Professional Documents
Culture Documents
in
general p rin ciples ; the applica tion of th em c an only be
learned by practical experience under th e dir ection of a
public a ccountant and au ditor .
“ ”
lis hed in The Business World .
mg .
1 7 3 7 24
4
A u diting , L R Dick s ee F . .
, . C
. A .
Auditing , F W Pixley F . .
, . C. A .
J Hardc a stle C P A
Encyclopa
.
, . . .
Accounting in Theory
and Pra ctice Geo rge Lisle C A F , . .
, . F A
. .
FREDERICK S TIP SO N . .
view the work oi others with the obj ect of determ ining
its a ccuracy as evidenced by absence of
( )
0 Fraud ;
b
( ) Technic a l errors
( )
c Er r o r s of principle .
thing .
The auditor should first ask for the minu te book whi ch ,
a
,
l
p y o ee s who “
too k ”
it ;
( )
b That capital a nd r even u e expendit u re have b e en
prope rly cl as sified
( )
c That the profit and loss acco u nt has been charged
with a p rope r pe rcenta ge of depreci ation off items s ub
j e ct to we a r an d tea r
,
and th at proper provi s ion h as
( )
e Fin a lly
, if divid e nds have been decl a red th at the y
have been paid ou t of su rpl u s and do not work an impai r
ment of capital .
The stu dent will find that a tho rough knowledge of cor
p o ra tio n law is a bsol u tely indispensable to th e e fi ec tiv e
gr ee
with the ca sh book balance Having pe rsonally deposited
cash a
.
,
c
ble ,
creditors .
stated
Lastly the ba
.
bl e signed ,
,
s k fo r the Min ute Boo k
IO
ad
n request that the S toc k Certifi cate Book Transfer ,
’
c
counts ) entered in the books ?
s to
, . t if
,
t
adequate provision ha s be en made f or depreciation .
, , ni za
,
, s to the ,
II
nd p a ssing
duced simulta
,
s cer
tain what ac c ou nts if any shou ld be w ritten o ff a s bad
, , .
in :
12
mt , that every ba
lance con sists of certain unpaid for -
bills ;
2nd, that no old di ff erences which sho u ld have been
written off a re included ;
3 r d that, no old bills re m ain un p a
id while r e c ent ones
have been settled unless satisfactory expl anation is forth
,
coming ;
4 th th a t no ac co u nt is included as good whi ch is b a r r ed
by the sta
,
tute of limitations ;
s th ,th a t b a l a nces d u e by insolvent fi rm s are trans
f e rred to do u btfu l a c co u nts ; and
6th tha t where outsta nding balances be foun d of un
us u ally l arge amo u nts the sta
,
,
nding and c redit of the
fi rm be ca refu lly a scerta ined This l atte r p recau tion is
.
especi a lly val ua ble whe r e a cco unts have been partly
cl osed by notes receivable which remain in the safe or
, ,
The au ditor should requ ire the produc tion o f all the
books of accou nt and a l l s u bsidiary books to which ref
,
bo oks ca
.
scer ,
) inventories , ( )
b
pay rolls ( c ) d ep reci ations and dis counts ?
-
,
a
( ) The au ditor shou ld hold himself r esponsible for
th e extensions and f ootings of invento r ies and s tate in ,
ge of gros s
profit in the Trading Accou nt shou ld be of great value
in determining the prima f a cie val u e of the reliability of
the inventory
a a
.
( )
b With re g r d to p y rolls-
the auditor
,
can che ck
time worked from fo reman s book into pay roll sheet
’
-
,
-
,
l ag rees
15
( )
e As to depre c iation he should see t h at a prop e r
percenta
,
a
, ,
y be used s
id
a nd re ceived and seeing that the average pe rcentage
a
,
t th e
16
bills of l ding .
y rolls properly ,
-
re corded .
) man u
facture d goods ( )
b p a rtially m a n
,
u factu r ed goods ( )
0 ,
a
( ) Ma n u fa ct ur ed goods should be val u ed at cos t ,
b
( ) Partially man u fa c tured g oods s hould be va l ued
Sum , 1 8 97 .
( )
1 The detec tion o f fr a ud .
( )
2 The detection of techni cal errors .
tion of
th e revenue account to ascertain th at the p rofit or l os s
for a fiscal period shown therein is correct ; and the
reviewing all the items appea ring upon the ba la nce sheet
so that the au ditor may be able to certify tha
,
t neither
assets nor li abilities a re over or under stated -
.
