m edio c r e a cco unting e ffi c i en cy a r e n o w
s im pl i fi ed to
su c h an exte nt that s atisfa cto r y result s a r e Obtain e d by th e u se Of
col u mna r ac c ounting reco rd s an d an au d itor th e r efo r e c u sto ma r ily
u s es sp ecial co l u mn ar sh e ets o f fou r six ten an d fou r teen col u mn s
, ,

up on whi c h to m ake notes Of n e ces s ary a dj u stin g ent r i es etc H i s ,

.

n ot e s en t e red u pon th es e sh eets as th e e r ro r s a r e d i scove r ed fo r m

t h e b a si s O f th e fin al l i st O f adj u sting entri es s ub m itted an d co m
ment s m ade the r eon .

T h e au d ito r sho u l d n o t b e d en i ed acc e ss t o th e r eco rd of m i n

ute s o f the co r p o ration fo r m eetings o f b oth sto ckhol d e r s an d di rect

o rs an d if a n e
,
w co r po r ati on th e o r igi n al r e c o r ds a s kep t b y th e
se creta r y o r O t h e r O ffi cial fr o m t h e tim e o f i n co r p o ratio n It i s d e
. .

ci d e d l y to h i s a dvantage t o read the se ve r y c a r efu lly to m ak e certain

th at th e ac cou ntin g r eco r ds a r e i n a c co r d with al l vote s o r r esol u
tion s m ade an d p as s e d b y th e sto c khol de rs an d di r e cto rs a s r e gards
s al a r i es Of O ffic e r s et c an d p a rt i
,
.
,
c u l a rl y i w
t h refe ren c e t o th e a u
‘

t h o ri z e d amou nt o f c ap ital sto c k n u mb e r Of s ha r e s an d th e val u e s

,

th ereof Thi s s u ggestion i s m a d e p a r ti ally fo r the reason th at in

.

m any i n stan c es t h e au th o r iz ed cap ital sto c k o f a c o r p o r ation h as

be en n o t mo r e th an o n e thou san d sh a r e s o f o n e hu n d r e d dol l ar s
each w h e r eas th e di r e cto r s hav e sol d an d i s su e d sto c k g r eatly in ex
,

c es s Of th e autho r iz e d c ap i tal an d h av e del ib erat e ly m is u s ed t h e fun ds

se c u r e d f r om th e sell i ng Of th e u n autho r iz e d sh a r e s .

It i s r egarde d a s goo d fo r m fo r th e au dito r t o in co rp o r ate i n h i s

fin al r e po r t a d e tail ed an a lysi s o f each accou nt ca rr ie d i n the gen e r al
o r p r ivate le dg e r . W hil e h e i s natu ral ly exp e c t e d to p r esent p rop e r
statements o f b il ls re ce ivab l e b ill s p ay abl e copy O f l ast o ffi c e p ay
,
‘

r ol l ;
,

t r ial b al an c e t r ading statem ent p r ofit an d l o ss statem ent an d

, ,

bal an ce sh eet O f a ccounts i n th e p rivate l e dg e r an d i n som e i nstan c e s

h e d oe s n ot r e ga r d it n e c e ssa r y to p resent an an alys is O f eve r y a c
c ount i ,
n v i e w Of th e n atu r e O f th e p ri vate l e dge r an d the p u rpose

it i s inten de d to s e r v e i t i s r e com m end e d th at a p r op e r exh ib it O f

e ach acco un t th e r ein b e in co r p o rate d in th e au dito r s r ep o r t Pa r t i
’
c .

ul ar attention sho uld b e p ai d to an item i z e d l i st o f all b ad debts

h a ving any b ea r ing wh ateve r u pon th e b al an c e sh e e t o r any su sp e nse
55
a ccou nts in cl u d e d at th ei r face val u e ,
or i n con n e ction w ith whi ch a
reserve h a s b een c r eate d .

