nni'i,' !' m i-hii if? f,>'i,t «) i m ^fttti: illlffi " w i ■I.i I.I ,li ',1) I' pii!l|i:;p!;>fi,,!i,iiiirfii'.!i Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/cpaauditingquestOObentrich C. P- A. Auditing Questions To January i, 19 14 Comprising All the Available Examination Questions in Auditing That Have Been Set by C. P. A. Examining Boards Up To and Including December 31, 191 3 COMPILED BY HARRY C. BENTLEY, C. P. A, NEW YORK THE RONALD PRESS COMPANY 1914 .i""'' y^^°-^^ Copyright, 1914, BY HARRY C. BENTLEY The William G. Hewitt Pre« Brooklyn, New York PREFACE This compilation involved the inspection of the avail- able C. P. A. questions in auditing, which have been set up to January 1, 1914, by boards of examiners of the thirty-two states having C. P. A. laws. Duplicate questions have been eliminated, the questions retained being credited, as far as possible, to the state boards by which they were originally propounded. In some cases questions are included which partially duplicate others but which include some essential features not stated elsewhere. It is the writer's intention to publish the answers to these questions in a subsequent volume. The following tabulation shows the total number of audit questions set by each state board of examiners up to and including December, 1913, and the number of original questions selected; by the author. The balance may be said to represent duplicate questions; e. g., New York leads with a total of 525 questions, of which 309 are originals, leaving 2i6"as representing duplicates (about 41 per cent). From the totals of this tabulatipn it will be seen that the totaljiumber of available C. P. A. questions in auditing' up to January, 1914 (and including Maine questions for Jan- ti^ry,. 1914), is 1>353, of which 705 are originals and 648 are duplicates (about 48 per cent). In the opinion of the writer the C. P. A. boards of. ex- aminers are to be congratulated upon having propounded such a large number of excellent questions. iii IV PREFACE STATES HAVING C P. A. LAWS State C. p. A. Law Enacted Number of Exam- inations Set to January 1, 1914, of Which Questions Are Available Total Audit Questions Available to January 1, 1914 Total Original Questions Selected by Author 1896 35 525 309 1899 18 186 100 1900 3 35 1 1901 1903 2 18 10 1903 14 143 101 1904 5 10 4 1905 5 50 20 1905 5 75 31 New York Pennsylvania (a). Maryland (b).... California* ...... Washington (c). Illinois New Jersey (d).. Michigan (e) Florida Rhode Island* 1906 Utah* 1907 Colorado (f) 1907 Connecticut* 1907 Ohio 1908 Louisiana (g) 1908 Georgia (h) 1908 Montana* 1909 Missouri (i) 1909 Minnesota 1909 Nebraska* 1909 10 6 61 18 1 13 4 1 10 4 2 24 19 4 63 21 •Questions not available. (a) Beginning in November, 1907, the Pennsylvania board of examiners dis- continued setting questions under the three subdivisions of accountancy (Theory of Accounts, Auditing, and Practical Accounting) and adopted the plan of setting questions under the one heading of "General Accounting." Until that time 110 questions in auditing had been set. Since that time questions in auditing have been included in the general accounting examinations. The author has taken from the general accounting examination papers in 1907-1914 such questions as might be included under auditing, consisting of 76 questions, of which he has selected 56. (b) Questions prior to 1909 not available. (c) Questions set by the board of examiners of the state of Washington are available only for the years 1908 and 1913. The former included eight questions in auditing, of which three were selected by the author. The latter did not include questions under the three usual headings (Theory, Auditing, and Practical Accounting), the board of examiners having adopted the excellent plan inaugurated by the Pennsylvania board in 1907, of setting one examination in general ac- counting. From the 1913 examination the author has selected seven out of a possible ten. (d) New Jersey questions are available only for the years 1904-1909. (e) Only five sets of Michigan C. P. A. questions are available, including the last one given in 1913. (f) Colorado questions available for 1913 only. (g) Louisiana questions available for 1913 only. (h) Selected questions from various examinations by the Georgia board of examiners are published in book form, including ten questions in auditing. Of this number the author has selected four. (i) Missouri questions available for 1912 and 1913 only. PREFACE STATES HAVING C. P. A. LAWS Number of Exam- Total Audit Total C. P. A. inations Set to Questions Original State Law January 1, 1914, of Available Questions Enacted Which Questions to January Selected Are Available 1, 1914 by Author Virginia 1910 3 31 8 Massachusetts 1910 5 75 30 West Virginia* 1911 Vermontt 1912 Tennessee* 1913 Oregon* 1913 North Carolina 1913 1 14 9 North Dakota! 1913 Nevadat 1913 Mainet 1913 1 10 7 Delaware! 1913 Wisconsint 1913 Totals 112 1,353 705 •Questions not available. tNo examinations set prior to 1914. (First Maine examination held January 27, 1914.) Taken collectively, these questions exhaust practically- all the fundamental principles of auditing in theory and practice, and cover the subject very broadly in its relation to audits, examinations, and special investigations of va- rious lines of business. In this latter field the questions are perhaps open to criticism. In order to answer all the questions embodied in this compilation correctly, the accountant must be pre- pared to explain in detail how to audit the books and ac- counts of the following : Trading (various lines) Manufacturing (various lines) Fire insurance company Savings bank Executor of an estate VI PREFACE Building and loan association Street railway and electric lighting company Gas company Trust company National bank Stock broker Municipality Commission house Wholesale dry-goods company Railroad Department store Real estate development company Life insurance company Coal mining company Contractor and builder Construction company Trustee of an estate Theatre Milling company Tax collector's accounts Water registrar's accounts Accounts for professional men Clubs and associations Grocery store Lumber company Gold mining company There are probably few practitioners who could give an authentic and detailed treatise upon the audit of each of the foregoing. It does not come within the province of the ordinary accountant's professional experience to audit or to become familiar with the accounting methods of such a -varied line of activities, for the above list covers a very broad field. PREFACE Vll Also the audit or examination of national banks and trust companies constitutes a specialty, and one who is not familiar with the inside workings of these financial institu- tions is not prepared to carry on arn audit or examination in the most efficient manner, regardless of his professional experience in other lines. The same holds true with respect to brokers' accounts and railroad accounts. It is the writer's contention that C. P. A. questions should not deal too much with specific lines of business, nor with exceptions to general practice. Mercantile and manu- facturing businesses furnish the great bulk of the profes- sional accountant's clientele. To judge a man's fitness to become a C. P. A. through questions dealing with bank examinations, or audits of brokers' accounts, railroad ac- counts, fire or life insurance accounts, or special rulings of state or federal commissions, is to subject him to a test that does not prove his general fitness, and that places a premium on exceptions to general practice. The questions worth while are the questions which test one's knowledge of fundamental principles, one's ability to reason logically, and one's knowledge to carry out the sort of work intelli- gently which a man with the practical experience required in the C. P. A. law of a given state might reasonably be expected to perform. Nor should the requirements for admission to C. P. A. ranks be placed too high. The general public does not consider that because a young professional man is permitted by law to practice as a lawyer, physician, or dentist, that he is as capable as those of his profession w-ho have had a broad professional experience; nor does the general public consider that the title of Certified Public Accountant alone is a conclusive measure of one's ability as an accountant. That is a matter of degree which no sort of legislation can regulate beyond a fair starting point. The C. P. A. laws viii PREFACE of our various states do not, at least by their wording, con- template that candidates for the degree shall possess a knowledge of accounting at all commensurate with that of a thoroughly capable professional accountant, else a longer practical experience would be required. Certain it is that three years' experience is not sufficient to develop a broad, practical knowledge of accountancy in all its branches. It would seem, therefore, that if higher stand- ards are to be set in examinations the laws should be re- vised so that the requirements for practical experience may be consistent with such raised standards. Otherwise the examinations should be prepared with the thought in mind that a matter of two or three years' experience does not ordinarily prepare one to answer questions which would severely tax the knowledge of practitioners of ten years' experience. It is highly desirable that in each set of C. P. A. ques- tions there should appear a reasonable number which have been included in previous C. P. A. examinations, especially in connection with such a technical and broad subject as auditing. The boards of examiners are to be praised for their broad-minded policy in carrying out this important feature, and in permitting their questions to be made public. It would seem that any man who can answer 70 per cent of the questions included in this volume deserves a C. P. A. degree in so far as his knowledge of auditing is concerned, and examiners who include in their sets of questions 50 per cent or more of those that have been asked heretofore are giving the candidates a fair chance to profit by studying precedents. The boards of C. P. A. examiners have made the subject of auditing just what it should be — the final summing up of all accounting principles. Their finest efforts are shown here, and of these they may well feel proud. PREFACE ix The writer wishes to express to the various state boards of examiners his sincere appreciation of their kindness in furnishing him with the questions set by them and their pre- decessors. Without their aid the present compilation would not have been possible. Hahry C. Bentley Boston, Mass., May 1, 1914 LIST OF STATES PAGE Colorado 185 Florida 175 Georgia 194 Illinois 133 Louisiana 193 Maine 225 Maryland 117 Massachusetts 213 Michigan 168 Minnesota 204 Missouri 196 New Jersey 166 New York 11 North Carolina 223 Ohio 187 Pennsylvania 73 Virginia 210 Washington , , 118 C. p. A. Auditing Questions NEW YORK Question 1 How may it be determined whether certain expenditures of a manufacturing business were of the nature of main- tenance and repairs or constituted an actual betterment of the plant ? State how in each case they should be dealt with in the balance sheet and in the profit and loss account. Question 2 In auditing the accounts of a business for the first time what books should be produced ? What would be the first duty of the auditor respecting these books? Question 3 In an audit stipulating for the examination of all vouch- ers of every description, what would be proper vouchers for the following: purchases, return purchases, sales, return sales, cash receipts, cash payments, journal entries? Question 4 Give a brief outline of the duties of an auditor, and ©f his responsibilities. • Question 6 What means should be employed to detect the wilful omission to enter in the books under audit, sales made or cash received? II 12 c. P. a: auditing questions Question 6 What evidence should be required as to the correctness of values of assets (other than customers' accounts) entered in the books ? Question 7 State what is necessary in auditing cash payments, and how to prevent the reproduction and passing of vouchers a second time. Question 8 State what examination should be made of the receiv- able book accounts of a firm or company to ascertain what accounts, if any, should be written off as bad. Question 9 In auditing the accounts at the conclusion of the first fiscal year of a corporation formed to acquire an established business, what documents and records should be examined in addition to the ordinary books and subjects of an audit? Question 10 To what extent should an auditor hold himself respon- sible for the correctness of (a) inventories, (b) pay-rolls, (c) depreciations and discounts? Question 11 On what basis should the following assets be valued in the preparation of a balance sheet: (a) manufactured goods, (b) partially manufactured goods, (c) raw mate- rial, (d) open book accounts receivable, (e) stocks, bonds, and other investments, (f) bills receivable? NEW YORK 13 Question 12 State the objects to be attained by an audit. Question IS How should one proceed in order to ascertain that all the liabilities are shown in a balance sheet? Question I4 How should the interest received on a bond bought at a premium be treated? Question 15 Should a reserve fund be invested in interest-bearing securities? State the custom. If so invested, what account should be credited with the income ? Question 16 In an audit of the accounts of a firm or of a corpora- tion, how may the cash as shown by the bank pass book be reconciled with the amount called for by the cash book or ledger? After this course has been taken, is it necessary to check the pass book with the deposits as shown by the cash book ? What might such detailed checking show ? Question 17 How may fraud in payment of wages be detected ? Question 18 In a statement of the earnings of a business to be sold on the basis of its earning capacity, how should the ques- tion of interest paid on accounts payable, on bills payable, and on loans be treated? 