AUDITING STUDIES JOHN RAYiMOND WILDMAN 1917 THE WILUAM G. HEWITT PRESS 61-67 NAVY ST.. BROOKLYN. NEW YORK AUDITING STUDIES BY JOHN RAYMOND WILDMAN. M.C.S., C.P.A. PROFESSOR OF ACCOUNTING IN NEW YORK UNIVERSITY 1917 THE WILUAM G. HEWITT PRESS 61.67 NAVY ST.. BROOKLYN. NEW YORK \\f Copyright, 1917 BY JOHN R. WILDMAN FOREWORD In the preparation of students for entrance into the profes- sion of accountancy the teacher has to meet the criticism that such students are only theoretically trained. Theory is the logical foundation for practice; however, theory alone does not make for success any more than does practice without theory. The ideal instruction seems to combine theory with practice. It is with the idea of supplementing the theory contained in the author's text on auditing that the material in this syllabus has been arranged. From "Principles of Auditing^* one may learn the theory as set forth therein. Through the use of "Audit- ing Studies" one may see the application of the principles to the problems as they arise in practice. If the work is carried out in the study as outlined in the text the student should have a fairly complete set of working papers. To the classroom student even laboratory practice based on experience is theoretical and to such students so this study will appear. It is, however, to this class, that this work will be most helpful since it will enable them to take along into the field a set of working papers for reference purposes. John Raymond Wildman. New York University, January 4, 1917. 3G0398 JONES & PARKER Memo of Engagement No. 150 Certified Public Accountants Assigned to Office, January 4, 1915 1. Client, Warburton Desk Company 2. Address, 265 Broadway, New York 3. Conference, John Parsons, President 4. Letter, dated January 2, 1915 5 Telephone, Barclay 1894 6. Report to be addressed to. President 7. Account to be charged in ledger, Warburton Desk Com- pany 8. Examination to be made of, same 9. Where located, as above 10. Nature of business, manufacturer of desks. 11. Nature of work. Audit for the year ended December 31, 1914 12. When to be commenced, January 12, 1915 13. Probable time required, four weeks 14. Accountants required, c«ie senior 15. Rates, usual 16. Remarks, Report required not later than March 15, 1915 AUDITING STUDIES THE WARBURTON DESK COMPANY History Report on conversation with Mr. Hoyt, Secretary of the Warburton Desk Company relative to thd history of the com- pany. Mr. Hoyt stated : "The Warburton Desk Company was incorporated January 1, 1908 for the purpose of manufacturing desks and other office furniture. The stock of the company is held largely by the three men who organized it, Mr. Parsons, Mr. Davis and myself. We have all had more or less experience in work of this character. Mr. Parsons, the President of this company, has a controlling interest in the Parsons Desk Company, and Mr. Davis and myself operate the Davis-Hoyt Company, a company manufacturing chairs, costumers and other small articles of office equipment. The company has progressed nicely, making a satisfactory profit each year, but this year we do not seem to be doing as well as we should. Conse- quently we called you in to look things over." Cash Count of the cash on hand at 6 P. M., January 12, 1915, showed the following: Checks Anderson & Bailey, 1/10/15 $325.00 Crane & Goddard, 1/ 7/15 50.00 W. W. James, 1/ 9/15 150.00 Desk Supply Company, 1/25/15 100.00 Walters & Thomas, 1/13/15 32.15 $657.15 S *£ * ^rt Auditing Studies Currency : $5.00 Bills 7 $35.00 1.00 Bills 5 5.00 Half-Dollars 3 1.50 Quarters 2 .50 Ten-Cent Pieces 11 1.10 Pennies 4 .04 43.14 25.00 I. O. U. of Cashier, dated 12/15/14 Check of P. F. Williams, dated 11/30/14, with nota- tion of bank on it, "Not sufficient funds" 110.00 English sovereign 4.86 Total $840.15 Petty Cash Count of petty cash on hand at 6.20 P. M., January 12, 1915, showed the following : Bills: $10.00. 20 $200.00 180.00 5.00. 36 1.00. 47 47.00 $427.00 Silver: $ 0.50. 25 $12.50 .25. 46 11.50 .10. 116 11.60 .05. 84 4.20 .01. 