Th e r e a r e va r yin g con dition s to be d eal t with in d i ff e r ent li n e s

o f b u sines s . I n certai n l in es i t i s custo m a r y to enter u p on the
b oo ks a c c ounts with cont r a cts s e cu red p rio r to th e i r h av in g do n e th e
wo r k cal l e d fo r by th e ag r e em en ts s e t fo r th the r e in Su ch a n o c.

c u r e n c e sh oul d n o t es cap e th e attenti on Of th e au d ito r who Shoul d

c re ate a r es e r v e to O ff s e t any su ch cont r a c t a c c ou nts e qu ival ent to

-

th e esti mate d co st O f c o mp leting th e work wh i ch m u st n e cess a r ily

b e p erfo r m ed un de r th e m T he sam e i s tru e in som e l in es in con
.

n ect i o n with u n fill ed o r de rs It i.s re ason ab l e to sup pos e that eve r y

b u sin e s s m an has a p e r fectly n atural d e si r e to h ave h i s b ooks make ‘

a s goo d a Showing a s p o ss ib l e h is a mb ition in th i s resp ect so m e

,

t i m e s e xceeds p r op er co n se r vati sm an d h e u n c ons ciou sly i n cl u d e s

a mong h i s as sets fi ctiti ou s item s su ch a s un fil l e d o r d e r s W h il e it
.

is tru e th at a goo - d b u n ch o f o r de r s o n h an d p o s sess e s a c ertain

amou nt o f val u e to th e b u s in e s s it i s al so tru e th at th er e m u st b e
'

a n exp en dit u re i n ti m e an d mon e y to co mpl ete tho s e cont r a cts with

th e p o s s ib il ity o f so m e O f th em b e ing can cell ed b efo r e b e ing fi lled .

An adj u stm ent a c c o unt i s ve r y Often o p e n ed in th e gen eral o r

p rivate l edge r fo r th e p u r p os e O f m aking n eces sary adj ustm ents an d
c o r r e ctions i n th e r e co r ds .

It woul d b e d i flfic u l t to e sti mate th e n u mb er o f el ectiv e a u dito r s

s ervin g so m e O f th e b est corp o r ation s wh o are ab sol utely un qu al i fied
to ful fil l the resp on sib il iti e s int r u sted to th em an d who get th ei r
m onthly t r ial b al anc e s by d elib erately m aking u pon th e b ooks a
s i ngl e ent ry eq u al to th e d i ff e r en c e b etw ee n t h e deb its an d c r ed its .

Su ch a con dition i s d epl o r ab l e as wel l as h ar d to acco u nt fo r I n th e .

first pl ace a p erson cann ot u n de r stan d how an i n divi d u al c a n d e l i b

e ra t e l y fo r ce hi s t r ial b al an c e i f h e has any rega r d wh atever fo r th e

eq u il i b r iu m o f h i s le dg e r Th ere i s rea son abl e excu se fo r anyon e

.

m aking e rr o r s b u t th e re i s ab sol utely n o excu se for a p e r so n to d e

li b e r a t e l y ov e r l oo k the m a n d n ot m ake any e ff o r t to fi n d them
-
.

Th e r e i s s o m u c h l ite r atu r e o f a s ci enti fi c an d techni cal n atu re n ow

p u bl ish e d cov e r ing th e s c i en ce O f a cco un tin g that it i s i
' n ex c u s e a bl e

fo r anyon e w ith a m e di u m am ou nt o f amb itio n to c lai m a lack O f

knowl edge O f th e p r op e r m eth o d s O f h andl in g th e wo r k wh i c h i n

va r iab ly r e du ces th e s i tu ati o rito o n e o f ca r el e s sn e s s

,
n egl e c t o r l ack
o f inte r e st.

56
 p r e feren ce t o a co mp lete detai l e d au dit an d wh il e thi s sy st e m p o s
,

s e ss e s a c ertain amou nt O f m erit i t i s adm itte d that it do es not

,

p rovi de su ch an ab sol ute check u p o n th e wo r k a s wil l sati sfy th e

w
m aj o r ity o f b usi n es s m en h o p r efe r to have an exten s ive i nvesti
ati o n ma d e Of th ei r a c co u n ting re co r d s wh en an au dit i s u nder way
g .