14 C. P. A. AUDITING QUESTIONS Question 19 State a method of procedure in an examination of se- curities consisting of bonds, stocks, and bills receivable. Question 20 In an audit of a railway company's accounts, how should it be determined that the net earnings are correctly stated? Question 21 State what items may properly be charged to Construc- tion account, after a railway has been in operation for some years. Question 22 In the books of a railway company what provision should be made for destroyed equipment? Question 2S What test should be made of the prime cost of man- ufactured goods to guard against loss of raw material through theft by employees? Questipn 24 In an inventory .how sliould stock purchased on .cr^cdit, subject to usual discounts, be valued ? ':/:■:■ ^\ /.^ :;..>.••■: ■• ■ Question,2pj .. •:,^. ..,..,.,,.,,.,.,,, ^. „^.y St2ite briefly a proper e6ut*se ;of procedure^ for niaki^g a correct audit of the books and accounts of (a') a manufac- turing business, (b) a fire insurance company, (c) a banki NEW YORK 15 Question 26 The check book of a company shows cash in bank $12,- 500, bank pass book for the same date sliows $14,000 ; which is correct and which amount should be included in the balance sheet? Question 27 Under what circumstances should deduction be made for depreciation? What classes of assets are most subject to depreciation? Question 28 An insurance company buys for investment $50,000 7% 10-year bonds at 116. Should this purchase be entered in the balance sheet at par or at cost price? If the latter, what should be done with the premium, in view of the fact that the bonds will be paid off at par at the expiration of 10 years? Question 29 In the case of an audit of the books of a corporation where the volume of transactions is so large that a detailed checking of postings and footings is out of the question, what course should be pursued in the examination in order to insure the correctness of the balance sheet ? Question 80 If in the course of an audit it should be found that capi- tal expenditures had been charged up against Profit and Loss account, or items of expense against Improvement account, what would be the duty of the auditor in respect to such charges ? l6 C. p. A. AUDITING QUESTIONS Question 31 How should goods sent out on consignment be treated in the books of a company? When the goods have been sold and the consignee sends in his account sales, what en- tries should be made to give effect to the transactions ? Question 82 If any payments are received by a company on account of work in process, how should such payments on account be shown in the balance sheet ? Question 33 In an audit of the books of a company, how may the correctness of the following items in the balance sheet be determined: (a) outstanding accounts, (b) securities, (c) inventory of finished stock and raw materials, (d) bank balances, (e) creditors' open accounts, (f) creditors' bills payable ? Question SJf A company has caused to be made a revaluation of its buildings, plant, and machinery, and it is found that the new values are greater than those shown by the books; what does this larger value indicate, and how should such excess be treated in the books of the company? What entries should be made to give effect to these conditions in (a) the balance sheet, (b) the profit and loss account? Question 35 A manufacturing corporation desires a certificate of its average annual profits for three years ; after charging up all costs, expenses, and depreciation, and an allowance for bad NEW YORK 17 debts, it is found that the profits for the first year were $62,- 000, for the second year $64,000 plus $10,500 profit on sale of investments, and for the third year $72,000 plus $8,400 profit on the sale of real estate. Give the annual average profit to be certified. Question 36 In some kinds of business the expenditure on repairs and renewals account varies considerably from year to year ; how should this expenditure be dealt with in the books of the company so that the profits need not fluctuate by reason of this variable expenditure? Question 37 In an audit of the books of a company it is found that the president's salary account is credited with a bonus of $5,000 for "extra services," in addition to the usual salary paid him ; what steps should be taken to ascertain that this item is correct? Question 38 The Profit and Loss account of a manufacturing com- pany for six months ending June 30, 1896, contains on the debit side, (a) stock on hand January 1, 1896, (b) pur- chases of raw material, (c) manufacturing expenses, (d) expenses of selling; on the credit side, (e) sales, (f) stock on hand June 30. Does the balance of these amounts con- stitute the net profit for the six months, or should other charges be taken into account? If so, state them. Question 39 An audit of a set of books for the half year ending De- cember 31 is begun January 26; what course should be pursued to prove the correctness of the cash on hand Decem- ber 31 ? l8 C. p. A. AUDITING QUESTIONS Question 40 How should doubtful debts be treated in a balance sheet? Give a convenient method of ascertaining whether accounts receivable are good, bad, or doubtful. Question Jfl How should leases be treated in the balance sheet and in the profit and loss account of a company ? Question 42 State which of the following should be charged to Capi- tal account and which to Revenue account: (a) repairs to machinery and plant, (b) replacements of plant, (c) new plant purchased, (d) cost of leasehold premises, (e) part- ners' salaries. Question 43 A manufacturing company takes out and sells a quantity of old machinery and replaces it by new ; what accounts should be credited with the proceeds of the sale? Give reasons. Question 44 Differentiate as fully as possible a Manufacturing ac- count, a Trading account, and a Profit and Loss account, and state what the balance in each case indicates. Question 45 How should the loss on shares issued at a discount be dealt with in the accounts of a corporation? Question 4^ In examining the books and accounts of a business for the purpose of giving a certificate of the net profits earned NEW YORK ig for a number of years, how should interest paid on partners' capital be treated? What other important points should receive attention in order to state the profits net ? Question J^7 How may the auditor know that the balance sheet and profit and loss account of a corporation whose books he has audited include all income and expenditures applicable to the year under review? Question k8 In a large dry-goods business it is considered necessary to divide the bookkeeping in such a way that each ledger shall be balanced separately ; how should this be done ? Question Jf9 Is a trial balance the same as a balance sheet? If not, in what way does it diflfer ? Question 50 A partnership contract between A and B provides that each partner shall contribute $25,000 to a new business, and that on any capital brought in by either partner in excess of this amount he shall receive 6%. A contributes $10,000 additional, and the bookkeeper makes an entry in the books at the end of the year crediting A with 6% on $10,000, viz., $600, which is debited to B. Is this correct? Give reasons. Question 51 What course should be adopted in an audit of the books of a firm where defalcations are suspected? 20 C. P. A. AUDITING QUESTIONS Question 52 What is the significance of an auditor's certificate of profits of a business about to be sold to a new company? To what extent is an auditor responsible, morally and le- gally, for his certificates? Question 68 State what an auditor should do to ascertain if the fol- lowing assets, appearing in a balance sheet, are taken at a fair value: (a) merchandise, (b) machinery, (c) real estate. Question 5Jf. State what means should be employed to ascertain if the following assets were properly included in a balance sheet at the valuation given: (a) stocks and bonds, (b) bills receivable, (c) accounts receivable. Question 55 How may an auditor know that the credits for mer- chandise returned are bona fide, and not made to conceal a shortage in cash ? Question 56 What classes of salaries and wages should be charged directly against the cost of manufacture? Give reasons. Question 57 How should the right to remuneration claimed by offi- cers and directors of a corporation be verified ? Question 58 How should the bank balance appearing in the books of a company be verified by the auditor? NEW YORK 21 Question 59 To what should the discount on bonds sold for con- struction and the expense of disposing of such bonds be charged? Give reasons. Question 60 Under what circumstances should paid checks be treated as vouchers ? Are checks proper and sufficient vouchers for purchases? Give reasons. Question 61 What books of a corporation, in addition to the ordinary- trade books, should be inspected by the auditor ? Why ? Question 62 In auditing the books of a company for the first time after a reorganization, what should an auditor do to verify the opening entries? Give reasons. Question 63 How may the auditor ascertain the profits for a given period from the books of a company kept on a system of single entry? Question 6J/. Is it the duty of an auditor of a bank actually to inspect the securities representing the bank's investments? If so, what course should be adopted in conducting such exami- nation ? Question 65 In the event of such a difYerence of opinion between auditor and directors concerning the rate of depreciation on plant and machinery as would involve an important 22 C. P. A. AUDITING QUESTIONS alteration in the proposed rate of dividend, hoAv can the matter be settled to the satisfaction of both parties ? Question 66 Is it a part of the duties of the auditor of the accounts of a stock company to consider the question of depreciation on assets, buildings, machinery, plant, etc.? Give reasons for your answer. Question 67 In examining cash vouchers in the course of an audit, is it necessary to place your initials or some other distinctive mark on each, and, if so, why? Question 68 If the cash in hand of a firm or company under audit consists in part of checks received from customers but not deposited in bank, how may the auditor assure himself that such checks are properly included? Question 69 Describe your mode of procedure in connection with some audit on which you have been engaged. Relate the nature of the business, answering in sufificient detail to enable the examiners to form an opinion regarding your knowledge. Define auditing. Question 70 What is the value of a bank pass book for the purposes of an audit? To what extent should it be taken as a voucher for cash book entries, or for the balance carried forward ? Question 71 Is there any satisfactory method of auditing accounts not kept by double entry? If so, illustrate the method. NEW YORK Question 72 23 In auditing the accounts of a private firm where there are several partners, to what points should the auditor look in order to be assured that the partners' accounts are cor- rectly stated in the balance sheet ? Question 73 State generally your views as to what constitutes capital expenditure and expenditure properly chargeable against revenue. Under what circumstances would an auditor be justified in refusing his certificate of audit ? Question 7-4 An auditor has to audit the accounts of a firm or com- pany which is a large employer of labor, fixed and extra; state (a) what vouchers the auditor should expect to find, and in the case of the extra labor, how such vouchers should be certified, (b) what course the auditor should recommend his client to adopt to make sure that there were no "dead men" charged on the fixed lists. Question 75 What reserves should the auditor expect to find set aside out of income, besides those for bad debts and discounts, in the case of (a) a steamship company, (b) a telegraph com- pany ? Question 76 When an auditor employed to adjust the accounts of a firm finds that the current work is behind and that no trial balance has been made for over a year, what course should he pursue, having regard for his own interests as well as for those of the firm ? 