, , n in cre sed
I9
ca
,
,
ndise by customers may have
been in cl uded in the inventory and not pa ssed through
the books to their credit The result would be th e same
a
.
,
cc rued liabilities .
f e rent nk .
d rawn on the ba
.
sho uld count cash and see that it agrees with his proof “ ”
margin .
. . .
y
be p roved by his le tte r s of advice ; the ci r culation re
ceiv ed f r om W a shing ton should be verified also w hile
,
d of interes t on in
ves tments .
cc ount On the
other ha
.
checking might show that the amo u nts were not depos ited
23
VII . How ma
y fraud in payment of wages be de
tected ?
,
nd
’
-mount
charged for piecework He should then go ca
,
reful ly
over the ca
.
p y
-
ro ll che ck made out by cashier and cash ac tually ,
drawn by him from the bank the money put into separate
,
ted ?
24
for profit sha ring were these cha rges not r ende red neces
s a ry
.
able.
, ,
nd total thei r f ace va lue He sho u ld next
.
—
cost c are being exe rcised to see that d u e p rovision
had been made for th e prope r appli ca tion of inte rest
whether bought a t a premiu m o r at disco unt
Stocks a s rega r ds va l ua
.
nd or in the
ban k for colle ction Those on hand m ay be verified by
exa
.
New roa d beds new buildings new side tra cks less
- -
, ,
nd bonds are
’
.
AS SETS . LIABI LI TI E S .
a
O ri g i n l C ost of R o d a C a
p ital St Co
oc k , on mm
Ba p i ta
a
. .
etter e s . o nd s .
r es s e P y - R o ll s
R a l E ta B
. .
nd Supp l i B
,
o nd C o up o ns
a
er s es
Ag nt a
. .
n d C nd u t Accrued T xes
a a
c or s
nd Co mpa
o
I nd i idua l a
e s . .
au y
. .
S ecuri ti es in th e Tr e Sund r i es
pa
s r . .
m
.
R enew l Fund .
y be illust ra te d a s follows
nuary 1 . To Inventory
June 30 . Pu rcha ses to date
1 904 .
June 30
. By consumption to da te
30 Invento ry
Shorta
.
ge to be accounted fo r .
ve to be accounted fo r .
ve to be accounted
f or .
28
we re no mistakes in ca
ances ha d been made for ma
a
I t would be necessa ry for the auditor to see that there
l culation and th at p roper l low
n u facturing shrinkage and
w a ste .
, l discounts be valued ?
,
) a
m an u factur ing business ( b) a fire insuran ce company
, ,
( )
0 a b a nk .
a
( ) In au ditin g the books of a m a n factu ring bu siness
u ,
All receipts should be traced into the bank ; all paym ents
ve rified by vouc hers ; all footin gs and postin g s che cked ;
and the balance on hand agreed with the pa ss book at -
( )
b In the au dit of the boo k s of a fire ins ur an c e com
p a ny the tot a l amount o f in co m e re c ei v able should be
first ascerta ined and ve rifi ed f rom the Policy Book and
the Renewal Register I f renewal r eceipts are given for
.
30
a
l l existing policies the un u sed receipts should be pro
,
receipts are u sed at the head offi ces and at the branch es
and agencies the numbe r of receipts issued used and re ,
, nd ,
will agree with the net amount receivable less the bal
a
,
, y
be able to certify tha t the assets are neither over nor
under st ated and th at a ll the liabilities h ave been ta
-
, k en
into account .
( )
0 The method of a u diting the books a nd a cc ount s of
a bank h ave been expl ained fu lly in the answe r to ques
tion n umbe r III J un e 1 897 to which the reader is re
, , ,
$ 5
1 2 00 a s it is ass umed ( a ctu a l ve rific ation having been
ma de by the audito r ) that the tota
, ,
l amou nt of checks
made ou t and charged th rou gh the ca sh book b u t not yet
-
se of leas es etc
Fixed or capita
.
,
nt
renewals the const ru c tion account might actu ally in
crease in val u e for va
,
t 1 16
-
Shou ld this p urcha se be
enter ed in the bal ance sheet at p a
.
r o r at cost p rice ? If
the l atte r wh at s ho u ld be done with the p remi u m in
, ,
“
incom e from investm ents accou nts It will be well to
”
l answe r to the
q u es ti on the income on the investment is not a s the
the consi g nment account with the sales p rice and charge s
a pe rsonal account with consignee with same ; credits a c
g
c h arges his own cash ac cou nt with same . Should th e
credit side of the consignment account exceed the debit
side the di ff e rence is the profit on the t ransaction whi ch
shoul d be debited to the consignm ent ac count ( closing it )
and credited to the mercha ndise acc ount as profit on con
s ignm ent .