T h e total sal e s fo r th e p e r io d i
s u s e d as a b as i s o f th e a u dit an d
'
to a ce r tain e xtent t h e p r i n cipl e s involved foll ow ve r y cl o sely th os e
al r e ady ou tl in e d i n conn e c tion with p roo f o f p ostings to se c tional ize d
sal e s ledg e rs e t c F o r th e p u r p o s e O f d eterm in ing t h e total a mo u nt
, .

o f sal es fo r th e p e r io d i t i s suggeste d that an ad din g m a c h in e b e

u s e d tak in g th e amo unt Of each invo ic e f r o m th e man i fo ld i nvo i ce

o r sal e s r eco r d o r r ecap itu l ati on Anyon e fam il ia r with th e p r in ci
.

p l es o f th e s c ie n c e Of accou nting will tho r oughly un d e rstan d th e fol

l owing exp l an ation s mad e .

Th e p r in cip l e s i nvol ve d ap p ly e qu al ly a s well wh e the r or no t

s e c tional iz ed s al e s l edge r s are u s e d a s th e tota l s ale s fo r m th e b asi s
o f th i s syst e m . Th e a u ditor fi rst det e r mi n es th e total a c counts r e
c ei v a bl e at th e com m en cemen t O f th e p erio d rep r es e nte d by th e n et

d eb i t b al an c e O f th e ac cou nts i n th e s al e s l edge r s By the u s e o f an

$

a dd ing m ach in e h e r e a dily dete rm ine s t h e total s al e s fo r th e p e r i o d ,

w hi ch o f cou r s e a r e p o ste d t o th e d eb it S i de o f th e sale s l e dg e r a c

, ,

c o unts I n ad dit i on to th e se d eb it p o stings th e r e will b e a few m o r e

.

f r o m th e j ou r n al the s e a r e al so determ ine d

,
B r i efly state d th e
.
,

total acco u nts re c e ivab l e at th e com men cem e n t o f the p e r iod p lu s ,

th e total s al e s fo r th e p e r i o d pl u s th e total deb its to a c c o unts r e

,

c ei v a b l e f r o m t h e j o u r n al fo r th e p e r io d giv es the total deb its to

,

th e sal e s l edg e r s .

Th e n ext step i s a con s i d eratio n o f t h e c r e dits again st the su m

total O f d eb its exp lain ed F o r th i s p u r p o s e th e total ac c o u nts r e
.

cei v a b l e at th e en d o f the p e ri o d i s r egard e d a s an invento ry an d

w
t r eat e d as a c r e dit Th e re wil l b e a fe othe r c re dits p o sted fro m
.

th e j o u r n al whi ch w i ll h av e to b e ve r i fi e d Th e au dito r then add s

.

th e j o u r nal credits to th e accou nt s r e ce ivabl e invento ry at th e en d

o f th e p e r iod ,
an d d ed u c ts th e am ou nt thu s Obtaine d f r om th e total
d eb its co mp r is e d o f th e th re e item s as exp l ain ed in ord e r to arrive
, ,

at the p o stings to a c c oun ts r e c e ivab l e $c r edits $ from th e cas h b oo k ,

in othe r words n et cash receipts f r o m sal e s a cco unts

w
.
,

Th e m aj o r ity O f b o ok k e e p ers ca r ry at l ea st t o colu mn s u p on

-

the deb it si de o f th ei r cas h b ook o n e i s u se d fo r t h e a mo unts O f all

,

58
gene r al cash recei pts th e othe r cash receipts f r om sal e s accou nts
, , .

