UC-NRLF B M SD3 7E3 \A ^^4^, («>«/ m ^S:' 5 M "^hVS m r^i r^ fe:cciS M. . J^ :1 l» iV THE SCIENCE AND PRACTICE OF AUDITING •- • > » COMPILED BY E. H. BEACH AND W. W. THORNE AUTHORS OF THK AMERICAN BUSINESS AND ACCOUNTING ENCYCLOPEDIA AND OTHER STANDARD TEXT BOOKS PRICE, ONE DOLLAR The Book-Keeper Publishing Co., Ltd. DETROIT, MICH.. U. S. A. 1903 ^3 Entered according to Act of Congress, in the year 1903, by The Book-Keeper Publishing Company, Limited Detroit, Michigan In the office of the Librarian of Congress. All rights reserved. The Science an4 Practice of Auditing* A large amount of literature on the subject of auditing, its proper scope, methods of procedure in special cases, responsibility of auditors, etc., has been produced of recent years, and the field is so wide on account of the spe- cial conditions prevailing in different kinds of businesses that it would be an easy matter to compile a book of several hundred pages and by no means exhaust the subject. In this text book we will endeavor to give general and comprehensive directions for the study of those who desire to become familiar with the requirements of this kind of expert work, and to give our readers an idea how they should arrange their plans in order to obtain the best results. GENERAL DUTIES. The general duties of an auditor may be defined as follows : First. — The audit of accounts, entailing such examinations as will sat- isfy him that the accounts placed before him are substantially correct and enable him to certify to this effect. Second — The investigation of frauds. Third — The investigation of the accounts of firms and companies with! a view to certifying the profits or verifying the assets and liabilities on con- version of the same into public or private corporations, either by sale or by the consolidation of several concerns into one large corporation. Fourth — The investigation of claims for compensation. GENERAL PROGRAM OR AUDITING PLAN. The following instructions for the audit of an ordinary set of books are those used by many Public Accountants : Check all postings — or at least all postings of the Cash Book, and all postings into the Nominal and Private Ledgers. Vouch Cash Book and Petty Cash Book. Check additions thereof, and verify balances at bank and in hand. Check Ledger balances and additions of all Ledgers; and, where the whole of the postings are not checked, compare the balances of each Ledger with the corresponding Adjustment Account. Complete and agree Trial Balance. 8 From the Trial Balance so completed, check the Trading, Profit and Loss, and Balance Sheet, so far as their arithmetical accuracy is concerned. Verify the existence of all assets. See that the values at which they are taken into the Balance Sheet are reasonable/ and that .proper allowance has been made (where necessary) in respect of 'depr'td^tibn, bad debts, and discounts. : , I/pqrf.'the lial^Uities side, see that ^'statements" have been procured in respect of each trade creditor's account, and that they agree with the balances shown in the Purchase Ledger. Carefully scrutinize all sundry outstanding liabilities, with a view to see- ing that everything has been included. Enquire what reserve is necessary in respect of liability on bills dis- counted. Inspect bills receivable in hand and check with Bills Receivable Account. Check the extensions and additions of Inventory, or see that these have been properly and thoroughly done and that the stock has been certified by responsible persons to have been actually in existence at the date of the Bal- ance Sheet, and to have been taken at cost price or under. Carefully compare every item in the Balance Sheet, Trading and Profit and Loss Accounts with the corresponding item at previous periods. CONDENSED AUDITING SYSTEM. A very complete and practical plan of auditing is described under this heading in the American Business and Accounting Encyclopaedia, page 133. The following special points should be carefully considered and will be found of value to the intending auditor : PETTY CASH. Separate vouchers should be required for petty disbursements. This cannot, however, always be obtained, in which case, the Petty Cash Book should be signed by some responsible official to indicate that he accepts the responsibility for the accuracy of that portion of the books. CASH SALES. The auditor should always recommend the use of consecutively num- bered counterfoil or stub cash receipt books, as where these are used any missing or blank stubs at once indicate that an explanation is required. CASH DISCOUNTS. The entry of cash discounts should be carefully scrutinized, but it is not always possible to check the discounts on account of the volume of work involved. In such cases certain deductions for cash discounts should be selected for examination at various intervals. COLUMNAR CASH BOOKS. In columnar cash books it is very important that the auditor should satisfy himself that all amounts have been entered in the proper columns. For example: a remittance on account to a travelling salesman would be a complete loss to the company if entered in the General Expense column. VOUCHERS. Where vouchers are missing it is considered satisfactory to accept the return check as the voucher. ACCOUNTS RECEIVABLE AND PAYABLE. A complete audit would undoubtedly include the checking of all post- ings in Accounts Receivable and Payable Ledgers. Where this cannot be done the general accuracy of the books should be arrived at by an indepen- dent adjustment account consisting of the total debits and credits obtained from the various books of original entry. It is important to compare the actual invoices with the entries in the Purchase Book, and these invoices should be O. K.'d by the manager of the department or other responsible officer. Where regular audits are performed it is considered best that the secretary of the company should keep the private ledger containing adjust- ment accounts. Accounts in the Purchase Ledger may also be verified by calling for statements from trade creditors. DOUBTFUL AND BAD DEBJS. The auditor should endeavor to ascertain that bad and doubtful debts are not included with good accounts receivable. Some accountants make a schedule of accounts receivable ruled with several money columns, each debt being entered in one of these columns according to the length of time it has been standing on the books. A special report should be made in regard to this feature of the audit. It is also customary to obtain from the officers of the business a certificate that all bad debts have been written off and suf- ficient reserve made for doubtful debts. Where a separate Suspense or Bad Debt Ledger is not used it should be recommended. Doubtful debts are usually taken in the Balance Sheet at 5©%. It is a good plan to open a reserve for bad debts account, crediting this account with an amount which corresponds with the percentage of ascertained loss on total sales of previous years. Losses thereafter occurring are charged against this account. '^''house'" expense. In some businesses it is the custom to furnish fixtures, tools, and ma- chinery, out of stock, or to have them made on the premises, these items being charged as ordinary transactions in the course of business. In cases of this kind it must be seen that such items are charged at cost and credited to Pur- chase Account and not to Sales Account. This, of course, refers to the material used. REPAIRS AND RENEWALS. Charges to plant and machinery, fixtures, etc., must be examined to see that nothing in the way of repairs or renewals has been included. TRADING ACCOUNTS. In making up the Trading Account the auditor must be careful to in- clude only such items as belong or add to the cost of article or product. All other items must be included in the Profit and Loss Account. RESERVES. Reserve accounts should be carefully distinguished in the balance sheet from reserve funds. SECRET RESERVES. Secret reserves are created by writing down assets below their real value, such as plant, machinery and inventory in a commercial business, and freehold premises and securities in the banking business. It would be the duty of the auditor to report to the directors in regard to reserves of this nature, in order to relieve himself from responsibility. INVENTORIES. The auditor should ascertain the basis on which the inventory is calcu- lated, i. e., cost or selling price, as it sometimes happens that managers of branch stores endeavor to inflate the assets on hand by taking an inventory on the latter basis. Investments in stocks and bonds should be carefully ex- amined and the actual market value determined in order to see that they have not been overvalued on the books. BILLS RECEIVABLE. These should be inventoried by the auditor and agreed with the Bills Receivable Account. Bills discounted should also' be scheduled and the contingent liability shown on the balance sheet. Worthless bills should be transferred to the Suspense Ledger. BANK ACCOUNT. It is well to obtain a certificate from the bank as to the amount standing to the credit on the date of the balancing. A reconciliation statement should be a part of the auditor's report. DIVIDENDS. The auditor must be careful to ascertain that dividends have not been paid from capital. 6 LIST OF BOOKS. At the commencement of an audit it is necessary to make a list of the books audited. It will be found useful to keep an audit note book which will contain the list of books examined and the extent of examination of each audit. DEPRECIATION. The American Business and Accounting Encyclopaedia goes very thor- oughly into this subject. In some cases it has been discovered that plant has been sold and credited to sales. The only way of insuring against con- ditions of this kind is by a re-valuation. The usual rate of depreciation on ordinary plant and machinery used in manufacturing businesses is from 7J^ to 123^ % per annum. Unsalable stock, of course, depreciates in value until, sometimes, it is absolutely worthless, and is therefore best for the auditor to accept no responsibility for the valuation of stock in trade. He should re- quire the managers of the departments to certify to the correctness of the inventories. ^ The customary depreciation on boilers is from 10 to 15% per annum, ^s they wear out rapidly. On furniture and fixtures it is usual to deduct from 5to7j4%. CONTINGENT LIABILITIES. These may include notes and drafts discounted or transferred, accom- modation obligations, disputed claims either way, unpaid cumulative divi- dends, unpaid rent, etc. PARTNERSHIP AGREEMENTS. In auditing the accounts of a partnership it is necessary for the auditor to carefully examine the partnership deed for the purpose of ascertaining the various agreements which will control the interests of the partners. CORPORATION STOCK AND BY-LAWS. In corporations it is the duty of the auditor (unless appointed to audit the accounts for a certain specified time) to ascertain that all subscriptions for stock have been properly accounted for and that no regulations affecting the financial management of the corporation have been violated. FICTITIOUS ASSETS. It is considered that s^uch items as stock discount, bonus, promotion and organization expenses should be written off in not less than four years. CHECK MARKS. All vouchers for payments should be either initialed by the auditor, or stamped with a special "audited" stamp, so as to render it impossible for the same voucher to be produced twice. . RESPONSIBILITY OF AUDITOR. It is difficult to exactly fix the responsibility of an auditor, as it may be possible that some of the Accounts Receivable may be non-existing, owing to their having been collected and the amounts embezzled. The inventory may be inaccurate and contain lists of articles which are not in the possession of the business. These are serious matters when businesses are being investi- gated on the part of an intending purchaser, or when defalcations are sus- pected. In such cases the auditor should send statements to all customers requesting a verification of the balances shown thereon. An independent valuation of the assets should also be made. PAR. 3 OF '^'gENERAL J>UTIES.'' This class of auditing is very thoroughly explained and discussed in "Duties of Auditors in Relation to Corporation Amalgamation," by F. H. Macpherson, C. A. Many accountants when ascertaining the profits of a business for the purpose of a prospectus, make no allowance for remuneration to a partner or partners for management. Suppose the capital of a company to be $100,000; preferred stock, $60,- 000; common stock, $40,000 — $100,000. And suppose the business to have belonged to one man who for many years has worked energetically and brought it to the state at which it has been floated. Suppose the reported profits to be, on an average, $7,000 per annum. These profits may continue to be earned by the company so long as the vendor continues to manage the business as he was doing before and chooses to be satisfied with his dividend for his remuneration. If, however, the vendor does not, after two or three years, choose to do this, the company must find and pay a man to do the work, and he should be a man of equal standing and ability. The salary which must be paid will form a first charge upon the assets of the company, and will, of course, be preferable to the interest on the preference shares. The new man at the helm will look for an income from the company equal, at any rate, to what is being earned by any one else in a similar position. In a company with the amount of preference stock and ordinary stock referred to, it may not unreasonably be supposed that with that salary to pay, the time may come when there will be no dividend on the ordinary stock, and when there may not be sufficient to pay the full dividend on the preference stock. The credit of the company when it pays no dividend on its ordinary stock, and is unable to pay a full dividend on its preference stock, will suffer very considerably. This appears to be a very serious defect in such an investigfation, and the auditor should make provision for cost of management in certifying amount 8 of profits earned, or state conditions clearly in his report so that intending purchasers of the business may understand them. TRUST COMPANIES. The auditing of a Trust Company presents distinctive features in that the auditor's report should include separate statistics in regard to the various trusts administered, and a report showing that any obligations necessary to keep the trusts intact have been duly fulfilled by the Trust Company, and that the properties and securities held in trust remain in the possession of or under the control of the Company. In a real estate trust it is usual to make an Income and Expenditure account one of the principal exhibits. It would also be very necessary to show that all payments involved in the administration of trusts, such as annuities, pensions, etc., have been duly paid when due. The various securi- ties and investments of the Company must be listed in detail ; a schedule of depositors made showing amount of liabilities to them at date of audit, etc. The following general directions will be found instructive: The auditor first takes up, for example, the department devoted to indi- vidual trusts and the management of estates, including such matters as exe- cutorships and trusteeships under wills. In this division he must follow out each individual trust and examine it on the merits of the case and not from the standpoint of any fixed rule. Next, for example, he takes up the question of administration, and in this department considers the company from the standpoint of administrator, trustee, guardian, receiver or assignee, as the case may be. Here again each individual undertaking must be examined from beginning to end in order to put into the report that which he is expected to present. Again, he takes up the question of trusteeship under mortgage issued by corporations or municipalities. Here there is the inquiry alon^ specific lines to be assured that the company is not making- mistakes and is not abus- ing the confidence reposed in it. PUBLIC INSTITUTIONS. The following would be a good scheme of audit in connection with the accounts of a hospital or charitable institution : Vouch all cash received and paid. Trace all subscriptions and donations received on to the published list, and compare totals thereof with the totals of the Ledger Account. Vouch legacies by comparison with the letters received from solicitors or executors enclosing them. Vouch all payments, paying, careful attention to the fact that they must have been properly authorized for payment. 9 Check additions of Cash Book, and verify balances in hand and at bank, either on deposit or current account. Verify existence of investments by inspection of the title deeds, certifi- cates, etc. Check all Ledger postings and additions, and extraction of Ledger bal- ances. Verify Trial Balance and check therefrom the published accounts, also comparing them with those of the preceding year. MINES. Where land for the development of mines has been purchased or leased subject to royalty, it is very essential to ascertain that the royalty accrued due has been paid. The auditor should also satisfy himself that the whole output of the mine has been accounted for. The stock of material at the pit's mouth should be valued for the Balance Sheet at cost of raising. BUILDING SOCIETIES. It is very important to call in all depositors' pass books and to compare them with the accounts shown in the books. 10 DUTIES OF AUDITORS. BY F. H. MACPHERSON, C A. THE DIFFERENCE BETWEEN TRUSTS AND AMALGAMATIONS. It is not my purpose, nor was it the intention of the Council of the Institute in selecting the subject for this evening's paper, that I should enter into a dissertation upon the merits or demerits, the good or ill to the com- munity of "Amalgamations," otherwise known as "trusts," "combinations," and "monopolies," or if the terms be used which are applied to them by those more especially and directly interested, then we shall speak of them as "Judicious combinations for the public good," "community of interest," or "community of control." Here I may interject that the difference between a Trust and an Amal- gamation has been thus described: "The Trust was designated primarily as a weapon of war, aggression and attack ; the Amalgamation is primarily a measure of self-defence and peace." Whether the objects of Amalgamation are desirable or the reverse, is not with us the question; not yet whether most beneficial to the com- munity or to the individual. There are two sides to this, as to every other question. All will agree, however, that the one ultimate end and aim of those who enter into these combinations, by whatever name they may be known, is a desire to increase profit. This increased profit may be brought about in numerous ways, as by command of the necessary capital; the checking of .competition; the utilization of materials which manufacturers in a small way cannot use, in the manufacture of by-products ; the introduc* tion of new and labor-saving machinery whereby the cost of production is materially lessened; the saving of energy whfch comes from the organ- ization of a large business under a single skilled executive head ; better or- ganization; the ability to retain men of peculiar abilities upon the line of work for which they are specially fitted ; the saving of expense in the selling or disposal of the products ; the specializing of work — and with all these, as it was put by the president of the Standard Oil Company, is given "power to give the public improved products at less prices and still make a profit for the shareholders," and to provide "permanent work and good wages for labor." 11 COMBINATIONS A NECESSITY OF THE AGE. In this age of progress it would seem that combinations have become a necessity. This being admitted, the important question to be considered by accountants is upon what basis shall these amalgamations be effected, and upon this subject I shall to-night endeavor to present a few thoughts. 'The Investigation of Companies' Accounts wth a view to amalgama- tion. How to do this and what the Report should contain." For the purposes of this paper I shall change the order of the sentence "How to do this and what the report should contain," and make it read: "What the report should contain and how to do this," or, the requirements having first been ascertained, how proceed to obtain the information re- quired. STATUS OF THE ACCOUNTANT. The first point to receive consideration is the position of the accountant with respect to the extent of the examination which he is called upon to make. Usually the instructions are very general in their terms; in some instances, however, they are sufficiently specific as to leave no room for the exercise of any discretion. As an illustration: Recently I was, asked to make an investigation of two concerns (about to amalgamate) for the pur- pose of ascertaining what the revenues and expenses of operation of the respective properties had been for a certain period. I was not to concern myself with the matter of assets and liabilities. The value of the former, and the sum of the latter had been arranged as between the parties previous to my being called in and certain statements as to profits had been made. My sole duty was to verify the accuracy of these statements as to profits. RESPONSIBILITIES OF THE ACCOUNTANT. In "Dicksee on Auditing" it is laid down as an axiom that "an account- ant cannot submit his professional discretion to the dictation of his clients without sacrifice of self-respect, and grave danger to his clients' interests." This is a sound principle and one which it is very desirable should be adhered to. In the great majority of the certificates of accountants which are found in the prospectuses of companies forming to effect amalgamations is a bare statement as to profits covering a period of years, not of the several com- panies individually, but in the aggregate. Each time that I see a certificate framed after this, the prevailing fashion, the thought occurs to me that the accountant is probably carrying out his instructions, and is telling the truth in a concrete form. But is the whole truth being told? For it is possible for the accountants to tell the truth and yet not give expression to the whole truth. The question I next ask myself is : What are the responsibilities of the accountant? We are coming to know and to realize, day by day, and 12 year by year, that the investing public are learning to rely more and more upon the certificate of the accountant ; that as much reliance is being placed upon this as upon the names of those who stand sponsor for the projected enterprise, prominent in the financial and commercial world though they may be. It is a recognized fact that the flotation of any scheme, large or small, where public subscriptions are invited is hardly possible in the absence of the certificate of a Chartered Accountant of known and recognized stand- ing in the community. Within the past year I have knowledge of three instances of attempts being made to float enterprises which were found impossible in the absence of the certificate of a known and recognized accountant. In every instance the flotation was successful, the accountant's certificate having been obtaied, the enterprises having been found deserving. In this view of the case the responsibility which rests upon the account- ant is impressed upon me as being so grave and serious that it cannot be treated lightly. Knowing that upon the strength of statements to which we certify will follow the investment of hundreds of thousands of dollars, the hard earned savings of persons who know little or nothing: of business, and who depend upon the word of the accountant as to the possible profit- earning power of the enterprise in which these savings are being invested, it behooves us as accountants to so prepare our reports arid certificates that in case of failure to realize anticipations, the blame may not be placed upon our shoulders. We must do this if the profession of accountancy is to be enduring and respected. ESSENTIALS OF THE ACCOUNTANT'S REPORT. ' What I desire to impress upon accountants at this early stage in our consideration of this subject is the necessity for stating the "whole truth." I do not for one moment wish it to be understood that I feel or think that failure to do this is from any desire on the part of the accountant to hide what ought to be revealed, but for the reason that his instructions limit him to a certain course, and because the telling of the whole facts might be prejudicial to the interests of those who engage his services. You ask my definition of the phrase : "the truth, the whole truth, and nothing but the truth.'