VIII I f any pa
. yments are recei ved by a company on
ac cou nt of wo rk in process how should su ch paym ents
,
d of
“
paym ent received on account of uncompleted contra ct ”
,
35
( )
c invento r y of finished stock a nd ra w m ate r i a ls ( )
d
ba
,
bills pa
, ,
y able ?
Outsta ding ex—
accou nts by
a mination of e a ch
( )
0 n
( )
b Se cu ri tie s should b e all produced at the same time
e xamined listed and com pa
,
, ,
re d with m arket p rices cost ,
bills etc
a
, .
( )
c Inventory of finished stoc k and r w m a terial
should be checked a s to extensions and footings and
si gned by the pa rties who m a de up the invento ry Raw .
d
( ) Bank b l a n c es sho u ld be tested by h a ving p a ss
books written u p checks comp ared wi th stubs of check
,
books and outst anding checks ded u cted from the pass
,
book balances .
( )
e With r e g a r d to c r edito r s open a cco u nts’
the bal
a nces should be compa r ed with statements r ende r ed ,
compar ed with the stubs of the bill book and the entries
-
a
.
( )
b It would be un desi r able th a t the it em sh oul d p
37
pear in the profit and los s account as an abno rmal ,
in
crease in p rofit would be shown .
cate of its ave r age ann ua l p rofits for th ree years ; after
charging up a ll costs expense s and dep reci ation and an
, ,
r plus l
es tate Give the annual average profit to be ce rtified
. .
total
profit ; 3 th e ann ua l p r ofit to be
certified The p rofits on s a le of investments and r eal
.
, gainst
this reserve .
d
( ) p
e x enses of selling ; on the c r edit side ( )
e sal es (f) ,
te ,
them .
into accou nt
Reserve f or B a d Debts .
B a d Debts
Depr eci a
.
tion .
ten up to Janua ry 26 a
,
3 1
, the b a lance m a y be ve r ified on th at date also
. The
method to be adopted is fully explained in the answer to
question No 3 Decembe r 1 896
.
, , .
4 0
311116 , 18 9 8 .
re
rt
ners in a priv ate conce rn a
( ) finished goods
. on hand ,
( )
b r a w m a te r i a l ( )
c wo rk in p
, r og r ess d
( ) a c co un ts ,
acc ount.
)
repai rs to machine ry and plant ( b ) rep la cem ents of plant , ,
( )
c new plant p u rch a sed d
( ) cost of le as ehold
, premises ,
( )
e par tners salaries
’
.
( )
0 Repai r s to m chinery a and plan t— reven u e a cco u nt
a
.
( )
b Replace m e n ts of pl a n t— c pital acco u nt less r e
s idua
l value of th a t taken ou t
a
.
( )
c New plant —
purcha sed c apital
cco unt .
( )
d Cost of le a sehold p r emises— c a pit a l ac c ount
a a
.
( )
e Pa r tne rs s l 1i
’
es revenue ac co unt -
.
nd loss
a
,
ctual p rofit or
l os on go ds sold—d i ff e r ence between cost of acqu isition
i o
or manufactur e w ith incidental exp enses a nd s a le price .
, ,
dep rec i ation rese rves for bad debts and discounts wou ld
,
n ce
4 6
2
( ) A pu r ch a se ledge r con t a ining individ ua l a ccounts
with c r edito r s and a general ledger account W hi
“ ”
\
etc should cont a in sep arate colu mns fo r e ach ledger the
tota
.
, ,
c ,
It is not .
-
nd recon c ile its
sh book
- -
He .
shou ld then car efully check the footings of the cash book -
re
-
rti cul ar atten
tion shou ld be paid to s ee that items a
,
re en te red in th e
“
a ll amou nts appearing in the expense column Re
”
,
n ce s of the
case relying upon his own ta
, ct and judgm ent a s to the
see that all ch a rges and credits in the profit and los s
account are co r rect and proper and finally that the
, , ,
and that the am ount of stock iss ued does not exceed the
amount o f the au thorized capital stock of the corpo ra
tion .
, tes ?
a
,
r ectl
y st ted and,
t h a t the a ssets a nd li a bilities ar e
neithe r u nde r no r ove r stated To en able him to do this
.