24 C. P. A. AUDITING QUESTIONS Question 77 How should the auditor treat a company's accounts with its several agencies at the end of the fiscal year, each agency having been charged with all of the goods shipped to it, and each having some stock remaining on hand ? Question 78 If you were called in to investigate the books of account of a manufacturing concern that contemplated selling its business to a corporation, and were required tO' report on the net profits of the past five years, what would be your course? How would you ascertain the value of the plant and machinery, and of other assets that might affect the net profits of the period under review? Give an indication of the report you would make. Question 79 In making up the balance sheet of a firm or corporation, how should the auditor treat goods that (a) have been sent abroad on consignment and remain unsold, (b) are in the hands of agents at home, (c) have been sent out on "sale or return" ? Question 80 You are called in to examine the books of a firm whose bookkeeper and cashier has absconded. He is known to be an embezzler to the amount of at least $2,000. The books have been kept by double entry and are apparently correct. How would you proceed to determine the total amount of the embezzlement? Mention the different methods that the embezzler might have used to hide his stealings? NEW YORK 25 Question 81 Should the auditor of a firm or corporation revise the form and wording of the balance sheet to which his certifi- cate is to be attached ? Give reasons. Question 82 Give reasons for or against the necessity of an auditor's verifying the stock ledger of a corporation. Question 83 In balancing a set of books consisting of cash book, purchase book, sales book, journal, and ledger, the debit side of the trial balance is found to be $87.19 in excess of the credit side; how should the error be sought? Question 8Jf Describe the steps necessary to make a complete audit of a savings bank. Question 85 Describe the processes of verifying the cash book of a partnership or company by means of the bank transactions. Question 86 The YCX Co. takes a large number of notes (bills re- ceivable) from its customers, and when in need of funds discounts or sells them ; how may the accounts be managed so as to show the company's liability as indorser on the paper discounted? Question 87 The machinery used by a firm has been purchased on the instalment plan, with monthly payments, and under the 26 ' C. p. A. AUDITING QUESTIONS stipulation that the title shall pass only when the last pay- ment has been made. At the close of the fiscal year there are yet several payments to be made. The firm also pays a royalty on the output of some of the machines secured on this plan. How should the auditor in his annual statement deal with the machinery, the instalments paid, and the royalty ? Question 88 Is it an auditor's duty to concern himself, to any extent, with the validity of the transactions that come under his notice? Explain. Question 89 In auditing a private banking institution, how would you ascertain the amount of checks that have been charged to depositors' accounts, but not presented for payment? Question 90 In preparing the balance sheet of a business at the close of a year, how should each of the following be treated : (a) bad and doubtful debts, (b) premiums for fire insurance unexpired, (c) interest paid in advance on bills payable dis- counted, (d) depreciation of factory plant, store and office fixtures, and similar items ? Question 91 Write in proper form an auditor's certificate of cor- rectness. Question 92 Under what circumstances, if any, would it be proper to open an account with good-will? On finding a good-will NEW YORK 27 account on the ledger of a business for which you are to prepare the annual statement, how would you treat the account, or what special adjustment would you suggest in regard to it? Question 93 What check has the auditor on fictitious entries showing purchases, and on returns of goods sold? Question 9J/. In auditing the accounts of a gas company, what evi- dence of the receipt of amounts due from customers should be required ? Question 95 Should any fluctuation in the valuation of permanent assets be permitted to affect the result of the Loss and Gain account? Give reasons for your answer. Question 9S Expenditures are made by a corporation for items of each of the following classes: (a) taking down a machine in one part of a factory, moving it, and putting it up in another part, (b) expenses of incorporating the company, including state charges and lawyer's services, (c) broker- age on purchase of a piece of property, (d) commission on an issue of debenture bonds, (e) costs attending a mort- gage, (f) furniture and fittings of a city office and sales- room, (g) costs of patents, including solicitor's charges and government fees. Which items should be charged to capital and which to revenue? State reasons for your answer in each case. Question 97 Assuming that you are limited as to time and fee in an 28 C. p. A. AUDITING QUESTIONS audit embracing numerous personal accounts contained in one general ledger, state precisely the steps you would adopt in each case to verify cash, sales, purchases, customers, creditors. Question 98 What proportion of $15,000 — commission paid for ne- gotiating a sale of bonds, to run 10 years — should be treated as an asset at the end of the first year ? Give reasons. Question 99 What v^ould you consider a satisfactory voucher for wages paid in a manufacturing business ? Question 100 In an audit of a business in which discounts are freely given and received and the accounts are charged and cred- ited in gross, what general check should be adopted in veri- fication of (a) discounts allowed, (b) discounts received? Question 101 Given the following reconciliation of cash at the close of an audit, state categorically how it may be verified : June 30, cash on hand as per cash book .$8,549.17 Balance as per bank pass book at the close of business $16,549.72 Add check of J. B. Jones, not de- posited 1,450.00 $17,999.72 Deduct checks drawn, not presented. . 10,154.29 $ 7,845.43 Cash in drawer 703.74 $8,549.17 NEW YORK Question 102 29 State generally what constitutes capital expenditures in each of the following cases: (a) a manufacturing com- pany, (b) a gas company, (c) a charitable institution. Question lOS To what documents should the auditor have access in each of the following cases: (a) partnership accounts, (b) trustees' accounts? Why? Question 10 Jf In commencing an audit, say three months after the close of a fiscal year, how would you verify cash on hand and bills receivable as they should stand at the end of such fiscal year? Question 105 State the special uses to which an auditor may put con- trolling ledger accounts, such as Customers' Ledger account, and Purchase Ledger account. Question 106 State what means should be adopted to verify (a) cash sales, (b) discounts allowed, (c) discounts received, (d) sold goods returned, (e) allowances on sales. Question 107 A corporation sells its first mortgage bonds at $10,000 premium and its second mortgage bonds at $10,000 dis- count. Give your views as to the proper treatment of these items of premium and discount. 30 C. p. A. AUDITING QUESTIONS Question 108 Without definite instructions, what, in your judgment, would constitute a thorough and proper audit of a set of books ? Question 109 What evidence should the auditor require as to the authority given to officials of a municipal corporation to expend money? State what methods should be used in auditing the actual payments. Question 110 How should the accountant proceed if required to audit the accounts of a firm which kept only a cash book and journal, but had preserved all the invoices and vouchers pertaining to the business ? Question 111 State briefly your views as to the question of deprecia- tion of assets, and the rule which you adopt in regard to it. What rate would you apply to plant and machinery, and furniture and fixtures? Question 112 What are the principal points to which attention should be given in ascertaining the amount of the net earnings of a company desiring to use your certificate? Question 113 What is meant by the term sinking fund? Show how a sinking fund is opened or established, and explain its operation from year to year. NEW YORK 31 Question llJf. Explain the difference between an account of receipts and payments and an account of income and expenditure. Question 115 In auditing the books of a building and loan association, what method should be used in verifying (a) depositors' pass books, (b) mortgages held by the association, (c) the income ? Question 116 , How should the auditor deal with the ledger accounts of partners (a) in the division of profits, (b) in the assess- ment of losses, (c) in case a partner's drawings exceed the amount specified in the partnership agreement, (d) in case a partner's drawings are less than the amount to which he is entitled? Question 117 What routine would you recommend in the checking of invoices of goods or materials purchased? Question 118 What rules would you recommend foi localizing the errors in a trial balance? Question 119 A company manufacturing a proprietary article offers certain premiums to its customers on the return of its wrap- pers, the premiums offered being indicated in a published schedule. At the time of making out the annual balance sheet, only a few of the premiums have been distributed. How should this matter be treated in the balance sheet ? 32 C. P. A. AUDITING QUESTIONS Question 120 In the case of a company which has issued preferred stock carrying a cumulative dividend, but has not earned enough to pay such dividend in full for several years, how would you deal with the arrears of dividends due, if at all, on the company's balance sheet ? Give reasons. Question 121 Explain the difference between capital expenditure and revenue expenditure. What rule controls in determining whether certain payments belong to capital or to revenue? When in doubt, to which should the payment be charged ? Question 122 In an audit of the books of a corporation using the voucher system, what means should be adopted to prevent the reproduction of vouchers already passed, in cases where the auditor is not permitted to deface the vouchers by stamps or writing? Question 123 Describe in detail the method that should be used to verify the securities representing the investments of a com- pany under audit in the case of (a) real estate, (b) mort- gages on real estate, (c) certificates of stock, (d) railway bonds. Question 12Jf An auditor, on completion of his work, certifies that the accounts are correct in accordance with the books. Is this form of certificate subject to criticism, and, if so, why? NEW YORK 33 Question 125 What is meant by a Suspense account? Give three ex- amples of items carried to Suspense account, and state how they may be removed from that account. Question 126 After auditing the books of a manufacturer annually for a period of ten years, you are asked to render a certificate as to the net earnings of the business for those ten years, for the purpose of a sale based on the earning capacity of the property. What items of expense heretofore charged annually through the Profit and Loss account may be prop- erly eliminated in the preparation of your certificate, and why? ■Question 127 Explain two methods by which depreciation on build- ings, machinery, and plant may be stated in the books of account. State which method you prefer and give reasons. Question 128 When auditing the books and accounts of a concern operating a large machine shop, you find that the machinery and tools have been regularly depreciated each year, that their value as shown by the books is considerably less than the value shown by an independent appraisal, and that the firm has set up the higher values as shown by the appraisal on the books. To what account would you recommend the corresponding credit to go and for what reasons? Question 129 Draft a bank reconcilement account, dealing with checks outstanding, not cleared. 