* I answer : that to my mind the whole truth would more nearly be told if the certificate of the accountant were to show the revenues and expendi- tures of the several concerns entering the amalgamation individually, and year by year, and not in the aggregate. If the profits are gradually increas- ing, the report would, as it should in all fairness, so show ; and on the con- trary, if a decline or irregularity in the profit-earning power is apparent, 13 the report should so state, with the particulars and reasons therefor. This as to the profit-earning power. As to the valuation of the assets, the report should show the amount of capital (bona fide) engaged in each business. This point, I will, however, take up a little later. If this be done the facts presented may be perfectly satisfactory, or on the contrary, they may be such as will have the effect of deterring many of those who now do so, from investing in shares of over-capitalized companies. It is possible that the accountant who follows the course I attempt to lay down may not receive very much of this particular class of business; but he will be certain to "come into his reward" at a later period, when the liquidator or receiver takes a hand, and an investigation follows for the purpose of fixing the responsibility. This phase of the business will be just as profitable, besides being a good deal more satisfying to the conscience, and the accountant will feel that he has fulfilled well the precept expounded by Polonius for the benefit of his friend Laertes : "To thine own self be true And it must follow, as the night the day, Thou canst not then be false to any man." For the purposes of this paper I shall assume : SCOPE OF THE INVESTIGATION. t- (i) That two manufacturing concerns in the same line of business contemplate amalgamation. (2) That the report of the accountant is to form the basis of the amalgamation. (3) That the accountant*s instructions are general and not specific, and include the determining of the assets and liabilities, as well as the earnings. (4) And that he is acting for the pur- chasers and not for the vendors. Accountants differ as to the scope of an investigation. There are those who take the position that the acountant is not expected to make the thorough examination which a regular audit would entail, bunt that the genuineness of the books and of the balance sheet should be assumed. Others consider that the accountant pursuing an investigation would wish to analyze the accounts, and that in doing this we would discover fraud, if any had been committed. Regular audits and special investigations have or should have the same end in view : the obtaining of a correct statement of facts. The first is for the purpose of verifying the balance sheet put forward as presenting the condition of affairs of the business under review, for the safeguarding of the interests of the shareholders or proprietors. The second (if on behalf of a projected company) is for a similar purpose, viz : the ascertaining the value of the assets, the liabilities, and the profit-earning power. 14 STATEMENT OF ASSETS AND LIABILITIES ILLUSTRATED. For myself, I cannot well see how an accountant can accept and pre- pare a report from any balance sheet without satisfying himself, by a suf- ficient analysis, of the regularity of the accounts and of the methods followed to produce the various items which enter into the assets of a concern, or which go to make up the revenue and expenditure accounts. Leaves from experience are of more practical value than volumes of theory. Take the following statement of assets and liabilities presented to me recently for an examination and report. The revenue and expenses were the subject of a second statement. ASSETS. 1 Cash on hand and in bank $ 1,345 40 2 Bills receivable 9,953 42 3 Advertising due bills 1,521 95 4 Mdse. on hand 10,000 00 5 Machinery and fixtures 33,204 45 6 Property and franchises 209,765 82 7 Accounts receivable 2,260 81 8 Insurance accrued 166 86 $268,218 71 LIABILITIES. 9 Bills payable $ 9,629 45 10 Accounts payable i,447 89 11 Reserve account 7,741 37 12 Capital account 250,000 00 $268,218 71 Items I to 5 and 7 and 8 of the assets presented no difficulties in the way of verification. Item 6 (property and franchises) required investigation and analysis, which revealed the fact that it represented nothing but a patent with three years yet to run, and the balance "water" in the capital account. Shorn of these the resources of the company were $58,452, and the liabilities on trade account $10,477; cash investment of shareholders $40,234, and surplus $7,741. WHA I mention this case for the purpose of emphasizing my position that it is rarely, if ever, safe to assume the correctness of the balance sheet, and the accountant who will certify, without an examination and analysis in detail sufficient to satisfy himself of the bona fides of the items which enter into such statement as assuming a responsibility from which I, for one, should wish to be excused. Statements of the concerns should be included in the report, independ- 16 ently of each other, and based upon the foregoing specifications should con- tain information as follows : (i) Assets as of a given date (the same in each instance) divided as to: (a) Realty. (b) Plant and machinery. (c) Merchandise (raw material). (d) Merchandise (in process). (e) Merchandise (finished product). (f) Leasehold. (g) Good will. (h) Patents. (i) Accounts receivable, (j) Bills receivable. (k) Cash on hand and in bank. (1) Bills receivable under discount (indirect), (m) Accrued interest, insurance, etc. (n) And such other divisions of the assets as the nature of the business might demand, (2) Liabilities, as of a given date (the same in each instance), divided as to: '(a) Bills payable. (b) Accounts payable. (c) Mortgage indebtedness. (d) Bills receivable under discount (indirect). (e) Other indirect liabilities. (f) Capital account. (g) And such other divisions of the liabilities as the nature of the business might demand. (3) Revenues and expenses of each business showing earning power of each in a given time (usually three years if the business has been in opera- tion so long) and preferably covering the same period. Taking the items in these divisions in their order, the accountant will ordinarily not be called upon to verify items "a" to "h,'' the land, buildings, stock-in-trade, leasehold, etc., being specially valued by independent valuers. If not, and these are subject to verification by the auditor, he should in the case of: (a) Realty, call for the title deeds and see that the account is not charged up with fictitious increases In value, or with the annual taxes, as I have found In certain Instances, and that a sufficient allowance has been made for depreciation In buildings, etc. 16 (b) Plant and machinery, a certified inventory, which should agree with the sum set down in the balance sheet, care being taken to verify exten- sions and additions, and a comparison of price. with the original invoices and that due allowance has been made for depreciation, and obsolete plant. (c), (d), (e) Merchandise, raw, in process, and the finished product, certified inventories, which should be checked both as to quantities and values — an independent appraisement is altogether preferable; comparison of inventory with invoices in the case of raw material; to see that profits are not anticipated, a careful inspection of cost accounts is required. In case of manufactured stock care must be exercised to see that office and selling expenses are not pro-rated, and added to the cost of goods appearing in inventory. Note should be taken of the "dead wood" in the stock and that proper allowance has been made to cover. (d) Leasehold, not usually a consideration, but if found to exist, a 'special valuation to ascertain present value is best; otherwise the original cost, less proportionate reduction for the expired period. (g) Good will. This item can only be determined by agreement be- tween the parties, and is one which does not seriously concern the account- ant, except that if it is put in at an arbitrary sum by the vendors, he should see to it that the price be set forth separately and distinctly in the "assets" so that the purchasers may know just how much they are expected to pay for the same. (h) Patents. Sec that these are entered at their proper present worth — which will be determined by the remaining life thereof, and the present "state of the art" in that particular connection. (i) Accounts receivable. A careful examination should be made to ascertain the condition of these, that they are alive and collectible, and that proper provision has been made for bad and doubtful. Also that secreted in the accounts receivable may not be found charges for "goods on consign- ment" billed out at the usual profit, and going to swell the volume of output, thus unduly increasing the earnings, by the "anticipation of profits." (j) Bills receivable. Same examination as in the case of accounts, so far as prospects of realization are concerned. (k) Cash on hand and in bank. The same verification as in a regular audit.. (1) Bills receivable under discount. This is an indirect asset as well as an indirect liability, and it is important in the case of an amalgamation where the liabilities are being assumed, that information on this point should be given and it may be necessary that some allowance should be made in anticipation of "loss upon realization." 17 (m) Accrued interest, insurance, etc. That the claim for these is fair aind proper. Turning next to the question of liabiHties, we take up : (a) (b) Bills payable and accounts payable. The verification will be the same as in a regular audit. In this connection it may be proper to say that there is not much danger of the liabilities being over-stated. The prin- cipal danger lies in the understanding or not taking to account of the out- standing liabilities, and this must be carefully guarded against if the transfer of the business involves the assuming of all the liabilities. (c) Mortgage indebtedness. Verification by the obtaining of a state- ment from the mortgagees, both as to principal and arrears or accrued interest. (d) Bills receivable under discount. The remarks under item "U' in assets would more properly come in here, the same being applicable in both cases. (e) Other indirect liabilities. These may be in the nature of endorsa- tions (although a strictly improper and illegal proceeding in the case of joint stock companies), claims for damages, disputed accounts for materials, ser- vices or commissions. A distinct statement in writing as to the existence or non-existence of these should be obtained from the proper officers of the company. (f) The value of the business to the purchasers will be represented by the difference between the assets and liabilities in each case and if profit- able should equal the issue of capital stock with an addition to the assets of any undivided profits, which would enhance the value of the equity to be transferred to the amalgamating company. VERIFICATION OF REVENUE. The question of revenue and expenses of operation will in all probabil- ity more particularly occupy the attention of the accountant, rather than the ascertaining of the value of the assets and liabilities; in fact, as I have stated before, his instructions may limit him to the determining of these without regard to the other. Taking the revenue accounts first : the accountant will require to make a careful investigation of the receipts for the period (usually three years) under examination. He will see that no extraneous revenue has been intro- duced and that the progress in the revenue account has been consistent and steady, or otherwise. He must be watchful that the revenue account has not been increased by credits for goods "on consignment" with an ofY-setting entry to accounts receivable. In a recent case open accounts of $45,000 were, upon investigation, found to contain consignments to the extent of 18 over $30,000, upon which gross profits exceeding twenty per cent, had gone to the credit of revenue, thus enhancing that account by over $6,000. This occurred during the last year of the three under examination. Of course a very substantial increase in turnover and profits was shown, which was purely fictitious. Other points which require to be looked into are, that goods "on approval" likely to be returned to stock afterwards, have not found their way into the sales account, that fictitious sales, for the purpose of swelling the revenue have been put through the books, and shipments not made be- fore close of inventory; that incompleted and unshipped orders have not been credited to sales account, thus inflating revenue by ungained profits; that rebates and allowances are a charge against sales and not an addition to merchandise account. In a word, the bona fides of all sales especially near the end of the period should be determined to the satisfaction of the accountant. VERIFICATION OF EXPENDITURES AND PROFITS. It is the duty of the accountant to see that all the expenses entered are a proper charge against the business and that they are made within the proper period ; that there is no reduction in expenses toward the close of the term under inspection ; that the expenses are regular and consistent and bear a steady ratio to the turnover ; that proper and reasonable allowances have been made for repairs and renewals, and that these are charged against revenue and not an increase to capital. Excessive profits from any particular cause should be noted, as for instance : those which might arise from the making of heavy purchases in anticipation of an upward tendency in prices, and which anticipation had been fulfilled. That all profits earned and taken to account are incidental to the busi- ness. A sale of real estate not required for the purposes of the business, and made at a substantial profit, forms an example. On the other hand expenditures of exceptional and unusual character which have gone to reduce the profits below normal should be noted. COST OF OPERATION. In the consideration of the cost of operation heed should be given to the effect which a limited capital has had upon the expenses of operation. Lack of capital is naturally followed by increased borrowings, and increased borrowings augment the interest account. Operation is thus charged with a sum, which, had adequate capital been invested, would have been in the nature of a dividend. By way of illustration : I have In mind a business in which every dollar of capital Invested Is borrowed. This may appear an extreme case, but such is, nevertheless, sometimes to be found. The bor- 19 rowed capital repre'sented $100,000. Upon this sum interest was paid out of the business and charged to operating expenses. I am asked to investigate, and find this condition. In the preparation of the profit and loss account I eliminate the $6,000 interest paid on this sum, in order to arrive at the earn- ing power of the business. It can readily be seen how unfair any other course would have been, and how lack of sufificient capital in any business will impair the earning power and afifect the showing as to profits, unless allowance be made therefor. There is room here for the exercise of a dis- play of good judgment on the part of the auditor in determining what the "adequate capital" should be. TRADING PERCENTAGES. English authorities suggest that it is part of the duty of the investigat- ing accountant to ascertain the amount of capital necessary to conduct the business on its present lines and report as to the scope offered for increased capital . investment. The accountant should so far analyze the accounts as to enable him to furnish information upon the following points : ( 1 ) Proportion the stock bears year by year to the annual turnover. (2) Rate per cent, of gross profit in trading account on cost. (3) Rate per cent, of selling expense on cost. (4) Rate per cent, of administration and office charges on cost. An analysis sheet covering these and other points of a like nature, in each iDusiness, would enhance the value of a report. SEPARATE REPORTS. Reports in detail upon each business should be prepared and furnished the principals, and these should form the basis upon which the Amalgama- tion is carried out. Regard, of course, will also be had to the introduction of other interests where more extensive operations are contemplated by the Amalgamating Company. In addition to the report in detail a certificate is usually prepared for use in the prospectus. This certificate is generally barren of all information except as to the revenues, expenses, of operation, and profit earning power of the various businesses entering the amalgamation, and these in the aggre- gate. Indeed, certificates are not uncommon where information is given only as to the profits earned by the several businesses. It is unusual to see any reference to the amount of capital invested. It occurs to me that a model certificate would be one framed somewhat after the following style : CERTIFICATION. Gentlemen — I beg to advise that I have examined the records of the Brown Manufacturing Company, Limited, and of The Jones Manufactur- 20 ing Company, Limited, each for a period of three years, and certify to the correctness of the underwritten statements, as to Capital, Earnings, Ex- penses of Operation and Net Earnings, covering the period given : 1898 $ $. 1899 1900 Total $ $ $. 1898 ■ $ $ $ $. 1899 1900 Total $. 1898 $ $. 1899 1900 Total $ $ $ For further information reference is made to my reports in detail, herewith, JOHN THOMPSON, Accountant. I fully appreciate that the less detail which appears in the report the better, for the obvious reason that much of it would not be understood by the average individual, and the tendency would be to befog rather than enlighten ; and that this is very undesirable. But I do think that an account- ant issuing a certificate framed as above, with a simple qualifying reference to a report for further and detailed information will be placing himself upon safe and sure ground. No reflection can fairly be made upon the honesty and integrity of the accountant afterwards, and if such should be suggested and an investigation be made as to the reasons for failure, if failure has come upon the enterprise, then the more rigid the examination the brighter and better will appear the position of the accountant. In presenting these views, I have departed from the usual course in some respects, with the object, amongst other things, of eliciting discussion and an interchange of views, as by this means only can these meetings be made to bear fruit to the fullest and best advantage. In closing I cannot do better than repeat the words of Mr. Fisher, F. C. A., President of the Institute of Chartered Accountants in England and Wales, who, in speaking recently upon the subject of Accountants' certifi- cates, has said: "In a word let our certificates be plain, clear, and with no uncertain sound, avoiding, as sometimes happens, a crowd of reservations and qualifi- cations, of which it is often difficult to understand the meaning. Let our certificate exclude everything that ma}^ possibly be constructed into, or even approach, the appearance of a possible double or doubtful meaning — let our 21 certificates be not only true and bold, but intelligible and understandable to all who read them. Thus will the certificate of the Chartered Accountant become more and more valued and relied upon, and the certifying accountant commended for keeping to facts, and not attempting to prophesy, or resort- ing to the foolish practice of fortune-telling. To so act, we shall merit, arid may I not say deserve, the confidence to enjoy and to establish upon a firm and, of the general public, which we all desire, lasting basis." 22 Program for Audit of a Natal Corporation's Accounts. BY T. WINSHIP, F. S. A. A. The Auditor should require the Secretary to supply him with the fol- lowing : 1. A list of all the books of the Company, including the statistical books, together with all such books. 2. A trial balance, showing the arithmetical accuracy of the books. 3. A list of members with their Register folios, and the number of shares held by each, together with a list of Members whose calls are in arrear (if any). 4. The Balance Sheet and Profit and Loss Account (if any) dated and signed by authorized persons. 5. The official copy of the Articles of Association. 6. All Contracts, Deeds, Leases and other documents and securi- ties of the Company, including the prospectus, applications, and the applications and allotments book. The Articles of Association should be read through, the Capital therein stated being compared with the books; the borrowing powers of the Com- pany and Directors noted ; all Contracts therein specified being checked with the actual documents, and any other matters calling for remark being care- fully noted for future reference. Next, the Contracts of Sale and Purchase (probably executed by a Trustee for the Company before incorporation) should be carefully exam- ined and the issue of shares or payments of cash checked against the Con- tracts, each document being initialled when found correct. The original applications for shares should be scrutinized and the names of allottees and number of shares allotted checked with the Applica- tions and Allotments Book, which should be signed by the Chairman of the Meeting at which the Shares were allotted. The allotments should then be agreed with the Register of Members and each agreement initialled, so as to keep the original issue of shares dis- tinct from any subsequent issue. 23 The securities of the Company such as Title Deeds, Investments, etc., should be very carefully inspected, each document being initialled as its cor- rectness is ascertained. After all documents have been examined and the Auditor has satisfied himself that all are in order, they may be handed again to the Secretary of the Cornpany and the Company's books, etc., taken to the Auditor's office (when necessary) to be gone through. This will obviate the necessity of the Secretary being in attendance until the work is completed, as a list of all notes and queries may be conven- iently, made in a note book kept for the purpose. The Auditor should now carefully peruse the Minute Books beginning with the first Meeting of Directors when the first allotment of shares was made. Reading on and noting anything particular or irregular, the whole history of the Company will be brought to light. The Auditor who fails to examine the Minute Book will lose much valuable information and numer- ous hints on particular transactions, which will, in my opinion, place him at a disadvantage (sometimes a serious disadvantage) in carrying out his other duties. When all his notes on matters in the Minute Book are made, he should refer these matters to the Statistical and Financial Books and at once ascertain whether resolutions passed by the Directors or Members have been properly carried out. There are many other and important matters arising out of the perusal of the Minute Boo^s which will readily occur to the mind of the Auditor. The Ledger should then be compared with the Trial Balance and all balances brought down or carried forward in the Ledger checked and addi- tions verified. The Trial Balance when found correct by this method should then be initialled. The Secretary should prepare and keep for the Auditor a Trial Balance before his closing entries for the period are passed, as well as a final Trial Balance agreeing with the Balance Sheet. Attention may now be turned to the Balance Sheet itself. Taking the Capital and Liabilities side first, Items i and 2 would appear in the Articles and items i, 2, 3 and 4 would appear in the Ledger, provided the opening entries in the books included the nominal capital, which is the plan always adopted by the writer. In the above Balance Sheet It Is evident that nothing has been received by the Company on account of the Forfeited Shares. The Auditor should see that a resolution declaring the shares to be forfeited has been passed and the conditions contained In the Articles as to forfeiture have been observed. 24 Item 5 will be verified by the Call Book, Cash Book, and the counter- foils -of the Receipts issued book. Many Secretaries prefer stating the Calls in arrear as an asset, but in practice it often happens that Calls in arrear are of no more value than bad debts and the writer prefers to deduct such amounts from the Issued Capi- tal, the balance clearly showing the Paid-up Capital. (Note. — It is on the amount of this Paid-up Capital that a Joint Stock Company's annual license is rated.) Item 6 will have been verified by inspection of the Actual Mortgage Bond and the endorsement thereof on the Title Deeds of the land mort- gaged. If there be no other endorsement the amount will be correct. To verify item 7 the Bank Account will have to be gone through, and all deposits and withdrawals carefully checked with Pass Book, Deposit Book and Cash Book for deposits. Pass Book, Cheque Book and Cash Book for withdrawals. This thoroughly done will disclose the amount showing by the books as owing to or by the Bank. A Certificate from the Bank should also be asked for by the Auditor. This latter is necessary, as in same cases of embezzlement two pass books have been in use, and the one handed to the Auditor, while agreeing with the books, did not agree with the actual account at the Bank. Item 8 should be verified by the Bill Book, Ledger, Receipts for the Bills, and statements of account to settle which the Bills were given. The Minute Book might also contain reference to the transaction by which the Bills were created. The verification of item 9 would necessitate comparison of the accounts as rendered by Creditors, with the Ledger and any Journal entries made to pass the amounts to the credit of the parties ; the Minute Book, which should contain a record of all accounts passed; the Order Book, which might be perused in order to discover whether any orders had been issued before the date of the Balance Sheet other than those for which accounts were pro- duced; and the Goods Received book to ascertain whether goods had been received prior to the date of the Balance Sheet which were not accounted for in the list of Creditors. It must be borne in mind that every item in a Balance Sheet, except the actual cash in hand (which of course can be verified) is at best but an esti- mate, and tentative, the net result of a combination and classification of all the items forming neither more nor less than a statement of the approximate position of a Company at a given date. It sometimes happens that Creditors' accounts come in after the Balance sheet has been certified and which in the nature of the case could not have been rendered before. 