H oweve r i f gen eral ca s h re ce ipt s an d the cash r e ceipts fro m sal e s

,

accounts are b oth ente r e d in o n e colum n th en th e a u d i tor is com

e d to d eter m
,

p e l l in e the total cas h r e c eipts an d de du ct t h e amo u n t

thu s Obtai ne d f r o m th e total ca sh rece ipts fo r th e p e r io d t o a sce r tain
h ow m u ch th e n et cas h re c eip ts f r o m s al es a c c o unts fo r th e p erio d
shou l d b e Th e r e w ill b e i nvari ab ly a few j ou r n al e nt r i e s po ste d to
.

t h e sales d i vi s ion o f th e l e dger wh i c h m akes it n ecessa r y to de

t e r m in e the total Of su c h deb it s an d cred its I t i s a dm itt ed that th e
.

ab ove expl anation cove r s i n a m eas u r e th e p r o of Of th e p o stings to

th e s al es l edg e rs alth o ugh th e p o stings O f items co mp r i sing th e g e n
'

e r al cash receip ts a r e n ot p r ov en T he se s ho ul d b e total ed an d th e

.

amount c o mp a r e d with the am o un t o f total gen e r al c a sh r eceip t s

shown .

U p to th i s p o int th e a u d ito r h as en d e avo r e d t o p l ac e r eason abl e

ch eck u p on cas h receip ts an d s al es h e n o w
d i rects h i s att e n tion to
,

th e credit si de O f the cas h b oo k o r check r e giste r Th e av e r age u p

.

t o dat e b u s ines s ho u s e n ow m ake s all di sbu rs em ents o f whateve r

-

n atu r e by che ck w ith the ex c e p tio n O f p etty ca sh fo r wh i c h a ch e c k

, ,

i s d r awn c r eatin g th e fund . W h ere a check regi ster is u se d th e

amoun t O f each c heck d r awn i s ente r e d in a s p eci al col u mn . Th e
s am e i s t r u e i f th e ca sh d isb u rs e ment s b y ch e ck a r e ente r ed up on
th e c r ed it si d e o f th e cas h boo k In un dertaking th e wo r k o f au d
.

iting t h e cash d i sb u r sem ents th e au dito r do es n o t rely u p o n th e

a ccu r a cy Of t h e amounts ent e re d in th e sp e c i al col u m n m enti on e d
b ut ende avo rs to pl ac e a che ck aga ins t thi s r e co r d by r e fe rr in g t o
th e b an k p ass b o ok w hi ch sh ows th e total a mo u nts Of al l c he c ks r e
tu r ne d by th e b an k monthly wh en th e pa s s b ook i s b alan ced I n th e .

fi r st p l ace h e dete r mi n e s th e total O f all Che cks returne d by th e ban k

d u ring the au d it p e rio d h e th e n r efe r s to th e st u b o f th e che ck book
,

at th e co mm en c em en t Of th e p e r io d fo r the p ur p os e O f det e rmin in g

th e total am ount o f c he cks outstan ding at th e com m en cem ent O f th e
p e r io d Thi s in fo r matio n i s u su ally s e t fo r th i n th e reco n cil iation o f
.

th e ch e ck book an d p as s b oo k b al an ce s a s ente r e d u pon th e ch eck

boo k st u b H e then r e fe r s t o the c he ck b oo k stub at th e clo se Of
.

th e p e r io d an d d eterm in e s th e total amou nt o f ch ecks outstan ding ,

in th e sam e m an ne r I f th e b ook ke ep e r ha s n ot al ready r econ cile d

.
-

th e ch eck b o o k an d b an k ib ook b al an c e s th e au dito r m ay do s o h i m

s e l f an d thu s b e ce r tai n th at the l i s t O f ch ecks o utstan ding i s co r rect .

Thi s expl anation m ake s it c l e a r ly evi dent that th e total amoun t O f

59
c heck s retu rn e d p ai d b y th e b an k d u r ing th e au dit p e r i o d as shown ,

by th e b an k s ent r y u p on th e p as s b ook l e s s the total o f ch ecks

’

o utstan ding u np ai d at th e com m encem ent o f th e p eri od p l u s th e ,

total am oun t O f ch eck s o utsta n ding un p a i d at th e clo s e O f th e p eriod ,

g ives an amount wh ich s houl d ag r ee w ith th e total ch ecks i ssu e d

a s reco r d e d i n th e cash b ook o r u p o n th e c h eck r egi ster i n th e
,

s p ecial col um n show in g ch e cks d r awn .