34 C. P. A. AUDITING QUESTIONS Question ISO Describe the various steps to be taken in auditing the accounts of an executor for the first year after the death of the testator. Question 131 It is found in an audit that certain merchandise shipped to an agent for sale has been charged to his personal account and credited to sales. Make correcting entries. Question 132 What is the difference between a reserve and a reserve fund? Give examples of each. Question 133 What points require special attention in examining bills receivable at the end of a fiscal period ? Question 13Jf. State your views as to the functions of the journal. In what does it differ from the cash book? Question 135 State your method of verifying the Bills Receivable ac- count. Does the balance of acceptances unmatured affect the Bad and Doubtful Debts account, and if so, how? What evidence would you require of the dishonor of an acceptance ? Question 136 In auditing the accounts of Bruce & Co., you find that a dishonored acceptance of Andrews for $2,500 is included NEW YORK 35 in bills receivable balance. If this is not correct state how it should have been treated. Question 137 A client who has a beneficial interest in the corpus of an estate employs an accountant to conduct a complete audit. State the points on which the accountant should particularly report. Question 138 To what extent would you, as auditor, concern yourself in the matter of depreciation allowances? Question 139 How should the discount and premium arising from the sale of a company's own securities held in its treasury be treated on the books ? Give examples. Question 1J/.0 Mention several transactions which, in an audit of the accounts of a village, would require inspection of the official minutes for verification. Question lJf.1 In what cases, if any, should checks be regarded as in- sufficient vouchers for the payment of bills ? Question 11^2 If, in the course of an audit, it is found that the balance shown by the bank pass book agrees with the balance shown in the cash book after all outstanding checks have been taken into consideration, should this be deemed conclusive evidence of the correctness of the bank balance? If not, what further evidence should be required? 36 C. p. A. AUDITING QUESTIONS Question 1J/-3 Give examples of such assets and liabilities, not usually found on books of account, as should be considered by the auditor when preparing an income and profit and loss account at the close of a fiscal period. Question IJt-Jf What method should be adopted to verify the correct- ness of amounts paid by a corporation for (a) directors' fees, (b) agents' and salesmen's commissions? Question lJf.5 What special considerations would influence you in fix- ing the rate of depreciation chargeable on (a) buildings, (b) machinery, (c) tools and fixtures, (d) patterns? Question 1J^6 In making an audit of a firm's books for the purpose of certifying the annual profits for a period of years and with a view to its conversion into a corporation, what items of earnings and expenses should be omitted which would ordi- narily be included in its regular annual profit and loss account ? Question 1^7 In making a first audit of the accounts rendered by an executor, what documents would be required to enable the auditor to properly perform his duty ? Question IJfS In a manufacturing and profit and loss account pre- pared from a trial balance submitted by your client and NEW YORK 37 verified by you, what expense accounts would you charge in the manufacturing account, and what in the profit and loss account? (Refer to any manufacturing business with which you are familiar.) Question IJ^Q How would you proceed to audit the transactions of a business for which no cash book, journal, or ledger had been kept ? Question 150 What safeguards in accounting would you suggest to a client to prevent loss of stock by theft? Question 151 What can an auditor do to verify (a) inventories and (b) pay-rolls? Question 152 Should provision be made out of revenue to provide for discount on accounts payable outstanding after the date of closing? Give reasons for your answer. Question 153 A firm resolves itself into a corporation in which new capital is to be interested. How would the auditor ascer- tain the value of the good-will? Question 15Jf. A house sends out many goods on approval and treats the transactions as sales. How should such items be treated by the auditor when setting up statements for a period ? 38 C. P. A. AUDITING QUESTIONS Question 155 A firm is worth $100,000 above all liabilities, and esti- mates its good-will at $50,000. A contract is made to con- vey all its assets, inclusive of good-will and subject to lia- bilities, for $150,000 of capital stock. You are asked to prepare a statement for taxation, and as good-will is not taxable for city and county purposes, it is sought to increase the amount of that item on the books and to reduce corre- spondingly the value of other assets, on the ground that the business is profitable and the good-will really worth more than the account shows. What should the auditor do under such circumstances? Question 156 The year's cash receipts of a corporation were $250,- 625.16, disbursements $110,328.28. Are the directors war- ranted in declaring a dividend on the presentation of these facts alone ? Give reason for your answer. Question 157 It is agreed by the directors of a manufacturing com- pany that certain depreciation should be allowed, but that it is desirable to let the plant accounts stand on the books at cost value. How would you as auditor manage to meet the situation ? Question 158 In an audit of the accounts of a corporation should the auditor accept as conclusive the certificate of the registrar of the stock as to the total amount of capital stock out- standing? If not, why not? Question 159 A construction company has a number of contracts partly completed at the close of its fiscal year. Would you NEW YORK 3Q carry any portion of the anticipated profit on these contracts into Revenue account? If so, why? Question 160 A company receives a premium on its own capital stock. What account should receive credit for the premium? Is this premium available for the payment of dividends ? Give reasons to sustain your answer. Question 161 What course should be pursued in an audit where it is impossible, owing to the great volume of business, to check the postings to subsidiary ledgers ? Question 162 State generally, what goes to make up in a mercantile house (a) the Trading account, (b) the Profit and Loss account. Question 163 A company gives more or less attention to its plant. Is it proper to enter the whole outlay against the capital? If not, could the outlays be spread over a period of years? Would a revaluation of the plant be a proper solution of the matter? Explain. Question 16 Jf A firm is indebted to one of its creditors in the sum of $45,000. The creditor agrees to accept notes with good indorsements for $50,000 in full settlement of the account, with the understanding that if any payment is not made at maturity, the whole debt, less such sum as may have been 40 C. p. A. AUDITING QUESTIONS paid, shall be declared to be due by the creditor. After con- cluding this arrangement the firm is succeeded by a cor- poration. The agreement covering the turnover provides that all debts of the firm shall be paid by the corporation. Only the indorsed notes for $50,000 are brought into the books of the company, and nothing is said regarding the agreement heieinbefore referred to respecting the original debt. You are asked to certify to the accounts thus set up. What course would you pursue ? Question 165 An individual buys a fleet of ships. He then forms a corporation to take them over at double the sum paid by him, payable one-half in debenture bonds of the company, and one-half in its capital stock. A sinking fund is to be provided for the gradual retirement of the debenture bonds. A public accountant is called in at the end of five years to make up the accounts. He insists on creating a depreciation fund based on the full consideration paid by the corporation. The directors argue that the depreciation fund should be based on the amount of debenture bonds issued, on the theory that the capital stock issued to the vendor was in the nature of a bonus and did not represent any real value. State your views regarding the two propositions. Question 166 Is it the duty of an auditor to examine the transfer books of a corporation ? Explain. Question 167 How may the auditor protect himself in a case where there are many branches that he is not permitted to visit, through which some of the business is carried on? NEW YORK 41 Question 168 A firm carries on its books a number of parcels of real estate. By what means could the auditor satisfy himself as to the ownership and value of the several parcels ? Question 169 In making an examination of the assets of a company, the officer charged with the custody of securities owned is unable to produce a certain certificate of stock which should be on hand when called for. It is produced later. Would it be the duty of the auditor in charge to inquire into the reason for its absence in the first instance? Give reasons for your answer. Question 170 It is customary with some institutions to carry secret reserves. State your views respecting that custom. Question 171 What system would you advise for checking the ac- counts of collectors for a charitable organization ? Question 172 An insurance company invests in the stocks and bonds of other corporations, and the books show a great many purchases and sales of securities. How should these trans- actions be verified? Question 173 A company authorizes its officers to borrow for its account $100,000 and give as security $200,000 of the first 42 C. P. A. AUDITING QUESTIONS mortgage bonds of the company. How should this trans- action be treated in the balance sheet ? Question 17 Jf A bank enters against overdrafts the interest accrued thereon. If an account is of questionable value, what should be its treatment in the Revenue account of the in- terest so charged to it ? Question 175 What is an audit? Mention the kinds of audits com- monly required and explain the object of each. Question 176 How may pay-rolls be manipulated to conceal fraud? What steps should be taken in a first audit to detect such manipulation and to prevent its recurrence? Question 177 At what stage in an audit should cash and negotiable securities be verified? Why? Question 178 Give the form of an unqualified certificate of audit? Question 179 Is it ever advisable to give a qualified certificate of audit? If so, under what circumstances? Write such a certificate. Question 180 In making a complete audit, how should the accountant NEW YORK 43 satisfy himself that all disbursements have been actually- made as charged in the accounts ? Question 181 Outline your method of procedure in auditing the ac- counts of a wholesale dry-goods store. Question 182 The secretary of a manufacturing corporation has un- dertaken to close its books. The balance to the credit of the Profit and Loss account is just sufficient to enable the directors to declare a small dividend, which they propose to do. At this juncture, the services of an accountant are en- gaged. He finds that no provision for depreciation has been made, and that all expenditures for repairs and renewals, amounting to more than the proposed dividend, have been charged direct to Plant account. Show the nature of any corrective entries that should be made. What would be the effect of such entries, there being no surplus ? Question 183 Mention five of the technical errors that frequently oc- cur in the keeping of accounts, and give the method of de- tecting them ? Question 18J^ In auditing the accounts of a corporation engaged in the business of erecting gas retorts in various sections of the country, you have reason to suspect that losses are steadily sustained on account of the theft of valuable tools by work- men. What recommendation would you make for the pur- pose of preventing such losses? 