) m e nd is e ( )
b m a chinery , ,
( )
0 r eal estate .
( )
b M a chine ry : Th e v a l u e should be determined by
comp aring pu rch a se bills with ledge r ent ries ca re being ,
( )
c Real Estate : The purchase pri c e should h ere be
taken plus any expenditu re for improvements Wh ere a
s ale is contemplated a professi ona
.
a
( ) Sto ks and Bonds : These shou ld be fi rst exa
c m
ined counted a nd listed
, Those quoted on the Stock
.
etc
( )
b t f ace
valu e a nd should either be on hand or le f t at the ban k
s to
lue it
wou ld be necessa ry to examine each account to see that
non e w ere outlawe d cons iderab l y overdue bad, or doubt
, ,
53
ful in the u s ual manner and care exercised to see that
, ,
cas hier cre dit clerk and stock cle r k then it wou ld be
necess ary to send sta tements to custome rs for verifi ca
, ,
tion .
ny be verified by the a u di to r ?
Supposing that the auditor has sta rted on his wo rk
before the books are closed at the close of busines s on
,
56
ba
, ,
dica
,
ber 1 896
, .
qu ir e d a
,
. ll
assets and liabilities we re properly b rou ght on to the
books of accou nt ve rify the opening ent ries by compa ri
,
sets a
,
accounts should be ext racted from the ledger and the sev
e ral sch ed ules of assets and li abilities constru cted which
,
3une 18 9 9 , .
Audit:
—
( au dit h e heaLatin
r s —
) The ex a —
minati o n .
u r a u a
'
rin
g e ch ite m wi th vo che s dding p e ch ,
— Coriol anus , I .
, 1 .
ud it s tands .
— H a mlet III .
, 3 .
”
pence .
uditors ,
— Timon of Athens 11 , .
60
to certify .
ve
to be replac ed If provision is not ma
. de for this out of
61
It is .
will a
, ,
ma de can be ve rified a s to da
.
,
,
te a nd a mo u nt with the
entries in the pas s book The check stubs can be com
-
.
The dispos ition of no tes rec eiv able can be traced a s can ,
-
u
ner ,
63
method .
The r e is .
check book reconciling the p ass book bal ance with the
-
,
-
checked the ch eck book stubs com mred with the cash
,
-
the ex istence of all othe r than book assets and the valu
ation of s ame p roved from the given d ata and all pos
sible sources The profit o r loss should be a rrived at by
.
nominal accou nts and controlling accou nts are not kept
in single entry books the a u ditor is often able to con
,
ticl es of agreem en t a
nd tho rou ghl y familia ri z e hi msel f
64
l agreed to .
stipu lated .
I
. Cash by
—actual cou nt of cash undeposited and ,
—
III Pl ant and ma chine ry by a ctua l inspection by
a
.
,
l y adj ust s ame be r efu sed ; ( 2 ) should the offi cers and
directors of a co rpo ration refu se him pe rmission to pro
vide a dequate rese rve for dep reciation ; and 3) should
dividends have been paid where no surplus existed
against which to charge them .
responsible offi ce r
a
.
( )
b To make sure that no de d men were charged
on the fixed lists the auditor should recommend that the
,
a telegraph company
a
( ) In case o f a steamship company the audi tor
the ,
3 Insurance
. and pensions .
b
( ) I n the case of a teleg ra ph company
1 Repairs and r enewals ;
.
a
,
l
p y o ee or member of the firm each outstanding account ,
, s
discounts etc , .
3aap 1
nu r , 9 00 .
ke up a bal
an ce sheet a nd by completing the posting of all charges
in the material
to con stru ct a pro fit and loss ac count to confi rm the a
,
a
.
fl in bringing
the wo r k up to date and in t king ofl a trial balan ce as
of the l ast day of the period under review He could .
tifica
, , ,
ses ) ,nc e
69
tions
o f the cor oration
p .
a
the seve ral accounts rec eivable fou nd open on the books
of a mercantile fi rm whose ccounts he is called on to
a u dit ? Give reas ons .
c redits for go ods returned into the retu rn book and stock
book Discounts credited should be checked into the
ca
.
a
,
p ec ted a final ,
tes t c ould be made by th e a u dito r per so n
ally mailing statements to the customers reque sting that
they be returned to him at his offi c e approved as correct
The reason s are tha
.
nd ?