126 1.26 41.06 Vouchers : Nos. 620 Dated 1/ 4/15 $10.00 1 t( ft 1.25 2 it 1/ 5/15 3.63 3 tt tt 1.28 4 it 1/ 7/15 4.20 5 it tt .61 6 tt 1/11/15 6.20 7 « (( 2.38 8 « 1/12/15 1.62 9 otal . . It « .77 31.94 T $500.00 4 Auditing Studies The cash book for January, 1915, which included the trans- actions of January 12, 1915, was footed by the accountant with the following result : Debit side $51,287.10 Credit side 5,625.50 Inasmuch as the pass-book had not been balanced since November 30, 1914, the accountant had it sent to the bank to be balanced as of January 12, 1915, and at the same time sent a request to the Packard Place Bank for a certificate as to the amount on deposit to the credit of the Warburton Desk Com- pany on January 12, 1915. The bank responded with a certifi- cate showing the balance on January 12, 1915, to be $49,794.46, (which included interest credited December 31, 1914, amounting to $48.50). The bank also returned to the Warburton Desk Company the balanced pass-book, together with the cancelled vouchers. The following facts were ascertained by the accountant: The currency on hand January 12, 1915, was received as the result of cash sales on that date. The checks listed below had been issued, but had not as yet passed through the bank : Nos. 14819—2/ 4/13, A. B. Smith $100.00 22615 — 1/ 7/15, The Rappaport Hinge Company 160.25 22620-1/ 8/15, The Broun-Green Company 22.50 22636—1/10/15, William Fisher 400.00 22638—1/10/15, The Ironton Screw Company 52.26 22640—1/11/15, Wm, Harrison Company 2.60 22641—1/11/15, The Pacific Novelty Company 5.20 22642—1/11/15, The Underwood Typewriter Co... 1.00 22643—1/12/15, The Anson- Ackroyd Company 175.00 Total $918.81 The check issued to A. B. Smith was in payment for serv- ices. A letter sent to Smith December 10, 1914, to his last- known address was returned by the post-office, marked "not known." 7 Auditing Studies Among the cash receipts for January, 1915, was a check from the Canadian Desk Company, received on January 11, 1915, for $252.20. The custom of the bank is to accept checks on Canada for collection only, and not to credit them until collected. A comparison of the daily receipts and deposits for the month of January, 1915, revealed the following: Receipts. Deposits. January 4 $1,506.21 $725.05 5 1,225.17 1,506.01 6 605.00 1,225.17 7 2,160.10 604.50 8 1,600.25 2,160.00 9 503.98 1,600.25 11 728.26 503.78 12 700.29 728.16 $9,029.26 $9,052.92 It is the custom of the bank to deduct exchange from the face of the deposits. The above differences are the result of this practice. It was also ascertained in a similar way that the exchange deducted from the face of the deposits during December was $3.50. On December 27, 1914, a note of Lyle & Company, of New- ark, N. J., dated 11/1/14, due 1/1/15, without interest, for $3,- 000, was sent to the bank for collection. The bookkeeper stated that he had heard nothing from the bank regarding this note. It also developed that on December 15, 1914, the Warbur- ton Desk Company had drawn at sight on the American Supply Company for the amount of their account, $1,262.50. The bookkeeper also stated that he had heard nothing regard- ing this draft. The note clerk at the bank stated, over the phone, that this item had been credited on December 20, 1914. Notes Receivable An examination of the notes receivable showed the follow- ing notes on hand : 8 Auditing Studies Desk Supply Company, dated April 1, 1914, due October 1, 1914, $843.72; interest at 6 per cent, (protest charges $2.31, paid out of petty cash and charged to "General Expense.") $843.72 (1) Canadian Desk Company, dated September 1, 1914, due February 1, 1915, with interest at 6 per cent 2,500.00 (2) Canadian Desk Company, dated October 1, 1914, due March 1, 1915, with interest at 6 per cent.. . 1,000.00 Walters & Thomas, dated October 1, 1914, due Feb- ruary 1, 1915, with interest at 6 per cent 2,000.00 (1) Endorsed by James Simpson, President of the Canadian Desk Company ; (2) not endorsed. Securities A "Securities Owned" record gave the following informa- tion relative to purchases of such securities as were claimed to be held : August 22, 1913, 5M Denver & Rio Grande 1st refunding 5's, 1955 Int. F. & A. at 73}i, $3,656.25, and interest $14.58; Sep- tember 2, 100 shares Pa. R. R. (par $50) at UU^, plus 5^, $5,581.25; September 23, 50 shares Norfolk & Western com- mon at 105%, plus ys, $5,300; October 3, 2M Erie 50-year conv. 4's series B, 1953, A. & O. at 69^^, $1,390, and interest $0.45; November 19, 80 shares D. & H. at 150>^, plus %, ex. dividend, $12,050; November 21, 7M L. & N. Unified Gold 4's, 1940, J. & J. at 92%, $6,466.25, and interest $108.89; November 21, lOM M. K. & T. 1st gold 4's, 1990, J. & D. at 88%, $8,862.50, and interest $188.89 ; December 1, 25 shares A. C. L. common at 123J^, plus %, $3,090.63; January 23, 1914, 5M B. & O., P. L. E. & W. system ref. 4's 1941, M. & N. at 87, $4,350, and interest $45.56; February 13, 5M Cent, of N. J. gen. gold 5's, 1987, J. & J. at 117, $5,850, and interest $29.17; May 8, 8M A. T. & S. F. gen. gold 4's, 1995, A. & O. at 95%, $7,650, and interest $32.89; May 8, 4M A. C. L. 1st gen. 4's, July, 1952, M. & S. at 94l^, $3,770, and interest $29.78; May 29, 3M C. M. & St. P. conv. 4^'s, 1932, J. & D. at 102%, $3,063.75, and interest $66.75 ; June 26, 5M C. B. & Q. Ill, div. 4's, 1949, J. & J. at 95y2, $4,775, and interest $97.22; June 26, 5M L. T. Ins. Gtd. Mtge. 5% ctfs. J. & J. at 100, $5,000, and interest $121.53. 