44 C. P. A. AUDITING QUESTIONS Question 185 A company was organized in February, 1900, for the purposes of constructing and operating two iron furnaces as one plant, and of owning and mining ore properties. An issue of mortgage bonds was arranged for the pur- pose of providing funds to finance the constructing of the plant and the purchase and development of ore properties. The mortgage provided that the property should be main- tained by the company in first-class condition. The first furnace was put in blast in May, 1901, and the second in June, 1902. The ore property was developed and mining commenced in April, 1901, at which date the total cost of the property and development amounted to $50,000. The superintendent of the plant reports monthly the quan- tities of ores and materials received, and also the quantities used at the furnaces. Stores accounts are kept for each kind of ore and material. Piles of ores and materials are cleaned up periodically. The plant superintendent also re- ports the quantities of pig iron produced monthly and the quantities of pig iron shipped monthly. January 2, 1905, you are appointed in the interest of the bondholders and shareholders to audit the accounts of the company for five years ending February 28, 1905. Apart from the accuracy of the clerical work and book- keeping, what are the principal points to be ascertained with regard to (a) expenditures, (b) issue of bonds, (c) mainte- nance of the properties? State how you would satisfy yourself of the accuracy of the following assets and liabilities at the close of the period of your examination: stocks of ores and materials, stock of pig iron, mortgage bonds out- standing, capital stock outstanding. Question 186 In drawing up a balance sheet is it desirable to show NEW YORK 45 the assets and liabilities by groups, and, if so, into what groups would you classify? Give reasons for your classi- fication. Question 187 You are appointed to audit the accounts of the trustees of the late C. D. who were designated in his will. His es- tate consisted of cash, real estate, U. S. government bonds, shares in various enterprises, mortgages on real estate, and a partnership interest in a manufacturing firm. What documents and records would you need to see in order to satisfy yourself that the accounts were properly stated and the interests of the beneficiaries properly administered ? Question 188 Should inventories of a manufacturing concern be taken at cost value, at market value, or at some other value ? Give reasons. Question 189 When sales are made on time with the proviso that certain discounts are to be allowed if payment is made on or before specified dates, would you, when auditing the accounts, make provision for such discounts on outstanding accounts? Give reasons and an argument for or against the practice. Question 190 A contractor engages to erect a building for $250,000, and his estimates indicate a profit to him of $25,000 in the transaction. He receives during the fiscal year payments aggregating $85,000 on architect's certificates, showing that 46 C. P. A. AUDITING QUESTIONS $100,000 worth of work has been done. Ought any of the contemplated profits to be carried into the accounts for that year, and, if so, how much? Question 191 In auditing the accounts of a corporation, what special precautions would suggest an inspection of the minute books, the stock ledger, the bond register, and a review of certain initial entries relating to the company's formation at a date prior to that covered by the immediate audit ? Question 192 To what extent may the "organization expenses" of a corporation be regarded as a permanent asset and how should this account accordingly be dealt with ? Question 193 An employee holding the dual position of cashier and bookkeeper is suspected of dishonesty. Some one has estab- lished the agreement between his cash book and bank pass book. What should an auditor do if subsequently called in to ascertain the facts ? Question 19 Jf In going over the affairs of a banking institution with branches, state how the following items should be verified : (1) cash at home ofiice and branches, (2) loans secured and unsecured, (3) securities owned. What, if anything, should be done concerning individual depositor's accounts? Question 195 A company is organized with a capital of $50,000. The stock is issued for a "going concern" whose accounts NEW YORK 47 showed it to have a net worth of $45,000. Nothing was said about good-will when the contracts were made between the owners and the new company. How would you treat the $5,000 difference? Question 196 Is an auditor justified in certifying to a balance sheet in case the books of account are not in balance ? Give reasons. Question 197 In the books of an insurance company are found numer- ous entries relating to the purchase and sale of stocks and bonds. What proof should the auditor require as to the correctness of these accounts ? Question 198 In auditing the accounts of a fiduciary, chargeable with income arising from rents, interest, securities, and cash in bank, how should the auditor satisfy himself that a full re- turn was shown by the books submitted? Question 199 How would you proceed to ascertain the net sales, pur- chases, expenses, and net profits of a business for a given period when the ledgers, sales books, purchase books, and supporting documents have been destroyed by fire, and the only records available are the cash book, bank pass book, and book of monthly balances, the latter containing all the ledger balances and annual balance sheets? (It is to be understood that no unusual transactions had taken place.) Question 200 What do you consider the best method to employ in the review and audit of cash receipts and payments? 48 C. P. A. AUDITING QUESTIONS Question 201 What method would you recommend in the conduct of a cash account to faciHtate a speedy and thorough audit thereof ? Question 202 Is there any reason why the good-will carried as an asset on the books of a prosperous and growing manufacturing concern should be depreciated, amortized, or otherwise writ- ten off, and, if so, what would be the effect of such depre- ciation, amortization, or writing off? Question 203 When a corporation acquires a number of separate plants, paying a lump sum for each, is it necessary for it to show on the books the proportion of the purchase price paid for the good-will, and, if so, what would be the proper method of ascertaining and expressing such proportion in the accounts? Question 204 Give the steps that should be taken to insure the state- ment of the full liability on the following items appearing in the balance sheet : preferred cumulative stock, first mortgage bonds, collateral trust bonds, income bonds, car trust notes. Question 205 A railway company leases the property of another rail- way company for a period of 50 years and, as part of the consideration for the lease, agrees to expend immediately $250,000 on the leased property, in order that it shall have a greater operating efficiency. At the termination of the lease the property is to be returned to the lessor in the same NEW YORK 49 condition as at the time of making the lease, subject to ordinary wear and tear. What entries, if any, would you make on the books of the lessor in respect to the expenditure of the $250,000, and why? Explain fully. Question 206 A gas company with a capital of $5,000,000 and a sur- plus of $1,000,000 had made no provision for the deprecia- tion of its property till the directors reviewed the valuation of the property accounts on the books and decided to write off $2,000,000, thus creating an apparent deficiency of $1,000,000. The net earnings during the year following the writing down of the assets amounted to $1,250,000 before any depreciation was charged, and the directors proposed to pay out as dividend $1,000,000. What opinion would you express as to this proposition, if called on by the board before final action was taken? Question 207 The company referred to in question 206, five years sub- sequent to the time of writing down its assets reconsidered the action taken at that time and instructed its accounting officer to write back the valuation of the assets and thus apparently add $2,000,000 to its surplus. If you were auditing the accounts of a corporation which owned prac- tically all of the capital stock of the gas company, how would you regard both the writing down and the writing up of the assets of the subsidiary company on the accounts of the company you were auditing? Question 208 A company is organized for the purpose of acquiring the capital stock of six different corporations, all of which 50 C. p. A. AUDITING QUESTIONS manufacture similar goods. The terms of the contracts with the various vendors of the stock contain provisions that the accounts receivable as they appear on the books at the date of the contracts will be guaranteed by the vendor. On a subsequent examination of the accounts of the several companies, you ascertain that many of the accounts receivable had been paid, not by the original debtors, but by the guarantors. State what criticism or recommenda- tions you would make under the circumstances and give your reasons therefor. Question 209 If, under the conditions mentioned in question 208, you were called on to certify to the amount of profits of the six companies for the year prior to the date at which the ac- counts receivable were guaranteed, would the fact that cer- tain of the accounts had been paid by the guarantors affect the profits earned? Give fully your reasons. Question 210 In examining the accounts of a coal company, you find that it is the owner of the entire capital stock of another coal company; w^hat would you require m respect to the accounts of the subsidiary company before certifying the balance sheet and income account of the parent company? State fully the reasons to substantiate your position in the matter. Question 211 On closing the books of a large business for the year, it is found that the profits are much less than were expected and much less than usual. What steps would you take to find the reason for this ? NEW YORK 51 Question 212 What is your understanding of a cash audit? Question 21 S What measures do you adopt to protect yourself against imposition by persons who have access to the books while you are auditing them ? Question 21 h A company owns all of the capital stock of another com- pany. This company has outstanding an issue of bonds not guaranteed by the company holding the stock. The assets of this subsidiary company are deemed insufficient to cover the bonds, so that its capital stock has no value. The own- ing company desires the auditor to prepare its balance sheet, setting up the assets of this subsidiary company along with other assets directly owned, and the bonds as liabilities. Is it proper for him to do so under the circumstances? Give reasons for your answer. Question 215 What do you consider a complete checking of (a) the general journal, (b) the purchase journal? Question 216 What is your method of checking dividends paid? Question 217 A New York company sells its capital stock at a pre- mium and the directors pass a resolution to declare a divi- dend out of the surplus thus paid in. Would you call atten- tion to this action if asked to make up the accounts, and, if so, why? 52 C. p. A. AUDITING QUESTIONS Question 218 In examining the books of a corporation you find that an officer is a partner in a business from which the corpora- tion makes purchases. Upon scrutiny you find that all the transactions are at proper figures. Would you, under such conditions, call attention to the fact when making your re- port to the directors ? Question 219 A concern owns a parcel of real estate which cost it $500,000. There is a purchase money mortgage on it of $350,000. You are asked to enter the same in the balance sheet at $150,000 net. Would you comply with this request ? Give reasons for your answer. Question 220 Under a law permitting payment of dividends solely out of surplus earned, a corporation pays a dividend out of gen- eral surplus, after carrying its losses for the period against the account. Would you make mention of the fact in the recital accompanying your statements, or would you let it go without specific mention ? Give reasons. Question 221 A teller is found to be short in cash. He has been in the position for a period of three years and has a daily record of cash on hand. His bond of suretyship antedates the discovery of the shortage by a period of six months, and it contains a clause that the surety shall not be liable for a shortage existing at the date the bond became effective. You are employed by the surety to ascertain if the shortage falls within the period of the bond. What steps would you take ? Do you think that you would be successful ? NEW YORK 53 Question 222 What is the objection to loose-leaf depositors' ledgers? Question 223 In auditing the paid bank checks of a corporation using a specially printed form of check, numbered numerically, would you consider it necessary to account for all check forms received from the printer? Give your reasons for or against such accounting. Question 221^ In making an audit would you consider it necessary to check in detail the postings of subsidiary ledgers ? Explain fully. Question 225 In examining the books of a railroad company for the purpose of determining the profits for a given period only, what class of expenditures should be carefully examined*? State how you would verify such expenditures. Question 226 In auditing the books of a concern that does busi- ness in a small city outside of New York and that uses a combined check and voucher for making payments, it is found that the concern buys drafts on New York and remits these drafts to its creditors. If the voucher check reads, "For the purchase of New York drafts to the order of the creditor to whom the money is due," would you consider this a sufficient voucher for the payment of invoices of the specified purchases ? State fully your reasons for or against accepting these vouchers as sufficient evidence of such pay- ments. 