sands of dollars, have been carried at full value though known to be uncollectible. He may not have made provision for depreciation of plant and machinery. Equipment which has become worthless because of depreciation or obsolescence may be shown in the statements at its original cost.

These are some of the things which an average bookkeeper, even one whose services command a big salary, knows but little or nothing about. If he does know something of the necessity for adjustments of this kind, his lack of experience and theoretical knowledge is a dangerous thing, and his attempt to put this theory into practice is likely to mar the result.

Don't think for a moment that the present day work of an auditor is merely a checking of the footings and postings. This part of his work requires the least amount of ability and experience. It is an auditor's duty to go much further to determine the accuracy of the figures stated on the books of account; to distinguish between capital and revenue expenditures; to determine the actual value of accounts with customers through a process of testing, or, if necessary, to correspond with each customer to secure a verification of the account; to determine a conservative and sound basis for the estimation of depreciation on all assets; and to secure authority for making all necessary adjustments. These things can be brought about through courteous cooperation between the officers and employees of the company and the accountants.

The professional accountant's work would not be satisfactory if he were to submit statements of financial condition which are simply in accord with the books of account. He must determine that none of the assets are overvalued and that all liabilities are stated. The latter may mean the determining of liabilities on account of accommodation endorsements of notes and other negotiable instruments, guaranties, warranties, etc. The head bookkeeper of a concern, in preparing statements of financial condition, is certain to be influenced by the wishes of the management, but an accountant must of necessity prepare his statements so as to show the absolute facts; he must be impartial. To fail in this is to become morally and legally liable for having failed to use the skill of a professional account

ant.

Periodical audits by professional accountants are necessary in hard times when competition is keen and profits small, because in such times operating cost must be carefully analyzed and reduced to a minimum. The auditor must determine where the expenditures have been made, why they were made and what the results were. He must find out if there are any leaks and suggest a way to stop them.

An auditor's report may disclose that during a period when sales were abnormally large, the results show a loss as compared

with previous periods when sales were considerably less. His report may show that one department is suffering a loss, yet the entire business shows a gain. His report may show that operating expenses in one department are abnormally high and he may be able to show how they could be lowered.

In many instances, it has been found profitable to secure an accountant to install a system of accounting and to make arrangements for the accounting to be done under his supervision. When this is done, the work of the bookkeeper is performed and statements are prepared under the oversight of a highly trained and widely experienced professional accountant, and usually at a very reasonable cost as compared with the value of the accountant's services if confined to the individual firm; yet with such arrangements the accountant may be consulted any time, even over the telephone. Unusual and difficult problems may be placed before him before the bookkeeper has recorded them, thus avoiding errors and misstatements.

There is not the slightest doubt as to the value of an audit when performed by a skilled professional accountant or auditor, and it is exceedingly doubtful if any corporation or business firm can afford to do without an audit.

The professional accountant is an efficiency engineer in times of prosperity. He sets the signals which, unless they are disregarded, keep the business train running without accident. He is the wreckmaster who gathers up the pieces, sets them on the track and starts them going-if possible-after a concern has been ditched.

When a rich man dies, the public accountant examines and appraises his estate. His range of activities covers the whole field of business existence, from birth to death, and the interval between.

KINDS OF AUDITS

A complete audit audit is usually Since the average

Audits may be either complete or partial. is known as a DETAILED audit; a partial known as a BALANCE SHEET audit. business man has no idea of the difference in the two main classes of audits, a careful explanation must be made so that he will know in advance just what kind of an audit he is getting. He will frequently ask the auditor to make a recommendation in the matter. It is quite impossible and inadvisable to do so without a preliminary inspection of the books and conditions existing. The detailed audit is the ideal audit but the time and expense of such an audit is not always advisable nor is it always necessary. In determining this matter much will depend upon whether a satisfactory internal check has been maintained.

Internal Audit. By an internal audit or check is meant a continuous audit by someone within an organization, or by the system being so planned that no one employee has complete control of any part of the accounts. A properly planned internal check is important and when carried out satisfactorily, a Balance Sheet audit will be found sufficient, unless fraud or dishonesty is suspected.

While large firms usually employ someone who acts as auditor and who maintains a continuous audit, yet a large majority of firms do not employ such a person, but simply plan the office work in such a way as to secure the best internal check. The exact division of the work in an office so as to secure a satisfactory internal check would depend very largely upon the surrounding circumstances.