9 Auditing Studies A visit was made to the safe deposit vault with the Treas- urer and the securities were found intact. It was found that dividend and interest receipts on all securities had been credited to income. A trial balance of the general ledger was taken, with the following result : THE WARBURTON DESK COMPANY Trial Balance 12/31/14 Folio Debits Credits 1 Land and buildings $350,000.00 2 Machinery and tools 67,581.49 3 Horses, wagons and motors. .. . 4,056.51 4 Furniture and fixtures 6,352.40 5 Securities owned 81,591.34 6 Treasury stock 5,000.00 7 Patents, trade marks & good will 34,157.41 8 Cash 42,257.84 9 Petty cash 500.00 10 Customers 226,664.83 11 Drafts and notes receivable. . . . 9,343.72 12 Subscribers to capital stock 7,280.00 13 Sinking fund 400.00 14 Discount on bonds 9,958.34 15 Legal expense deferred 1,250.00 16 Organization expense 995.03 17 Moving expense 926.00 18 Advertising paid in advance. . . . 213.81 19 Freight on consigned goods .... 27.93 20 First mortgage bonds $160,000.00 21 Loans payable 58,000.00 22 Accounts payable 1 16,181.22 23 Notes payable 18,905.00 24 Capital stock preferred 286,500.00 25 Capital stock common 225,000.00 26 Sales 177,276.31 27 Cash sales 243.27 10 Auditing Studies 28 Purchases 65,017.52 29 Freight account 1,472.94 30 Labor 47,847.72 31 Factory account 20,270.53 32 Selling expense 18,498.18 33 Salaries of officers 22,575.25 34 Salaries of clerks 13,926.47 35 Stationery and printing 1,527.00 36 Postage 1,243.28 37 Telegraph and telephone 485.26 38 General office expense 2,732.14 39 Legal expense 1,750.00 43 Interest 11,724.42 44 Rent— New York office 1,200.00 45 Insurance 2,563.75 46 Taxes 4,410.00 47 Royalty 726.39 48 Provisions for depreciation — horses, wagons and motors. . . 2,095.74 49 Provision for depreciation — furniture and fixtures 1,769.95 40 Interest on bonds 1,935.00 41 Dividends on stock 1,495.00 42 Commission 337.24 50 Profit and loss surplus 24,520.15 $1,070,393.19 $1,070,393.19 Reading the Minutes While reading the minutes of the board of directors notes were made of the following non-routine transactions : January 15, 1908. — It was regularly moved and seconded that the sum of $10,000 be paid to Mr. Parsons for his services in organizing the Warburton Desk Company, and that the payment of the $10,000 be made in preferred stock of the com- pany. Motion carried. January 15, 1909. — On motion the board of directors accepted with thanks the donation by Mr. Parsons of $10,000 of preferred stock of the Warburton Desk Company for the purpose of creating a surplus on the books of the company. II Auditing Studies January 15, 1911. — On motion the treasurer was authorized to loan to the Parsons Desk Company the sum of $50,000, and to the Davis-Hoyt Company the sum of $20,000. January 15, 1914. — Mr. Davis moved that inasmuch as the disbursements of $25,000 for advertising during 1911, 1912 and 1913 was solely for the purpose of acquainting the public with the trade mark and product of the company, that this amount be set up as good will, as of December^ 31, 1913. Motion seconded by Mr. Hoyt and carried. Errors Disclosed by the Mechanical Work Invoice of Thompson & Co., January 24, 1914, $245.22, entered in Purchase journal as $245.22, paid by check No. 18234 as $254.22. Invoice of F. A. Ridgway, February 16, 1914, $10.25, entered in Purchase journal as $10.00 and paid as $10.00, check No. 18598. Invoice of Samuel Scarborough, Inc., July 2, 1914, $101.50, entered in Purchase journal as $101.50, paid by check No. 20010 as $110.50. Invoice of Holbrook & Byers, July 24, 1914, $61.24, entered in Purchase journal as $61.00, and paid as $61.24, check No. 20154. Invoice of T. A. Decker, July 25, 1914, $754.38, entered in Purchase journal as $754.38, paid as $754.18, check No. 20175. Invoice of Ramsay & Quick, July 28, 1914, $223.32, entered as $225.52 in the Purchase journal, paid as $225.52, check No. 20198. Invoice of Thompson & Co., July 30, 1914, $112.45, entered as $121.45 in Purchase journal, paid as $112.45, check No. 20222. Invoice of Read & Co., August 2, 1914, $105.00, entered as $105.00 in Purchase journal, paid as $100.00, check No. 20268. Invoice of C. B. Hall Company, October 5, 1914, $150.44, entered as $154.44 in Purchase journal, paid as $150.44, check No. 21510. Invoice of Ferris & Ferris, November 2, 1914, $22.62, entered in Purchase journal as $23.62, paid as $23.62, check No. 21980. 