It $i s rap i dly b e com ing th e c u sto m amon g u p to date b u s in ess ‘

- -

ho u s e s to deman d th e d e po sit of al l m on ey s receive d i n stea d O f a p

p ro p r i
a t in g c a sh re ceipts fo r d i sb u rsem ents O f any n ature I f th is .

p l an i s foll owed i t b ecom e s evi den t th at th e total d e p o s its fo r th e

a u dit p erio d sho u l d ag r e e w ith th e total cash r ec e ipts Th e valu e o f
.

thi s p l an i s in creas e d by n otin g th e si mpl i city Of th e fol l owin g

m etho d o f p r oving cash r eceipts an d d isb urs em ents
Th e au dito r refers to t h e b an k p as s b oo k wh i ch wh en b al an ce d
,

monthly sh o ws th e mo nthly total s O f dep o sits m ade by a b u s in ess .

T O th e su m o f th e m onthly total s fo r th e au dit p eri o d i s a dd e d th e

b alan c e o n de p o si t as sh own by th e b an k p as s b ook an d fr o m t h e ,

am oun t thu s Obtai n e d the r e i s d e du cte d th e bal an ce o n d ep os it at

th e co m m en c e m ent o f th e p erio d fo r th e p u rp o se o f d eterm i n ing th e
a ct u al d epo s its m ade . I f al l cas h r eceip ts a r e d ep o site d ac c o rd i ng ,

t o the p r evail ing c u stom th en t h e b an k d e p o s its sh own by ca r ryi ng

,

o u t th e ab ov e plan sh ou l d agre e w ith th e total ca sh r e cei p ts o n th e

d eb it s i d e O f th e cash b ook fo r t h e su m total o f gen eral cash re ceip ts

an d ca sh r ecei p ts f r o m sal e s accounts .

It will therefo r e b e s een that u n der th i s p l an O f au diting in

, ,

w h ich s a l e s are u se d as a b as i s th e total cash r eceipts a r e p r oven

by th e entri e s u p on th e l edge r s an d the total cash d i sb u r s em ents a r e
p roven b y th e b ank p a ss b ook entri e s in wh i c h a r e m ade by the
,

b an k wh ich i s a d i sinterested p arty fr o m an au diting stan d p o int

,
.

Th i s system O f au ditin g el i minate s th e n ece s s ity o f ad d in g any

O f th e colum n s i n th e cash b ook o r che ck regi ste r o r ch ecking the
,

S ingl e po sting to any o f th e a ccou nts i n th e l edgers It i s co n si

. d
e red r easonabl e p r oo f th at al l cas h rece ip ts have b e e n p rop e r ly a c

c o u nted for an d a s th e au dit i s con du cte d sol ely by total s it i s n ot

a l ab o rio u s task fo r th e au dito r to che ck th e monthly footings O f

s p e cial col u mn s in th e ca sh b ook sale s r e co r ds o r j o u rn al t o th e

,

c ontrol l ing a ccounts i n the gen e r al o r p r ivate l e dger .

Th e actu al wo r k in conn ecti o n w ith th i s syst e m O f a u ditin g con

s ists i n a ddin g t h e sal es fo r th e p e r io d de te r m ining th e amou nt O f
,

60
gen e r al cash re ce i p t s p etty c ash d isb u r sem e n ts a r e tak e n c a r e O f by
,

drawi ng a check fo r c r eating th e o r igin al fu n d th e h an dl ing o f t h e

,
‘

total s i n di cate d a cco rd in g to th e pl an o utl in ed p roving th e accu racy

,

o f th e ac co u nts receivabl e an d s afe gu ardin g again st in accu racy in

-

any o f th e gen e r al a cco unts i n th e t r i al b alance A s i de fro m th is

.

wo r k th e au dito r i s exp ected to emp loy th e u sual m etho d s fo r a s

ni
c e rt a i n g that t h e r eso u r ces o f the b u s in es s a s ente r e d upon th e

b al a n c e sh eet a r e n ot in fl ated th at th e invento r y c al cul atio n s are

,

co rrect an d th at al l l i ab i l iti e s o f th e b u sin es s a r e in cl u ded Th i s .

syste m doe s n o t gu a r ante e t hat th e d i sb u rsem ents have b een m ad e

p r op e r ly to cove r p u r chas e invo i ces e t c b u t i t el i m inate s th e n e c e s
w
.
, ,

si t y Of ch e c ki ng ,
i n som e i nstan ce s a fe ,
tho u s an d pu rch as e i n

vo ice s It di s r ega r d s p u rchas e d ist r ib utio n et c

.
,
.

