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Water Rates, Etc. "Where bills for such expenses as water, gas, etc., are not rendered monthly, the auditor must enter the accrual of the proper proportion since the last bill as a liability.

Traveling Expenses and Commissions. "It is important to note whether the accounts of all traveling salesmen have been received and entered before the books are closed. The auditor should secure a list, and if any report was not so entered, provision should be made for it unless the amount is likely to be trifling.

“Ample provision should be made for all commissions eventually payable on sales which have been billed to customers. As commissions are frequently not payable to salesmen until the sales have been collected from the customers, accrued commissions are often omitted from the books. As they must, however, be paid out of the proceeds of the sales on which the full profit has already been taken into the accounts, they should be set up as an accrued liability.

Legal Expense. “All concerns have more or less litigation. Before the books are closed the lawyers should be requested to send in a bill to date. If one is not found, the auditor should ascertain the amount, if any, probably due and set it up as an accrued liability.

Damages. "If the concern is insured against liability for damages to employees or the public, a proportion of the premiums paid in advance for the unexpired time covered by the insurance will appear in 'Deferred charges.' But there may be claims or suits for other damages not covered by insurance, and where the auditor finds any evidence which leads him to suspect there may be liability of this nature he should insist upon being informed of all the facts. He can then form an opinion as to the amount that should be set up as an accrued liability, or, if the outcome is uncertain, as a reserve against possible loss."


(Note. In connection with the discussion of contingent liabilities on account of accommodation endorsements, it is appropriate to quote from the negotiable instruments law which regulates endorsements of negotiable instruments.)

What Constitutes Negotiation. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the endorsement of the holder and completed by delivery.

Endorsement; How Made. “The endorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the endorser, without additional words, is sufficient endorsement.

Kinds of Endorsement. "An endorsement may be either special or in blank, and it may also be either restrictive or qualified, or conditional.

Special Endorsement. “A special endorsement specifies the person to whom, or to whose order the instrument is to be payable; and the endorsement of such endorsee is necessary to the further negotiation of the instrument.

Blank Endorsement. "An endorsement in blank specifies no endorsee, and an instrument so endorsed is payable to bearer and may be negotiated by delivery.

Restrictive Endorsement. “An endorsement is restrictive, which either:

I. Prohibits the further negotiation of the instrument; or 2. Constitutes the endorsee the agent of the endorser; or

3. Vests the title in the endorsee in trust for or to the use of some other person.

But the mere absence of words implying power to negotiate does not make an endorsement restrictive.

Qualified Endorsement. “A qualified endorsement constitutes the endorser a mere assignor of the title to the instrument. It may be made by adding to the endorser's signature the words 'without recourse' or any words of similar import. Such an endorsement does not impair the negotiable character of the instrument.

Conditional Endorsement. "Where an indorsement is conditional, a party required to pay the instrument may disregard the condition and make payment to the endorsee or his transferee, whether the condition has been fulfilled or not. But any person to whom an instrument so endorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person endorsing conditionally.

Striking out Endorsement. “The holder may at any time strike out any endorsement which is not necessary to his title. The endorser whose endorsement is struck out, and all endorsers sudsequent to him, are thereby relieved from liability on the instrument."

A. THEORY QUESTIONS 1. What steps should an auditor take to insure, so far as possible, that accounts presented to him for audit contain all the liabilities of the company?

Inst. Ex. 1917. 2. Outline the work which should be done in connection with notes and bills payable in an audit for credit purposes of a merchandising company.

Inst. Ex. 1918. 3. How would you ascertain whether a Balance Sheet contains all the liabilities for purchases of supplies and raw material?

C. P. A. Ind. 4. What are contingent liabilities? Should they be embraced in a Balance Sheet? Give an example. C. P. A. Ind.

5. State three kinds of contingent liabilities. How should they be shown on the Balance Sheet?

C. P. A. Mass. 6. (a) What different methods should be employed in books of account for keeping track of notes endorsed for accommodation and notes endorsed in the regular order of business?

(b) How would you indicate in books of account the contingent liability arising in each case?

C. P. A. Mich. 7. Describe the voucher system and state some of the advantages and disadvantages of the system. Inst. Ex. 1918.

8. You find that a group of accounts receivable have been assigned to secure a loan. Does that affect the value of any other creditor's claim in case of failure before the loan is paid? Should any reference to the fact be made in your report? How would you set up that fact in the Balance Sheet?

C. P.A. Mich.


Balance Sheet
December 31, 1916


$ 3,000.00 Accounts receivable.

15,700.00 $18,700.00

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The foregoing was the Balance Sheet of a corporation, December 31, 1916, incorporated January 1, 1910, and during the ensuing year the following transactions occurred: Sales, net.....

$550,000.00 Purchases, net-raw material.

347,000.00 Raw material inventory increased..

64,000.00 Labor....

60,000.00 Total manufacturing expense.

35,900.00 Process inventory increased...

20,000.00 Finished goods inventory decreased

36,000.00 Total selling expense..

35,000.00 Total administrative expense..

26,000.00 Notes payable have been renewed as they became due,

except that $100,000.00, held by the largest owners in the company, has been donated to the company, July I, 1917....

$100,000.00 $5,000.00 of 372% Liberty Bonds have been bought.

5,000.00 $2,000.00 has been donated to the Red Cross.....



Depreciation on buildings, estimated life 47 years,
beginning January 1, 1910.
Depreciation on machinery, estimated life 27 years,
beginning January 1, 1910.

Accounts receivable were $45,000.00, and accounts
payable $15,000.00 at the close of the year.
There was accrued interest payable $2,500.00, Decem-

ber 31, 1917.
Prepare Trial Balance and Balance Sheet as on Dec. 31, 1917.

Inst. Ex. 1918.

(Note. It will be necessary to set up skeleton ledger accounts to obtain a Trial Balance. No information is given as to the amount of interest paid during the year. The date and method of acquiring the Liberty Bonds is not shown. Since this information is not given in the problem, you may ignore the element of interest. You may assume that the same amount of insurance and taxes is to be deferred as at the end of the previous year.)


I. How are negotiable instruments negotiated?

C. P. A. Mich. 2. A note non-negotiable in form is executed and delivered by A to B and endorsed by B to C. A refuses to pay it when due, claiming want of consideration. C brings suit against A averring that he was a holder in due course. Can A successfully defend the action if want of consideration is established? Give reasons.

Inst. Ex. 1918. 3. A negotiable note executed and delivered by A to B passes in due course to and is endorsed in blank by B, C, D and E; F is the last holder and strikes out C's endorsement. What is the liability of C, D and E on their endorsement?

Inst. Ex. 1918. 4. As an accommodation to B, A on June 1, 1918, endorsed B's note for $1,000 payable to C's order on July 1, 1919. On July 2, 1919, C endorsed and delivered the note to D. What rights, if any, has D against A?

Inst. Ex. 1919. 5.

New York, April 10, 1916. Thirty days after date I promise to pay to the order of C. D. One Hundred Dollars.

(Signed) A. B. Endorsed in blank "without recourse." C. D. What does the endorser warrant by his endorsement?

Inst. Ex. 1917.

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