70
in the
value of the pl ant and m achinery and of other assets ,
that might aff ect the net p rofits of the pe r iod under re
view ? Give a n indication of the repo rt you would make .
r was correctly
stated I shou ld take the av er age ann ual r es u lt of the five
,
The report made would depend upon circu mstan ces but
'
,
Dear Sir
In acco r dance with your instructions I have m a de an
examination of the books a
,
nd a c count of Messrs So .
rnings fo r the
per iod we re Appended plea se find a statement
72
tif y
. Yours faithfully C P A ,
. . .
, )
have been sent abroa d on consignment and rem ain un
sold ( b) are in the hands of the agents at home ( c )
, ,
a
( ) In making up the bal ance sheet goods that have
been sent ab roa d on consignment a
,
nd rema in unsold
( )
b Goods th at ar e in th e h ands of a gents t home
should be tr eated in the s ame way .
( )
c Go ods sent o u t on “
s a le or r et u rn sho u ld form
,
sh
74
“
lower .
s to their
inte res t o f the di recto rs and offi cers but in that of the
stock holders and the general p ubli c ba
,
-
nk s etc w ho rely
upon his bon a fides to state clearly the exa
.
, , ,
ct position
fina
,
”
nd surplus ,
“
profit and los s sho uld a lw ays be res isted as being
”
X Give rea
. s ons f or o r aga
inst the nece ssity of a
n
audito r s verifying the sto ck ledger of a corporati on
’
.
-
c
il s .
- nd ledg er the
debit s ide of the trial ba
, , , ,
lance is found to be in
ex cess of the c redit side ; how shoul d the error be
nd
c r edit entr ies since made and the res ult will be the cor
'
nd the
— t
“
the l ongest way round is the shortest way hom e a ”
nd
tha
,
nd ,
, ccount .
76
l ledge r controlling
account Whe re possible depositors pass books should
.
’
-
compli ed with .
re made by ch eck
-— th e
auditor should see tha t the bal ance s per cash book at a -
p are d with cash book ent ries ; d epos its checked with the
-
-
sh book In this way -
the m onthly c a sh ba
.
cou nt When pa
. i d this account shou ld be ch a rged and
,
counts ”
.
and unde r the stipul ation that the title shall pass only
when the last payment has been made At the close of
the fi s cal year there are yet several pa
.
yments to be made .
llments
to be paid As ea ch in sta
,
- . l
pe riod the machinery account would figure as an as set
— paid on accoun t of machinery — with a note stati ng
“ ”
yable
.
79
311m , 1 9 00 .
n au di tor
for the discharge of his duties .
nd
. c
men t of time .
cquisiti on of s u ch qual
,
-
, ns l eas t
, ,
reliability .
80
II Is it a
. n audito r s duty to con c ern him self to any
’
,
’
t
ten tion to the fa ct
pital expendi
tu r e o r decl ar ing dividends where no su rp l u s exists out
,
cate.
se the
members of the firm a re a lways aware of the act ual facts ,
e ry ?
lan ce -
.
ticul rs .
payment
eral ”
Ca n celled checks pa id wo u ld be at the bank a nd
should be compa
.
,
n d similar item s ?
a
( ) B a d debts shou ld be charged to pro fit and los s
account ; dou btful debts to a su spense account o r doubt
fu l debt ledge r are serve for same bein g crea
— ted .
b
( ) P remi u ms fo r fi r e ins u r ance u nexpire d : A p ro
( )
c Interest paid in advance on bills pay ble disco u nt
ed : The dis co unt accou nt ba
.
lan ce shou ld be charged
to p rofit and los s ac cou nt ex c ept such items as are t e
ferred to in the qu esti on This ba lanc e shoul d al so a
,
p
pear on the balance sheet as a
.
nt store and ofi ce fix
tu res and similar items : The items ma
,
y appear on the
ledge r and on the bal ance sheet at cos t if profit a nd l oss
g e of th e
correctness .
85
C P A . . .
,
—
magaz ine or periodical in short establishment ex
,
a
be placed a s sepa rate item in the balan ce sheet so th a t
no one can be misled on this subj ect As it repres ents .
Undeposite d
Reconciliati on with ca
sh book -
,
s c onsumed etc with , .
,
87
lan ce agreeing
with the total of a
mounts outsta nding and unpaid .
n in .
t1on
should rather be trea
.
( )
c broker a ge on p ur chase of a piece of propert y (d) ,
nd whi ch to revenue ?
Sta te rea sons for your ans wer in each case .