12 Auditing Studies Invoice of T. A. Decker, November 14, 1914, $315.55, entered as $315.05 in Purchase journal, paid as $315.05, check No. 22006. Invoice of Johnson Brothers, July 30, 1914, $110.25, was paid August 14, 1914, check No. 20424. This same invoice was included by Johnson Brothers on a statement rendered Sep- tember 2, 1914, and was again paid September 12, 1914, check No. 21061. On the following invoices no discount had been deducted: Invoice of : Date. Amount. Paid. Terms. H. W. Mack, Jan. 15 $150.00 Feb. 11. . . .1/30 Read & Co., " 21 55.26 " " . . . . 1/30 Smith & Smith, Feb. 4 210.00 " " . . . . 2/10 S. M. Knight, " 5 100.00 March. 12. .. .2/60 E. E. Hall, April 10 563.24 May 10. . . .2/10 EOM Holbrook&Co., June25... 201.50 Aug. 10.... 2/60 Read & Co., July 31 50.00 " "... .2/10 S. S. Cook, Oct. 25 44.20 Nov. 10 ... . 1/30 In distributing the purchase invoices, the following errors were noted : February 15. — Thompson & Co., $156.25, page 42 of Pur- chase Journal, entered in "General Office Expense." Should have been entered as "Selling Expense — Advertising." June 30, 1914. — Ajax Trucking Company, $54.50, page 64 of Purchase Journal, entered as "General Office Expense." Should have been charged to "Freight (inward)." July 30, 1914.— Smith & Smith, $150.00, page 64 of Purchase Journal, entered in "Accounts Payable" column as $150.00, but in "Stationery and Printing" column, to which it was dis- tributed, is was entered as $160.00. August 2, 1914.— William L. Brown & Co., $5.20, page 68 of Purchase Journal, entered in "Postage" instead of "Stationery and Printing." August 3, 1914.— F. A. Ridgway, $110.00, page 68 of Pur- chase Journal, entered in "Accounts Payable" as $110.00, but distributed to "Selling Expense — Advertising" as $100.00. In footing the Purchase journal the following errors were found : January, 1914, page 34, "Accounts Payable" column over- footed $10.00. 13 Auditing Studies January, 1914, page 36, "Selling Expense" (advertising) column overfooted $10.00. March, 1914, page 50, "Accounts Payable" column over- footed $1.30. Crossfooting for March out $1.30. July, 1914, page 64, "Stationery and Printing" column underfooted $10.00. August, 1914, page 72, "Telegraph and Telephone" column overfooted $10.00. In footing the sales book, which was simply a summary of sales, the errors detailed below were found : January, 1914, page 4, underfooted $80.00. March, 1914, page 16, underfooted $0.99. September, 1914, page 52, overfooted $10.01. October, 1914, page 55, overfooted $1.00. December, 1914, page 61, overfooted $20.00. In footing the cash book : October, 1914, Receipt side: "Accounts Receivable" col- umn overfooted $10.00. July, 1914, Disbursement side. "Accounts Payable" column overfooted $10.00. An entry was found in the journal under date of December 31, 1914: Expense $0.01 To Accounts receivable $0.01 To adjust control to subsidiary accounts. The footing of the column in the Purchase journal "General Expense" in July, 1914, $210.78, was posted to the "Postage" account. In the journal entry of November 16, 1914: Accounts payable $3,910.00 To Notes payable $3,910.00 The debit was posted correctly, but the credit was posted as $3,905. The footing of the sales for March, $18,518.20, was debited to customers and credited to sales as $18,578.20. The footing of the sales for July, $13,121.52, was posted to the debit of customers as $13,121.52, but was posted to the credit of sales as $13,125.12. 