Chapter One Accounting firms usually classify their employees as JUNIORS and SENIORS. In large firms there may be several different STAFFS located in different cities. A staff will be under the supervision of a SUPERVISING or MANAGING SENIOR and he in turn may be under the direction of a PARTNER of the firm. THE WORK OF THE JUNIOR At first a junior will usually be assigned to work under the direct supervision of a senior who is familiar with the different phases of the field work and he will be instructed as to just what to do and how to go about it. In due time, however, he will be sent out only with general instructions from the senior who may not accompany him and he will be expected to know how to proceed with the work. Policies of the firm must be thoroughly understood. They will vary but every firm has certain policies that it expects all employees to adhere to closely. Juniors, seniors, the managing senior, and even a partner will be required by all firms to prepare and keep a set of WORKING PAPERS showing a complete record of work completed. The arrangement and scope of these working papers will naturally vary. They will be made up of SCHEDULES containing records and figures arranged in a systematic order so as to show conclusions; how the conclusions were arrived at; why, in some cases, the figures differ from the book figures; and to show items not appearing in the books of account at all. Briefly the duties of the junior will be the verification of bank and cash balances, checking footings, checking and testing postings, vouching entries, verifications of securities, taking Trial Balances, checking inventories, making schedules and a variety of similar work. In accounting terms the work to be performed is referred to as an ENGAGEMENT and the party for whom it is to be done is spoken of as a CLIENT. In undertaking an engagement it is essential to keep in mind the work to be performed whether an AUDIT, an EXAMINATION or an INVESTIGATION; and if an audit, whether it is to be a BALANCE SHEET AUDIT or a DETAILED AUDIT. A Balance Sheet audit is frequently referred to as a PARTIAL AUDIT. THE WORK OF THE SENIOR Naturally the senior has certain responsibilities that do not fall on the junior. He may have one or several juniors under his supervision depending upon the nature and extent of each engagement. He will be expected to plan and direct their work, decide difficult and complex questions arising from time to time, and make a complete report of each engagement completed, submitting all necessary working papers arranged to show in detail the work performed. As a rule he will not be expected to prepare final reports for the client, this being done in the office at the direction of a supervising senior or a partner of the firm. However, the senior who expects to become a manager or a partner of the firm should learn to prepare certificates and reports from a set of working papers. PURPOSES AND ADVANTAGES OF AN AUDIT Minor Objects. The minor objects of an audit may be classified under two distinct heads. (a) Detection and prevention of Fraud. (b) Detection and prevention of Errors. Fraud. In the beginning of professional auditing, fraud was considered the principal objective and an auditor was employed only when fraud was suspected by the management. Consequently when an auditor appeared in an office and began his investigation, the bookkeepers began to wonder who was to be the victim and in most cases the auditor was looked upon as a sort of detective. Today fraud is considered only as a minor reason and not a principal reason for an audit,t hough it is often detected by the auditor regardless of what may be the chief reason for the audit. Either a continuous audit or a periodical audit will go a long way toward the prevention of fraud and embezzlement. Errors. From the standpoint of an audit there are certain different classes of errors and the auditor should be able to distinguish between them without any difficulty. Errors may be divided into five general classes as follows: Errors of Principle. Errors of Commission. Errors of Omission. Clerical Errors. Offsetting Errors. Errors of principle and commission are very similar and so important that they must be detected by the auditor. The most common errors of this class are due to the inability of the bookkeeper to distinguish between capital and revenue expenditures. Frequently items are charged to Expense which should be charged to Property accounts and vice versa. PURPOSES AND ADVANTAGES OF AN AUD IT As an example of each class of errors, the following list was compiled from actual auditing practice: Errors of Principle. (a) Sales were made to a number of customers residing in Canada. These customers would remit by check and the checks were deposited in the bank but the custom of the bank was to accept checks on Canada for collection only. The bookkeeper entered all such checks as cash receipts and added them to the bank balance as soon as deposited. One of these checks was included in the cash balance at the close of the fiscal period. (b) In analyzing the account with Buildings, it was discovered that an end wall of a concrete building had partly caved in. The cost of repairing the wall was $2,195.30 and this sum had been charged to the Buildings account instead of