54 C. P. A. AUDITING QUESTIONS Question 227 Explain fully how you would proceed in inspecting and verifying the bonds and stocks (not valuation) owned by a company whose books you are auditing, stating the princi- pal points you would investigate in connection with the coupons and the names appearing on the stock certificates. Question 228 In auditing an account the auditor finds that Robert Brown had bought a bill of goods amounting to $500, pay- able on August 10th, less 2%. He had, however, made pay- ments thereon as follows : June 2nd, $100 ; June 15th, $100; July 3rd, $100; On what date would he be required to make payment of the remaining $200 to entitle him to the 2% discount under the original terms of sale ? Question 229 How should journal entries be verified ? What particu- lar class or kind of journal entries should be subjected to careful scrutiny on the part of the auditor? Why? Ex- plain in a general way how the journal may be used as a medium for the falsification of the following accounts: (a) cash, (b) accounts receivable, (c) asset accounts or expense accounts. Explain the purpose and effect of such false entries. Question 230 Write two forms of certificate such as might be given to a client upon your completing an audit for the fiscal year of the company. Question 231 The accounts of a steel and iron manufacturing com- pany show large additions to plant and machinery. It is NEW YORK 55 found that these charges include considerable amounts from pay-rolls. In the absence of specific explanations as to the pay-roll element, what method should be employed by the auditor to determine the accuracy and the propriety of these charges ? Question 232 A public service corporation that regularly sets aside from its profits a sufficient amount to provide for deprecia- tion, removes part of its old plant and replaces it with a larger and more costly one. The old plant is sold for scrap. How should the cost of the new plant and the proceeds from the sale of the old plant be treated in the accounts of the company? Give reasons. Question 283 How should an auditor determine that allowances for errors in bills and credits for merchandise returned are proper credits to customers' accounts, and are not made to cover amounts misappropriated by the bookkeeper and cashier ? Question 23Jf In handling large factory pay-rolls, which do you con- sider the better practice for the prevention of fraud, the taking of receipts from each employee for the amounts paid, or the establishment of a good system of accounting for handling pay-rolls ? Give reasons and explain why you think one method is better than the other. Question 235 If the cash in bank as shown by the cash book or ledger is reconciled with the amount shown by the pass book or certificate obtained from the bank, is it necessary to check 56 C. P. A. AUDITING QUESTIONS the pass book with the deposits as shown by the cash book? Give reasons for your answer, stating the nature of a pos- sible irregularity that might be disclosed by such detail checking. Question 236 The bookkeeper and cashier of a concern whose cus- tomers make all their remittances by check, fails to record certain bills on the sales books and misappropriates the amounts. The remittance checks for these bills were regu- larly deposited in the bank and the checks drawn for petty cash include additional amounts for such checks. State and explain two parts of an audit that might lead to the detec- tion of the misappropriation. Question 237 What measures should be taken to ascertain whether or not any notes receivable have been discounted and cleared from the books, notwithstanding the fact that they are not due and at maturity will be subject to demand on the last indorser in case payment is defaulted by the maker ? Question 238 What examinations should an auditor make with re- spect to fire insurance policies and their cost ? What should he do if he finds that all premiums have been charged to ex- penses when, and as vouched or otherwise, entered to the credit of the insurance company or broker? What notice, if any, should an auditor take of the fact that the client has. at risk of loss by fire property on which no insurance is carried ? Question 239 Describe two methods of procedure by either of which NEW YORK 57 might be detected the fact that a cashier has been appro- priating to his own use the funds of his employer, but has been keeping his cash book in agreement with the funds on deposit and in hand through the process frequently termed ^'kiting remittances of customers," i. e., depositing on one day all checks and drafts received from customers on that day together with a sufficient amount of cash to equal the cash book entries made on the same day for amounts re- ceived from certain customers on previous days, thereby postponing the entry of receipts from customers to an amount equal to the cash misappropriated. Question 240 What do the orders issued by the Interstate Commerce Commission require of railway companies with respect to making provision in the accounts for the replacement of equipment ? Question 2Jfl What are the duties of an auditor as to examination of inventories of finished product, product in process, and ma- terials and supplies, which have been taken and appraised by representatives of the client, in case he is not permitted to make tests for the purpose of satisfying himself as to the integrity of the quantities shown ? How should he cover such a situation in his report? Question 21^2 What are the duties of an auditor when he finds no charges made against maintenances or other accounts for depreciation of plant? Should he be concerned with the condition in this respect which obtains throughout the pe- riod prior to the one to be covered by his audit? How 58 C p. A. AUDITING QUESTIONS should he report to his cHent, having regard for the possi- biHty of his report being used for the purpose of obtaining loans, obtaining additional capital in the business, or selling some part of the existing capital interests ? Question 2.ltS What means should an auditor use to verify accounts representing bonds and stocks owned and bills and notes receivable, and to ascertain whether or not the book values are within the real worth ? Question 2JfJf State two methods by which, under different conditions, an auditor may establish the actual amount of capital stock outstanding, and state the conditions that will require the use of one method, and the conditions that will require the use of the other method. Question 2^5 Describe the procedure that should be followed in audit- ing the books and accounts of a stock exchange broker. Question 2^6 Is an ordinary bank check drawn by the concern whose books you are auditing, to the order of the Receiver of Taxes and properly indorsed by him, a sufficient voucher for the payment of the taxes of this concern ? Give reasons. Question 2Jf7 Two concerns in similar lines contemplate consolidating their business; you are requested to examine the books of account and report on matters germane to the contemplated NEW YORK 59 merger. What data would yon probably present in your report^ Question 21^8 The assets of a concern as shown by the books include real estate and accrued interest. In your audit how would you verify the correctness of these items? Question 2^9 In making a bank examination woum you commence at the start of the business day or at the conclusion of the busi- ness day? Give reasons. Question 250 How should an auditor commence a new audit of the books of a concern whose business is foreign to his expe- rience, in order to gain familiarity with the work in hand in the shortest possible time ? Question 251 In classifying the items of a statement of profit and loss under what caption should the following items appear, to be logically allocated : freight on sales, insurance, salaries of watchmen ? Give reasons for your allocation. Question 252 Describe the necessary precautions to be taken to safe- guard a corporation when an executor presents a certificate of stock for transfer. Outline entries on the transfer books. Question 25S Should any fluctuation in the valuation of permanent 6o C. P. A. AUDITING QUESTIONS assets be permitted to affect the result of the Profit and Loss account? Give reasons. Question 25J/. Draft instructions for cHent to follow in monthly recon- ciliation of cash, as basis for your audit. Question 255 Is it necessary to verify the stock ledger of a corpora- tion? Why? Question 256 State the method and the objects of an analysis of Bills Payable account. Question 257 State, in the order of their importance, five rules for the guidance of a junior in starting on his first audit. Question 258 Outline working papers and office records necessary to handle detailed semiannual audit of a wholesale mercan- tile house. Question 259 State precautions that you would take in verification re- quiring several days' work, of the securities of an insurance company, including both stocks and bonds in negotiable and non-negotiable form. Question 260 A corporation has branches in 20 cities, each selling at retail its standard product and paying local bills from NEW YORK 6l receipts. State matters on which the traveHng auditor of the corporation should report, and suggest suitable forms therefor. Question 261 In case it is expedient to have a local accountant audit the accounts of a branch office of a wholesale trading firm for which you conduct the general audit, state matters on which you would require a report. The branch sells goods, collects from customers, pays all local expenses, and remits cash in round amounts to home office. Question 262 A balance sheet audit discloses satisfactory conditions with the exception of insufficient allowance for losses in collection of accounts receivable. In case the client should not consent to adjustment, draft form of certificate that would be proper under the circumstances. Question 263 State the arrangement of a report in which it is desired to present balance sheet with supporting schedules of ac- counts receivable, accounts payable, bills receivable, and bills payable, and profit and loss account, together with comment on extraordinary features of the business. Question 26Jf- If called on to verify the Merchandise account of a man- ufacturing concern, what steps would you take to make the necessary investigation ? Question 265 As an auditor, state and explain the use of percentage in the presentation of operating and income results. 