14 Auditing Studies On the credit side of the "General Expense" account an item of $0.10 was found under date of December 31, 1914, with no posting reference. Inquiry of the bookkeeper devel- oped the fact that at December 31 his ledger was "out" $0.10 and that he had forced the balance. ^ Inventory i The inventory of December 31, 1914, was checked as to extensions and footings. The Secretary of the company certi- fied that the inventory represented only the materials and goods on hand at the plant, as ascertained by actual count. The totals of the inventory were : Raw material $12,192.50 Goods in process 6,412.62 Finished goods 7,112.82 The following information relating to the accounts in ques- tion was obtained by analysis : Land and Buildings, $350,000. This account represents a parcel of land (500x600 feet) located in Long Island City, acquired in October, 1911, for cash in the amount of $60,000, and used for factory purposes. A deed to the property is found among the company's papers, but has never been recorded. Building operations were begun immediately after the acquisition of the land and were com- pleted in May, 1912, at which time the cost of the brick and concrete buildings erected was $210,762.59. Additional charges have been, 1912, $22,162.50; 1913, $25,723.98, and 1914, $11,542.67. The assessed value of the property was in 1914, $245,000, an increase of $20,000 over the previous year on the strength of which the company's auditor instructed the book- keeper to write up the land and building account to $350,000. In 1913 an end wall of one of the concrete buildings sloughed partly oflf and $2,527.74, included in the above, represents the cost of replacing it. No depreciation has been charged off because of the fact that the buildings are of brick and concrete. Machinery and Tools, $67,581.49. The balance in this account represents purchases of machinery and tools amounting to $93,426.23, plus cost of 15 Auditing Studies installing, $783.42; less depreciation, $26,628.16. The pur- chases by years and months are as follows : 1912 — Prior to June 30, $83,528.96, plus installation, $783.42. 1913— January, $2,347.80; May, $92.50; November, $2,284.09; total, $4,724.39. 1914_February, $4,233.24; December, $939.64; total, $5,172.88. The rate used in computing depreciation was 12 per cent, per annum, and additions were treated as beginning at the first of month in which shown. For example, the depreciation on the additions of January, 1913, was figured from January 1 — the full year. Employes of the company spent time equal to $145 and used material which cost $97.38 in setting up new machines in February, 1914. These items are not included in the above. Small tools amounting annually to $688.24 and $574.32, respec- tively, have, beginning with 1913, been charged to expense (factory account). Inventories of such tools showed on December 31, 1913, $324.50, and on December 31, 1914, $418.75. Horses, Wagons and Motors, $4,056.51. A transcript of the account is as follows: 1914. 1914. Jan. 1 Balance ...$3,227.00 July 14 C-27 $15.00 May 25 P. J. 22. . . . 2,437.00 Dec. 31 J-14 2,095.74 Oct. 19 P. J. 42. . . . 237.50 Balance 4,056.51 Oct. 30 P. J. 42.... 265.75 $6,167.25 $6,167.25 1915. Jan. 1 Balance ....$4,056.51 The balance at the beginning of the account, ($3,227), represents two draft horses at $350 each, purchased June 1, 1909; one double set of harness in the amount of $65, pur- chased August 1, 1913; one horse truck purchased for $187 on October 15, 1912; one motor truck (No. 2) purchased on November 10, 1912, for $2,275. The subsequent debit entries cover respectively: one motor truck No. 3; repairs to motor truck No. 1, which had been entirely written off prior to Jan- uary 1, 1914, but which with ordinary repairs will probably i6 Auditing Studies last two or three years, and in consideration of the respective service may reasonably be considered worth $500; and extra parts. The credits are: Sale of old harness ($15), which harness is not the same as that included in the analysis of items on the debit side, and depreciation ($2,09574). The depreciation has been computed on the motor trucks at the rate of 33% per annum. That on No. 2 began to run Nov. 1, while that on No. 3 was figured from June 1. Furniture and Fixtures, $6,352.40. This amount is represented by the following account: 1914. Dec. 31 J-14 $1,769.95 Balance 6,352.40 1914. Jan. 1 Balance . . . $7,229.83 Jan. 31 P. J. 8... 300.00 Mar. 31 P. J. 17... 185.00 July 31 P. J. 30... . 325.00 Dec. 31 P. J. 52... 82.50 $8,122.35 $8,122.35 1915. Jan. 1 Balance ...