to Building Expense account. Errors of Commission. (a) On the credit side of the Selling Expense account an item of $1.00 was found without a posting reference. Inquiry of the bookkeeper revealed that at that date the ledger was out of balance that sum and he had made the entry in order to "force" the balance. (b) An invoice for $100. was paid but subsequently included in a statement rendered and paid again by the bookkeeper. Errors of Omission. (a) The bookkeeper failed to deduct discounts from a number of invoices although they were paid in the discount period according to terms. (b) Delivery service was rendered in behalf of another company but not billed nor collected. (c) In auditing the books of a Hardware Company it was found that a plumber had rendered service amounting to $45.40, but this had not been billed nor collected, consequently did not appear on the books of original entry. Clerical Errors. (a) Accounts Payable column in purchases journal overfooted $10.00. (b) The total of the column in the purchase journal known as "General Expense" for June was posted to the Postage account. (c) The footing of the sales book for April, $18,546.90, was posted as $18,564.90. (This is known as a transposition of figures and is a very common error.) (d) An invoice for $4.97 was entered as Postage instead of Stationery and Printing. Offsetting Errors. (a) An account with a customer in the customers' ledger was overfooted $10.00 on both sides and the controlling account with "Accounts Receivable" in the general ledger showed an overfooting on both sides of the same amount. (b) The "Stationery and Printing" column in purchases journal was underfooted $1.00 while the "Advertising" column was overfooted the same amount, therefore, the total of the distribution columns agreed with the "Total" column. Major Objects. The more important reasons for audits may be classified as follows: (a) Determining a condition of affairs. (b) An audit for credit purposes. (c) An adjustment between partners. (d) An audit as an aid in the adjustment of claim on account of fire loss. (e) As an aid to bonding. (f) Protecting stockholders and bondholders. (g) To facilitate the sale of a business. (h) As a basis of recovery for negligence on the part of a previous auditor. John R. Wildman,* in his "Principles of Auditing," says with regard to the occasions for auditing: "Generally speaking, it may be said that auditing is done, first, to satisfy someone as to the correctness of the accounts; second, to prove or disprove some contention; third, to influence prospective purchasers of goods or proprietary interests, and prospective creditors. "While the occasions for auditing are numerous and A. AT THE INSTANCE OF SOMEONE WITHIN THE I. To satisfy someone within. 2. To satisfy someone without. 3. To prove or disprove some contention on the 4. To prove or disprove some contention on the 5. To influence someone within. 6. To influence someone without. B. AT THE INSTANCE OF SOMEONE WITH- I. To satisfy someone without. 2. To prove or disprove some contention on the 3. To influence someone without." QUALIFICATIONS OF AN AUDITOR A brief summary of the necessary qualifications of a competent professional auditor would include at least the following: *Professor of Accounting at New York University. (a) A thorough knowledge of acccounting, embracing a complete mastery of bookkeeping. (b) Familiarity with all the systems of accounting in general use and with the various details of office and factory methods. (c) A fair knowledge of commercial law. (d) Absolute honesty including a natural habit of fair dealing and the faculty of inspiring others to trust in his integrity. (e) An extensive preliminary education and the broadest kind of business training. (f) Analytical ability and the ability to grasp situations quickly. (g) Ability to meet people and converse easily, and with dignity. BE A GENTLEMAN IN EVERY SENSE OF THE WORD. RESPONSIBILITY OF AUDITORS Anyone who holds himself out to be skilful in any trade or profession, and who is negligent in the performance of an undertaking and does not use the skill of an ordinarily skilful tradesman or professional man, becomes legally responsible and is subject to a suit and penalty for damages for such failure. This statement applies to an accountant or an auditor. His moral responsibility is undoubtedly higher than his legal responsibility. Legally, one is not required to measure up to the standard of the most skilful but only to the standard of an ordinarily skilful accountant and auditor. Morally, an auditor is responsible if he does not properly perform his duties in a manner which shall conform to the best practices of the profession. THEORY OF ACCOUNTS "Accountancy comprehends the conduct of audits, examinations and investigations; devising and installing systems; criticising organizations and management; and, in some cases efficiency work."-New York State Educational Dept. Syllabus. ACCOUNTANCY is a profession having to do with the recording, verification and presentation of facts, involving the acquisition, production, conservation and transfer of values. ACCOUNTING is the science which treats of the systematic record, compilation and presentation in a comprehensive manner of the financial operations of a business. |