25 It is also sometimes the case that Directors withhold accounts for addi- tions to Stock in order to cover a loss on the trading account. In the second year's audit the payments during the first month or two of the financial period should be carefully examined in order to see whether any such pay- ments were for goods invoiced during the last month or so of the first year. It is much more difificult to detect a fraud in the first year's audit than in any subsequent one, as the opportunity of testing payments after the end of the year is, of course_, non-existent. . Item lo should be compared with the Dividend Book, Warrant Count- erfoils, Dividend Account at the Bank, Dividend Account Pass Book and Bank Certificate, Minute Book, recording the resolution to pay the Dividend, and the Register of Members to verify the amount of dividend payable to those Members whose Dividend Warrants had not been presented at the Bank. Reserve Fund item ii, should be the amount of nett profit set aside to provide for contingencies such as a breakdown of machinery or other losses, or the equalization of Dividends, or for any purpose stated in the Articles, and should be verified by the Minute Book containing the resolution of the Members (or the Directors if so empowered) authorizing the creation of the Fund. The securities for the investment might also be examined at the same time. Thus far it will be seen that the writer's idea of auditing is to check each item on the Balance Sheet with the Books and documents relating thereto, instead of the more usual method of taking say the Cash Book and checking all the postings into the Ledger and then proceeding in the same manner to check the other books. Turning now to the assets side of the Balance Sheet, item i would be verified by inspection of the Purchase agreement, if any. Title Deeds (the Transfer Deeds would state the amount of the purchase consideration), and the payment of the purchase price if the freehold were so acquired. Items 2 and 3, if not included in the Purchase Agreement, would have to be verified as follows : — All the postings from the Cash Book and Journal or other books would be checked with the Ledger and with the Vouchers for payments, the Vouchers in turn compared with the Invoices (not a difificult task when Invoices and Vouchers bear the same number), as certified by the Manager or other authorized person, then, the cost having been arrived at, the Minute Book should record the resolution of the Directors authorizing the agreed amount of depreciation to be written ofif, the balance being the amount set down in the Balance Sheet. To check the actual value against original cost less depreciation, a valuation might be made by a competent 26 person, but if the depreciation appeared sufficient this latter precaution would not be necessary. It has been held that an Auditor is neither a Stock Expert nor a Valuer, but it seems only reasonable that he should carefully examine the basis of the book value of the assets and use his best endeavors to see that proper depreciation was being allowed for. Item 4 — The Contract for building (if any) might be inspected, and the instalments paid on account ascertained, and also the final payment agreed with the Contract price. No depreciation having been allowed for, it is probable that the build- ings were only completed a considerable time after fhe Company com- menced business. If the buildings were taken over by agreement with Vendors the Con- tract should be inspected and a valuation of the buildings obtained. To ascertain the correctness of item 5 the Bills Receivable Book would of course be inspected. Besides this it would be necessary to trace the amounts for which the Company held the Bills to their source of original entry, and a receipt for the goods or other assets sold or disposed of or some such document or entry produced. The nature of the Bills, date of matur- ity and other matters would guide the Auditor in tracing the evidence. And now that forged signatures or alleged forged signatures are somewhat com- mon, it m-ight be well for the Auditor to get an acknowledgment in writing from the makers of the Bills that their signatures to the various amounts were genuine. The verification of item 6 is a somewhat longer piece of work. For this purpose the Day Books, Delivery Books, and possibly other sources of original entry would have to be checked with the Ledger accounts, and re- turns or other credits carefully and exhaustively examined, and any Journal entries bearing on the Sales and Returns Accounts checked with the Ledger. All credit postings from the Cash Books to Ledger would have to be checked with the counterfoils of Cash Receipts Book; and a debit slip stating the amount said to be due might be posted to each debtor, with a request that it be returned to the Auditor certified by the debtor. In practice, however, this precaution seldom works well, as Debtors will not generally take the trouble; Creditors might. The checking of this item will have exhausted the work on the Day Books and one side of the Cash Book. The next question in this connection Is whether all the Debts are good. If all the Debtors have consistently paid their accounts during the year, and the balances at the end of the year are for purchases within a reasonable 27 time of that date, no provision for bad debts would appear to be necessary. This, however, is seldom the case, a provision for bad debts generally being necessary. This is a point of very common disagreement with Directors, and often old accounts for goods sold during a previous period are included among the debts said to be good. While the Auditor cannot compel the Directors to alter their way of thinking on such matters, he will find that tact and good judgment will often have the desired effect. When it is otherwise, and the Directors are stubborn, the Auditor's responsibility is fully discharged by reporting what NATAL HARDBRICK COMPANY LIMITED. Balance Sheet as at 30th March, 1903. 1 To Nominal Capital £30.000 in 30.000 Shares of £1 each £30000 Less 2 To Reserve Shares (1000) £1.000 3 To Unissued Shares (1000) 1000 4 To Forfeited Shares (1000) 1000 3000 Issued Capital .£27000 Less 5 To Calls in Arrear as per Schedule.. 8000 Paid-Up Capital £24000 6 To First Mortgage Bond . .'. 4000 (Title Deeds of part Freehold Land as Security) 7 To Bank Overdraft 3000 (Secured by Di- rectors Guarantee) 8 To Bills Payable.. 1000 9 To Sundry Cred- itors, as per Schedule 500 0-0 10 To Unclaimed Divi- dends 100 11 To Reserve Fund. 2000 Balance, carried to Profit and Loss Account 10600 5400 £40000 By Freehold Land, at cost £11000 By Plant, cost. ... £5500 Less depreciation. 500 5000 By Machinery, cost 11000 Less depreciation. 1000 per 4 By Buildings, at cost.... 5 By Bills Receivable 6 By Sundry Debtors, Schedule 7 By Investment of Reserve Fund. . 8 By Stock of Bricks on Hand at date, at cost 10000 6000 1000 2000 2000 3000 £40000 he believes to be the true state of affairs to the Shareholders. More than this he cannot do, nor is it expedient that he should do; but he must not do less. Item 7 should not give much trouble as the specific investments would 28 be readily checked by the production of the documents of Fixed Deposits Receipts, if so invested, or other proper securities. Item 8 on the other hand, is one of the most important in the Balance Sheet, and one which has been fraudulently manipulated oftener than all the other items put together. And although an Auditor is not necessarily a stock expert he may be an expert in relation to any particular stock of which he has sufficient knowledge. It is absurd to suppose that because an Auditor is an Auditor he must therefore be ignorant of any particular stock and the method of valuing it. As a matter of fact an Auditor of long experience is almost bound to be a stock expert of some kind, by reason of his experience. And the writer has often been considerably helped by a knowledge of the value of the particular stock set forth on the balance sheet. First of all, the Auditor should see that a good system of cost accounts is kept. Then the stock in hand should be certified by the Manager, Manag- ing Director, or other such authorized official, both as to qaantity and cost price, which certificate the Auditor should refer to in his report. He should further take all the ways and means of verifying the stock that the circumstances of the case suggest, and where unsatisfactory answers to his questions are given, he should probe the matter to the bottom, and if necessary employ a stock expert to value the goods. In the case before us the cost of bricks and number in stock is generally easily ascertainable, but the Auditor should fully satisfy himself before passing the accounts. ^ We now turn to the Manufacturing and Trading Account, and profit and Loss Account, which for illustrative purposes may appear as shown : Beginning with the expenditure side, item 12 will be checked by an examination of the total amount paid for coal during the period, less stock on hand, if any. In the case we are considering there is no stock on hand as the item is not found among the assets. In the case of stock being on hand the Manager should certify the quantity. Item 13 would be treated similar to the above, the invoices being com- pared with the vouchers and the goods received book, and the amounts paid and charged through the cash book with the vouchers. Item 14 and 15 present more difficulty. The wages book at the works, which are usually some distance from the Head Office of the Company, should be carefully checked with Work Tickets issued to Natives and In- dians. These Tickets are numbered and contain the name of the erriploye, each day worked, total days worked, rate of pay and total paid, the Wages » 29 book being copied from the tickets. The Ticket and the Book should there- fore agree. As to White Men's pay a receipt is generally given either on a separate form, or the Book is signed. One of the chief features of checking wages is to ascertain by inde- pendent inquiry that the number of men are actually at work, and some trouble will have to be taken by the Auditor, unless he relies on a Certificate from tlie Works' Manager, when such should be stated in his report. Item 1 6 should be traceable through the books and should be treated in the same way as items 12 and 13. MANUFACTURING AND TRADING ACCOUNT. p'oR THE Year ended 30th March, 1903. 12 To Coal Consumed. £2000 13 To Native and In- dian Rations... 1500 14 To Native and In- dian Wages .. 1500 17 To White Men's Wages 500 16 To Stores and Re- pairs 1000 17 To Railway Car- riage 1000 £7500 Balance, carried to profit and Loss Account 10500 £18000 By Brick Account — 9 By Sales for the Year £15000 10 By Stock on Hand, at cost 8000 £18000 PROFIT AND LOSS ACCOUNT. 18 To Directors' Fees. £110 By Balance from Manufacturing 19 To General Charges 100 and Trading Account £10500 20 To Insurance 100 11 By Transfer Fees 10 21 To Salaries 300 *i »2 To De- preciation on Plant . £500 To Depre- ciation on Machin- ery ... 1000 1500 2110 3000 23 To Dividend Paid, 10%... Balance, being net profit for the year 8400 Less Dividend Paid 3000 5400 £10510 _0 £10510 Item ly could be checked by the Railway Consignment Notes, Monthly Statements rendered from the Chief Accountant's Office of the Railway and the Vouchers. Items 1 8 and 21 might be referred to the Articles and the Minute Book respectively, and of course proper receipts should be produced. 30 Items 19 and 20 present no difficulty, as they should be easily traceable through the Cash Book to the Ledger, Vouchers to support the entries being forthcoming. Particulars of item 22 should be found in the Minute Book as a reso- lution authorizing the amounts to be written off. Depreciation is nearly always a bone of contention between Directors and Auditors. It is not always easy to decide how much should be written off for depreciation. Some maintain that when repairs and renewals are charged to revenue and the plant or machinery maintained in good and effective work- ing order, it is not necessarv to provide for depreciation. This is a very popular fallacy, but is easily shown to be a fallacy by a little common sense. Take a steam engine, the life of which when maintained in good order ♦ is so many years (bar accidents of course). During the first year all repairs and renewals have been charged to revenue, and the value of the engine as an asset is shown on the Balance Sheet at original cost. But one year of the life of the engine has gone, and although it has been maintained in good working order out of revenue, the value has depreciated or become less by the same proportion that one year bears to the total estimated life of the engine ; hence that proportion should be charged to revenue, and the balance only remain as the asset value. There will come a time when the engine will have worn itself out, no matter how well it may have been maintained, and when that time comes it wdll only be worth what it will fetch as old iron. If that ultimate sale value be deducted from original cost, we have the amount of real asset value of the engine. This amount should be divided by the estimated number of years of the life of the engine, the amount thus found being written off annually. It may be urged that this whole process is only estimation. That in fact is so, but so is every other item on the Bal- ance Sheet until the Company has been wound up, or the whole of the assets sold and turned into a cash sum. Then and then only the truth is out, and the estimate no longer necessary. It may be added that, in providing for depreciation generally, several factors must be taken into account, such as the nature of the asset and its functions ; whether it is being carefully or improperly used ; its upkeep, and various other matters. The correctness of item 23 might be arrived at by referring to the reso- lution authorizing the payment of the Dividend, the Dividend Warrant Counterfoils and Bank Pass Book; also the Register of Members should be agreed with the Dividend Book. It should also be noted that unless the Articles specially authorize it, the payment of an Interim Dividend is illegal. 31 NATAL HARDBRICK COMPANY LIMITED. Costs of Manufacture, Month of 190 Number of raw bricks made 1,000,000 Number of bricks burnt 900,000 Balance raw bricks on hand 100,000 MAKING. Section 1. Excavating and Filling Trucks: Wages as per Wages Book Rations as per Rations Issued Book Depreciation of Hoes, Shovels and Trucks Section 2. Hauling: Wages as per Wages Book Rations as per Rations Issued Book Coal as per Coal Book Stores (Oil, etc.) as per Stores Issued Book Section 3. Machining and Cutting: Wages as per Wages Book Rations as per Rations Issued Book Coal (proportion for machines) as per Coal Book.. Stores (including new Dies, Cloth, Zinc, Oil, etc.) as per Stores Issued Book Section 4. Trucking to Drying Sheds: Wages as per Wages Book Rations as per Rations Issued Book Depreciation of Trucks, etc Total cost of making, including Stacking in Sheds to Dry £600 burning: Section 5. Trucking to Kilns and Packing: Wages as per Wages Book Rations as per Rations Issued Book..., Depreciation of Trucks Section 6. Burning: Coal consumed in No. 1 Kiln Coal consumed in No. 2 Kiln Coal consumed in No. 3 Kiln Coal consumed in No. 4 Kiln Coal consumed in No. 5 Kiln Coal consumed in No. 6 Kiln Wages of Firemen, as per Wages Book. Rations as per Rations Issued Book... Section 7.. .Unloading Kilns into Railway Trucks: Wages as per Wages Book Rations as per Rations Issued Book.... Total cost of burning £810 Note. — Percentage for broken, cracked and otherwise damaged bricks to be deducted from total output. ANALYSIS. Cost of making £600 Cost of burning 810 Total cost £1410 Number made 1,000,000 Number burnt 900,000 = 900,000 @ 30/- per thousand burnt £1350 = 100,000 @ 12/- per thousand raw 60 £1410 32 We have now exhausted the other side of the Cash Book and the Journal. On the Revenue side of the Trading Account, items 9 and 10 will have already been examined under items 6 and 8 respectively of the Assets side of the Balance Sheet, as already detailed; but a word re cost accounts of a brickmaking concern may not' be out of place. The Wages Book should be divided up into sections, under the follow- mg heads : 1. Excavating and filling trucks. 2. Hauling to Machines. 3. Machining and Cutting. 4. Trucking to Drying Sheds. The total of these sections will furnish the wages cost of raw bricks. Then the following sections give the wages cost of burning and loading info trucks ready for despatch : 5. Trucking to Kilns and Packing. 6. Burning. 7. Unloading Kilns into Railway Trucks. We will now consider these sections of the Wages Book. A good rul- ing for a Wages Book is as follows : HARDBRICK COMPANY LIMITED. Wages Book for Month of 1903- Percentage for White Overseer. " " Manager Total of this Section £ and so on for the other sections, with a place for percentage of Mana- ger's and Engineer's time when necessary. The totals of each section should be extended into an outer column, the total of which would be the total wages for the month. Next, the Rations issued would be apportioned to the employees in the various sections. The Coal (which is generally passed through a box without a bottom, holding an ascertained quantity) would be apportioned between Engine and Kilns, in a book kept for the purpose, and in which is recorded the trucks of Coal as they arrive, with their numbers (for identification of the Invoices), the balance on hand at the end of each month being carried to the following month and the accounts agreed and ruled ofT. Stores and repairs would also be allocated to their proper sections, and the final cost accounts should appear in the form shown. The Correctness of item 11 might be ascertained by an examination 33 of the Register of Transfers, where a column is usually provided for "Fees Paid," and the Cash Book and Receipts Counterfoil; but where a charge is always made, the number of shares transferred would be sufficient check. The Work on the Wages Book, Day Books, Journal, Cash Book, Ledger, and all other subsidiary books will now have been exhausted. The Ledger should now be taken and examined with a view of discov- ering whether any item has not been ^'ticked" off; also, all the other books should be similarly examined; all additions and amounts "carried forward" and "brought forward" checked, and all being found in order, the actual auditing of the financial accounts may be said to be complete. Regarding the statistical books, wherein the names and addresses of Members are kept, with the number of shares held by each, the numbers of the shares, and other particulars, a diversity of opinion exists as to whether the checking of such books is part of the Auditor's duty. The majority of Auditors regard such work as not being part of the ordinary duties of an Auditor, but a special duty for which a special fee should be paid. In practice it seldom happens that there is any audit of these books, and matters are allowed to go on from year to year until the Directors are called upon to make good the value of shares issued in excess of the issued Capital of the Company. Elaborate arguments have been advanced for the examination and can- cellation of Vouchers by the Auditor. Cases are on record where the same voucher was produced for two distinct payments. If the vouchers are kept in a guard book, properly filed away, they might (if not too numerous) all be examined on the same day, and while the book was in the Auditor's possession. When they are loose, and not all taken at once, there is, of course, the possibility of Vouchers being used twice. Rubber cancellation stamps have been suggested, but some men will get over that check by erasing with chemicals, which has also been known to happen. In an extensive audit, the Auditor should have the particulars of the Vouchers called over by a responsible clerk, complete up to a given date (if not convenient to check all at once), the Vouchers all being cancelled when found in order. In a small audit, and with the Voucher book in his posses- sion, the Auditor would hardly fail to discover the same Voucher for two payments. 84 Dicksee on Special Considerations in Different Classes of Audits* GAS COMPANIES. An especial feature, from the Auditor's point of view, is the division of all expenditure, into two classes — Capital and Revenue. The wording of the statutory form of accounts will probably sufficiently indicate the basis of this division ; it remains, therefore, to say that, perhaps, the Auditor's most important duty is to see that this basis is maintained. It is not, how- ever, always possible for the Auditor to judge as to the correctness with which, say, the cost of an extension has been apportioned as between Capital and Revenue; nor, indeed, is it necessary that he should so constitute him- self an engineering expert. He will, however, require to see that the com- pany's engineer has certified the apportionment to be correct, and that the expenditure on Capital Account has been passed by the Board. In addition, it is desirable that he should satisfy himself that the principle followed by the engineer in arriving at his apportionment is a sound one. There is, properly speaking, no "safe side" in these matters — an undue charge to Capital is unfair to the proprietors, while an undue charge to Revenue is (through the operation of the sliding scale) an injustice to the consumers. The following examples of apportionment will, however, be found useful, as indicating, in general terms, the correct method of arriving at the amount chargeable against Capital, and against Revenue, in any special case that may arise : New Works (including extensions) : Capital. ' New Works in place of Old Works : Charge original cost of old works pulled down, less value of old materials^ against Revenue ; charge the remainder against Capital. (This amounts to debiting Capital with total cost, debiting Revenue and crediting Capital with original cost of old works, and crediting Revenue with value of old materials sold.) Conversions: In a similar case to the last, except that certain old materials, instead' of being sold, are used for other purposes on the works, treat the particular department of Capital Expenditure as the purchaser of the old materials in question, debiting it with the value of the materials and the full cost of conversion (if any). 