$6,352.40 The balance at the beginning of the year is made up as follows : New York office : Furniture, being written oH at the rate of 10% per annum, $965.56, representing 45% of original cost; office equipment, being written off at the rate of 20% per annum, $516.23, representing 20% of original cost; rugs, be- ing written off at the rate of 10% per annum, $120, repre- senting 55% of original cost; office partitions, $513, repre- senting original cost ($540), less amount applicable to the months of October, November and December, 1913, original cost to be written off over the period of a five-year lease be- ginning Oct. 1, 1913. Factory office : Furniture, being written off at the rate of 10% per annum, $4,025.79, representing 85% of original cost; office equipment, being written off at the rate of 20% per annum, $1,089.27, representing 50% of original cost. Subsequent debits are: $300, efficiency engineer plan- ning arrangement of factory office; $185, internal office tele- phone system, New York office; $325, indirect lighting sys- tem, New York office ; $82.50, new directors' table. New York, 17 Auditing Studies $80; carpenter setting up and adjusting same, $2.50. The credit, in the amount of $1,769.95, represents depreciation for the year 1914. Treasury Stock. 1909. 1909. Jan. 15 J-2 $10,000 Mar. 15 C-1 $5,000 1914. Dec. 31 Balance 5,000 $10,000 $10,000 1915. Jan. 1 Balance .... $5,000 The credit represents the proceeds of the sale of 60 shares at 83 1/3. Patents, Trade Marks and Good- Will. 1910. 1912. Feb. 1 P. J. 4... $5,000.00 Feb. 1 C-6 $756.21 1911. 1914. Feb. 1 P. J. 24... 4,000.00 Dec. 31 Balance ..$34,157.41 Mar. 1 P. J. 18... 297.42 1912. Jan. 1 P. J. 1... 616.20 1913. Dec. 31 J. 30... 25,000.00 $34,913.62 $34,913.62 1915. Jan. 1 Balance ..$34,157.41 The debits represent, respectively, a patent for a drawer lock purchased from John N. Thomas, $5,000, patent granted Nov. 1, 1908; patents, granted Feb. 1, 1909, for a wood polish- ing machine, purchased from the Parsons Desk Co. for $4,000; expense of securing trade mark, $297.42; expenses of suit brought by the Warburton Desk Co. to protect the wood polishing patent from infringement; cost of an advertising campaign during 1911, 1912 and 1913 to acquaint the public with the company's product. The credit ($756.21) represents a judgment obtained and collected in the suit to protect the wood polishing patent. i8 Auditing Studies Customers, $226,664.83. A transcript of the account is as follows : 1914. Debit Side Jan. 1 Balance $139,214.36 Jan. 31 Sales SJ5 17,610.24 Feb. 28 " SJ9 16,861.46 Mar. 31 " SJ16 18,578.20 Apr. 30 " SJ24 16,340.22 May 29 " SJ30 17,612.50 June 30 " SJ37 17,027.61 July 31 " SJ42 13,125.12 Aug. 31 " SJ46 12,482.56 Sept. 30 '' SJ52 12,001.29 Oct. 31 " SJ55 12,891.31 Nov. 30 " SJ58 14,651.04 Dec, 10 Bonds Payable J64 150,041.66 Dec. 31 Sales SJ61 11,520.12 $469,957.69 1914. Credit Side Jan. 31 Cash C3 20,106.38 Feb. 28 Cash C7 16,521.91 Feb. 28 Sales returns SRI 836.50 Mar. 31 Cash Cll 17,622.60 Mar. 31 Sales allow SAl 461.20 Apr. 3 Notes receivable J51 843.72 Apr. 30 Cash C15 19,060.20 May 29 Cash C19 17,621.92 May 29 Sales allowances SA2 312.17 May 29 Sales returns SR2 1,017.98 June 30 Cash C23 16,222.12 July 31 Cash C27 15,120.12 Aug. 31 Cash C31 15,510.16 Aug. 31 Sales returns SR2 595.78 Sept. 2 Notes receivable J60 2,500.00 Sept. 30 Cash C35 11,238.60 Oct. 2 Notes receivable J61 1,000.00 Oct. 2 Notes receivable J61 2,000.00 Oct. 31 Cash C37 11,120.10 19 Auditing Studies Credit Side — ^^Cont'd Oct. 31 Sales allowances SA2 201.73 Nov. 3 Notes receivable J63 3,000.00 Nov. 30 Cash C41 10,215.10 Dec. 10 Cash (from bankers on bonds) C45 50,041.66 Dec. 31 Cash C45 10,122.90 Dec. 31 Expense J64 .01 Dec. 31 Balance 226,664.83 $469,957.69 The opening balance consisted of: Advances to allied companies: Parsons Desk Co $50,000.00 Davis-Hoyt Co 20,000.00 $70,000.00 Advances to salesmen : Frank Hutchinson (still employed) $2,760.00 Willard Brown (who severed his connection with the Warburton Desk Co. July 1, 1914 — collection of account improbable) 5,200.00 7,960.00 Customers' balances 61,254.36 $139,214.36 An examination of the accounts in the customers ledger at the time of checking the trial balance of this ledger gave the following information: Month during which Name. goods were purchased. Remarks. Amount. American Supply Co November $1,262.50 Anderson & Bailey December 3,627.42 Acme Furniture Co December 2,527 . 50 J. H. Barlow November 1,136 . 25 Bristow & Myers December 591 . 20 Canadian Desk Co October 1,672 . 71 Crane & Goddard November 3,420.16 Deering & Co December 80.00 Desk Supply Co September 562.00 T. J. Donshea December 829.50 20 Auditing Studies E. & T. Desk Co .December 28.86 Evarts & Brown Credit Balance, $100. Fink, Ryan & Heal October 1,521.92 French & French December 62. 