( )
0 Revenue : the earning capa c i ty is not nec ess aril y
increa sed by the O peration
a a
.
( )
b Capit l : these r e es tablishme nt expense s and ,
88
( )
c Capi tal : it is p a rt of the cos t of the p r ope r ty.
d
( ) Capi tal : the cha r ge should be written o ff b y
cha rges to profit and los s periodically du ring the term
the bonds have to run .
( )
e Rev e nue : it is an addition a l cha r ge to interest on
borrowed money
a
.
cond u ct of a business .
follows
A SSETS
Cash stock and accounts receivable $67 500
Ma
, .
,
a
t ined in one general ledger s tate precisely the steps
a
,
l s of receipts and
disbu rsements into the ca sh account in the ledger and ,
see that the fina l balance agreed with the cash boo k bal -
ls
could be verified Much woul d of course depend on
tim e a Where a dmissable the cash t ra
.
, ,
n d fee nsactions
should be checke d exha
.
,
ustivel y .
lance
sheet : ( a) la n d and buildi ngs b
( ) stoc k s and bonds ( )
,c ,
( )
e prepaid insuran c e ?
a
( ) Land and buildings : the produ ction of the title
deeds receipted bil ls of sale examination of the accounts
to see that only capital expenditu re was in clud ed a
, ,
nd
that a proper a m ount had been periodi cal ly written ofl
for depreciation .
( )
b Sto c ks and bonds : their produ ction f or ex am ina
tion or if hypothecated certification as to equity therein ;
compari sons with market quota
, ,
tions etc , .
9 1
( )
c No tes re c eivable : the produ c tio n an d e xam ina
tion of the notes or if left at the ba nk a c er tifica te from
the bank as to a
, ,
m ounts etc , .
( )
d Inven to r y of stock and supp l ies : the pro du ction
( )
e P r epaid insur nce : the production of the pol
icies and the receipted bills f or same
,
.
) a m nu f ctu r
s titution .
nd fixt ur es
a a a
, .
( )
b A g s comp a ny : re a l estate buildings m n uf c
( )
c A charitable insti tution : r e l estate b u ildings
furniture and fixtures perma
, ,
,
nent investments .
V What proportion of
.
— c ommission paid for
—
negotiating a s ale of bonds to run 1 0 years should be
trea
,
prop e r ly b
e ch a
rged up as capital expenditure e g c on , . .
,
a
( ) In th ca se
e of pa rt e r ships the
n a udit r should o
have acc ss to th
e pa rtnership agreement in order that
e co-
b
( ) The a u dito r ,in th e c s e of trus tee s a ccounts ’
,
, ,tisfy himself
th at all statuto ry pro vision s have been duly complied
with .
,
o
t
th e amo u nt ag ree s with the total to th e debi t of the ledger
account and then compare e ach note book entry to s ee
,
-
( )
b fixed m a chine ry ( )
c loose machine ry ( )
d ho r ses
and tru cks ( e ) patterns and molds ? Give rea
, ,
, sons in
each case .
a
( ) L asehold buildings
e : being held for a limited
time only a t th expi r ation of the lea
e se the whole a m ount
paid fo r th a
,
be introduced to obta
,
have to in a renewal .
94
( )
d Ho r ses and tru ck s : the former get old and die ;
the l atte r wear ou t fa ilu r e to w rite off depreci ation
—
causes an oversta tement of assets with a l l the evils l ikely
to accrue therefrom .
( )
e Patents and molds : the forme r h ave only a limited
life ; th e latter become old fashioned and obsolete If this
-
.
re char ed
g
95
and credited in gros s wha t general ch eck should be
adopted in veri fication of ( a
,
) di s co u nt s a ll owe d ( )
b ,
a
( ) A g eral check on discounts al lowed might be
en
obta ined by extending the amounts of sal es into various
columns according to the various rates of discounts ; by
figuring out the di scounts on the tota l s in gross ; dedu cting
outsta nding a c counts ; a nd then comparing the result
1
( )
7 As to di s counts received the , auditor c
test by arriving at an approximate average percent ge of
the disc ounts on purc hases for a few years past and com
a
ould onl y
paring the res ult with that shown in the p eriod under re
view In the case of both discounts allowed and di scounts
.
ger account ” “
,
purchase ledger ac count ”
.
c eived and p a id , l es ; he ca n
also maintain a check u pon the gene ral led ge r tri al bal
ance If the plan be adopted of chan ging the ledge r
.
easily detectable .