85 The income of a Gas Company consists of Gas Rates, Meter Rents, Residuals sold, and generally profit on Fittings and Rents, in addition to Transfer Fees and Interest on Investments. Trie collections of Gas Rates and Meter Rents are best checked in totals (in the manner shown under Fire Insurance Accounts, care being taken to fully test both allowances and arrears), the total receivable being arrived at from the State of Meters Book, which will show the total amount of gas consumed and what meters are on hire. The residuals sold cannot well be checked as to quantity (save by comparing the results of various working statements), but, of course, the Auditor may, and should, check the collection of the amounts debited. The same remark applies to fittings, which will almost invariably be found to form a part of a Gas Company's business, although no mention of the circumstance will be found in the statutory form of accounts. It may be added that it is best merely to state the profit arising from fittings on the credit side of the Revenue Account (rather than to credit Revenue with In- come, and to debit it with Expenses), as there is nothing gained by showing the whole world what percentage of profit has been made. The two lead- ing items of expenditure arise from stores and wages, and both must be fully vouched for, and carefully tested. All Cash Book entries must, of course, be vouched, and the additions checked and the balance verified ; also, all the General Ledger postings should be called back. . Some companies charge all renewals and repairs against the Revenue of the year in which they are executed, but a more scientific method is to set aside a sufficient sum annually for renewals, and to charge their cost against the fund so created. , The investments held against Reserve, Insurance, and (if any) Depre- ciation Funds, must be verified by an inspection of the securities held. This leads up to the consideration of the Depreciation Fund, which must be accumulated by companies owning works on leasehold lands. The case will not often arise, but, when it does occur, a suflficient sum must be set aside, and invested to accumulate to the cost of the works by the time the lease expires. The Auditor will require to satisfy himself as to the suf- ficiency of the annual instalments. WATER companies. The audit of Water Companies is slightly simpler than that of Gas undertakings, by reason of the fact that the rates charged are, for the most part, fixed, instead of fluctuating with the quantity used. Such portion as is supplied by meter, for trade purposes, will entirely follow the method recorded under Gas Companies. With regard to the greater portion, which is based at a sliding scale upon the rateable value of the houses, it is not- 36 usual to exhaustively check the calculations involved, but they should be tested to such extent as may appear desirable. Vacancies should be vouched for by a declaration of the owner that the property in question has been vacant for the whole of the quarter. Allowances (which should be very exceptional) must be properly explained, while arrears and bad debts must both receive careful attention. Most companies are empowered to make their rates in advance, and consequently their books will, at the date of the accounts, reveal a profit that has not yet been earned ; due allowance must, of course, be made for this in the General Balance Sheet. RAILROAD. The actual extent of the Auditor's responsibility is a matter of some little uncertainty, but it is at least certain that he is not to be held responsible for every detail of the half-year's recorded transactions. The audit of these details occupies the whole of the time of the Chief Accountant and the audit staff; and not only would it be a physical impossibility for the professional Auditor to go over the whole of their work, but it would also be a lamentable waste of time and money. The Audit Office, in itself, constitutes a continuous and thorough check upon every other department under the supervision of the Accountant, and, as no monies whatever pass through the office, it may safely be taken that the work is honestly performed. The Auditor's work may thus be said to commence with the certified' returns of traffic, and the certified accounts of tradesmen and others. He must, however, himself examine and verify the summaries of these items. He must see that they tally with the cash and bills received, and that the latter find their way into the bank in due course. He must examine the vouchers of all expenditure, and, so far as possible, verify its apportion- ment; in particular, must he satisfy himself as to the correctness of the apportionment of such expenditure between Capital and Revenue. With regard to the issue of new capital, he must see that the arnount actually received agrees with the totals shown in the Stock and Share Ledgers kept at the secretary's office. He should compare the certified returns of the Railway Clearing House and "Foreign" Railways with the entries in the books of his own company. He should check the transactions in bills in detail, follow the matured bills into the Banking Account, and verify the outstanding bills by the inspection of the actual documents. He must check the' traffic outstandings with the certified statements, examine the entries on both sides of the Banking Account, and check the additions ; and, so far as possible, the classification of the items. He should examine all debentures 37 that have been redeemed, and see that they hat^e been cancelled. He should vouch the payment of dividends and interest by the original warrants pro- duced from the secretary's office for that purpose, and scrutinise all out- standing amounts. He should examine the accounts for repairs done to the rolling stock of customers, and compare the lists with the Ledger. He should examine the accounts of rent received, thoroughly check the General Ledger, compare the balances of the various Stock Accounts with the certified list of stores on hand, compare the totals of the General Ledger Expenses Account with the totals of the subsidiary books. It will then still remain for him to ascertain that such liabilities as traffic drawbacks are provided for, verify the investments by inspection of securities and exam- ination of the interest received, compare the capital issued with that author- ised, give a final consideration to the apportionment of Capital and Revenue Expenditure, and see that the necessary certificates have been furnished as to the efficiency of the permanent way, rolling stock, etc. Even after everything has been done, it is probable that the Auditor who has had no previous experience in Railway Accounts will feel far from easy in his mind as to the sufficiency of his examination. The skilled Rail- way Auditor will, however, rely in a great measure upon the look of the Accounts submitted to him, and will remember that he cannot reasonably be held responsible for the honesty of the Accountant — that must be as much taken for granted as the honesty of the Auditor himself. SHIPPING COMPANIES. Unlike the accounts of Railways, the accounts connected with marine traffic are subject to no special statutory provisions with regard to form. There is no essential difficulty in connection with Shipping Accounts, but the fact that it is both desirable and customary to show the net result of every voyage of every ship necessitates some very nice apportionment of the items constituting Shore Expenses and Insurance. The extent of an Auditor's investigations will vary greatly in different cases : In the case of a Single Ship it is desirable that the audit be as exhaustive as possible ; but in the case of one of the larger Companies such a course would be quite as impracticable as in the case of a Railway. The actual extent in any particular case will thus be very largely a matter of arrangement and of expediency. The following considerations may, however, be safely submitted, as they will in every case require to be dealt with in more or less detail. Ascertain that freights and passage money are duly accounted for ; that the apportionment of shore expenses is equitable; that the Cost Accounts are not improperly manipulated (especial care being required where one 38 Cost Account is kept for a whole fleet) ; that only structural improvements are debited to Cost Account; that proper depreciation is allowed — especially in regard to boilers ; that outstanding freights and agents' balances are pro- vided for in accordance with the documentary evidence; that unclaimed return passages are in order ; that proper return of insurance premiums has been obtained for the time during which any vessel has been "laid up," and, generally, that insurance matters are in order; that the question of foreign exchanges has been dealt with upon a proper basis ; and that no profits are taken credit for on account of uncompleted voyages. In order to prevent misunderstanding, it seems desirable to point out, for the benefit of the reader who has no experience of Shipping Accounts, that the ''Cost Account" is really neither more nor less than a Capital Ex- penditure Account, and must on no account be compared with the Cost Accounts kept by manufacturers. Before leaving the subject of Shipping Accounts, it is desirable to point out that some shipowners, instead of insuring with underwriters against risk of total loss or damage to their vessels, raise an Insurance Fund where- with to meet such losses by periodical charges against Revenue. The effect, of course, is that, instead of Profit and Loss being debited with insurance premiums, it is debited with an instalment — probably somewhat in excess of that which would have been thus paid — which is credited to the Insurance Fund. At the same time, to make the Insurance Fund really effective when required, it is desirable that a corresponding amount of cash should be invested in readily realisable securities, the Insurance Fund thus becoming for all practical purposes a Sinking Fund, rather than a mere reserve. When any loss is incurred, the cost of replacing it is debited to the Insurance Fund Account, a corresponding amount of investments being realised to provide the necessary cash. It need hardly be pointed out that an Insurance Fund can only become an effective provision against loss in the case of companies owning a large fleet of vessels, so that within their own experience they get a reasonable average of risk. Even here, however, it will sometimes happen that a loss occurs which will more than swallow up the whole of the accumulated fund, and the question then arises w^hether it is reasonable to bring forward the debit balance of the Insurance Fund Account as an asset upon the Balance Sheet. If there is a reasonable probability that this debit balance can be extinguished out of future instalments within a reasonable time, there is probably no objection to this course of procedure; but, in any event, it seems desirable that it should appear as a special item in the Balance Sheet, so that no shareholder may be deceived as to the actual position of affairs ; and, in addition, the Auditor would do no harm by drawing atten- tion to the facts in his certificate. 39 Single Ship Companies almost invariably make no provision for depreciation : the Auditor need not waste his time upon any efforts to con- vince his clients of the imprudence of this course, but he should not forget to append the necessary qualification to his certificate. The Auditor of Single Ship Companies must bear in mind that, as regards fraud, there is no such thing as "safety in numbers" here, for the accounts are usually all in one person's hands — let him, therefore, not omit to examine the Voyage Account Book in detail. STREET railroad. Tramway Accounts are usually prepared upon the "Double Account" system; permanent way, rolling-stock, and horses constituting the items of Capital Expenditure. With regard to the first two items, on account of the extreme difficulty of making any periodical estimate of their value, the method adopted is, perhaps, the most convenient one — ^^the work being maintained in a state of perpetual efificiency rather than r^uced by deprecia- tion and increased by renewals. As regards "Horses," however, the unper- manent nature of this item appears — in spite of the fact that such a course is unusual — to lend itself more readily to the "Single Account" method of treatment, namely, by writing ofT depreciated value and debiting the account with fresh purchases. The certificates of the responsible officials must always be obtained for the efificiency of the assets represented by the Capital Expenditure. The traffic receipts must be carefully tested, and it is not unusual for the Auditor to consider it necessary for him to go over the whole of this work in detail, commencing with the tickets, guards' books, or way-bills (as the case may be), and tracing the receipts on to the traffic sheets and daily and monthly trafific books, and seeing that the whole amount received has been duly banked. Where the system employed does not provide a perfect internal check, it w^ould seem to be very desirable for the Auditor to examine every detail, for it is here, especially, that a leakage is -likely to occur. It may, perhaps, seem superfluous to suggest the propriety of seeing that receipts are accounted for upon every day of the year. The only other source of revenue of any importance will be advertising ; but as this is almost invariably sub-let to a contractor, it needs no comment. The expenditure — whch should always be made by cheque, no payment out of traffic receipts being on any account permitted — must be carefully vouched; while the analysis thereof must, so far as possible, be verified. In particular the apportionment between Capital and Revenue must be thoroughly scrutinised. The Horses Account is one that might easily be manipulated, and must 40 be particularly watched ; the number of horses shown on the account should, of course, agree with the number stated on the vet.'s certificate. Tramway statistics for short periods will be of but little value to the Auditor as a general check upon the satisfactoriness of affairs ; but statistics of longer periods may prove most useful, if intelligently applied. MUNICIPALITIES. It is the opinion of most experienced Auditors that no efficient audit can be made without an exhaustive examination into every detail, for the transactions of local authorities are so numerous and various that it is im- possible to take a bird's-eye view of the matter. Thus the late Mr. Wm. Edmonds^ F.C.A., F.S.S., in a lecture upon "Corporation Accounts," has said 'Tn my experience it is the smaller items of receipts and payments that "generally are the most fruitful source for defalcations and irregularities. "Non-professional Auditors would pass over much detail, and are fre- "quently content to merely cast the Cash Account submitted by the Treas- "urer, considering such to be their sole duty." The sinking fund instalments must in all cases receive the Auditor^s close attention : he must satisfy himself as to their sufficiency for the redemp- tion of the loans within the periods prescribed ; and verify the investments of the fund, both as to principal and interest. The actual significance of a sinking fund and the method of dealing with it in the books of a corporation are not always so well understood as might reasonably have been expected. As, however, the principle is exactly the same as that described with reference to insurance funds (under the head of Shipping Accounts), the matter need not engage further attention at the present time. With regard to the routine to be adopted in any particular case, much will naturally depend upon the individual circumstances: but the best plan will be to reproduce here the "Instructions" prepared by the late Mr. F. R. GoDDARD^ F.C.A., for the audit of the Newcastle-on-Tyne Corporation Ac- counts. The standard here set up is, doubtless, a very high one^ but it can- not be considered to involve anything beyond the strictest necessities. The late Mr. Wm. Edmonds, when speaking of these pro forma instructions, said "In my opinion there is nothing superfluous contained in the lengthy detail set forth by Mr. Goddard: for myself, I have found it absolutely necessary to check every penny of receipts and payments before I sign the 41 INSTRUCTIONS FOR AUDIT. MONTHLY AUDIT. TREASURY DEPARTMENT. Cash Receipts Pass Books — Check additions of all Pass Books, and see that total receipts are signed for by Treasurer, and entered in Treasurer's or General Cash Books. See that the head of each Department signs, the Pass Book of his Department weekly. Departmental Pass Books. No. of Books. Packoge Dues Cranage Dues . ; Port and Harbour New Streets Formation Materials Sold Manure Sold Work Done > Old Materials Fever Hospital Rents 1 Rates 1 Collectors' Pass Books and Cash Books — Check Debits* of Pass Books with Collectors' Cash Books. See that the Collectors' Pass and Cash Books are initialled by Treasury Clerks. Check counterfoils, Collectors' Receipt Books, with their Cash Books, for two or three weeks in each half-year. See that Collectors sign their Pass Books and Cash Books weekly : Cattle Market (4), Cattle Market (Accommodation Pens, Corn Mar- ket), Concert Hall, Cattle Sanatorium, Concerts, Hirings, Thorough Toll, Butcher Market and Vegetable Market, High Bridge Female Lavatory, Elswick Park (3), Armstrong Park (3), Branding Park (3), Leazes Park (3), Sandhill Weigh House, Refunded Workmen's Wages. Miscellaneous Pass Books — See that Pass Books are initialed by Treas- urers' Clerks. Check occasional Counterfoils with Pass Books. Baths and Wash-houses — Check Daily Statement to Pass Book, and see that former are signed by Cashier and Superintendent. Weights and Measures — Check occasional Counterfoils with Inspector's Cash Book. St. Mary's School — Check a few entries in register occasionally. Hay Market Weighage and Standage — Check occasional Counterfoils. Chimney Sweep Certificates — Check Counterfoil Receipt Book. Pedlars' Certificates — Check Counterfoil Receipt Book,. Cabmen's Badges, Science and Art Class (Public Library). Public Library — Check Vouchers at Library occasionally with Librar- ian's Cash Book. Royal Grammar School — Check Counterfoils for pupils' fees to Cash Book. 42 Town Hall Rentals (Meetings, &c.) — Check Counterfoils and Diary occasionally. Organ Performances — ' do. City Concerts — do. Freemen's Admission Fees — Check Fees received with Freemen's Ad- mission Book in Town Clerk's Office, Moor Small-Pox Hospital (Dripping Sold), Leazes Park (Skating), Recreation Ground (Skating). Lough and Noble Models (Elswick Park) — Stick and Umbrella Re- ceipts: check occasional Counterfoils, Gas Meter Book. • Treasury Receipt Books — Check all Counterfoils Receipts given by Treasurer to Treasurer's Cash Book. Check all Day Book entries with Council Minutes, Police Pay Bills, Cattle Inspector's Sheets, and all other sources of information, and see that the correct amounts are carried into the Books. Cattle Sanatorium (Standages). Through Toll Compositions — North-Eastern and North British Rail- ways. Fire Brigade Expenses — Proportion charged to Insurance Companies : Call Fire Bills to Fire Brigade Day Book. Services of Police at Factories — Check vouchers to accounts and check additions of latter. Town Hall Concert Room — Letting of Hall, Organ, &c. Hospitals — Funeral allowances Repaid. Criminal Prosecutions — Magistrates' Clerk's Fees, Police Superannua- tion Fund (as per Police Pay Bills), New Road Baths (Rent from Lessee), Gallowgate Baths (Rent from Lessee), Northumberland Baths (Rent from Lessee), Home for Incurables (Garden Rent), Explosive Licenses (issued by Town Improvement Committee), Freemen's Admission (fees to Treasurer), Cemetery Company (Dividends on Shares), Scotswood Bridge Company (Dividends on Shares), Old Horses sold. Quay Shed Rents (List from Quaymaster weekly, not included in Genex"cil Rents), Tramways (Lessees' Rent), R. Thompson's Becj.^st Fund (Loans Repaid), Sir T. White's Bequest Fund (Loans Repaid), Education Rate (Precepts on Overseers), Gaol Rate (Precepts on Overseers), Town Moor Intakes (collected for Freemen), Slaughter Houses Licenses, Deposit Tickets (Rubbish), Virgin Mary Hospital (contribution to Grammar and St. Mary's Schools), Library Rate by (Precept on Overseers), Lunatic Asylum (Mr. Pace, Treasurer, Miscellaneous Receipts (Interest, &c.). See that all Dividends and In- terest on Funds invested for the year are received and entered in Cash Book. Police Superannuation Fund, Dale Scholarship, Meikle Schlorship — Interest Forms, Transfers by Cheque. Interest on Coal Dues, Money, &c. Receipts given on Receipt Forms; transfers by Cheque. 43 H.M. — Treasury — Police Claims, Criminal Prosecutions, use of Police Van. Receipts on Special Forms supplied by Government. Magdalene Hospital — Dividends on Consols per Bankers. School Grants — per Bankers on Government Forms. Property Sold and Enfranchised — ^per Order of Council and by Deed enrolled. Town Moor Purchase Account and Tyne Bridge Trust Fund — Divi- dends on Consols. Corporation 3>^ % Stock — Check Stock Bank Book v^ith General Cash Books. CASH PAYMENTS. Voucher Guard Book — Call Vouchers and Wages Sheets to General Cash Books, stamping each voucher, and taking out list of missing vouchers in the Note Book. Bonds paid off and Conveyances of Property purchased to be produced as Vouchers. See that all Bonds paid off are properly discharged. See that Wages Sheets are signed by City Engineer and Surveyor. Watching — Police Pay Bills — Call Pay Sheets to Cash, checking sepa- rate Pay Sheets to total sheets. Bank Pass Book — Call Bank Pass Book to General Cash Books and check last Reconciliation, showing cheques outstanding and in hands of Treasurer at date, checking those in hands of Treasurer with Counterfoil Cheque Books. Treasurer's Petty Cash Book — Check additions, and see that there is £150 in hand. Count Cash in hand half-yearly, after giving credit for sums paid after last meeting of Committee. Treasurer's Cash Book — Check credits to debit of General Cash Books. Check additions. General Cash Books (3) — Check additions. Reconciliation of Payments with Committee Minutes — Check total payments in Cash Books to monthly Reconciliation. Check Finance and all other Committee Minute Books to Book containing record of all cheques drawn, and see that the total payments in the Cash Book agree with total amount of cheques drawn during the month, excepting cheques in the hands of Treasurer, which have not been entered in Cash Book nor paid away at that date, wHich must be produced to the Auditors. DEPARTMENTAL MONTHLY AUDIT. TOWN IMPROVEMENT DEPARTMENT. New Streets Formation — Cash Book. Check all Counterfoils of Receipt Books for Cash received at the office, 'and also all Counterfoils of Collector's 44 Receipt Books to Cash Books. Check Receipts in Cash Book to Treasurer's Pass Book. Rate Department — Check a few entries here and there in Collector's Cash Books to Treasurer's Pass Book. See that Clerk from Treasury Office initials the Collector's Cash Books as having been checked by him. General Rents Cash Book-^Check additions of Cash Book. St. Mary Magdalene Cash Book — Check additions of Cash Book. Package Dues Department — Check all Counterfoil Receipts from Mer- chants and Wharfingers (2 Books) with Cash Book. Verify any exceptional allowances wilh documents relating thereto. Call Counterfoil Receipts for commissions to Wharfingers' Book and check additions. Call Cash to Pass Book and check additions. Port and Harbour Dues — Call Counterfoils, Quaymaster's Receipt Book to Cash Book, Cash Book to Pass Book, and check additions. Cranage Dues — Check Counterfoils to Pass Book, thence to Cash Book, and check additions. HALF-YEARLY AUDIT. TOWN IMPROVEMENT DEPARTMENT. New Streets Formation — Cash. Call all work charged during the period under audit from the Minutes and Estimates to the Day Book. Call Cash Book, Day Book, and Allowances Book to Ledger. Check additions of all books and extraction of balances half-yearly, proving their accuracy by totals. Examine arrears and take particulars of different classes of same yearly. Old Materials Sold — Check Book in Surveyor's Office with Invoices. Call Day Book and Cash Book to Ledger and check all additions. Check and prove balances and note arrears. Manure — Check yard sheets with Day Book in Surveyor's Office, one here and there as a test. See that all allowances are duly authorised by Committee. Call Day 'Book, Cash Book, and Allowance Book to Ledger. Check all additions and extraction of balances and prove same by totals in Reconciliation. Note arrears yearly. Work Done and Materials Sold — Check occasional entries in Time and Materials Sheets to test correctness of Day Book entries. Call Day Book, Cash Book, and Allowance Book to Ledger. Check all additions, prove balances and note arrears. Fever Hospital — Check Register with Admission and Discharge Books. Call Register to Day Book, Day Book and Cash Book to Ledger. Prove balances and check all additions. Rate Department — Check rates made with Council Minutes, and see 45 that Rate Books are signed by the Mayor and Town Clerk with Corporar tion Seal affixed. Call Counterfoil Receipts, which have not been used, to Irrecoverable Arrears Column in the Rate Books, and note any arrears written off for which no cancelled receipt is produced. Check additions ( I in every 3 pages). Check summaries, and see that the total cash received has been paid over to the Treasurer. Check General Summary in All Saints' Book, and also half-yearly Statement prepared by Mr. Pybus. RENTS DEPARTMENT. Rent Rolls — Check occasional counterfoils for General Rents, and ex- amine a few Tenants' Rent Books and Collectors' Collecting Books for Tenement and Market Rent by way of test each half-year. Check one week's receipts each half-year, and see that the total rents received agree with the total cash paid over to Treasurer during that week. Check Council Minute Book, Engineer's Tenancy Book, Seal Book, Assignment Book, and Treas- ury Minute Book to Rent Minute Book and Day Book, to ascertain any alteration for General and Magdalene Rents. Call all entries in Rents Minute Book and Day Book to Rent Rolls as follows : General Rent Roll, Magdalene Rent Roll, Tenement Rent Roll, Willington Tenement Rent Roll, Butcher Market Rent Roll. Check New Rent Rolls each year with that of previous year, and see that all alterations to close preceding year are made in new Rent Roll. Check additions and Reconciliation in General Rent Roll. Check additions of all Rent Rolls, prove Summaries, and check same to General Rent Roll Reconciliation. General Refits Cash Book — Check receipts to Tenant's Pass Book. Check additions of Cash Book. Check Summary of Cash to Reconciliatipn in General Ledger and Enfranchisement Sales Ledger. General Rents Ledger and Liberties Ledger — Check half-year's rents charged to tenants, and see that all differences agree with Minute Books and Day Books. Check the following Books with Ledgers : Empties Book, Rates and Taxes Book, Arrears Book, Balance Book (yearly). Check additions of these books and totals to Reconciliation at end of General Ledger. St. Mary Magdalene Cash Book — Check receipts to Pass Book, and check Summary to Reconciliations in General Ledger and Enfranchise- ment Sales Ledger. St. Mary Magdalene Rent Ledger — Check half-year's rents charged to tenants, and see that all differences agree with Minute Books and Day Books. Check the following Books with Ledgers: Empties Book, Rates and Taxes Book, Arrears Book, Balance Book (yearly). Check additions of these Books and totals to reconciliation at end of General Ledger. 