15 Theo. Card August 1,415.92 A. E. Gilkey November 1,627.32 Goldstein & Cohen December 46.20 Harris Brothers & Co.. . .October 2,615.80 The Hawthorne Co December 2,036.25 Henderson & Smith Credit Balance, $57.21. W. W. James November 2,136.20 The Lane Co Consignment 4,632. 18 Marston & Co October 612.40 Miller Desk Co June .16 S. M. Noyes December 58.50 Office Supply House Consignment 2,210.60 Post & Bro December 112.24 Raymond & Co October, 1913 2,416.81 Riland & Hulbert November 3,648.63 Sole & Sole October 792.98 Stern & Co December 5,628.50 Tillotson & Son December 26.50 Victor Desk Co January 2.00 Walters & Thomas November 1,420.68 T. R. Young December 100.00 $48,862.04 Credit Balances... 157.21 $48,704.83 Terms on which goods are sold, 30 days. Investigation of the consignment accounts showed that the goods which were consigned to the Lane Co. ($4,632.18) and the Office Supply House ($2,210.60) represent desk fit- tings which had previously been consigned to the Warburton Desk Co. by J. Entwhistle & Son at $4,632.08 and T. J. Smith at $500. Conversation with the credit man revealed the fact that Raymond & Co had been petitioned into bankruptcy Nov. 20, 1913, and after payment of a first and final dividend of 15% 21 Auditing Studies on Aug. 1, 1914, was discharged from bankruptcy Dec. 12, 1914. The credit man also stated that the experience of the company showed that the bad debts amounted to about 2% of the gross sales. Subscribers to Capital Stock, $7,280. This account represents the balance due on preferred stock to the extent of $11,500 sold to employees at par during 1914. The subscriptions are payable in monthly installments of $5 per share. The stock itself has not been issued, although when "subscribers to capital stock" was debited, "capital stock preferred" was credited with $11,500. Sinking Fund, $400. A clause in the mortgage governing the issue of the first mortgage bonds provides that a sinking fund shall be estab- lished to provide for the payment of the bonds at maturity (Dec. 1, 1939). The $400 in the sinking fund represents the first monthly payment, the check for which was deposited Dec. 31, 1914. Discount on Bonds, $9,958.34. Representing the discount on the first mortgage bonds issued Dec. 1, 1914. (See also First Mortgage Bonds a/c). Legal Expense Deferred, $1,250. Represents the deferred portion of a retainer of $3,000 for legal services June 1, 1914, to May 31, 1915, paid in advance. Organization Expense, $995.03. Expense incident to organization incurred in 1908. Allowed to remain on the books at the original figure. Moving Expense, $926. During February, 1914, the Warburton Desk Co. pur- chased from an allied company a number of wood turning machines. The cost of the machines was $4,233,24 and the cost of moving them $926. Advertising Paid in Advance, $213.81. This covers payment for advertisements to appear in January and February, 1915. 22 Auditing Studies Freight on Consigned Goods, $27.93. Under an agreement with T. J. Smith, who consigned to the Warburton Desk Co. $500 worth of desk fittings, he is to reimburse the Warburton Desk Co. for any freight charges in connection with the reconsignment of this merchandise. The charge in this account represents the cost of freighting the fittings to The Lane Co. Purchases, $65,017.52. An analysis of the account showed: 1914. Debits. Jan. 1 Balance.. $15,277.02 Inventories on hand : Raw material (at cost) $6,524 . 36 Goods in process (estimated) 3,115.26 Finished goods (at cost) 5,637.40 $15,277.02 Jan. 31 P. J. 4. . $17,340.20 Purch. of lumber, etc., in Jan. Mar. 31 P. J. 16.. 9,430.88 " " " " "Mar. June 30 P. J. 28.. 10,160.25 " " " " "June Oct. 31 P. J. 60.. 8,240.60 " " " " " Oct. Nov. 30 P. J. 70.. 7,140.28 " " " " "Nov. Total Debits . . . $67,595 . 23 Credits. Apr. 30 P. R. 3.. $1,040.00 Purchase returns. Oct. 31 P. R. 8.. 1,537.71 Purchase allowances. Total Credits... $2,577.71 Balance $65,017.52 Among the contracts found in the contract file was one with the Michigan Lumber Co. for deliveries of lumber on the 15th of October, November, December, January, February and March. Inquiries revealed the fact that a bill of lading and an invoice for $7,250.28 had been received Dec. 19, 1914, but as the lumber was in the freight yards at Long Island City on Dec, 31, 1914, the invoice was not taken up on the books. 