Page images


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 $10o. 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 asthough 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. varied, they are probably all comprehended in the following category:


I. To satisfy someone within.
2. To satisfy someone without.

3. To prove or disprove some contention on the
part of someone within.

4. To prove or disprove some contention on the
part of someone without.

5. To influence someone within.
6. To influence someone without.


I. To satisfy someone without.

2. To prove or disprove some contention on the
part of someone without.

3. To influence someone without.”


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 accoounting, 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.


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.


“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.


Generally speaking there are but two different systems of bookkeeping and accounting—SINGLE ENTRY and DOUBLE ENTRY. It is doubtful, however, if single entry bookkeeping may be correctly called a system. It would rather seem to represent a lack of system.

A knowledge of the so-called single entry method of keeping books is necessary for there is nothing more common in the work of the accountant than to be called upon to change a single entry system to double entry. The great number of questions in CERTIFIED PUBLIC ACCOUNTANT examinations based upon this changing process is but evidence of the necessity of a thorough understanding of the proper method of procedure.

The accountant will need to know the advantages and disadvantages of single and double entry bookkeeping; the method of ascertaining profits and losses; how to prepare financial statements; and the course to pursue in the conversion of single to double entry bookkeeping.


I. The purpose of single entry bookkeeping is to keep a record of transactions with persons only, that is, with customers, creditors, and the proprietor. However, accounts are frequently kept with cash, merchandise, and a few other items of special interest to the firm.,

2. The disadvantages of the system are:

(a) Nominal accounts are not kept, therefore, profits and losses are not shown. (b) A Trial Balance cannot be taken unless the auditor goes over the journal or day book and sets up accounts and posts all entries or arranges them in columns on a working sheet. (c) Errors which creep into the records are not easily detected. (d) A Balance Sheet can be made up only by an inventory of the assets and liabilities. (e) It does not provide for the determination of cost of operation of different departments nor for departmental returns.

3. To prepare a Profit and Loss statement from a single entry set of books, subtract from the net worth at the end of the period the net worth at the beginning. To this amount add amounts withdrawn from investment and subtract additional investments. The result will either indicate a profit or a loss.


4. To prepare a Balance Sheet from a single entry set of books, it is necessary to take an inventory of all assets and liabilities or to add to, or deduct from, the assets and liabilities as at the beginning of the period, the transactions of the period shown by the sundry records and memoranda.

5. To convert a single entry set of books to a double entry system is not at all difficult. The same ledger may be used if desired. First, prepare a statement of assets and liabilities. Second, determine the profit or loss for the period. Third, prepare a journal entry, debiting all assets, crediting all liabilities, and crediting the proprietor for the net investment. If the proprietor is not credited for the net profit or debited for the net loss before preparing the above entry, a second journal entry will be necessary to adjust the proprietor's account and the Profit and Loss account. If the same ledger is to be retained, those accounts which already appear in the ledger should be checked so as not to be posted again. If a new ledger is to be opened, all entries must to be posted.


With this system a complete record of every transaction is kept showing its effects upon both nominal and real accounts. There is a constant equilibrium maintained at all times for every debit is offset by an equivalent credit, and every credit by an equivalent debit. The advantages of double entry bookkeeping are many. Among them are to be mentioned. (a) A Trial Balance can be taken from the ledger at any time, thereby determining the accuracy of the posting and the equilibrium of the accounts. (b) A Profit and Loss statement can be prepared from the nominal accounts and a Balance Sheet from the real accounts without analyzing the transactions. (c) The journal and the ledger can be balanced independent of each other thereby acting as a check one upon the other.

(Note. It is assumed that students taking up this course in Public Accounting and Auditing are familiar with the principles of elementary bookkeeping, both single entry and double entry, and with the ordinary procedure in actual business routine. If anyone proposes to take up this course of study who has not had a fairly thorough training in bookkeeping, it is suggested that he secure a copy of “20th CENTURY BOOKKEEPING AND ACCOUNTING,” by James W. Baker, published by the SouthWestern Publishing Co., Cincinnati, Ohio.

This text is commended because it is up-to-date as regards modern business methods and accounting terminology. Laboratory work is also provided for use in connection with the text, making it a comparatively simple matter to o a theoretical and practical knowledge of bookkeeping and account1ng.

« PreviousContinue »