46 Enfranchisement and Sales Ledger — Check interest for half-year, and check balances, arrears, rates and taxes, and carry to Reconciliation at end of Ledger. Paving and Flagging Ledger — Check half-year's charge and check balances. PACKAGE DUES DEPARTMENT. Check Register of Vessels arrfving and sailing to Declarations of Cargo.- Call Declarations of Cargo (see that Manifests are signed) to Manifest Summary, and check Manifest Summary additions. Call Cash Books, Allow ance Book, and Commission Book to Ledger and check additions. Call Ledger to Balance Book, check additions of latter, and prove total amount of balance by totals of the various books, as shown in the Reconciliation State- ment ; make copy of Reconciliation. Check transfers from Mr. Pace's Cash Book to Mr. Harvey's Petty Cash Book, and check additions of Petty Cash Book. Check transfers from Petty Cash Book to Stamp Book, and check additions of Stamp. Book. PORT AND HARBOUR DUES. (Rent of Goods impounded by Quaymaster.) Call Cash Book and Day Book to Ledger. Check additions of Ledger and check Balances to Balance Book. Check the Quaymaster's record of Goods impounded daily with the Day Book. CRANAGE DUES. Check sheets certified by Mr. Laws to Day Book. Call Day Book to Journal, Journal to Ledger, Cash to Ledger, Call Allowance Book to Ledger and check additions of all Books. Call Ledger balances to Balance Book. Check Balance Book additions. TOWN clerk's office. Check Vouchers and all Deeds, &c., for Stamps charged into Cash Book, and make a note of any missing. Check from Counterfoil Receipt Book and Bills of Cost Book to debit of Cash. Check Sales of Parliamentary and Municipal Registers with Counterfoils, Fees on Leases for 75 years with Seal Book, Fees for Bonds under Thompson and White's Bequests with Loans granted, Fees for Freemen's Certificates of Birth with Guild Book, Fees for affixing Mayor's Seal to Affidavits and Foreign Documents with Register of same, and Fees for Freemen's Admissions to Freemen's Admission Minute Book. See that total receipts and payments agree with transfers in general Books. 47 magistrates' clerk's office. (This Audit to be done on Wednesdays.) Check Rough Cash Book to Cash Book of Apportionment, and check latter to Daily Summary Book and latter to Monthly Summary. Book signed by the Clerk. Check Vouchers of payments to Treasurer, and see that same agree with Magistrates' Clerk's Monthly total. Check additions of all Cash Books. COUNCIL MINUTES. Finance Committee Minutes — Read through Council Minutes, checking into Seal Book all Bonds, Mortgages, Assignments, &c., and taking notes of all Cash transactions passed by the Council, and extract all Minutes relating to Special Grants and payments, increase in Salaries, &c., from Council and Finance Committee Minutes; also Town Improvement, Watch, Sanitary, Town Moor- Management, Schools and Charities, Public Libraries and Parks Committee Minutes. See that Council and Committee Minute Books are signed by Mayor and Chairman of Committees respectively. Seal Book — Check with and from Council Minute Book all entries in Seal Book, Call to General Rents and Magdalene Hospital Rents Day Book all new Leases, Assignments, &c., also to Bond Book and Stock Registers, New Loans to the Corporation, ticking the latter to the left of the amount. STOCK REGISTERS. Redeemable, Irredeemable, Holder, Bearer — Check money paid from Cash Book, ticking to the right of the amount." Check Duplicate Stock Certificates issued to Stock Registers. ♦ Check Transfer Deeds to Transfer Registers and call latter to Stock Registers, and check total of Ledger balances to Summary. Check all certificates issued to Council Minutes and Seal Book. Check balances of Stock Ledger to List of Stockholders, and see that total agrees with Summaries of Stock Registers at 25th March (yearly). Bond Book — Check, with Cash Book the Cash received for new Loans, ticking to the right of the amount. Check Loan repayments into Cash Book and compare same with yearly Ledger, and see that the correct balance is brought down and carried forward each year. LEDGERS. Capital and Special, General Rate, City Fund, Intermediate and Trust Accounts — Call Cash and Transfer Journal Posting and check additions. Check balances at 29th September and 25th March. Treasury and Bequest Ledger — Call Postings of Treasury Cash Book, Miscellaneous Day Book, Sanatorium Day Book, Allowances and Fire Brigade Day Books to Treasury, and Bequest Ledgers (Thompson and White). Check all additions and extraction- of balances. Check Summary 48 of Cash Receipts and Payments and Cash Balances at 29th September and 25th March. Outstanding Accounts and Allowances in Treasurer's and New Streets Departments — Check half-yearly Statement of Accounts and Arrear Book (2). Note — Chief Clerk to examine all Pass Books and Collectors' Cash Books at the close of half-year, and see that they have been checked and initialled by Treasury Clerks, and that the Audit Instructions have been properly carried out in each case. Chief Clerk to initial each Pass Book and Cash Book, with date when examined by him. YEARLY AUDIT. St. Mary Magdalene Ho-spital, Cash Book — Check additions, and see that total agrees with Balance Account in Ledger. Package Dues, Cash Book — As above. Public Libraries, Ledger and Cash Book — As above. Lunatic Asylum — Check balance forward from previous year. Check amount receivable for the year current from the Precepts and Minute Book. Check amount received from the Counterfoil Receipt Book. Check Bank Account, vouch all payments. Check balance forward and all additions. Securities for Invested Funds — Check Securities in hand of Town Clerk and Treasurer. Accountant's Department — Check Statement of Assets and Liabilities with Ledger. Check Redemption of Stock, Borrowed Money, Borrowing Powers. Since the first edition of this work appeared, the attention of the pro- fession has been very prominently directed to' the great diversity of the forms in which the accounts of corporations are stated. Many of the varia- tions to be found are mere differences of detail that need not be considered here; but, on the other hand, many corporations adopt a form that seems to be quite opposed to all principle, and such forms are of course to be resisted. It is thought that the published accounts of every corporation should show {inter alia) an Account of Income and Expenditure and a Balance Sheet for each separate department or fund, and also an Aggregate Balance Sheet. The desirability of following this course is not likely to be questioned — it remains only to discuss the form that the Balance Sheet should take. The forms at present in use are most diverse, but they may (disregarding details) be said to be all based upon one or other of the following principles :. ( I ) All classes of capital expenditure are treated as assets, and 49 (a) Perpetually maintained at' cost. (b) Written off as the loans are repaid. (c) Written off as the value becomes reduced by effluxion of time. (d) Re- valued periodically, and the difference charged to revenue. (2) Only Realisable Assets are included in the Balance Sheet as assets, the subsequent treatment being as before. (3) Only Revenue-bearing Assets are included in the Balance Sheet as assets, the subsequent treatment being as before. It is strongly contended that ( i ) is the only true principle, and that the subsequent treatment should be upon the lines of either (a) or (c) : both (b) and (d) are regarded as unscientific in method and false in principle. With regard to the choice between (a) and (c), the balance of advantage appears to be in favour of the former; that is to say, it is considered that the double account system is more suitable to this class of accounts than the single-account system. It is, however, clearly desirable that obsolete or non- existent assets should always be written out of the account, and attention should be directed to this point at every audit. The more recent volumes of The Accountant contain much that is of interest and value in relation to Municipal Accounts, and it will be found that the view there advocated is the one now recommended by the present writer. The position is shortly, but fairly completely, set out in an article that' appeared in that journal on the 23rd March, 1895. This article con- cludes as follows: There can, we think, be but little doubt that the accounts of all local authorities (which, for convenience sake, we describe under the term "Mu- nicipal Accounts") should be so framed as to contain the fullest information possible in the most intelligible form. This being granted, it further follows that not only is it desirable that the outstanding indebtedness of the munici- pality should be clearly shown, together with the amount of loans redeemed, but, further, that the accounts should show, with equal, clearness, the exact manner in which the whole of such loans have been expended, and the residual value which may fairly be said to remain as an asset. We do not, of course, suggest that every kind of expenditure for which a Corporation may be permitted to borrow is, of necessity, in the nature of an asset, but it is at least in the nature of capital expenditure, and should, we think, be so treated in the accounts ; and our own view is that the General Accounts should not be complicated by any question of depreciation, except in relation to works that are not of a permanent character — or in relation to works 50 which, while treated as capital expenditure, in the sense that a Corporation is permitted to borrow upon them, are really in the nature of revenue ex- penditure extended over a term of years ecjual to the time given for the repayment of the loan. With these exceptions we think that the total expenditure should be brought forward from year to year in exactly the same manner as it would be in the case of a railway or any other undertaking upon the double-account system, the consequent effect of which would be that all loans extinguished (less ''temporary" capital expenditure written off) would appear upon the General Balance Sheet as a surplus. Perhaps some more appropriate name than ''surplus" might have to be found for this balance, but we think that the items of which we suggest that it should be composed are the most appropriate items to appear as the difference be- tween the two sides of the General Balance Sheet. Supplemental Capital Expenditure Accounts might, and indeed should, we think, be added, marsh- alling the various items of capital expenditure, first into the headings of the various departments, and secondly under some such headings as those advocated by Mr. Guthrie. These might conveniently be set forth in tabular form, as giving, perhaps, the maximum of information and clearness combined. The question as to whether or not depreciation should be provided for is one which has already been discussed, but upon which more might yet be profitably said. We are not sure that a sufficient case has been made out to establish the necessity for a different treatment from that which obtains in the case of railway companies. Doubtless, like railway companies, munici- palities would often require to create some reserve, even if it did not appear in their accounts expressly as depreciation; but, from whatever point of view the matter is regarded, there can, we think, be nothing more illogical than the method adopted by some Corporations of depreciating their assets at such a rate that, when the loans out of which such assets were created are redeemed, these assets will have been written down to zero in the accounts. In the case of the older loans and stocks, where a very long period for re- demption was permitted, there might very easily be some sort of connection between the rate of redemption and the rate of depreciation ; but loans now authorized have frequently to be repaid in such periods that it is obviously the intention of the Local Government Board and the Legislature to arrange matters so that the whole loan shall be redeemed some considerable time bfore the asset has ceased to possess a value. Consequently, to adhere in the accounts to a rate of depreciation which is equal to the rate of redemption required for the indebtedness, is to adhere to a system which not only fails to exhibit the actual facts of the case, but also fails to express what was 51 obviously the intention of the authorities authorising the issue of the loans. MUNICIPAL GAS, WATER AND ELECTRIC LIGHT WORKS. — These accounts must not be dismissed without at least a few words of notice. The Act or Order authorizing the particular undertaking must, of course, be carefully perused, but a few general considerations obtain. The question has been raised (and, it might be added, discussed ad nauseam) as to whether local authorities should or should not set aside a sum for depreciation in addition to sinking fund instalments. It has been ingeniously contended that the sinking fund instalment is required to be set aside "out of profits," or (if there be no profits) out of the rates, and that no profits can exist until depreciation has been provided for. Few terms are more elastic than the term "profit," but it may be remarked that the profits divisible among the shareholders of a gas company are — according to the statutory form of accounts — noi arrived at after an allowance for depre- ciation has been deducted. It would appear that the modus operandi here sanctioned (viz., to maintain the efiiciency of the works out of revenue, but to keep the Capital Expenditure Account intact) is equally applicable to the accounts of similar undertakings in the hands of local authorities. In dealing with the audit of these accounts, however, care must be taken to inquire into the sufficiency of the sinking fund instalments and into their due investment. EXECUTORS' AND TRUSTEES' ACCOUNTS.— It will some- times happen that the professional accountant is called upon to audit the accounts of executors or trustees, on behalf of some dissatisfied bene- ficiary. The purport of the Auditor's investigation in such cases will be to ascertain that the terms of the will or trust have been complied with, and that no improper use, or unauthorised investment, of the trust funds has occurred. Questions of apportionment between Capital and Income will also claim his attention. The fullest investigation into details will be necessary, except perhaps where the trustees have been authorised to carry on the testator's business, and there is no suggestion that their conduct has, in this respect, been improper. In addition to the will and probate, and the accounts kept by the execut- ors and trustees, the Probate Account (with any subsequent corrective accounts) — or its more modern equivalent — and Residuary Account, to- gether with the Minute Book (if one be kept) and al Idocuments and vouch- ers, will require to be carefully examined. With regard to the question of apportionment, it is important to remem- 52 ber that all interest accrued to the date of death forms part of the corpus; that the profit or loss arising from any subsequent bona fide change of invest- ment falls, as regards capital, upon capital, and as regards income, upon income; that, even where investments of a wasting nature are specially authorized, the whole of the income does not pass to the life-tenant — the usual custom being to consider four per cent, as income, and to capitalise the remainder (.see various recent decisions); that. any loss arising out of an unauthorised investment falls upon the trustees personally, who are liable to repay the amount with such interest as the Court may direct — the rate being usually four per cent, (simple interest), except where the trus- tees have applied the funds to their own use, when a higher rate is generally charged. Any of the above provisions, may, however, be modified by the special terms of the will or other instrument creating the trust. It is also important to remember that benefi'ciaries, unless of full age, have no power to consent to any variation in the terms of the will. It may sometimes occur (in fact, it has occurred) that a trustee, carry- ing on the business of his testator, has depreciated the goodwill by attracting the customers to his own (similar) business. It would, however, be very difficult to establish a liability against the trustee in such a case, except upon the face of the most convincing evidence. Ir^ conclusion, it need hardly be pointed out that one of the most important duties in these audits consists of a very careful verification of the investments. ACCOUNTS OF INSTITUTIONS.— (a) CHARITIES— Under this head may be considered the accounts of Hospitals, certain endowed Schools and Almshouses, and similar institutions. In the early part of 1890 a Committee of the Charity Organization Society appointed a sub-committee, consisting of four well-known Chartered Accountants, to enquire into the best methods of preparing and auditing the accounts of Charitable Institutions. A full report of the sub-committee (including specimens of the forms of accounts -recommended) appeared in Volume XVI. of The Accountant, and should be studied by all persons inter- ested, but it does not appear to be of sufficient general importance to neces- sitate its reproduction in this work. It should be mentioned, however, that the report urges the importance of a Balance Sheet being submitted by all Institutions owning property, and of a proper Income and Expenditure Account being submitted by all Institutions having current liabilities at the date of their accounts. With regard to Endowed Charities, certain statutory provisions obtain ; but inasmuch as they do not practically affect the Auditor's position it has not been thought necessary to include them in the Appendix. The distinguishing feature of most charities' accounts is the receipt of subscriptions and donations. These will, of course, require to be vouched in the usual way ; but, perhaps, the most effective check consists in the pub- lication of a list of subscribers and donors along with the accounts. Another important point is that charities are not liable for income tax ; it should, therefore, be seen that none has been paid, and that the tax deducted from dividends received upon investments has been refunded. The following extracts from the 'instructions for the guidance of Secretaries," prepared by the before-mentioned sub-committee, will form an appropriate conclusion to this section: "i. — Where Form I. [a simple Receipts and Payments Account] Is used, the Cash Book should be kept upon a columnar method, so that the analysis appearing in the Teasrurer's Cash Statement may be easily followed by the Auditors. "2. — Where a Banking Account is kept, all cash balances should be paid into the Bank on the last day of the period to be reviewed. "3. — A list of all books kept by the Institution should be handed to the Auditors, all the books being open to inspection. "4. — In Forms II. and III. (involving an Income and Expenditure Account) the accounts should be kept in Ledger, opening in the form in which they will be presented in various financial statements. "6. — The Books should be balanced and the Statements for audit prepared prior to the visit of the Auditors. "7. — All Deeds and other Securities should be kept in a Deed Box at the Institution's Bankers, the box having three locks, the keys of which should be held respectively by the Treasurer, Secretary, and another member of the governing body. "9. — Before going to press the prlnter^s proof of the Subscription Lists and Accounts should be examined by the Auditors. ''11. — All vouchers of payment should be arranged In the order of the dates of payment prior to the audit. 12. — All Bankers' Pass Books, made up to the end of the period under review, should be at hand at the time of audit." Many of these points do not relate solely to Charities' Accounts, but wijl be found useful at all times ; they are, however, mentioned in this con- nection because they appear to indicate the lines upon which the audit ."••hould run. (b) CHURCHES. — In many respects the audit of Church Accounts 54 is a peculiarly thankless task. Apart from the fact that they are hardly ever submitted to the Auditor in anything approaching proper form, it is almost invariably the case that no effective internal supervision is exercised, and frequently large sums will pass through, say, a verger's hands without any proper check being kept upon his dealings. The Auditor must check everything he can, and try to teach his clients the elements of commercial caution; but it is probable that he will never feel quite happy with a church audit. The writer well remembers, upon one occasion, being refused permission to count a balance of over £ioo (prac- tically a running balance) that was in the hands of the verger: not long afterwards — but, nevertheless, after repeated warnings — the suspicions of the vicar were at length aroused, and the verger was instructed to pay his balance into the bank. It seems unnecessary to add that he was unable to do so. Church Schools receiving a Government grant are required to keep an account of all receipts and payments in the prescribed (columnar) form. Such account is made up annually and summarised upon a statement which for some occult reason is called the Balance Sheet. This statement (of which a duplicate copy must be furnished) has to be signed by the Treas- urer and the Auditor, and — together with the Cash Book and all vouchers — submitted to the Government Inspector upon the date appointed for his visit.. It is not necessary to produce vouchers for subscriptions received, nor yet for small payments; but it is important to remember that, if the accounts are not in order, payment of the grant of the Education Depart- ment will be delayed. (c) COLLEGES AND SCHOOLS.— These accounts call for but little comment. The usual method of audit may be said to consist of a "cross" between that employed in ''Charities" and ''Hotels" (q.v.), but it may be added that only a detailed audit is Hkely to be found entirely satisfactory. Many University Colleges are subject to the Statutes made by the Commissioners appointed under the Universities Act 1877, under which duly audited accounts have to be submitted to the University. In most cases a tax is payable upon the amount of income received. Endowed Schools are nominally under the control of the Charity Commissioners, to whom copies of the Annual Accounts should be for- warded. The principal point to be remembered is that the Governors have no power to apply the corpus of the endowment to current purposes. BUILDING AND FRIENDLY SOCIETIES, ETC.