In planning a system of accounts for a jobbing house, wherein five persons kept the books, did the billing, made the city collections, handled the general and petty cash, and paid all the invoices, the following method was advocated and later found to be very satisfactory:

It was arranged for one person to keep the general ledger and record the invoices; a second to handle the cash; a third to keep the sales ledger; a fourth to do the billing; and a fifth to make collections, etc. The work may be still further subdivided, depending upon the volume of business. For instance, one man might handle only cash receipts and another man handle cash payments, or one man might handle cash receipts from customers keeping a special customers' cash book. All this subdivision of the work will depend upon the volume of business. The important feature is that the cash book and ledger be kept by different persons so that one person acts as a check upon the other. Some accountants recommend that persons in the office exchange duties at times, the theory being that in so doing one person might detect dishonesty on the part of another. From the standpoint of efficiency, this procedure might be argued as unwise.

Without a doubt, vacations should be insisted upon. The author recalls an experience of a teller in a bank who for a period of three years constantly embezzled the bank, and although the books had been audited periodically by bank examiners, he had been able to cover up the shortage so that it had not been detected, but finally, while away on a vacation, the bank examiner made an unexpected call and during the process of his investigation uncovered a shortage of $10,000 in the teller's accounts. This illustration is mentioned as one reason why vacations should be insisted upon from the standpoint of an internal check.

Cash Audit. The so-called cash audit is practically a balance sheet audit or partial audit, but it is difficult to understand how an audit of cash could be made without leading

to the consideration of many other accounts and records. Fraud and errors of principle are not necessarily confined to cash in any sense, and are far more likely to be uncovered somewhere else.

Balance Sheet Audit. A Balance Sheet audit is made with the view of preparing a correct Balance Sheet as at a certain date. It not only includes the verification of stated assets and liabilities but also the discovery of any unstated assets and liabilities. Furthermore, the auditor must ascertain if all the liabilities have been incurred with proper authority. In the case of a corporation it will be found frequently that certain liabilities were incurred without authority from the board of directors.

Detailed Audit. As stated above, the detailed audit is the ideal audit. It comprehends a complete audit of all income and expenditures during the period, including the checking of all records, vouchers, footings, postings, etc. The detailed audit is seldom carried out in full. A process called TESTING is resorted to quite often in both a Balance Sheet and a detailed audit. It consists in picking out the transactions for a certain period and if, after carefully vouching these transactions they are found to be correct, it is then assumed that the transactions for the whole period under audit are reasonably correct.

Contingent Fees. The question as to the advisability of an auditor accepting a contingent fee frequently comes up. While under certain circumstances it may be safe to accept a fee based upon the results of the audit, it is doubtful if the plan is to be encouraged. At any rate it is not considered good ethics by the American Institute of Accountants which has gone on record as opposed to the practice. To illustrate what is meant by a contingent fee, a client approaches an auditor stating that he desires an audit made with the view to obtaining a loan from his banker and states that the fee will be based upon the auditor's success in aiding him to secure the loan through the preparation of a Balance Sheet for credit purposes. The auditor who undertakes such an engagement would not be likely to prepare an impartial report.

Audit Program. At the beginning of the engagement the auditor should prepare a program. Naturally it will differ, depending upon the scope of the engagement, the nature of the business, and the purpose of the audit, but it usually will be along lines similar to the following:

1. Count the cash; verify bank balances; read minutes.

3. If a Trial Balance is furnished, check it with the general ledger.

4. Check list of accounts receivable and accounts payable with controlling accounts.

5. Check any other subsidiary lists of accounts with controlling accounts.

6. Check extensions and footings of inventories; test the inventory.

7. Verify outstanding capital stock by comparison of stock ledger accounts with stubs of stock certificate book.

8. Check all footings of books of account, both original and final; check all postings or transfers from one book to another.

9. Review cash disbursements; compare with cancelled checks.

10. Ascertain if proper provision has been made for depreciation.

Legal Responsibility of Client. It is not out of place here to mention the fact that it is always advisable to determine the legal responsibility of a client before accepting an engagement. If someone within an organization seeks to have an audit made, it is necessary to ascertain whether or not he has any right to engage the services of an auditor, and also as to whether or not he is employing you personally, or is merely acting as an agent of the company.