columns for a Trial Balance, should provide columns for adjustments, columns for the nominal accounts only, and columns for the real accounts only. The first two columns show the Trial Balance taken at the close of the period, but before the adjustments have been made. The adjustment columns show all the adjustments and corrections made after the Trial Balance is taken and before the statements and report are prepared. The columns for nominal accounts show the profits and losses for the period. The columns for real accounts show the assets and liabilities as at the end of the period under audit.

The accounts should be arranged on the Working Sheet in such a manner as to provide the most information and so as to make it most convenient for the preparation of the report for the client at the completion of the audit. The accounts need not, therefore, be arranged in the same order as the arrangement of the accounts in the ledger. (The Working Sheet will be explained in detail in a later chapter.)

Procedure in Taking a Trial Balance. First, prove each account by footing both sides of the account and substracting the two footings so as to verify the balance. It does not matter whether this has been done by the bookkeeper previously or not. The auditor should make his own verification independent of that of the bookkeeper.

Second, every page in the ledger should be examined. Experience will prove that some bookkeepers have peculiar ideas with regard to the arrangement of their accounts, consequently blank pages will be found here and there throughout the ledger and if every page isn't examined, accounts might be omitted.

Third, subsidiary and memorandum accounts may be found in the general ledger. For instance, one ledger may be used. It may be divided into sections; the first section may contain all the assets and liabilities together with controlling accounts for customers and creditors; the second section of the ledger may contain accounts with customers; and the third section, accounts with creditors. On the other hand, it is not infrequently found that subsidiary ledgers are kept, but no controlling accounts maintained in the general ledger. The bookkeeper when preparing his Trial Balance simply makes a schedule from the subsidiary ledgers and uses the total amount in his Trial Balance.

Fourth, some bookkeepers seem to have the idea that a Cash account need not be kept in the general ledger simply because a cash book is kept. While it is certainly poor practice to eliminate the Cash account in the ledger, yet such will often be the case, consequently a Trial Balance cannot be obtained unless the cash balance is first obtained from the cash book and included in the Trial Balance. The only sound accounting theory is that a general ledger should balance independently of all the other books of account. Any argument contrary to these principles is certainly contrary to good accounting practice.

Fifth, the first Trial Balance is usually taken after the posting has been done at the end of the period and before any adjustments have been made. The auditor will have to be on the lookout for items posted to the accounts after the bookkeeper completed his Trial Balance. This is sure to happen when an audit is made at a date later than the end of the period under audit.

Quoting From The Federal Reserve Bulletin:

"Trial Balances of the general ledger, both at the beginning and end of the period under review, should be prepared in comparative form and checked with the ledger. The items in the Trial Balances should be traced into the Balance Sheets before the assets and liabilities are verified, to prove, among other things, that no 'contra' asset or liability has been omitted from the accounts, that the assets and liabilities have been grouped in the same manner at the beginning and at the end of the period, and also that the Balance Sheets are in accordance with the books. The disposition of any general ledger assets and liabilities that may have been scrapped, sold, written off, or liquidated during the period under review should be traced and noted in the working papers. Furthermore, a general scrutiny of the general ledger should be made to see that the accounts, if any, that have been opened and closed during the year have no bearing on the company's financial position at the close of the fiscal period."

ITEMS NOT ON TRIAL BALANCES

The following quotation is taken from "Duties of the Junior Accountant" by Reynolds and Thornton, published by the American Institute of Accountants:

"Among the items which must be taken into account, but may not be on the books, are some which the junior should detect and take up in every instance. These are omissions from interdepartmental balances and balances between subsidiary companies, goods in transit and cash in transit.

"It is quite common to find Trial Balances, apparently in order, which contain among ‘accounts receivable' amounts due from subsidiary companies or from departments of the same company, and among 'accounts payable' corresponding entries, but for differing amounts. Wherever a Trial Balance shows any balance due from one department to another, from one subsidiary to another or from either to the principal company the auditor must see that the entry is exactly offset by a corresponding item in the accounts of the subsidiary or department concerned. If a department carry as an asset an amount due from another department and the

second department does not show any liability in respect
thereto the accounts as a whole contain an inflation of
net assets, and the auditor can so easily find such an
error that no excuse for failing to do so will be admitted.

"Where subsidiary companies are concerned the de-
tection of such errors is equally easy if the auditor has
access to books of subsidiaries.

"The detection of omission from inventories of goods in transit and of cash in transit are dealt with under appropriate headings herein.

"To sum up this section, let the auditor, whenever he has access to books showing both sides of a transaction, compare the two entries and agree the resulting balances."

Results of the Senior's Checking the Trial Balance. The senior checked the Trial Balance himself because of the opportunity it offers to gain an insight into the nature of the organization and of the business conducted. His working papers show the following:

First, he found that the information referred to in the audit of accounts receivable in Chapter Six is correct. The total of the debit balances of the customers' accounts in the sales ledger amount to $84,721.50. The total of the credit balances amount to $3,034.50. The difference between the debit and credit balances is equal to the balance of the controlling account in the general ledger, amounting to $81,687.00.