— (a) BUILD- ING SOCIETIES. — The enormous number of frauds — some of them of disastrous proportions — that have occurred in the accounts of Building 55 Societies within the last few years should suffice to make the Auditor of these accounts more than usually cautious. The great majority of frauds that have been committed have remained undetected by reason of the very superficial examination bestowed upon the accounts by the Auditors; but cases have occurred in which the most detailed audit (conducted by unskilled men truly, but none the less detailed on that account) has failed to detect anything wrong." The author's experience of Building Society Accounts — and these remarks apply equally to every class of accounts included under this heading — has convinced him of the extreme importance of checking every addition, posting, and voucher, of carefully verifying every amount received in re- demption of mortgages or paid out to investing shareholders, of comparing every Pass Book with the Ledgers, and both with the lists of balances, and of testing the latter at considerable length in respect of the calculation of interest. The income received from 'properties on hand must be verified in every possible way ; and, where such income does not seem to be a fair return upon the book-value of the various properties, the latter should be either revised or supported by a Surveyor's valuation. The deeds relating to all mortgages, and the securities relating to whatever other investments there may be, must also be examined by the Auditor, who will do well, in addition, to require the solicitor to certify that such deeds are all in order. It must also be remembered that there is a statutory limit to the bor- rowing powers of a society, which must not be exceeded. Another point to be borne in mind is that the Balance Sheet and accounts are now required to be kept in such form as the Registrar of Friendly Societies may prescribe. It is more than probable that the fees attaching to his office will afford the Auditor no adequate remuneration for an examination conducted on such lines as those laid down; but, be this as it may, the Auditor who — • under ordinary circumstances — omits any of the precautions named would be worse than foolish. (c) SAVINGS BANKS. — The remarks in connection with the ac- counts of Building Societies will apply, so far as they are relevant, with equal force to the accounts of Savings Banks. The examination of all the Pass Books is a most important feature, and it must not be forgotten that there is a statutory limit both to the amount standing to the credit of any one depositor, and to the amount that may be paid in by a depositor in any one year. The books of the bank may be taken to comprise — (a) In all cases, Deposit Ledgers with one or more daily Cash Books, 56 or other record of the individual cash transactions with depositors. These books, at least, must, therefore, necessarily be examined not less than once each half-year to comply with a minimum requirement of the Act of Parlia- ment. (b) In certain cases, a General Ledger and General Cash Book, or cash summaries, in wdiich the totals of the daily transactions are periodically worked up to show the aggregate sums deposited and repaid. From the reports received the examination of the detailed cash records does not appear so thorough as might be desired, though doubtless there may be a considerable amount of examination not mentioned by the Audi- tors in their reports, nor referred to in the reports of the inspectors. This is especially noticeable in the checking of the daily additions of these books, or schedules, in the regular checking of the cash remittances to. the treasurer by a reference to the Bank Pass Book, and of the cash balance by actual enumeration. Although there may be some details of examination which have not been defined in the Auditors' reports, the statistics obtained do not convey any very great assurance that the scrutiny brought to bear upon the Cash Books by the Auditors in the majority of cases is a searching one, and it would thus appear that in many instances the audit in this respect ought to be supplemented. The examination of the Deposit Ledgers, ^n the other hand, appears to be much more complete, notably the detailed postings from the Cash Book. The additions and subtractions in the Ledgers, it is true, come in for but a small share of attention; butthe verification of Pass Books,' so far as it extends, is a test of the accuracy of these operations, as well as, to some extent, of the postings. The calculation and addition of interest is decidedly a weak point in the management of banks w^here there is only one paid officer. Though checking these items can hardly, in ordinary cir- cumstances, be held to be the function of an 'auditor, still the Auditor seems at times to be the only person available to test their accuracy. Unless the Auditor does it, no independent check is brought to bear upon the items of interest at banks where only one paid officer rs employed, and errors in cal- culation are apt to remain undetected. Any such defect should be seen to, even if some additional expense is incurred thereby; the cost to be met, where necessary, by corresponding economies in other items of Management Expenses. The most marked feature of a Savings Bank Audit appears to be the examination of the lists of balances extracted from the Deposit Ledgers. Two hundred and tw^enty-five Auditors certify that they have checked this independently, and eleven that they have done so with the aid of some mem- 57 ber of the staff of the bank, a test that is not usually sufficiently independent to be safely relied upon. The importance of this operation will be appre- ciated when it is remembered that in most banks the total of the list is the only independent evidence of the aggregate liability of the trustees to the depositors, and it is necessary, therefore, to enable the Auditor to give a true certificate as to the amount of liabilities and assets. It also furnishes a check upon the accuracy of the postings in the Deposit Ledgers in the aggregate. As a check upon fraud the list is of little worth, unless made accessible to depositors, and even then, before it can be put to much use, it is necessary to give every publicity to the existence and purpose of this volume by means of proper notices. Little reliance ought, therefore, to be placed on this statutory check upon fraud. As a rule, *'the books of the bank" include a General Ledger and Gen- eral Cash Book in the larger and better managed and audited Banks only, but we suggest that such books should be adopted by all Savings Banks, large and small. These books, or corresponding summarised statements, should be made up not less frequently than once a month, and ought to be checked by the Auditor throughout in all respects as to additions, transfers, and postings, either continuously month by month (where a visit of such frequency is possible), or at other longer intervals. Other books of account relate to Stock business, in which there is but little scope for error of any serious moment. Auditors^ Reports. — Our experience during the past three years shows that a clear report in writing, not less frequently than once every half-year, has not always been given, a minority of banks being still content with an annual report only. List of Balances. — As already stated, the examination of this list is usually well attended to. Certificate of Liabilities and Assets. — This requirement. can now in all cases be conveniently complied with by the Auditor certifying the Annual General Statement of Account (which, as last amended, contains a form of Balance Sheet), as having been examined and found correct. Book of Balances. — As mentioned already, this bpok should bear a clear certificate as to its accuracy. At nearly all banks it is so, but some cases still occur where the accuracy of this book is either not certified by the Auditor, or is certified by implication only. The double check upon cash transactions with depositors appears to be complete and to be completely recorded at 204 banks out of the 236. Of these 204, 182 record the use of the double check in two independent Cash Books, while 22, having only one Cash Book, post the Ledgers at the time 58 from the entries in the Pass Book, thus recording each transaction in two ways before the Pass Book leaves the bank. This method, although it might serve to trace any discrepancy in balancing the cash, does not afford a check on the total of the cash transactions for the day. It is only in use as a rule, however, in the smallest banks; but, to make it more complete, the accounts operated upon might be marked by inserting tags or other markers in the Ledgers, and the postings should be checked with the Cash Book, and the Cash Book summed a second time before the business of the day is concluded. The removal of all the tags, or other markers, from the Ledgers would show when all the postings had been checked. The double check is wanting, or is insufficiently recorded, in 32 cases out of the 236. Valuable assistance in the work of audit is occasionally rendered by the trustees and managers, either acting individually or by forming them- selves into small audit committees. In the former manner a trustee or manager, willing to personally undertake some detail of audit, could most usefully direct his attention to the examination of Pass Books with the. Ledgers of the bank. The work of an audit committee would more espe- cially be valuable in connection with the examination of the Cash Book, and of monthly or other statements of business done. This would be particularly the case at banks where it is not usual for the Auditor to undertake more than a half-yearly or quarterly audit, apart from any continuous examina- tion of Pass Books that he may be called upon to make. We deem it of essential importance that the rules of all Savings Banks should make provision for the following matters : — "(a) For the examination of Pass Books during the year as pre- sented by depositors and their comparison with the Ledgers to the extent of 10 per cent, of those extant, either by the Auditor or by some other independent person or persons. (b) For the examination by the Auditor of the annual general state- ment and its certification by him,'if found correct. If he is not satisfied, the Auditor should report accordingly to the trustees and manager^;. (c) For the Auditor to render occasionally, when desired, a list of work done by him in the course of his audit." The above extracts are of value, as showing the usual practice, in addi- tion to that which experience has shown to be desirable. (b) STOCKBROKERS. — A considerable amount of mystery appears to envelop Stock Exchange Accounts, and the remark has frequently been 59 made that the audit of Brokers' and Jobbers' Accounts is altogether too technical a matter to be safely conducted by the general practitioner. The advantage of special practical knowledge on the part of the Auditor has already been freely admitted by the author, but it is contended that the desir- able knowledge may be readily obtained, even by the general practitioner ; and, with Stock Exchange Accounts in particular, it is suggested that the necessity of ''specialism" has been greatly exaggerated. For the audit of these accounts to be of any value, however, it is neces- sary that it should be of the most detailed description ; the danger of error or fraud — either of which might assume alarming proportions — is extremely great, and the utmost care and circumspection are, therefore, imperative. Particular attention should be directed to the Name Ledger, and Continua- tions must also be carefully traced. The question of ''splits" should also be kept in mind, as — although not a large item — it is a likely source of petty fraud. Perhaps the chief danger in this class of audits lies in the fact that, in the great majority of offices, there exists no regular system > affording a reliable internal check, and no efficient supervision. To remedy this obvious weakness the visits of the Auditor should be frequent, say, at least once during each account; indeed — although what we have called a "completed" audit is doubtless useful, as affording a reliable periodical statement of accounts — the only really efficient audit of Stock Exchange Accounts would appear to be one that is both detailed and continuous. (c) ARCHITECTS. — The accounts of Architects are, perhaps, less frequently the subject of professional audit than either of the two classes of . accounts just discussed, but this is a state of affairs which is always unde- sirable, and particularly so in cases where two or more architects are prac- tising in partnership. The accounts do not, as a rule, involve a particularly voluminous record, - and it is therefore desirable that in all cases the audit should be a detailed one. The fact that architects are frequently not business men makes it im- portant that the Auditor should take every precaution to guard his client from loss, both through actual fraud and bad book-keeping ; it is therefore important for him to see that every item in the Cash Book is properly vouched, and, so far as possible, that all fees and commissions are duly accounted for. It may be mentioned here that, with regard to fees payable able by way of a commission, at the uniform rate of 5 per cent., upon the value of the work done, as certified by the architect for the purpose of assessing the payments to be made on account to the builder. There will always, at balancing time, be a considerable amount of accruing fees, which 60 must be treated as an asset, but which are not actually due for payment at the time; a schedule of these items should be prepared and certified by the principals for inclusion in the accounts. Another point that must not be lost sight of is that, in all important undertakings, a ''Clerk of the Works" is appointed to be on the spot, for the purpose of checking the material and workmanship employed by the builder. The Clerk of the Works is not infrequently appointed by the architect, but he is invariably paid for — and is the servant of — the archi- tect's client; if, therefore, for reasons of convenience, his salary has been paid by the architect, it is important to see that it is subsequently recovered bv him. til Extracts From the American Business and Accounting Encyclopaedia^ The following extracts from The American Business and Accounting Encyclopaedia are republished with a view to making this text-book as complete as possible to those who may desire to purchase it separately. AUDIT. — The examination of books of account to determine their accuracy, and the honesty of those interested. The objects of an audit have been defined as follows: 1. The detection of technical errors. 2. The detection of errors of principle which do not affect the accuracy of the figures. 3. The detection of fraud. Another authority states that the principles which should govern an audit are : 1st. The obvious prijnciple, that the books should be thoroughly examined and found to be in balance and all payments correctly vouched. In my humble opinion, no partial audit of a company's affairs is satisfactory. 2nd. An exhaustive survey of the results from past standpoints (where there are any), and any serious discrepancy noted with a view to careful inquiry. 3rd. An intelligent and conscientious review of the assets (and upon these an auditor of any experience and ability to gather information ought to form some definite opinion), in order to ascertain to the best of his judg- ment the true financial position. It is clearly laid down that where the ser- vices of an outside and independent valuer are employed, the auditor cannot go behind his certificate, but I suggest that in his report he should set out the fact of an outside valuation. But it appears to me that the auditor is not wise to accept the certificate of anyone inside the company, without making such examination as is possible, within the bounds of his experience. F. N. Yarwood, Fellow Sydney Institute of Accounts, N. S. Vv''., says : "The auditor is appointed to see that : ( i ) Tlie balance sheet is correct. (2) That it states the position as clearly as possible. (3) That the direc- 62 tors, etc., have carried out their duties in a bona fide manner to the share- holders, and with due regard to the objects and intentions of the company. AUDITING. — The method employed or work performed in accom- plishing an audit. The Scope of an Audit. — In considering this subject we have to take into account the fact that it has by no means been authoritively defined as to exactly what an efficient audit should cover. There has been considerable diversity of opinion as to the extent of probing which the term "auditing" should embrace, some maintaining that an audit should trace every entry to its original source, while others consider the verification of the trial balance from" the books to be sufficient. It is often very difficult to convince a merchant of the value of the work for which he will be called upon to pay, and in such cases what may be termed ''a condensed method of audit- ing" may be used, which will of course be subject to modifications made to suit the special conditions encountered. Such a condensed method of audit- ing will be hereafter described in detail. Checking Postings to Ledger. — A great many auditors consider it necessary to check in detail the postings to the individual accounts receivable and payable, but it is usual in this country to take the ground that if the general or representative accounts are found correct, no manipulation of the individual or personal accounts could remain undetected. The auditor does not devote any time to satisfying himself that a bill of goods bought by John Jones has been charged in error to John Smith. When John Smith gets the bill he will promptly attend to the rectification of the error. The postings to customers and purchase accounts, however, are checked in bulk. The auditor satisfies himself that the total amount of charges called for by the sales book has gone into the ledger, as also the total amount of credits called for by the cash book, etc. As the trading statement will show the gross and net sales and purchases, there is very little chance of falsifying the merchandise account so that the falsification will not be detected. Books to be Audited. — These will comprise customers' ledgers, pur- chase ledger, general or private ledger, cash book, petty cash book, cross- entry journal, purchase journal, sales journal,' credit journal, pay roll, bills receivable book, bills payable book, trial balance book, and any other extra- ordinary book, or books of original entry, from which postings may be made to the ledger, or the totals of which may be transferred from the aux- iliary books to a book from which postings are made to the ledger. The im- portance of paying attention to the last mentioned detail can be illustrated by an accountant's experience in an audit where it was only accidentally dis- covered that the book-keeper used an auxiliary or "blotter" cash book, from 63 which he transferred each day the items to the regular cash book, from which they were posted to the ledger. This "blotter" being examined, a comparison with the regular cash book disclosed the fact that the book- keeper had changed the entries so that for years he had been putting in his pocket not less than $io every day, making fictitious credits to conceal the defalcation in the ledger, said credits being duly entered in the journal. Statistical Reports and Exhibits. — From the books above men- tioned, the auditor compiles the following statements and exhibits, which, as a rule, will cover all the desired information. Where investigations are made for a special purpose the whole trend of the audit will naturally be directed along the special line and special statements will, in all probability, be required: 1. Trial balance at commencement of period covered by audit. 2. Trial balance at close of period covered by audit. 3. Trial balance after closing the books. 4. Balance sheet, or statement of assets and liabilities. 5. Trading statements. Departmentalize as much as possible. 6. Profit and loss account. 7. Analysis of expense account and comparative statement when possible. 8. Statement showing analysis of Merchandise account as appearing on the ledger (where a Merchandise account is carried). 9. List of bad or suspense accounts. 10. Schedule of Bills Receivable. 11. Schedule of Bills Payable. 12. Schedule of Missing Vouchers. Check Marks. — It is usual for the auditor to use a distinctive check mark by which he can readily distinguish his completed work. Some accountants, however, state that they make a point of accomplishing their work without placing a mark of any kind upon the books audited. This seems, however, to be a very risky method and would not be advisable unless the books audited were in the sole charge of the auditor during the exam- ination. Particularly is this true where books of account are subject to a partial audit which is supposed to keep the work as much as possible up to date until the accounts receive their final checking. In order to prevent alterations being made after the books have been checked in this way, some accountants adopt a special form of check-mark upon all figures upon which a correction rrfay appear. They afterwards look back over their work for corrections, erasures or alterations in order to see that nothing of the kind appears without the special check-mark. This special check-mark should 64 be as much like the regular check-mark as possible, so that the book-keeper may not recognize the distinction. Cash and Bank. — The first task of an auditor upon undertaking an audit is usually to check the cash account both on hand and at bank accord- ing to the balance shown in the cash book. If some time has elapsed since the books were closed, add to the cash balance on hand the footings of all disbursements since that date, deduct the footing of the receipts, and the balance should agree with the cash on hand at date of closing as shown by the cash book. It should be particularly noted that no check for currency has been drawn but not entered on the cash book for the purpose of making up the amount which should be on hand. An audit is much facilitated when all receipts are deposited in the bank,' and in any case it is useful to compare deposits made in bank with the receipts as shown by the cash book for the purpose of locating any large differences which need investigation. It has often happened that dishonest cashiers have deposited amounts in the bank, omitting to enter same on the books, thus enabling them to appropriate a similar amount from the receipts which are entered on the books. Purchase Accounts. — It has been indicated above that accounts with creditors are frequently checked in bulk and not in detail. It will, however, be necessary for the auditor to take particular notice that there has been no opportunity to charge purchases for employes to merchandise or expense accounts. Vouchers. — The auditor should call for vouchers, not only for every expenditure entered on the cash book, but also for credits and allowances entered on the journal, the latter being fruitful ground for entries made to cover defalcations. There should also be vouchers for deductions from the amounts of customers' bills for freight, discount, etc. In a well ordered office such deductions are always O. K.M by a responsible person who guar- antees their accuracy to the auditor. The vouchers should be turned over to the auditor in order of date, and it Is best also that they should be in numerical order. This, however, comes under the head of improvements which an auditor can generally suggest In his report. Discount. — Where the information can be readily ascertained the auditor will allow for the usual cash discounts on both sales and purchases In making up his statements. Trade discounts must always be deducted, but this class of accounts is usually posted to the ledger "net." Fraudulent Errors. — The detection of Irregularities forms a large part of an auditor's duty, and he must always be on the watch for "clues'* which may lead to discoveries. 