A ca r e fu l co mp a r i son b etween th e a u diti ng pro g r a m o ut l in ed in

the p r e cedi ng p age s fo r a com pl et e d etail e d au d it an d thi s system ,

o f au d itin g by total s ,
Show s a con si d erab l e d is c r ep an c y i n th e l atter .

In a dditio n to th e r e b e i ng n o v e r i fi cati on o f p u rc h ases di stribution as ,

al r eady stated n o attenti on i s giv e n to th e sto ck l edg e r an d to va r i

,

o u s oth e r c ons i d e r ation s e ss en ti al to an ab sol ute gu a r ante e th at th e

final t rial b al an c e t r adi ng statement p ro fit an d lo s s statem ent a n d

, ,

b al an c e sh e e t pr e s e nte d by t h e au d ito r a re co rr e c t an d e xh i
b it a tru e
con dition o f a ffai r s Of t h e b u s in es s I t i s design e d fo r the p u rp os e
.

o f p r ov ing th at n o defal cati on h as o c cu r r e d in th e h an dl i ng o f th e

cas h .

61
 In d e x

Acco untant
Adj u stin g Ent r i e s
A u dit Essenti al
Au d iting
A u dito r
Au d ito r s C e r ti ficate s
’

C o ntract
$

D u tie s
L i ab il itie s

Q u al ific ation s
Re sp on sib il iti e s
Book kee p e r
-

B ook s an d Re c o rd s fo r Investigatio n
C on d e n se d A u diti ng P r og r am
C o op e ration So u ght
-

C o st Ac c o u n t a n t
-
. .

D i ff eren t K in d s of A u dits
C om p leted A u d i t
C ontin u o u s A u dit
Pa r ti al A u dit
Perio d ical A u dit
Sp ec i al A u dit
Essenti a l Of an A u dit
Ex h ib it O f L a st O ffic e Pay Ro l l
Genera l In fo rm ation .

Pay Ro l l A u dit
P r actical A u diting System
62
 Statem ents
B al an c e
B ill s Payabl e
B il l s Receivab l e
P r ofi t an d Lo ss
T r ading
System ati zer
System O f Aud itin g by Total s
T ri al B al an c e
.

Private Le dger
P u rch ase L edge r Ac co u nts
Sal e s Le d ger Ac co u nts
Sto ck Le dge r
Su b s i d iary L edgers
Val u e O f an Au d it
V e rific a t i ons

B ank B al anc e
C a sh B al anc e
Di vi den d Ac co u nt
Footin g
I nven to r y
I nvoi c es w ith Ship ments
—
Po stings C ash D i sb u r sement s
Po stings— C a sh Recei p ts
Postings—P u r c has e I nvo i ce s
—
Po stings Sal e s In vo i ce s
Po stings t o P r ivate L e d ge r
P u rch as e s D istrib u tio n
Tri al B a l an ce
Sal e s C l as s ific ation
U N I V ERSI T$ OF C A L I F O RN IA L I $ RA R$
$ E RK EL E$

TH I S $ O O K IS D U E O N TH E L A ST D A TE
STAM PED $ EL O W
$ oo k s n ot re t u r n e d o n t i m e a re s u bj e ct t o a fin e o f
5 0 c p er vo l u m e a f t er t h e t h ir d d a v o ver d u e i n c re a s i n g
p er vo l u m e a f t er t h e s i x t h d a y $ oo k s n o t i n
,

d e m an d m a y b e re n e w
to
f a p p l i c a t io n i
s m a d e b e f ore
.

ed i
e xp ir a t io n o f l o an p erio d .

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’ ’

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