23 Auditing Studies Freight Account, $1,472.94. Represents inward freight and cartage, $896.23; outward freight and cartage, $576.71. Labor, $47,847.72. Represents labor paid during 1914. The payroll for week of Jan. 3, 1914 ($708.25) included $476.50 applicable to Dec. 29, 30 and 31, 1913. The payroll for the week of Jan. 2, 1915 ($965.20) included $860, applicable to December, 1914. Factory Account, $20,270.53. Analysis of account showed that it consisted of the follow- ing: Superintendence, $6,000; small tools, $574.32; heat, $258.13; light, $483.28; power, $1,837.68; depreciation,$l 1,1 17.12. Selling Expense, $18,498.18. Analysis of account showed: Commissions, $12,843.26; traveling expenses of salesmen, $1,132.47; advertising, $4,522.45 ($4,736.26 minus $213.81). Salaries of Clerks, $13,926.47. New York office, $7,643.20. Factory office, $6,283.27. Legal Expense, $1,750. Paid $3,000 June 1, 1914, for year June 1, 1914— May 31, 1915, less deferred $1,250. Interest, $11,724.42. Analysis of the account showed: Cash discount on sales, $3,126.50; interest on bond issue of Parsons Desk Co., $5,000. (This represents an advance to the Parsons Desk Co. on Oct. 1 at a time when the Parsons Desk Co. was unable to meet the maturing interest on its bonds. It was made to protect the loan of $50,000 to this company and the bookkeeper was instructed to charge it off, as the officers of the Warburton Desk Co. did not expect that it would ever be returned) ; in- terest on loans payable, $3,480; interest on notes payable, $826.43; interest on notes receivable, $524.17; interest on bank balances, $184.34. Insurance, $2,563.75. The insurance register showed the following policies : New York office: Fire, term one year; expires Oct. 1, 1915; premium paid, $63.75. 24 Auditing Studies r^ > - ' '.':':: /; Employers' Liability: Factory, term one year; expires Jan. 1, 1916; rate, $.25 per $100 wages paid and $.10 per $100 salaries paid clerks and superintendent. Premium paid Jan. 1, 1914, $100. Factory: Blanket policy insuring against loss by fire; buildings, $250,000; machinery and tools, $60,000; raw ma- terial, goods in process and finished goods, $15,000; horses, wagons and motors, $4,000; furniture and fixtures, $4,000. Excerpts from policy (taken when reading it). Insurance carried under a "mutual" plan. Warburton Desk Co. paid June 30, 1914, on $323,000 at a rate of $2.4768 per $1,000 per year; three-year term, $2,400. Experience of this group of mutuals shows net cost of carrying members' insurance $.33 per $1,000 per year. At expiration of policy, after distributing pro rata this cost of carrying, the balance of the $2,400 is to be returned to the Warburton Desk Co. Under terms of policy, the Warburton Desk Co. insurance is, however, contingently liable in addi- tion to the premium paid for an amount equal to the premium, namely, $2,400. First Mortgage Bonds, $160,000. Represents the issue of 6% twenty-five-year bonds on December, 1914; sold to brokers at 93 3/4, but shown on the companies' books as $150,041.66. The $41.66 represents mis- cellaneous expenses in connection with the issue chargeable against the brokers, but erroneously considered and treated by the bookkeeper as having affected the account for bonds. Accounts Payable, $116,181.22. Contains $50,000 loaned to the company by the President. Notes Payable, $12,916. July 1,1914 Due March 1, 1915 $5,000 Int. 6% Aug. 31, 1914 Due March 1, 1915 5,000 " " Sept. 30, 1914 Due April 1, 1915 5,000 " " Nov. 16, 1914 Due May 16, 1915 3,910 " " Capital Stock Preferred, $286,500. Capital stock preferred authorized Jan. 1, 1908, at organi- zation of company, 3,000 shares of par value of $100, $300,000. 25 ^A 1 1' ^\'*J^\'^ "fs I ..J /'■^""I' ^^Auditing Studies Capital Stock Common, $225,000. Authorized, 3,000 shares of a par value of $100, $300,000. Issued and outstanding, $225,000. Sales, $177,276.31. Sales to customers, $173,858.89; consignments made, $6, 842.78; sales returns, $2,450.26; sales allowances, $975.10. Cash Sales, $243.27. Contains the proceeds of the issuance of 267 locker keys to employees at $.25 each. Deposit to be returned upon sur- render of keys. From the above statement of facts prepare: (a) Complete working papers covering the audit. (b) Report to be rendered as i>er engagement blank. 26 3G0398 UNIVERSITY OF CALIFORNIA UBRARY UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW Books not returned on time are subject to a fine of 50c per volume after the third day overdue, increasing to $1.00 per volume after the sixth day. Books not in demand may be renewed if application is made before expiration of loan period. MAY 31 1918