65 Customers' Accounts. — In cases of suspected embezzlement of col- lections, statements should be mailed to all customers with a request that they verify the balance shown as owing. Arbitrary Entries. — One of the most trying conditions encountered by the auditor is when transfers are made from one account to another without originating from any book of original entry or when simple postings are made in the same manner. Such entries must necessarily cause a large amount of trouble and the auditor will know how to deal with them in his report. The proprietor of a business should promptly deal with such mat- ters, as it is he who pays the bill. Location of Errors. — The detection of irregularities in books of account forms a large part of the duties of the auditor and accountant, the auditor exclusively employed by a large corporation, or the independent public accountant. One of the peculiarities of accounting in the United States commercial houses is that they prefer to have their books made of a paper on which erasures can easily be made without detection. Any sign of erasures, there- fore, should be considered with suspicion, and the entries carefully followed up checked back. The transfer of footings from page to page should also be carefully watched, as this is a frequent hiding place for peculations. It is a very common trick with fraudulent book-keepers or cashiers to bring footings forward accurately in the first place until the cash-book has been scrutinized by the proprietor. After he has found everything all right, he is not likely to look at those particular entries or that particular page again, and the footings brought forward can, therefore, be safely reduced on the receipt side or increased on the payment side. Vouchers should be demanded for all payments entered in cash book or petty cash book, and also for all journal credits to customers, etc., such vouchers to be properly O. K.M by some responsible official who at the time was cognizant of the transaction. Six months hence no person in the business will be able to recollect why certain payments were made if no receipts can be found for same, or no authorized vouchers. A system of vouchers for journal credits should always be instituted for the reason that receipts may be diverted into the book-keeper's pocket and entered in the journal as a credit for goods returned, or for all allowances, or something of that kind. An embezzlement is more frequently connected with a clever manipulation of merchandise account than with anything else. Deductions from remittances on account of freight, expressage or dis- 66 count are frequently taken advantage of, the amounts of said deductions being increased and the amount of the remittance decreased. These petty frauds are extremely difficult to locate, and can only be checked up by filing remittance letters as vouchers in order of date, so that even if all such letters are not compared with the entries a judicious selection can be made which will probably determine the fact as to whether the entries are correct. Another favorable location for embezzlement is in the pay roll of a large manufacturing concern, unless proper precautions and safeguards are adopted. It will be found quite possible to overcharge the wages earned by workmen who are in collusion with the superintendent, to insert "dummy" names, or for the cashier himself to foot up the pay roll suffici- ently incorrectly to give him a "rake-off" when he enters the wages paid in the cash book. The proper method of preventing defalcations of this kind is to have a complete system of record from the time the workman enters the factory until he leaves ; an automatic machine to register his arrival ; a job record book in which a clerk will register the work he is engaged on; a cost ticket on which the workman will enter time occupied and material used on each job; cost summary from which another clerk will make up the total labor from the cost cards and the amount due each workman ; a pay roll book to be kept by another clerk which shall bring the labor of the different jobs together for each man, and will show the amount due him, the amount which may have been advanced him, and the balance due on pay day. A form of receipt should then be issued to each workman showing the amount he is to receive, and on his presenting this form, duly signed, at the cashier's desk he will be paid. There may also be irregularities in making deposits in the bank, outside of such irregularities as taking a few hundred dollars In currency to deposit and taking the train for Canada Instead. Cases have been known In which deposits have been short for quite a lengthy period of time, the amount In the bank pass-book being made to agree with the amount shown on the books of account by omitting one or two entries towards the close of the month when the balance Is taken. The only way to detect such Intentional mistakes is, of course, to carefully compare the payments as per cash book, or check stub, with the payments entered In the cash book and to check the balance of cash on hand and at bank as shown by the cash book with the actual cash on hand at unexpected Intervals, afterwards depositing the whole amount on hand In the bank, so that there will be an accurate basis for further inves- tigation If found desirable." Another method of embezzlement often employed Is by paying Invoices of goods purchased twice. This can easily be prevented by a good voucher 67 system by which the bills to be paid are all attached to the voucher, and each bill is stamped by the officer who O. K.'d them as he reviews them. These bills cannot then be brought before him again because of the endorsement upon them, and in case a duplicate bill should be presented it would be the officers' duty to carefully investigate the matter before sanctioning its pay- ment. Every invoice, also, before being presented for O. K. to the treasurer, should bear the O. K. of the shipping clerk, as being received in good order; of the superintendent (if it is a factory) ; or of the department manager (if it is a business divided into departments) ; of the purchasing agent in regard to price ; and of the book-keeper so far as accuracy of computation is concerned. The misappropriation of cash sales occurs very frequently in business houses where strict and proper methods of precaution are not used. The salesman may pocket the cash sale when receiving the money from the customer, or the cashier may pocket it on receiving the money from the salesman. The best method of protecting the merchant from this class of fraud is to use triplicate cash sales tickets, and to advertise to every custom- er that a receipt is given for every sale. This practically compels the sales- man to make out a ticket for the customer. The salesman retains one of the carbons and hands the other to the cashier with the money. In case of an investigation the salesman's tickets and the cashier's tickets are com- pared. Both sets of tickets should be numbered and filed away consecutively. The best method to prevent defalcations in the keeping of petty cash is to have that duty performed by an assistant cashier, providing him with a separate book with which to enter his transactions. A check should be drawn to his order, which he will enter in the petty cash book as a receipt. At certain intervals he will account for all moneys expended to someone appointed to receive his report, and on this account being O. K.'d he will receive a check for the amount of his expenditures which will make the amount of cash in his hand equal to the amount originally given him. In the general ledger an account will be opened with the petty cashier, charg- ing him with all checks for which he is responsible, and crediting him with the amount of his expenditures, the difference showing each month the bal- ance he has on hand. There are, of course, a number of other methods of making intentional errors for the purpose of concealing fraud, but It is impossible to attempt to describe them all, and the foregoing may be considered interesting examples which may be useful reading to anyone whose duty it is to supervise or check up the work of others. 68 The responsibility of the auditor for errors or defalcations unlocated has been a matter of considerable discussion, but the general conclusion appears to be that he is not bound to do more than exercise reasonable care and skill. He does not guarantee that the books correctly show the position of a company's affairs, but he does guarantee that his investigation has been perfect to the best of his ability and that his findings have been arrived at in the most careful and bona Ude manner possible. The Valuation of Assets on the Balance Sheet. — The respon- sibility of the auditor for the values set down in a statement of assets and liabilities has not yet been defined in this country, and the auditor will, as a rule, take the values as he finds them, incorporating in his report such criticism and recommendations in regard to same a:s he may think best. This refers exclusively to an audit performed for the purpose of verifying the accuracy of books of account. Where an examination is made for intending purchasers of a business all values must be analyzed in detail, and only what are considered to be actual current values accepted of assets known to exist as represented. Market Values. — The fluctuation of values affected by the market is a very difficult matter to handle in most cases, but where it appears rea- sonably permanent the difference between present and original values should be charged or credited to profit and loss. Depreciation. — It is the auditor's duty to see that proper provision is made for the depreciation of fixed assets, and that bad debts are eliminated from the statement of assets. Whether he will establish a reserve for bad and doubtful debts will depend upon the general conditions of the case. Charges for repairs should be carefully watched, as it is quite usual for merchants to treat them as capital expenditures instead of as a charge to revenue for maintaining present values. This subject will be considered at length under its proper heading. Verification of Profits. — There has been considerable discussion as to the scope of an accountant's work when engaged to verify the profits of a business, some maintaining that it does not include'an examination as to the accuracy of the books of account from which the profits are deter- mined. The only way, however, to verify a statement of profits made is to determine the truth of the figures from which such a statement is compiled, i. e., those figures which affect the trading, and profit and loss accounts. With regard to this important subject, which hinges so much upon the value of certain supposed assets which go to make up the alleged surplus 69 ' shown by the bo®ks, such as accounts receivable (either trade or loans), etc., it may be well to quote the following: "It is no part of an auditor's duty to give advice, either to directors or to shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, pro- vided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then comes the question : How is he to ascertain that position? The answer is, by examining the books of the company. But he does not discharge his duty by doing this without inquiry and without taking any trouble to see that the books them- selves show the company's true position. He must take reasonable care to ascertain that they do so. Unless he does this, his audit is worse than an idle farce. Assuming the books to be so kept as to show the true posi- tion of the company, the auditor has to frame a balance sheet showing that position according to the books, and to certify that the balance sheet pre- sented is correct in that sense. But his first duty is to examine the books, not merely for the purpose of ascertaining what they do show, but also for the purpose of satisfying himself that they show the true financial position of the company." Unearned Profits. — It is a part of the auditor's duty to see that no unearned profits on uncompleted work, or on sales booked for future delivery are included in the period covered by the audit. One method of treating uncompleted work is to include the credit for a completed contract — for instance — and to open an account entitled "reserve for unfinished con- tracts," — and charge to this account the estimated cost to complete. This applies only to contracts in an advanced stage. Condensed Auditing System. — Verify the cash balance at date of commencement of audit with balances found in ledgers. On suitably ruled paper open accounts with all general ledger accounts, and adjustment accounts with customers and purchase ledgers. Post up these accounts from cash book and cross entry journal, and post totals from Purchase, Sales and Credit journals to their respective representative accounts. Where the books are well kept and separate columns used for the different ledgers and for heavy posting accounts (such as cash sales, cash purchases, expenses, etc.) this work is extremely simple, and easy to perform with speed and accuracy.^ 70 In a case of very old fashioned book-keeping, where everything is jumbled up in one column on the books of original entry, it is a more difficult process, and necessitates great care. After completing this auditor's ledger, or abstract, draw off the balances from same and compare with the balances shown on the book-keeper's trial balance. Locate the source of every difference and note all errors found, such as personal accounts charged to non-posting columns, etc., accompany- ing same with entries necessary to correct. The customers' ledger balance accounts will agree total sales and other ledger debits with sales and cross entry journal, total cash and other ledger credits with cash book and credit journal, and the resulting balances will agree with the total of the ledger bal- ances as per trial balance. The purchase ledger balances will be checked in the same manner. To obtain this comparison^ on a sheet of suitably ruled paper write out the following data: From the trial balance at commencement of audit the debit and credit balances, taking sales and purchase accounts in totals. From the auditor's abstract ledger in adjoining columns, the total debit and credit postings for the period audited. In columns next adjoining draw off new trial balance and agree with that of the book-keeper. To the total credits add cash on hand at close of books. To the debits add cash on hand at commencement of audit. The debits and credits will then agree. Compare with total debits and credits from cash and journals. This will catch errors of footings, simple or counterbalancing. Close out accounts to profit and loss, and draw up statement of assets and liabilities. Check footings of all columns of cash book and journals the totals of which were taken into the abstract. Check footings of pay roll and compare with cash book. Check footings of petty cash book. Check bills receivable book with Bills Receivable account, and verify inventory of bills on hand. Check bills payable book with Bills Payable account. Have bank book balanced at bank, and verify balance on hand at close of books after listing all unpaid checks. Check vouchers for all payments by cash or check, and make a list of vouchers not produced. Some auditors consider the checks themselves as sufficient vouchers for payments through bank. Call for vouchers for journal credits and allowances. Prepare report and necessary financial statements. Whenever possible the auditor should endeavor to satisfy himself that all receipts have been entered in the cash book, but it is rare to find a business house possessing a record which can be satisfactorily checked or that will take the trouble to keep such a record. Should it fall within the 71 duty of the auditor to balance the books, this is best accomplished by making each ledger self-proving by means of adjustment accounts. Name* df /^ccounfe Al«*^ cJoly I' ' &^1 I*!* 1S&S D«t,.<» Oncdite, :d>t» Deb'.-li c««J.-t Ob»K. or, Karci .S/aI BlarxK Accour,-}* Dece.v*bl« G.rtofr>ij. Bill* Receivable Real El^afe Gooc3w-.ll rioR^HSa. x Dol) lrCHtn.t»i- 0.oco^rN+ 35 79D 7S e36 €76 05 7 5 8 7 5 3a al7 ISA 4L_ ooo 05I in Caa^UJ -c^u^y )' xQ&az Corporati6n Auditing. — The audit of the books of a corporation involve the examination and verification of Capital, Debenture, and Dividend accounts. To accomplish this, the company's minutes must be perused and their effect noted, and a report made of any variations therefrom. The corporation laws of the United States do not, however, prescribe the method of dealing with these accounts, and the auditor will therefpre use his judgment in regard to what he finds. AUDITOR. — An auditor may be described as a person whose duty it is to examine the accounts of a company, firm or person, so as to ascertain the exact state of affairs financially at a given moment. This involves not only a scrutiny of the figures, but also an examination of the form and substance of the accounts, in order to see that they truly represent the state of affairs purporting to be represented by them. The position of an auditor, his rights, and liabilities, depend very much upon the circumstances under which, and for the purpore of which, he is appointed. ' Attitude of the Auditor. — The auditor to a firm is usually api pointed by the mutual agreement of the partners, but, occasionally, by the articles of partnership themselves, or by one particular partner. If appointed auditor to the firm, he must, however, in either case, consider each partner as his client, and protect the interests of each accordingly. The same con- ditions as to terms of agreement, responsibility, fees, and resignation, obtain as to the auditorship of firms as mentioned in the previous paragraph; but it would seem that any one partner would have power to bind the firm as to the amount of the fees — except, perhaps, where the appointment lay 72 in the hands of one partner, when the consent of such partner would prob- ably be required. Probably no one partner could discharge an auditor without the consent of all his co-partners. The auditor of the company is subject to the rules and regulations of that company, and tp such further statutory provisions as may apply to the particular class of undertaking. The usual practice is for him to be appointed, in the case of a new company, by the directors; but he is subject to re-election at each successive annual general meeting, and at any such meeting the shareholders may (theoretically), if they so please, appoint another auditor. Unless the remuneration of the auditor be fixed at the time of his appointment, or by the articles of association, he is entitled to a reasonable remuneration; but if appointed "^t such remuneration as the shareholders may think fit," he is entitled to such sum as the general meet- ing may award him — and no more. Directors have no power to dismiss an auditor, once appointed; but, apparently, an auditor may resign at any time, although probably at the loss of his fees for the uncompleted work. A casual vacancy has usually to be filled by an appointment at an* extra- ordinary general meeting, but many articles of association give the directors power to fill casual vacancy. To a great extent it rests with the directors to decide how much information shall be supplied in the published accounts ; but the auditor must not lose sight of his individual responsibility, and he should never certify a balance sheet to be "full" merely because he considers it to be as "full" as he may think it expedient for it to be. Rather let him, in such a case, certify the balance sheet, "in his opinion to be a fair balance sheet, and to sufficiently disclose the financial position of the company." On the 6ther hand, he should be particularly careful to guard against juggling with words, and .so appearing to give a full certificate, when in reality he is "making himself safe," or ^'hedging" behind a certificate which, when carefully analyzed (and only then) is found to be most qualified. He must, in every case, be satisfied in his own mind that the accounts are correct, and fairly stated. , ' Attitude of Proprietors of Business. — An accountant says : "Com- panies' audits are curious things. Some secretaries and managers think the audit ought to be as they think fit — that is, they and not you should say what ought to be gone through. In this case I strongly recommend the auditor to go through first what is ofifered, and afterwards to whatever he wants. Never be put off by anything material. If seriously blocked at any stage or t'lwarted in any way, look out and pay more particular attention to this part of the audit than any other." The proprietors of a business whe4-c the books are being audited are, however, pleasant as a 73 rule, especially if the work is being done "on contract" — that is, at a speci- fied sum for the job. If, however, the work is being done at so much per diem, some proprietors have an unpleasant habit of sneaking around the auditor every ten minutes and surveying his work with manifest impatience and displeasure, after a while asking him how much longer he thinks the audit is going to take, and otherwise generally upsetting his equanimity. Some proprietors are quick to take advantage of any hints thrown out by the accountant in regard to shorter and better methods which might be improved, and promptly give such suggestions a trial. Others, strange to say, resent these suggestions, although they actually pay the accountants to make them. Instaipces have been known when very trying abuses, which greatly hindered the accountant in his work, and thereby made the audit more expensive for the merchant, were left uninterfered with year after year, in spite of*, recommendations for their removal in each semi-annual report. Attitude of the Book-keeper. — In the performance of his duties the public accountant must of necessity come into contact with all kinds and varieties of persons, and it naturally follows that some of his experiences are amusing, and some exasperating. The demeanor of the book-keeper to the public accountant is of itself an entertaining study. Some book- keepers maintain an impressive and haughty dignity with a view to impress- ing upon the accountant the fact that he, the book-keeper, considers himself ^ not only as good as the accountant, but a great deal better, and that if he, the book-keeper, must suffer the outrage of the accountant's contiguity, he does it under protest. Some book-keepers, on the other hand, are extremely agreeable, and even endeavor to be as "chummy" as possible with the accountant, as by this method they expect to touch the soft spot which can always be found in the heart of a human being, and thus obtain a favor- able report in regard to their abilities and the way in which the work has been performed. Some book-keepers are morose, savage, and act as though the exam- ination conducted by the accountant was an insufferable insult which could never be forgiven. The accountant generally manages in some way to help improve the prospects of such a book-keeper as a return for his amiability. Auditors' Assistants. — Reliability is the first requisite in an auditor's assistant, and those who wish to do well in this profession must, above all things, obtain a reputation for being tenacious of the secrets of their busi- ness. The accountant's assistant should be careful not to accept the friendly advances of the employers' book-keeper or other clerks with whom he may have to do, as in case condemnatory reports have to be made, he may other- 74 wise find himself in an uncomfortable position. Owing to the difficulty in obtaining experienced assistants in this country, the public accountant is frequently compelled to suffer many annoying experiences. One difficulty which appears to be almost omnipresent is getting the detail work of an audit done in such a neat and orderly manner that, should the assistant die in the midst of an audit, or suffer any other calamity whereby he may be prevented from completing the work, someone else may take it up at the point of breakage and intelligently « complete it, without having to do all the work over again. The average assistant, when he comes to any dif- ficulty, will generally make a note on some small slip of paper, with an intention of referring* to it at some time hereafter. He also generally car- ries these small slips around with him in his pockets. When he quits the work it never occurs to him that the contents of these slips will be unknown to his successor, and if that successor takes up the work where "number one" left off, and carries it out until its completion, he will consequently find himself involved in an almost inextricable tangle, the straightening out of which will be extremely annoying and expensive. Another curious trait of accountants' assistants is that a great many of them cannot on any account be persuaded, induced or cajoled into obey- ing instructions, and this is frequently true of really good men. You may order them to follow certain lines in their work and to adopt certain methods, but in the end it is usually found that they have done the work in some other way (their own way), which they describe to you as having been found by them to be much simpler and speedier in this particular case. AUDITORS' CERTIFICATES.— Many forms of certificates have been used by auditors, and we attach some of the best known. It should be borne in mind that the auditor is not required to make himself respon- sible for errors or defalcations which have escaped his notice after a* faithful and conscientious examination. Forms of Certificates. — "I hereby certify that I have carefully ex- amined the books of account of Tames Reid & Co. with the vouchers pro- duced, and that the above balance sheet (or statement of assets and liabili- ties) is a true and correct statement of the present condition of the business as on the 31st day of December, 1899, as disclosed by said books of account. Dated this 8th day of January, 1901. (Sigfnature.) Certified Public Accountant." 75 "I have audited the above Balance-Sheet (or the Company's Balance- Sheet dated the day of ) , and in my opinion such Balance-Sheet is properly drawn up, so as to exhibit a true and correct view of the state of the Company's affairs as shown by the Books of the Company.'* "We hereby certify that we have thoroughly audited these accounts for the (year) ended (25th March) last, and that the same appear to be correct. We further certify that the above Balance-Sheet is in accordance with the books, and appears to us to be a correct statement of the financial position of the firm, as it appeared on the above date." CX<'cX3Vd 76 FREE TO YOU partments are of heavy press-board- handsome piece of office furniture. -top compartment in WITH YOUR SUBSCRIPTION TO Business Man's Magazine THIS file is made of heavy quarter-sawed white oak — measures 14 x 9 — big enough to accommodate the largest letter-head — completely indexed by day, month and al- phabet. Every tab is re-in- forced with leather. The com- leather. It's not a toy, but a DO NOT LET A MEMORY STUNT REGULATE YOUR DAY^S WORK C Do Not Scatter Yoof Brains Through Ten or Twelve Pigeon Holes — A Dozen Drawers — Two or Three Note Books — Or over a Quantity of other Paraphernalia. Ct. There is a simple way to concentrate your work into a compact and easily accessible form. There is a certain^ sure method of planning your day's work. You need a personal desk system. There should be a definite place for everything that comes to your desk. You must have a way to carry over your unfinished work — business that requires attention at some future time. Keep the details of your own work always at your fingertips. The silent secretary as we call it, or the business watch-dog as one user puts it, takes absolute care of the petty details of your daily routine work. It provides the means of ^r / keeping everything that you wish to preserve, always at your elbow. It lays out your plan of action — it automatically reminds you of your appointments and engage- ments; it calls your attention to collections due, prospective orders that need X^- attention; it's a sort of mechanical memory — an automatic collector, salesman, ^^/ correspondent. It's the prod for the forgetter — the office alarm clock — the ^^/ safety valve of the over-burdened pigeon-hole. .