62 C. p. A. AUDITING QUESTIONS Question 266 You are employed by a lawyer to examine and report on the affairs of several corporations similarly engaged, with a view to the purchase of the same by his clients. In so doing you find that in paying a dividend the directors of one of the corporations have used the premium received from the sale of its treasury stock. Would you deem it necessary to call your client's attention to this action, and, if so, why? Question 261 Give sample of a report such as you would make after having examined several copartnerships engaged in the same line of business, that desire to combine in one corpora- tion. Give your views, and reasons therefor, as to the ad- visability or as to the inadvisability of the merger. Question 268 What condition of office organization, above all others, leads to fraud and defalcation by bookkeepers and cashiers ? Support your opinion. Question 269 What means would you employ to verify the usual cash receipts of the average social club ? Question 270 Give at length your views on the "ethics" of accountancy. Question 271 Assuming that you are a certified public accountant and employed as auditor by a corporation, state what you would NEW YORK 63 consider it your duty to do in order to safeguard your clients regarding the fire insurance that they carry on their stock of merchandise. Question 272 A foreign agent of a life insurance company sends monthly the following data : a report showing his receipts and disbursements, with dates; vouchers supporting the dis- bursements ; list of overdue premiums ; a statement of his daily cash balances in bank, supported by a certificate from his bank as to his closing balances. How would you audit his report? Question 273 A company has acquired, at $90 per share, 100 shares of its own capital stock, of the par value of $100 per share. Its balance sheet shows treasury stock $9,000. Is this cor- rect? If so, why? If not, state how you would adjust the books. Question 27 Jf. In auditing the books of a corporation capitalized at $250,000 you find that three years previously they acquired the business of a copartnership included in which was an asset called good- will valued at that time at $25,000, since which the same has not been written down. The average profits of the corporation for three years have been 9% on the capitalization. How would you treat the item good- will? Give reasons. Question 275 What steps would you take to audit the notes receivable purchased and the notes receivable on commission held by 64 C. P. A. AUDITING QUESTIONS a cottimercial paper house, to satisfy yourself that there had been no fraud by substitution? Question 276 The cashier of a concern is at the same time its book- keeper. During his absence on vacation sHght irregularities are discovered and you are engaged to audit his books. He returns on the day you begin your audit and admits a defal- cation of $5,000. Knowing that his receipts were supposed to be deposited daily in the bank, state the steps that you would take to ascertain the truth of his admission. Question 211 The result of your count of the "cash on hand" at a large agency on January 1, 1912, discloses : Bills $1,979.00 Coin 484.19 Cash items supported by properly signed vouchers: January 14, 1908— Sub-agent Jones $200.00 July 20, 1909— Sub-agent Thomas.... 140.00 August 20, 1909— Sub-agent Vincent.. .. 75.00 September 30, 1910— Sub-agent Nelson 230.00 645.00 Cash balance as per general ledger $3,108.19 Does this count complete your duty as an auditor? If you consider that further steps are necessary state what you would do. Question 218 What instructions would you give to a junior account- ant to whom you had intrusted the audit of the account In- vestment in Bonds and Mortgages appearing on the books of a trust company ? NEW YORK 65 Question 219 You find that a concern whose books you are auditing has capitalized the amount of royalties that it would have had to pay on the sales of a three years' period if it had not owned the patents. On the increase of surplus thus obtained the directors have declared a stock dividend. Would you consider yourself called on to criticize the action of the di- rectors? If so, state what would be the character of your criticism ? Question 280 The bondholders of a company are contemplating an ac- tion against the directors and retain you to obtain the ac- counting proof of their contentions ; subsequently the direc- tors ask you to act in the same capacity for them ; they pro- fess to have no objections to your representing both sides. What would you do? Question 281 Explain the steps you would take regarding an asset de- scribed as "Accounts Receivable — Suspense," in the audit of a business, the owners of which required a "clean and un- qualified certificate." Question 282 In an audit of a business the Plant account of which has been increased from $100,000 to $150,000, what steps would you take regarding this asset and what would be your con- trolling consideration as to the propriety of the $50,000 of additions during the period under audit? Question 283 What vouchers would you refuse to accept in the audit 66 C. P. A. AUDITING QUESTIONS of a corporation, even though such vouchers were duly approved by such of the officers of the corporation as is re- quired by custom or in the by-laws? Give examples and explain. Question £8J^ A life insurance company pays a lump sum of $7,500 to purchase an agent's interest in renewal premiums. What is the correct treatment of such expenditure ? Explain fully. Question 285 A lead company issues certificates evidencing the sale of and agreement to deliver on demand to the purchaser a cer- tain number of pigs of lead of variable and unknown weight, at a price to be based on the average daily published quo- tation of pig lead during the month in which the certificates are issued. In a certified balance sheet how would you treat these certificates ? Explain. Question 286 In an audit covering the year ended December 31, you discover that invoices aggregating $2,000 for bricks and other building materials to be used in the construction of an addition to the plant, were received after the books were closed, although the materials were actually received on De- cember 15. As the materials were not taken into the inven- tory and the invoices were not on the books, would you re- quire any adjustment? Give reasons. Question 287 As a certified public accountant auditing the books of a manufacturing business that operated a supposedly highly developed cost system, what steps would you take regarding NEW YORK 67 inventory values that were found to agree with the cost records ? Question 288 You are instructed to make an audit, prepare and certify a balance sheet to be publicly used in the sale of additional capital stock. The date of your engagement is September 16, 1912. No inventory has been taken since October 31, 1911. What course would you pursue? Question 289 The Wiltshire Life Insurance Company's office build- ing has suffered a total loss by fire. The loss stands on the books at $100,000, but the site alone is known to be worth double that amount. At the time of your audit the company has lost in rentals from the burned building $6,000 and has paid $15,000 taxes and expenses incidental to the removal of debris. How would you have these items treated ? Give reasons. Question 290 Write three concise certificates to a balance sheet, with qualifications respectively as to (a) inventory of merchan- dise not taken under your supervision, (b) accounts re- ceivable not verified by confirmation, (c) investment securi- ties not examined. Question 291 The "proof" of the first teller of a bank shows the fol- I owing captions : Debits: (1) Cash, (2) Second Teller, (3) Third Teller, (4) Second Teller Special, (5) I Clearing House. 68 C. P. A. AUDITING QUESTIONS Credits: (1) National Bank Notes, (2) Checks on Bank, (3) Second Teller's Items, (4) Third Teller's Items, (5) Clearing House. State what instructions you would give to an assistant whom you were about to intrust with the checking of that proof, immediately following the count of the cash and se- curities on hand. Question 292 You were retained by an inventor to ascertain the accu- racy of the figures submitted by a company operating under his license. Royalties are paid on sales ; licensee issues a cata- logue in which the sundry finished products are referred to by numbers ; if the invention is used on any particular pro- duct the letter ^'I" precedes the code number. What steps would you take to perform your duty ? Question 293 An electric lamp manufacturing company has charged to cost of lamps as "depreciation," one-fourth of the value of the filament-filtering machinery acquired a little more than one year ago. The life of the machinery is estimated to be 10 years, but, owing to discovery by a competitor of a new process of metal pulling which, while still imperfect, promises to revolutionize the lamp industry, the machinery in question will probably be obsolete within a period of three years. State at length what you would say concerning the propriety of making such a charge to cost. Question 29Jf The consolidation of companies A, B, and C is under consideration; it is desired to establish a comparative NEW YORK 69 Statement of income for the three companies as of August 31, 1912. Company A closes its books on December 31 ; Company B on June 30; the fiscal period of Company C expires on August 31. No inventories have been taken as of the latter date by A and B, and they will not be taken. Express the procedure that you would follow in order to establish a satisfactory statement. Question 295 A, engaged in the jobbing business, enters into a copart- nership agreement wnth B, the terms of which are in sub- stance as follows : B is to share in the gains and losses of the business at the ratio of 37%%, which is in proportion to his investment of $6,000. A is to act as general manager, cashier, etc., and is to render an accounting to B at the end of every six months. The books are kept by single entry. There are day book, check book provided with proper col- umns and space for deposits, drawing, and particulars, and a general ledger kept in accordance with the purpose of single entry. All moneys received or paid pass through the bank. You are engaged to render the accounting to B at the end of the first six months. State what information you would consider necessary to convey to B and how you would proceed to obtain it from the material at hand. Question 296 What are the chief points to which attention should be directed in dealing with fluctuating currency in the books of accounts of merchants? Question 297 An auditor, on completing an investigation of the af- fairs of an importing house, certifies that the accounts are 70 C. p. A. AUDITING QUESTIONS correct as recorded in the books. Would you criticize this certification? If so, why? Question 298 An importer of automobiles receives shipments in ac- cordance with bona fide orders placed against six months' acceptances with interest. He stores the merchandise in bonded warehouses subject to withdrawal. At the end of the fiscal period it is customary to omit from the inventory such warehouse goods as are left and also the acceptances unpaid. In being asked to certify the statement of condi- tions at a given time, how would you deal with this state of facts ? Question 299 A, B, and C are equal partners, each having subscribed $5,000 to the partnership. A pays in $3,000, leaving $2,000 still due the partnership on his capital account. It is agreed for the present that this $2,000 can remain unpaid, provided A pays interest on same, which he does. Later a dispute arises as to how this interest shall be credited. A claims that it should be included with the earnings of the business, the profits of which are to be divided equally among the three partners. B and C claim that this interest should be divided between them only, as they have fully lived up to their obligations under the partnership agreement, while A had only partially done so. To what account should the interest on the deferred payment be credited? Question 300 In auditing the accounts of a manufacturing firm, what salient features of the cost ledger should receive attention ? NEW YORK Question 301 71 In auditing the accounts of a manufacturing contractor, what manipulations of the cost accounts should the auditor anticipate, to guard against inflating profits? Question 302 What common expedient is resorted to by manufacturing contractors to hide their losses in the cost ledger ? Question 303 In auditing the accounts of a factor, what equitable method should the auditor employ to ascertain the amount of interest due to or from the consignor with respect to the account sales ? Question 30Jf What documentary