( ) c as h sales b
( ),discounts allowed ( )
c discoun
,
ts t e
ceived ( d ) sold goods r et urned ( e ) allowances on s ales
, ,
.
( )
0 W h ere c a sh sales ar e numerous the method
,
of
verification will depend largely u pon the system employed .
totals che c ked and compa red with the daily ent r ies in the
,
b
( ) With r egard to disco u nt allowed the a udito r should
app ly the law of average test a
“ ”
,
n d by examin ation of
98
To A B Co
. . .
,
DEAR S IRS
I have examined th e balance sheet submitted to me and
beg to repo rt as under
I I t is unusual to put capita
. l and s u rplus under one
heading The capital might be
. the s u rplus
Were this so the position of the company ,
“
II The s econd i tem current liabilities is indefinite
Of w hat do they consist ? Notes have an awkw ard ha
.
.
, ,
bit
of falling due on ce rtain d ates fixed whe reas the paym ent
of Op en accounts payable may so metimes be ma
,
de in part
o r deferred
III The item s u spense ac count cer ta
.
. inly ne eds ex
planation Is this a disputed liability or is it a r eserv e
.
,
account ?
IV With regard to the fixed assets it ma
.
y be said at
once that they are ou t of all proportion to those whi ch
—
may be called cash o r quick assets being plus
stock as against in other words there is
available s u pposing same could be immediately reali z ed
cu rrent lia
,
—
These matters a re self appa rent although in addition
-
C P A
. . .
veri fied :
J u ne 30 c ash on h and a s per cash
,
bOO k
B al ance as per bank p a ss book a
t
close of b u siness
Add check of J B Jones not de
. .
,
posited
7
- 2
Dedu ct checks d r a
wn , not pre
sented
Cash 1n drawe r
ck
, nd c redits might be
set o f books ?
nd amo u nts of
to thei r correctn ess and m anife st p rop riety and the cl assi
fica
,
business of the comp any were excl u ded ; that the inven
tory had been taken at cost o r m a rket whichever was ,
pari son of the municipa lity s accou nts with the deposi
’
lso be on
file and cancelled .
, , tes ,
ns
actions ca n be verified by check book and p a ss book
, c
firm tion .
1 06
nd explain ,
, nd credited to sin k
n a
VIII Expl ain the diff e rence betw een a ccount of
receipts and payments and an account of income a
.
!
nd ex
p endl tur e .
meaning the same thing ; all desi g ned to show the same
res u lt Thu s a n income and expendi tu re account revenue
.
,
period .
, )
deposito rs pa ss books ( b) mo rtgages held by the asso
’
-
cia
,
a
( ) E a ch pass book shou ld be p rod u ced and every
entry checked with the cont ribu tion book stockholders ’
nd
’
, ,
-
s
b
( ) As to mo r tga ges the title deeds, sho u ld be ex a m
ined receipts for c a sh ve rified inte rest cha rges and re
, ,
that they are systematic ally reco r ded and s a fely kept
a
.
( )
c As to incom e the a u dito r sho u ld ascert a in nd li s t
the sou rces whence the income is received ve rify cash ,
sh book .
1 08
) in th e division of p r ofits ( b ) ,
—
in the a rticles of co partnership then the pr ofits must be,
—
divided equally i r respe ctive of the amount of capital in
vested by each pa rtner The au dito r shou ld s ee th at each
.
( )c In case a pa r tne r s d ’
ra wings exceeds the a mount
specified in the partne rship agreement he should be re ,
( )d In c a se a p a rtn e r s d r
’
awings ar e less t h an the
amount to which he is entitled he m ay by consent of his
, ,
. ted in
the bal ance sheet ?
premi ums co uld the rea fte r be pe riod ically c r edited to the
p remi um a ccount and ch arged aga inst the rese rve a c
count .
as set is acqui r ed
In short ca
.
—
the answe r to the second section of this qu estion what
rule controls in determining whether certain payments
belong to capital or to revenue ?