^^■■''.^ There's Money in The Business Man's Magazine THE PROOF IS IN THE READING /^f^r Every page is crammed with it. A little pressure — brain pressure — will force it out. There is no easy-money schemes described in it; no royal road to wealth. It deals with legitimate plans that you can adapt to your work. Ideas that mean money to you. ^-' ■o -A' / ment that it does not explain clearly and C This book is not the work of one indi- experts— men especially fitted to write on Ct. Such men as J. H. Jeffries, Vice-president of W. G. Schweppe, Manager of the American Credit of others give you in cold, hard type, the boiled A half hour's conversation with any of the con- times the cost of the book to any credit densed credit and collection information given in C Think what it means to get every statement, sected for your benefit by the very men who use handling millions of dollars worth of credits every O. We cannot begin to tell you all this valuable book the opportunity of examining it at our expense. We will be glad to send it to you on approval if you act today^ Send in the coupon now. C This book contains over three hundred twenty-five pages of reading matter. The salient points of credit work are con- clusively brought out by dividing the book into twenty-five separate and distinct chapters. Each particular subject is handled by a man competent to write authoritatively on the subject. Not only is there value in the book, but it looks its worth. It is handsomely bound in three-quarter Morocco, full Russia back, is gold stamped and gold edge. Remember your money back if you do not find it is the best investment you ever made. How^ mucK of your Money is tied up in Bad Debts? €L Better than ways of pounding money out of bad debts are methods, systems and credit plans for preventing live accounts going into the black book list. Every time you place a customer in the position of h^mg forced \q pay, you stand the chance of losing sales and making enemies. The Credit Man and his .work Not only shows what are the needs of a credit department— what are the essential characteristics of a successful credit expert— it not only points out the defects in existing systems, but it actually describes in minute detail the best credit systems in operation anywhere. It shows, too, how to force a settlement when other means fail. There is nothing pertain- ing to the successful operation of a credit depart- completely. vidual, but of a corps of trained business this particular subject. the National Credit Men's Association, Indemnity Insurance Company and dozens down essence of their years of experience, tributors to this work is worth ten man. Think what it means to get the con- The Credit iVian and his Work! every plan, every idea analyzed and dis- these same systems and methods in year. can do for you, but we will give you The Book-Khbpbr Publishing Co., Ltd.. 302 W. Fort St., Detroit, Mich. Gbntlbmbn: Enclosed please find |2.00 for which send me, in accordance with your offer above, one copy of The Credit Ban and His Work. It is understood that this book is sent me subject to examination and approval. If I am not en. tirely satisfied with it I will return it. You agree to refund full purchase price. (B. M. 8) Name „ _ Address _ .-.State Borne Study Course in Advertising Free 1 A four hundred page business-bringing book that covers the whole subject of advertising from the preparing and placing of copy to the organization of an advertising department. SUaESSFUL ADVERTISING, BOW TO ACCOMPLISH IT BY J. ANGUS MAC DONALD Is a book that every business man should have. It's an invaluable assistant to the advertiser, manager, buyer, ad-writer, clerk and student of advertising. Every page is a condensed Encyclopaedia of advertising fact. Every line is practical. There isn't any theory about it. The author is a practical advertising man of large experience. For the first time retail advertising receives the attention it deserves. It tells the retailer hiw to pre- pare special sales, how to advertise to get results, what he should do every month in the year, how to keep a continuous stream of trade coming to his store. It tells the country store-keeper how to compete successfully with the large city mail-order houses. It's not only a book on advertising, but it's a retailer's hand book of good practical business-getting information. Ad-building, mail-order advertising and general advertising receives comprehensive treatment. There is no book like MacDonald's in existence. The unusual experience, keen insight, and clever style possessed by this author help to make the work invaluable and ever readable. THE AMERICAN PRESS PRAISED THIS WORK. THE FOREIGN PRESS PRAISES THIS WORK. New York Herald "Within 400 octavo pages he has given practical lessons that cover the entire field of 'Retail Advertising,' 'Mail Order Ad- vertising,' and 'Miscellaneous Advertis- ing.' In a chapter on 'Ad Building' he gives directions as to how to build up a splendid superstructure of words on a solid foundation of fact. In short, the book will be found of the greatest utility to business men." Printer's ink "Where the usual volume on retail adver- tising quotes stale advertising phrases and gives hackneyed specimens, Mr. Mac- Donald searches out the inner advertising principles of each business, and sets it forth clearly and briefly. His matter all through the book is distinguished for com- pactn>;ss and clarity, and is written in a sprightly, forceful way." New York Sun "Because of the way in which this book explains certain mysteries known hitherto only to the elect, it has a distinct exoteric interest." SUCCESSFUL! ADV'EIITiSING TOACCOMPUSH Progressive Advertising LONDON "Mr. MacDonald's book should be in the hands of every advertiser, whether he is spending 50;^ or 500;^." New Zealand Herald "It is brimming over with hints, ideas and information, and is a profitable 'two dollars' worth' to those whom such matters concern." The Advertiser's Review LONDON "We do not remember handling an ad- vertising volume so full of interest, ideas, sound, practical talk as this one. It is most carefully edited and the author's unfettered hands have turned out some capital reading. Over 400 Pages— Stamped in Two Colors— Bound in handsome Japanese Green Vellum— Printed on Special Quality, Fine Antique Paper. If your business drags, if your goods are not moving fast enough, there is something wrong with your methods, there is something wrong with your advertising. You are lacking in schemes and ideas to create a demand and a sale. If you want more busines.s, if you want to increase your profits, send for a copy of this great work today and APPLY ITS PRACTICAL LESSONS TO YOUR OWN BUSINESS NOW Keep it on your desk, take it home with you, read it, study it, go back to business with a keener insight of the methods of promoting your work. THIS BOOK HAS NEVER BEFORE SOLD FOR LESS THAN $2.00 Fill out the coupon below and send it in now. Get a year's subscription to the BUSINESS MAN'S MAGAZINE and SUCCESSFUL ADVERTISING by return mail. This offer is made for a limited time only. If you wish to take advantage of it at this price you should order now. The Book-Keeper Publishing: Co., Ltd., Detroit, Mich. 302 W. Fort Street Enclosed find $1.50, for which please send me copy of Successful Advertising, How to Ac- complish it, and enter my subscription to the Business Man's Magazine for 12 months. It is understood that this is an on approval offer. (B. M.3) Name Town Address State A COMMON SENSE OFFER HOW TO GET A HANDSOMELY BOUND UP-TO-DATE DICTIONARY OF THE ENGLISH LANGUAGE IN CONNECTION WITH YOUR SUBSCRIPTION C A complete and reliable volume for every-day use, comprising the pronunciation and definition of every practical word — new and old— in the language. Only words that should invariably begin with a capital are so printed. C The Twentieth Century Dictionary is abundantly illustrated, both in the text and in full page groupings. More than twelve hundred pictures are utilized in the work, among which may be found all of the new inven- tions; such as the Graphaphone, X-Ray, Linotype, Megophone, etc. Also a full page group of pictures of sport- ing implements, showing the different goll clubs, polo clubs, lacrosse racquets, curlers, quoits, etc. Pictures of the tools of many of the handicrafts are likewise grouped on one page, ahd there are two pages illustrating the State Seals. Supplemented by fifty pages of condensed every-day helps and a TWENTY-SEVEN PAGE GAZETTEER OF THE WORLD FOR A FRONTISPIECE THE DICTIONARY CONTAINS THE FLAGS OF ALL NATIONS IN COLORS SUPPLEMENTARY MATTER Foreign Words and Phrases Alphabetical List of AbbreTiations Christian Names and their Sig< niflcatious Weights and Heasnres Forms and Address Legai and Loeai Hoiidays Postage and Postai Information How to Secure a Copyright How to Secure a Patent Ruies for Punetuation and Capi* taiization Facts Abont the President! State Statistics and Interesting Facts State Seals Fopniar Sobriqaets of Cities and Loeaiities Deriratlon of Geographies! Names How to Write a Letter Formal Letters Business Forms Common Errors in Spelling and Writing Parliamentary Rnles of Order Business Terms Delned Hythologicai and Classical Names Declaration of Independence Constitution of the United States Twentieth? EXAMPLES OF SOME OP THE NEW WORDS RADIUn ACETYLENE KHAKI aerograh LYDUITE ANTITOXIN COHERER VOLT BENZOZONE HALF-TONE BOYCOTT APPENDICITIS BOLO KOPJE MERCERIZED LINOTYPE ARGON TREK BCCKET-SHOP LINGERIE MEGAPHONE GRAFTER PING-PONG ACTOnOBILE DELSARTB BOODLE CINE1HAT06RAPH GRAPHOPHONB C The most modern dictionary published, answering every practical purpose of the home, school, office or work- shop. Handy in size; concise in contents; completely and well-illustrated; universal in vocabulary; encyclopedic in information. Large enough to be adequate, and small enough to be convenient to handle. Size 8x6j^xlJ^; 635 pages; weight SO oz.; printed on fine quality paper; first-class press-work from new type-set plates; handsomely and durably bound in Full American Sealo, flexible, with burnished red edges, complete with thumb index. OUR SPECIAL OFFER TO YOU Fill out the coupon at the bottom of this page, send it in to-day with your remittance and we will enter your subscription to THE BUSINESS MAN'S MAGAZINE for one year, and send you immediately this valuable volume all charges prepaid. If you are not entirely satisfied with the book after you get it, remember we will refund your money for the asking. THE BOOK-KEEPER PUBLISHING CO.. LTD. 302 W. FORT ST., DETROIT, MICH. Enclosed please find $1.75 for which enter my sub- scription to The Business Man's Magazine for one year and send me, all charges paid, copy of The Twentieth Cen- tury Dictionary in accordance with above offer. Send $2.00 and we will include a year's subscription to Home Study, also your choice of these 3 books : Factory Management ; Office Management; The Voucher System. Name Address Town State W/e^'ki:t^^}):i wigjg5^'i J LACEY SPEER TELLS you in a tangible, graphic way how to increase your sell- ing power. It shows how to bring your sales organization to the top notch of efficiency. It describes clearly, and in a way that you can grasp, the greatest selling plans— the biggest selling campaigns that have ever been inaugu- rated. The men who conceived these gigantic campaigns, the men who conducted them and brought them to a successful conclusion, are the very men who helped to build this money- making book. C Think of it! Over two hundred and fifty pages of boiled-down money-producing, money-earning methods, systems, schemes and ideas— and every one of them practical. This is the kind of knowledge that sticks. It's the kind you cannot get in the class room. It's the knowledge that comes from experience, and in SALES PROMOTION over twenty of the greatest sales generals give you in a clear, forceful way the benefit of their years of experience in the selling world. C SALES PROMOTION is the finger-post that points the way on the road to success. SALES PROMOTION has more reason for being than any other business book ever published. Your very welfare hangs on the one It's your duty^to yourself to learn all you can about selling plans and methods, and to develop to Learn from the ex- word SALES the very highest point of efficiency every latent spark of selling power that you possess perience of others to avoid the pitfalls that lie in your path. C If you are a sales manager, learn how the greatest sales organizations— selling powers that make their influence felt on every hand— spend hundreds and even thousands of dollars on a man, coaching him and drilling him in the essential features of his work before he is ever put out into a territory. Absorb the methods and plans of suc- cessful sales managers. Make it a study to help the man in the field with tactful, diplomatic letters that win. Let SALES PROMOTION show you how to inject all the live personality possible into your business correspondence. C Mr. Speer has done for SALES PROMOTION, what no author of any similar work has ever done. He has not only covered the established methods of personal and mail-order organizations, but he has also shown the proper relation of advertising to the sales department from every point of view.- This feature of the book alone is worth many times its cost. C. This book will help you. It will increase your selling ability. It will put commissions in your pocket and money in the cash drawer of your employer. It will do it now. Fill out the coupon below and send itto-dax, because you lose money every moment you delay. Remember you can get your money back for the askingif you are not satisfied. 8^°* During the next thirty days we will include a full year's subscription to Home Study, free, with every copy of Sales Promotion The Book-Keeper Publishing Co., Ltd., Detroit, Mich. Gentlemen :— Enclosed find $2.00, for wihch please send me on approval one copy of SALES PROMOTION; also enter my subscription to Home Study for one year. L Name l\ Address A^ Xsh. ^*^*® Manufacturing Cost is the subject of greatest interest to every manufacturer. He wants to know what it costs to make his goods, and he wants a system of cost finding that will give accur- ate results with as little labor as possible. "Manufacturing Cost" has been written for the man in the factory who wishes to devise a system of cost finding suited to his own requirements. It is not a description of the systems used in some particular concerns, but it tells how to organize a simple, efficient cost finding system for any factory. Manufacturing cost was selected as a text book by the International Accountants' Society, Inc., after examining every book published on the subject because it teaches the principles underlying a successful system of cost finding. Among the subjects treated in this little book are "Organization" (being a discussion of the proper organization of the factory) ; ''Cost Accounts and General Accounts," "Store Room" "Tool Room," "Pat- tern Shop," "Labor and Its Records," "Mechanical Devices" and a complete "Time Record and Pay-Roll System." The book is handsomely bound in half morocco — gilt top — marbled edges — price, $2.00 post paid. Say where you saw this Ad. and we will include a copy of "The Factory Manager" without extra charge. THE BOOK=KEEPER PUBLISHINe CO., Ltd. DETROIT MICHIGAN U. S. A. Two Great Book Offers Here are two sets of books, every one of which should be in the library of every business man. Office Library No. 1 *Thorne»s TTrentleth Century Book-keeping and Business Practice" $3.00 2.00 <« api>roval, one "Thorne^s 20th Century Book-Keeping and Business Practice," special De Luxe edition, in accordance with thirty-day offer — twelve lessons as described — one set of examinations. Send by express prepaid. Name Address Town State O. Be the Master of your own Ship— Uy your own course-THORNE'S BOOK POINTS THE WAY. A PRACTICAL SYSTEM HAND BOOK SY^rafI«S FOR BUSINESS MEN SelUng Systems Advertising Systems Accounting Systems Billing Systems Shipping Systems Cost Systems Loose-Leaf Systems Cliarging Systems Buying Systems Order Systems Piling Systems Stock Systems Insurance Systems Voucher Systems Delivery Systems Collection Systems Credit Systems ST^aeis FOR BOSINESS MEN THIS BOOK FREE TO SUBSCRIBERS THIS book of over 200 pages (55^x8) substantially bound in art boards contains complete working plans of more practical systems than were ever before condensed into the same space. The simple— time saving — confusion prevent- ing ideas, which hundreds of successful business and profes- sional men have found practical by actual test, are here clearly described and illustrated in every detail. It is not a collection of impractical theories involving complicated records— but the most simple systems for every part of your work. For months the experts of "The Business Man's Magazine" have been gathering the information contained in this book. They have had access to the files of the country's leading manufacturers of business systems; they have inspected the systems of the most progressive manufacturers, wholesalers, mail order houses, professional men, and public service corporations; they have consulted the most advanced public accountants and expert system men ; they have clipped the best system articles in business periodicals. From this vast store of brains they have selected; those systems proved best by test— these they have boiled down that you may have, ready for instant use, the simple systems that will make your every efiort more produc- tive—that will economize your time. You are offered, not merely the ideas of these five experts, but the practical busi- ness experience of over a hundred successful men. BUSINESS MANS MAGAZINE THE BOOK- DEEPER We will give you a copy of the Book with your subscription —New or Renewal— to The Business Man's Magazine AND The 3ook:»K:eeper Systems for Attorneys Banks Trust Companies Manufacturers Retailers Dentists Publishers SYSTEMS FOft BDSINESS MEN SEND YOUR SUBSCRIPTION TO-DAY The magazine that contains more practical business ideas than any other magazine in the world. Every issue is filled with money making — money saving— ideas for every business man. Its contributors are successful business men who tell you of the methods that have helped to make them successful. For more than seventeen years it has helped to create a higher standard in business methods, more simple systems for every depart- ment, more economical ways of doing your every day work. During the present season the subscription mail of "The Business Man's Magazine" has contained as many as 2,182 ORDQRS IIV A SIIVOL.B DAY, convincing evidence of the popularity of the magazine among business men. Regular departments in "The Business Man's Magazine"— each one edited by a specialist— in addition to the special articles which describe the systems used by the leaders in every line— are departments devoted to ADVERTISINQ— SALESMANSHIP— ACCOUNTINQ-BUSINESS SYSTEMS— SHORTHAND- BUSINESS LAW— FACTORY ORGANIZATION The entire field of business is covered— not a department is neglected— there is not a man in business who can- not gain many ideas of value in his own business from a year's issues. Sign* the coupon, take it to your newsdealer, or send it to us with $1.00 for a year's subscription to "The Business Man's Magazine," and we will give you a copy of the book "Tabloid Systems." Add 60c. for Forei8:n Postage For the enclosed $1.00 enter my subscription to " The Business Man's Magazine for one year, and send me, free of charge, a copy of "Tabloid Systems." THE BOOK-KEEPER PUBLISHING CO., Ltd. 49 W. Fort Street, Detroit, Mich. Name Address Town State. Business Let Me Ask ? a Question Do Vou Oliint more money m (JHY do you work overtime? Your boss don't care how hard you work. He wants results — wants the work done. If you could do your twelve hours work in seven hours he would be just as well satisfied — probably better. So why work overtime? Do you like it or would you prefer to stop? It's IJJ up to you. Now, Mr. Clerk or Mr. Book-keeper, [there's a way open to you which means less work and more money. There's a way for you to get the results of years of experience without wasting the years. There's a way of making yourself the absolute master of your profession— a way to become the best in your class and a way to get into a higher class. You want to know about it and we want to tell you. Hundreds have been helped to bigger places and better salaries — you can be if you will. Sign your name and let us tell you. The information is FREE. THE INTERNATIONAL ACCOUNTANTS' SOCIETY, INC. 203 W. Fort St., Detroit, Mich. Tell me your plan for bettering my position— the information to be FREE. NAME .• ADDRESS » TOWN AND STATE OCCUPATION INTERNATIONAL ACCOUNTANTS' SOCIETY, Inc. 203 W. Fort Street Detroit, Michigan U EVERY BOOK-KEEPER SHOULD POSSESS The Complete Accounting Library Do not pass this by because of the expense, as the Library can be secured any time on our EASY PURCHASE PLAN THE selection of text books included in the library, covers the whole field of up-to-date account- ing, leading from the first principles of book-keeping to the most advanced work They cover modern corporation and stock company accounting, commercial law, and the latest information on the subject of cost records in manufacturing, a subject with which all bookkeepers are now required to be acquainted in order that losses may be promptly detected. LIST OF Vp-to-Date Accounting and Book-keeping Thome's 20th Century Book-keeping and Business Practice $8.00 The latest, best and most practical text-book published on the subject. Soule's New Science and practice of Accounts 4.00 Expert Bookkeeping , .. 8.00 Short Methods, Proving Work, Locating Errors, Opening and Closing Books, Partner- ship Adjustments, Special Systems, etc., etc. Business Shortcuts 1.00 Short Cuts and Pointers for everybody. Corporation Accounting Keister's Corporation Accounting and Auditing 4.00 Corporation Stock Books, Formation of Corpo- rations and Trusts, Consolidations, Bond Issues, Sinking and Reserve Funds, Corpora- tion Law, Difficult Entries, etc., etc. Pointers for Stockholders 50 The Credit Man 2.00 The only publication on the subject of the Credit Man's duties and opportunities. Special Business Systems Accounting Systems for the Wholesale Grocery and Hardware Businesses. .. .50 Accounting for Department Stores 50 Accounting for the Retail Business 50 The Voucher System 50 AH profusely Illustrated. Include Sectionall- BOOKS: zatlon. Comparative and Departmental Rec- ords, Columnar Account Books, etc., etc. Time Record and Pay-Roll Systems. ..$ .50 Numerous illustrations of Time and Pay-RoU Books and Card Systems. Cost Accounting Hall's Manufacturing Cost 2.00 An exposition of the general principles of cost accounting and how they may be adapted to the requirements of different industries. Business Mathematics Soule's Philosophic Practical Mathe- matics 5.00 Contains solutions of thousands of business problems extending over the whole field of commercial experience. Averaging Accounts 50 The book-keeper will be glad to have this book in his library when called on for com- plicated equations. Checking or Proof Systems The Detroit Book-keeper's Balance System 50 How to do Without a Trial Balance 50 All kinds of methods of proving work on ac- count books are explained and illustrated in these two text books. Auditing Duties and Procedure of Auditors 50 A valuable treatise on the work required of accountants In cases of Amalgamation or Con- solidation of Corporations. Science and Practice of Auditing 1.00 Total Value. $30.00 Our Special Offers To approved purchasers we will furnish this complete Accounting Library for Only $24.00. payable $2.00 down and $2.00 monthly until full amount of purchase has been paid. The Library will be forwarded (express prepaid within the limits of l). S. and Canada) immediately on receipt of first payment. Should any purchaser already possess one ot more of the above listed text books he may deduct from amount of contract 80 per cent, of list price of such books. The Book-Keeper Publishing Co.* Ltd. Book-Keeper Building, DETROIT. MICHIGAN The Complete Accounting Library. INSTALLMENT ORDER FORM. 190. To The Book-Keeper Publishing Co., Ltd. DETROIT, MICHIGAN. Gentlemen: — Please find enclosed the sum of Two Dollars for which send me The Complete Accounting Library as described on the back hereof. I agree to pay the balance of Dollars in monthly install- ments of Two Dollars each on the following dates: MONTH DAY YEAR MONTH DAY YEAR 1st 190 1st 190 1st 190 1st 190 1st 190 1st 190 1st 190 1st 190 1st 190 1st 190 • 1st 190 And it it also hereby agreed that the Library shall remain the property of The Book-Keeper Publishing Co., Ltd., until the last installment has been paid, and that failure to pay any installment when due shall cancel this agreement and make the unpaid balance of the purchase price payable on demand. B. M.-2-06 Signature. Address... P»r full j^arfieulars af affer sm rtv*rst sid*. ^« BOOK IS nvE OK ^ r • ^"^^ '■ STAMPED B^J^^ DATE AN INlTiAi — — ■ OVERDUE *'°° °N THE spT/l "^"""TH ^"ENTH DAY ^j^-j J"N Q aS3S 2 ^ < or 3 ^ CO 01 >- a: r^ • o> u, < 00 ^ ct < m CM a U ^ QL u. CO f- 2 ^ 1