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.

When

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. 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.

FIXED ASSETS

Having completed the audit of the current assets, the fixed assets will be taken up in the order in which they appear in the Trial Balance of The Blank Manufacturing Company as shown. on page 50 of Chapter Four. The following accounts classified as fixed assets appear therein:

Following these accounts a discussion of depreciation will be given (see Chapter Ten). The object, of course, is to determine the true value of each asset, and the method the auditor used in arriving at the value.

Real Estate. The following discussion appears in 20th CENTURY BOOKKEEPING AND ACCOUNTING: page 87)

"Real Estate is a technical term that is applied to immovable property which consists of land, buildings and other improvements which make the land valuable. Real estate may be purchased by a business (a) for a home, or (b) for speculation. When it is purchased as a speculation a separate account should be opened for each property owned.

"The purchase price fixes the value of the real estate, and this value does not change except in the case of additional improvements. The value should not be increased by means of an inventory or appraisal for no profit can be realized until it is sold. A distinction should be made between the land and the buildings, because the buildings decrease in value owing to age and use, while the land does not. On account of this distinction their value should be separated at the time of purchase. Accountants recommend that separate accounts be kept with land and buildings. If only one account is kept, their separate value should be indicated by the use of the explanation column. In either case an account termed Building Expense and Revenue should be kept to record all expenses incident to the upkeep of the buildings, and income which may be derived from the rental of any portion of the building.

"If the building is to be constructed on land pur

(See

chased for this purpose, the purchase price of the land
together with any additional cost of grading and prepar-
ing it for the building, is charged to the Land account.
Payments in connection with the construction of the
building are charged to a Building Contract account.
When the building is completed, the balance of this
account is closed into a Building account. This is car-
ried on the books as the value of the building, and the
depreciation is based on it."

Many bookkeepers will keep an account with Real Estate or some similar term and the account will represent both the land and the buildings thereon. In fact, some of our bookkeeping texts still illustrate an account of this kind, consequently, there are thousands of students each year who are taught that land and buildings may be grouped in one account. To state that it is poor practice is putting it mildly. The accountant will always insist that land and buildings be kept separate in the accounts because of the difference in the nature of the items.

Esquerre' says:

"The components of the cost of plant land vary materially from those of investment land; the consideration of increases in market values, while of much importance in the case of the latter, is merely an incident in the case of the former, since the asset cannot ordinarily be sold without causing operations to come to an end, at least temporarily. On the other hand, buildings depreciate through wear and tear, while land does not; hence, if reserves are created for the depreciation of buildings, and applied for Balance Sheet purposes to Land and Buildings account, it is not possible to ascertain the book value of the asset which the depreciation affects.

"These accounting differences in the nature of the two values, land and buildings, would seem to be sufficient to cause the creation of two distinct accounts with them, and are generally so regarded."

In the preparation of a Balance Sheet the value of the land should always be listed as a separate item and should never be included with the value of the buildings for the reason that the depreciation on buildings does not affect the value of the land. Furthermore, good practice demands that the value of the land used in the business should be listed separately from land representing investments.

The Theory of the Land Account. This discussion is confined to land used in the business. It is the most permanent asset owned by a business enterprise. Land should appear in the Balance Sheet at cost, regardless of what the market value may be. be. In fact the market value is never known unless a sale is made. The object of the Land account is to show the cost,