W hen there is a do ubt the payment Should be charged
to ca pita
,
in th e ex tent
and scope of his work a nd decide on the be st method of
,
II Describe in deta
. il your method of conducting an
audit of a man u factu ring corp oration desiring your cer
tificate where no instructions hav e bee n gi v en a
, s to the
extent or scope of the audit .
u sed to ve rify the secu rities rep resenting the investm ents
of a company u nde r au dit in the case of ( a
, ) r ea l e s tat e ,
( )
b mortgages on re a l est a te ( )
c c ertifi c,
ates of sto c k ,
d
( ) r ailway bonds .
a
( ) In the case of real estate the most satisfac tory
evidence wou ld be the production of the title deeds t e ,
ceip ted bills and checks showing cost The au dito r would .
expenses .
b
( ) Mortg a ges on r e a l est ate should be verified by
p ro d uction of the checks p a id o u t a nd of the deeds them
s elves The recording the reof shou ld be exa
. mined a nd ,
( )
c Certific a tes of stock sho u ld be produ c ed s im u lt
neous ly with
d
( ) R a ilw a y bonds They
. sho u ld be exa m ined ,
from m a rket qu ot ations and all othe r ava il able sou r ces of
inform ation The au ditor sho u ld take the precaution to
a
.
cou pons are attached and that a ll those paid sin ce the
,
the ca sh book ?
-
p c tory s tatement
,
1 16
in carefully
the method of h andling them and a
,
ct ac cordingly A .
and if so why ? ,
te .
( )
b the p r ofit n d loss a cco u nt ?
a
( ) In the bala nce sheet the auditor is ex pected to
ce rtify that it is fu ll and correct ; that the assets and lia
bilities a r e neither over no r unde r stated ; a -
nd that it is a
b
( ) In the p rofit and l oss a cc o unt the au di tor is ex
p ec ted to c e r tify that the earn ings a r e co r r e c tly stated
and that all expenditur es and income p rope rly cha rgea
,
ble
or cre ditable ther ein have been in cluded whethe r same ,
, y be st ted in th e
books of acc ount State which method you p refe r and
give rea
.
s ons .
ll m ents .
diminishing valu e peri odic ally until the resid ual val u e is
arrived at
The second method is g enerally p r efe rable be ca
.
u se
while in the fi rst case the amounts w ritten off do not va ry ,
at first w hen there is the least w ear and tea r this is off set
,
’
. c
d ; cash ch arged if
good ; o r p roft and loss and cash cha rged if part of the
debt is p aid and the bala nce pronou nced uncollectable .
,
’
ined
the account should be debited and the payer s account ’
c r edited .
a
ccou t is the proper r e c ipient of the c redit When the
n .
nd to what ,
a
consider himself responsible fo r the co rrectness of the
invento ry of these items a s to c lcu lations and a
mount
Any g ross ove rval uation wo u ld of cou r se manifest it
.
So and So .
n independ ent
appraisal and that the firm ha s set up the higher val u es
as shown by the appraisal on the books To wha t a
,
. c
count wou ld you recom m end the corresponding credit to
go a nd fo r wh a t re a sons ?
,
1 22
3une 19 02 , .
il the orde r
in whi ch the audit should be ca
,
uf a
,
me
results are obtain able with a great saving in labor by ,
I II Draft a
. bank reconcilement acco unt dealing , w ith
checks o u tstanding not cleared
, .
Pa ss book balance
Check book balan c e
Add chec ks outstanding not retu rned
by bank
r after
the death of the testa
tor .
, nd
A reserve fund is a ca
.
bui lding is p u rcha sed or built w ith the amount set aside
for that pu rpos e .
. mined
to see that none are overdue ; the amo unts to see that
the tota
,
a
nd end rser s names so that inqu i ry may be made
o
’
, ato s
their c redit .
( )
b a c c ounts re c eivable ( )
c goods in pro
, c ess of manu
facture ( d ) bills receivable ?
,
a
( ) Manufa ctured good s at cost ; ,
( )
b A cc ounts Re c eiv able if good at f a ce value ; if
doubtful a reserve should be crea
, ,
( )
c G o od s in p r oc ess of manufact u re should be valued
at the extent to wh i ch they have approached completion
—c ost of material and supplies labor p roportion of , ,
a a
Ex m in tions
FREDERICK S . TIPSON . C P . . A
Fel low of the A m e rica
n A ss oc i a tion
of P u blic Accou nt a nt s ,
ad t
is pr ep ah adida
re t o f C co c c n es or . P .
exam ina
ti n N w Y k S ta
o t
s, and b
y e or e, cor r es pon
d n e— al l Sta
ce t wh C P A l gi l a
esti er e . . . e s on is in
f or ce . Fee f or th e f ul l cou r s e , w h ich incl udes
ex ami a
ti n ons , $ 1 00 a
; p y abl in e f our m on th l y in
s ta
llm t en s of $ 25 ah
e c .