audit. A. THEORY QUESTIONS Distinguish between a Balance Sheet audit and a detailed 2. Large business concerns frequently have on their staff what are known as "internal auditors". Under such conditions, would you approve the employment of Certified Public Accountants to make periodical audits? Give reasons for your C. P. A. Ind. answer. 3. Under what circumstances would you advise a client that a complete detailed audit should be made? Give your arguments to convince him that a test audit would not be satisfactory. C. P. A. Ill. 4. How is the position of an auditor affected if the system of the concern under audit is defective as to internal check? Inst. Ex. 1918. 5. Why is it advisable to determine the legal responsibility of a client before accepting an engagement? 6. What do you understand by (a) personal account, (b) impersonal account, (c) real account, (d) nominal account? C. P. A. Ind. 7. Define the following: (a) Fixed assets and fixed liabilities. C. P. A. Mich. 8. In making "detailed" audits some auditors verify all postings and footings of general and subsidiary ledgers, even though controlling accounts are kept. State reasons for and against such procedure. Inst. Ex. 1919. B. ACCOUNTING PROBLEMS I. The Trial Balance of the Yellow Pine Timber Co. on January 1, 1920, was as follows: Classify the accounts in accordance with the outline shown on page 26. C. P. A. N. Y. (Note. The date of this Trial Balance is January 1, 1920, hence all nominal accounts have been closed into surplus. All accounts appearing in the Trial Balance are real accounts, but they should be classified, showing which are personal and which are impersonal with a further subdivision into assets current and fixed; and liabilities current and fixed.) The office of a firm of traders, doing business in San Francisco was destroyed by an earthquake. The books of account, which had been fully posted, were badly damaged. The following ledger accounts were found to be legible: Purchases, net, $69,000; Discounts Lost, $640; Discounts Gained, $3,450; Sales, $54,000; Bills Receivable, $33,000. Inquiry at the bank disclosed a balance on deposit, $129,000. Bills receivable amounting to $45,000 had been discounted at the bank. An audit of the checks paid by the bank showed that $99,000 had been paid creditors (including $60,000 notes payable). A Balance Sheet prepared at the last closing of the books was produced, containing the following items: cash, $60,000; accounts receivable, $126,000; loans receivable, $24,000; real estate, $90,000; notes receivable, $78,000; capital, $318,000; notes payable, $60,000. Prepare a Trial Balance supplying the missing accounts. C. P. A. N. Y. (Note. You should set up skeleton ledger accounts with Real Estate, Cash, Notes Receivable, Loans Receivable, Accounts Receivable, Accounts Payable, Capital, Sales, Purchases, Discounts Gained, and Discounts Lost. I. Debit or credit each account with the amount shown in the Balance Sheet prepared at the last closing of the books. 2. Set up the balances of those ledger accounts which were found to be legible after the earthquake. 3. Make the necessary adjusting entries from the information obtained at the bank and from an audit of the checks paid by the bank. After this work has been completed, you will have no difficulty in preparing a Trial Balance.) 3. From the Trial Balance prepared in the solution of Problem No. 2, you may prepare a list of the assets and liabilities. List the current assets first and the fixed assets second. Likewise, list the current liabilities first and the capital second. Show the amount of increase or decrease in the net worth of the business. (Note. You may assume that the entire stock of merchandise was destroyed by fire following the earthquake.) I. 2. C. LEGAL QUESTIONS What are the essential elements to every valid contract? What special element is required in some contracts but not in all? 3. How is a contract made? 4. Can a contract be implied? C. P. A. Ohio. C. P. A. N. Y. C. P. A. Mich. 5. Where a contract is in writing is it admissable for one of the parties to it, to vary it by proving that at the time it was entered into, such was their oral agreement? C. P. A. Ill. Chapter Three Books of Account. Before proceeding with a Balance Sheet audit, the auditor must thoroughly understand the various systems of account in general use and be familiar with all books of account, both those of original entry, including AUXILIARY books, and those of final entry, including SUBSIDIARY books. By auxiliary books is meant those which contain detailed information supporting the record in the books of original entry. They include check stubs, note stubs, draft stubs, receipt stubs, bank pass books, etc. By subsidiary books are meant subsidiary ledgers controlled by accounts in the general ledger. They include customers' ledgers, creditors' ledgers, stockholders' ledgers, cost ledgers, etc. The following discussion and the accompanying chart is intended as a review of the ordinary principles of bookkeeping and accounting as taught in the leading texts. BOOKS OF ORIGINAL ENTRY The Journal. It is possible to record all transactions in what is known as a general journal and, regardless of how many subdivisions of this journal there may be in a system of accounts, all books of original entry which are used as a posting media constitute a part of the journal. James W. Baker, in his "20th Century Bookkeeping and Accounting", says: "The Journal is a book of original entry in which all the transactions may be recorded. If it is the only book of original entry, all the transactions are recorded in it; if the purchases, sales, cash receipts, and cash payments are recorded in special books, it contains only those transactions not recorded in these books. The record shows the date, name of the account debited and amount, name of the account credited and amount, and the explanation or information for the auditor." Roy B. Kester, C. P. A., in his "Accounting, Theory and Practice," says: "A Journal may be defined as a diary or log in which the happenings or transactions of a business are recorded. Formerly it was sometimes called a day-book or blotter. The day-book or blotter record was a rough record giving all the essential data relating to each transaction without regard to accounting terminology, and was used as a sort of memorandum from which a formal record might be made in accounting terminology. This day-book or blotter, still in use in some places, has very largely given place to the journal which, either a single book or separated into many subsidiary books, is the book of original entry." Reference to the illustration on page 35 will show how the journal might be subdivided in a highly organized system of accounts. Under such a subdivision, it will be seen that transactions of a similar nature are recorded in separate books. The saving of time in posting is evident although it is not the only reason for such a subdivision of the journal. Another reason is the fact that it enables several bookkeepers to record entries in the original books at the same time, where if only one or a few books of original entry were in use, the volume of business might be so great that the bookkeepers could not handle the work. Therefore, in planning a system of accounts, it is always necessary to provide special records or books for recording each class of transactions in accordance with the volume and nature of the business, and depending upon the number of employees involved in recording the transactions. Regardless of the detailed subdivision of the journal, there will still remain certain transactions that should be recorded in the general journal. A. Lowes Dickinson, C. P. A., in his "Accounting Practice and Procedure,*" says: "A journal is, however, still necessary for special entries, correction entries, and other miscellaneous matters which do not fall within the scope of any of the books or forms described." The principal use for the general journal will be for recording opening entries at the beginning of the business, correction entries during the fiscal period, and adjusting and closing entries at the end of the fiscal period. Of course, any special entries that cannot properly be classified in the special journals will be recorded in the general journal. BOOKS OF FINAL ENTRY If the journal is to be subdivided into special books for the sake of saving time, for analyzing purposes, and to enable more bookkeepers to work on them at the same time, likewise, it is equally advisable to subdivide the ledger. *Published by Ronald Press Co. |