Second, he reports an offsetting error in footing the accounts. The debit side of the account with Salary Advances to Salesmen was overfooted $30.00, and the account with Sales was overfooted $30.00 on the credit side.

Third, he found an error in principle. An expenditure amounting to $215.00 for a new machine in the factory was charged to Tools and Implements instead of to Machinery. Investigation shows plainly that it should be a charge to the Machinery account.

Fourth, he notes an error in the working papers of J. I. King with reference to listing of notes receivable. Reference to page 69 of Chapter Five will show that Mr. King listed the notes receivable. His papers show that two notes were discounted, December 1, 1918. If that were the case, then the face of those notes should either have been credited to the Notes Receivable account or to an account with Notes Receivable Discounted. Inasmuch as the Trial Balance does not indicate an account in the general ledger with Notes Receivable Discounted, it is apparent, even without an examination, that no such an account is maintained. Therefore, notes receivable discounted were credited to the Notes Receivable account, consequently, would not be included in the total of notes receivable on hand and would not

appear as a part of the balance of that account in the Trial Balance. The Trial Balance prepared by Mr. Shields and handed to the senior at the beginning of the audit lists notes receivable, in amount $12,906.00. The Working Sheet of the junior shows the same total, but he makes no comment relative to the notes receivable discounted except to say that they were verified at the bank.

Mr. King states that the error is in the date of discount. He claims that he made an error in indicating "December 1, 1918" as the date of discount. It should have been "January 1, 1919". He says the error was due to a mistake in copying his report.

Advice to Juniors. It is in order here to point out the advisability of using the utmost caution in the preparation of all working papers and reports. Carelessness is not excusable. Accounting firms employ extra juniors during the busy season. Those juniors who are competent and accurate in their work are the ones likely to be retained permanently, while those incompetent, inaccurate and careless in their work are the ones who will be the first to be let go. Seniors frequently are asked to name the juniors they wish to work with them on certain engagements. The mere fact that certain juniors are asked for frequently by the seniors is evidence as to the quality of their work and is in itself a recommendation. While a junior who is not asked, but who is used only because no one else is available, is certainly at fault in some manner and he needs to take an inventory of himself and determine his weakness. Mr. King, the junior mentioned above, may or may not be at fault, the fact remains, however, that he made an error although he states that he simply erred in copying his report from hastily written notes made on the day of the audit.

READING THE MINUTES

Without a doubt the minutes should be read as early after the audit is begun as may be practical. They will give an authoritative insight into the organization that can not be gained in any other way; consequently, the auditor will be prepared to do more intelligent work in completing the audit. He will know whom to consult in case any further information is desired because the minutes show who the officers are and what their duties and responsibilities are.

The minutes of the stockholders, board of directors, the executive committee, and any special committees should be read. The articles of incorporation will usually be embodied in the minutes of the stockholders, but if not, the auditor should ask for a copy of the articles or for a certificate of incorporation. These are sometimes known as the charter. The auditor should note in his working papers the exact name of the corporation, the date the certificate was filed, the authorized capital stock

showing the kind of stock, the par value of each share and the number of shares, the names of the incorporators, and any other information likely to be of benefit in the preparation of the report. It is better to write down more than will ever be used than to find when making the report that certain information is necessary and that he failed to make note of it in his working papers. The importance of this statement will be understood when it is considered that frequently an audit is made in a distant city, while the report will be prepared in the office. The audit might be made in Seattle and the report might be written in Boston. Therefore, it would be quite embarrassing to learn that all the information desired had not been obtained. The minutes of the stockholders should be examined with regard to election of officers, compensation of officers, bond of the treasurer, contracts with the manager and other employees, any special contracts that may exist, resolution fixing the value of property purchased and the rates of depreciation, etc. The minutes of the board of directors should be examined for additional information.

An executive committee often exists in a corporation. It may be composed of three or more members of the directors and its purpose is to facilitate certain features of the work. Financial matters are usually looked after by this committee, and it often outlines the financial program and has authority to make appropriations, etc.

In the case of a corporation the by-laws will often furnish additional information and should undoubtedly be read. One cannot become too well acquainted with the organization and its details.

The author had an experience that may be of interest to some. He was employed by a man conducting a milling business. to install a system of accounts involving a cost system. Preliminary to the installation of the system of accounts, he was asked to make a partial audit so as to insure a proper financial statement at the time the new system was installed. When employed by the client, he was informed that the business was a partnership, but when he asked for the copartnership agreement, he learned that none existed and finally obtained the information that the business was owned solely by the father of the client and that the client's position was that of a manager. Before proceeding further a conversation was held with the father and thereby, in addition to establishing the responsibility and authority of the client, information was secured that aided materially in opening the books after devising a system of accounts.