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"If the auditor is satisfied that his audit has been complete and conforms to the general instructions of the Federal Reserve Board, and that the Balance Sheet and Profit and Loss statement are correct, or that any minor qualifications are fully covered by the footnotes on the Balance Sheet, the following form is proper:
“I have audited the accounts of Blank & Co. for the period from............ to
and I certify that the above Balance Sheet and statement of Profit and Loss have been made in accordance with the plan suggested and advised by the Federal Reserve Board, and in my opinion set forth the financial condition of the firm at
and the results of its operations for the period
A. B. C."
The Auditor's Responsibility. Opinions vary as to the extent of an auditor's guarantee, and as to his legal responsibility in case of an error being subsequently discovered in the statements which he has certified. This responsibility was discussed briefly on page 9 of Chapter One. Concerning the extent of an auditor's guarantee, what Lawrence R. Dicksee, F. C. A., of the firm of Price & Dicksee, says in his manual on "Auditing" is so appropriate that we can do no better than to quote from him:
“Unfortunately, this is a matter upon which the profession are by no means agreed; while, on the other hand, the cases that have been decided by the courts are so few, and the questions at issue actually so narrow, that sufficient precedents are not available to definitely settle the matter. At the same time, it is well to remember that, however desirable it may be to know exactly the bare extent of the legal responsibility, the real professional responsibility to clients ought always to be the ideal, and, further, an auditor will be the worst of friends to his profession if he studiously exerts himself to narrow the responsibilities, and so to dwarf the importance of his position.
“The responsibility involved in certifying a Balance Sheet to be absolutely correct is so great, so limitless, that many have preferred to discard all claim to such a position of certainty, and prefer merely to certify a Balance Sheet as being ‘in accordance with the books.' Auditors, however, will hardly require to be reminded that an investigation which had been limited to the comparison of the Balance Sheet with the books would be, for every purpose, absolutely valueless. So obvious is this conclusion that no professional auditor would ever think of confining his investigation to this particular point, yet many experienced auditors appear to be afraid to make any certification as to the result of such further investigation as they know to be essential. Such a state of affairs is unsatisfactory to the client and discreditable to the auditor. Again, it is a very open question as to whether so unsatisfactory a certificate would ever have the effect of limiting the legal responsibility of the auditor to the exact points certified. It is, at least, possible that the court would view the matter from a broader aspect, and consider that the man who had accepted the position of auditor, to say nothing of the fees incident thereto, had also undertaken the responsibilities of that position, and that it would be disposed to form its own opinion as to the real extent of such responsibilities.
"It would appear, therefore, that the auditor who does not consider his investigation has been sufficiently searching escapes no liability by issuing a carefully modified certificate; and, indeed, such a course is decidedly unmanly, somewhat dishonest and exceedingly childish. These are strong words, but not stronger than the circumstances appear to require.
"When addressing a meeting of the Institute of Chartered Accountants, Mr. Frederick Whinney, F. C. A., expressed himself as follows: 'I know perfectly well that a proper auditor must go further (than comparing the published accounts with the books) and see that books themselves do correspond,' and this view appears to be endorsed by legal decisions. As to how far it is possible for this standard to be carried into practice, there is perhaps some room for the elasticity of individual opinion, but the general statement is absolutely unassailable.
"The chief evidence is, of course, the books (and it may be remarked, incidently, that it is clearly the auditor's duty to see that the accounts he certified, in addition to being correct, are in accordance with the books), but the books must not be considered the sole source of evidence; the fact that a statement appears in the books is prima facie evidence only, and must be verified, not only by internal cross-examination, but also by reliable and independent evidence.
“The result of such an examination will be that the auditor has proved to himself that certain statements represent absolutely indisputable facts, and that certain other statements in his opinion appear to represent facts. Beyond this not being omniscient-he can not go, and should never attempt to go. Let him therefore certify that he has thoroughly examined the accounts, that they are in accordance with the books, and are, in his opinion, correctly stated; he will then be occupying a logical, manly position-far more in keeping with the dignity of his profession than that afforded by the most skillful of word juggling."
In accordance with our engagement, I have made an audit of the accounts of The Blank Manufacturing Company for the year ended December 31, 1918, and herewith submit my report which includes the following:
Exhibit “A” –Balance Sheet, December 31, 1918.
“B” -Statement of Profit and Loss for the year
ended, December 31, 1918.
Schedule “B-1"-Statement of Cost of Goods Manufactured
and Sold for the year ended, December
I HEREBY CERTIFY that the attached statements have been prepared in accordance with the plans suggested and advised by the Federal Reserve Board and, in my opinion, set forth the true financial condition of the business as of December 31, 1918, and the results of operations for the year ended December 31, 1918.
(Signed) J. F. SHERWOOD
C. P. A.
THE BLANK MANUFACTURING CO.
Less Div. Vouchers Out. 2,050.00
2,500.00 $22,662.00 Notes and Accounts Receivable: Notes Rec. Cus. (Not past due)
Res. for Bad Debts, 2% 1,750.43 2,008.55 94,118.95
59,875.00 Finished Stock..
80,000.00 139,875.00 Accrued Assets: Interest on Notes Receivable
131.24 Interest on Inv. of Surplus
124.59 Interest on Sinking Fund....
1,131.17 Total Quick Assets.....
$257,787.12 Securities: Notes Receivable (Gen. Mgr.)
1,500.00 Investment of Surplus....
10,000.00 Salaries Adv. to Salesmen..
950.00 12,450.00 TotalCurrent Assets.....
$270,237.12 Fixed Assets: Land...
Less Res. for Depr. 10%.. 3,000.00 12,000.00
363,292.55 Sinking Fund.......
15,000.00 Total Fixed Assets....
$378,292.55 Deferred Charges to Operations: Insurance..
12,575.00 Unapportioned Organ. Exp.
6,615.00 Bond Discount Unamortized
5,700.00 25,346.00 Total Assets...
$673,875.67 Exhibit "A"
THE BLANK MANUFACTURING CO.
Balance Sheet-Dec. 31, 1918
Notes and Accounts Payable:
Special Accounts Payable:
Due to Officers and Clerks.
Factory Pay Roll-Labor..
Total Current Liabilities...
First Mortgage 5%, 20-year Bonds......
Sinking Fund Reserve.
Capital Stock Authorized ..
Less Book Value of Good Will.....
500,000.00 50,000.00 450,000.00
13,719.93 78,969.17 542,689.10 75,000.00 $467,689.10
Total Liabilities and Net Worth.....