evidence would you require to prove the acceptance of bills payable by a factor, against goods in transit ? Question 305 The value of the lease of a piece of property for 20 years, with privilege of renewal for a like period, is carried on the books at its value in fee simple. Would you pass this unnoticed ? If not, why not ? Question 806 In the books of a manufacturing corporation whose ac- counts you are investigating for creditors, you learn from outside sources that accounts assigned to a discount com- pany have been concealed. Explain how this may have been done and the methods you would pursue to detect it. 72 C. p. A. AUDITING QUESTIONS Question 307 Three corporations are to be merged. In examining the records of corporation B, formed three years previously with an authorized capital of $250,000, you find the entire capital stock carried on the books as fully paid in. The facts you ascertain are as follows : There are three directors, X, Y, and Z, composing all the subscribers to the stock. The payments have been received at a directors' meeting with all present. X subscribed for $100,000 worth of stock and paid all in cash ; Y subscribed for $75,000 worth of stock and paid $50,000 in cash and a note of $25,000 on demand ; Z subscribed for $75,000 worth of stock and paid $25,000 in cash and a note of $50,000 on demand. These notes are carried among the assets and are still unpaid at the time of your examination, no interest having been collected. Y and Z cannot make good. In preparing a report on this state of facts what recommendations would you make, and why? Question 308 In auditing the books of a concern you detect the fol- lowing : A customer paid $100 in currency on account of a debt and returned $10 worth of merchandise. The entry in the cash book records a receipt of only $90 and the return book a return of $20. The money not properly accounted for was taken by the bookkeeper. In reporting these facts state where in this transaction you find a defalcation, a fraud committed, or an embezzlement. Question 309 What method would you adopt to prove the outstanding certificates of stock to be correct as represented on the transfer ledger ? PENNSYLVANIA Question 310 How far should an auditor inquire into the work of his predecessor, and what circumstances might affect his de- cision upon this point? Question 311 Of what use is the minute book of a corporation to an auditor ? Question 312 Of what use are partnership papers to an auditor? Question 313 You are called upon to audit the disbursements of a treasurer's account of a manufacturing company. The voucher system is in use. Five thousand vouchers are in- volved, these being paid by bank check which is attached to its voucher, or one of several it may have paid. You are expected to examine all the vouchers, although a number of them may have been journalized. State your method of procedure, also how you know you have seen every voucher issued in the period under review. While this is going on, and may occupy some weeks in its discharge, office boys, clerks, manager, superintendents have access to the vouchers, and are allowed to take out and re- turn for reference purposes of their own at will. 73 74 C. P. A. AUDITING QUESTIONS Question SlJf How would you audit the receipts of a treasurer, they being deposited in the several depositories of the company? If not all deposited, what would you do to verify? Question SI 5 A bookkeeper of a manufacturing concern fails to make all proper charges of time sales. No order book was kept. He retains twelve to fifteen hundred dollars yearly for many years of payments received on account of these time sales, by cashing the checks received in due course, out of the drawer, and deposits the said checks regularly in firm's bank account, properly indorsed by firm. How would you detect this? Question SI 6 In auditing the books of a department store where sales checks are used, and are sent at once to the cashier with money offered in payment, should there be collusion between several salesmen and cashier by which a certain amount is retained by cashier for subsequent division among himself and associates in these transactions, he destroying the checks, how would you detect this and what method would you suggest for its suppression ? 'Question S17 If you are restricted in the scope of your auditing on a set of books, what part should you, as an auditor, insist upon doing? Question S18 If you are called upon to audit the accounts of a trust PENNSYLVANIA 75 company or building and loan association whose principal investment may be mortgages, how would you prevent the introduction of cancelled or fictitious mortgages? Question 319 In auditing the accounts of a firm you find a number of dishonored and overdue notes which form part of the bal- ance of Bills Receivable account. State fully what you would do with these. Question 320 How would you audit the accounts of a corporation whose capital was invested in the entire capital stock and bonds of a number of other corporations, and arrive at a correct result as to the profits of the company? Answer fully and give reasons for your action. Question 321 What would be your mode of procedure in ascertaining the earnings of: Gas companies? Electric lighting companies? Passenger railroads? Answer fully, explaining the different accounts of each, going into operating expenses and betterments. Question 322 In auditing trust companies holding funds of a dece- dent's estate, what are your duties as to the investments made from such funds? Question 828 How far does your duty as an auditor require you to go 76 C. P. A. AUDITING QUESTIONS outside of the books, in furnishing a statement of the con- dition of a business at a given time ? Question 32J^ Under what conditions would amounts be charged to betterments at one time, and charged to operating expenses at a later date in railroads, electric companies, and gas com- panies ? Question 325 In ascertaining the profit or loss of a company which had been purchased for a stated amount of stock and bonds of a new company, without an inverttorv of the plant in detail, how would you arrive at a fair basis of yearly depre- ciation of plant? Question S26 On a suspected embezzlement in a bank, how would you make a quick preliminary examination ? ■Question S27 Your certificate is desired by your client to be presented to a mercantile agency. Give your mode of procedure to get at a fair report, and give illustration of such report, using your own figfures. Question 328 State how you would make an examination of street railway and electric lighting, and gas companies, and what points you would examine with great care. PENNSYLVANIA 77 Question 829 Give your mode of procedure in examination of : (a) Industrial corporation (b) Manufacturing business (partnership) Question 330 When a number of corporations are operating under their own charters, but managed and controlled by one other corporation, how would you state the results of the business : (a) When the controlling corporation owns a ma- jority of the stock of each of the other cor- porations? (b) When the controlling corporation owns all of the stock of the other corporations? Question 331 Give your mode of procedure in the examination of a building and loan association. Question 332 Write a report of your audit of not more than one hun- dred words : fa) When the books are properly kept (b) When the books are improperly kept using your own figures in both cases and showing the im- proper entries in the last case. 'Question 333 In case a corporation of five persons owninitr all the stock should credit each party in proportion to their several holdings with the profits as shown by the books, without ^8 C. p. A. AUDITING QUESTIONS formally declaring a dividend, and the said stockholders were also credited with interest on the undrawn credit bal- ance, what would be your action? Question 33^ Take up a business you are familiar with and state fully how you made an audit. Question 335 Explain the difference, if any, between an audit and an examination. Question 336 How would you audit the stock certificate book of a corporation : (a) When the corporation has no registrar? (b) When the corporation has a registrar? Question 337 In a business consisting of five separate departments there is kept a general ledger containing Capital account, the speculative accounts, such as Merchandise, Expenses, etc., and accounts with each separate department; sales ledgers containing the accounts of customers; and a pur- chase ledger containing the accounts of foreign and domestic creditors. In the general ledger each department account is charged with all the purchases made for the department, and cred- ited with cash received and allowances on account of sales of said department. The sales ledgers contain the different customers' accounts, showing charges for sales and credits for cash, allowances, etc., on account of sales. The pur- PENNSYLVANIA 79 chase ledger contains the accounts of the different creditors, showing credits for merchandise and charges for cash. In making an audit of the books, how would you deter- mine that the profit or loss for each department had been properly stated for a given period? Question S38 In three successive fiscal years a manufacturing cor- poration values its supplies, etc., in hand at cost, with de- ductions for deterioration as follows : at end of first year, 5% ; at end of second year, 10% ; and at end of third year, 15%. With the inventory taken on this basis the profits for the second year did not equal the dividends declared, and surplus was intrenched upon ; and in the third year the dividend paid was so much in excess of profits that the sur- plus was entirely exhausted and a debit balance created in the Profit and Loss account. In auditing the books, how would you treat the above condition in your report? Question 339 A wool dealer's business consists of the following trans- actions : (a) Buying and selling for his own account. (b) Receiving on consignment and selling for com- mission. (c) Consigning to other dealers for sale for his ac- count. All wool received, whether purchased or consigned, is charged to Merchandise account and credited to the vendors or consignors ; and all wool disposed of, whether consigned go C. P. A. AUDITING QUESTIONS or sold, is credited to Merchandise account and charged to the purchasers or consignees. The prices in the pro forma invoices of consigned goods invariably differ from the prices shown in the account sales rendered to consignors or re- ceived from consignees. At the end of the year he prepares a statement treating all wool in his possession as inventory, and credits Merchandise account therewith ; all debit bal- ances on account of goods sold or consigned by him, as ac- counts receivable, and all credit balances on account of goods purchased or consigned to him, as liabilities. The accounts are clerically correct; you are asked to audit his accounts and certify to the correctness of his statement. How would you proceed to do this? Write a report thereon not exceeding two hundred words. Question SJfO A and B formed a partnership in a manufacturing busi- ness, each contributing $25,000. The business was con- ducted in a building owned by B, for which B was to be paid $10,000 rent per year. During three given years the profit averaged $10,000; and A drew out $1,000, $5,000, and $10,000 in the respective years, and B drew out $3,000, $4,000, and $5,000. The rent account was adjusted in the books by crediting B in each year with $5,000 and charging this amount the first year to A, the second year to expense, and the third year to B. In an audit of the books, how would you state the ac- counts at the close? Question SJfl How would you proceed in making an audit of a stock broker who also does a banking business? Give full par- ticulars, with an illustration, using your own figures. PENNSYLVANIA gl Question 3^2 How would you proceed in making- an audit of the books of a municipality? Give full particulars, with an illustra- tion, using your own figures. Question SJ^S How would you proceed in making an audit of an es- tate, including principal personality and income personality, and real estate and real estate income, where the interests of distributees include legacies to lineals and collaterals, an- nuities, widow's dower, life estates, and estates in remain- der ? Give full particulars, with an illustration, using your own figures. Question SJfJf Describe in detail your method of conducting an audit of a commission house. Question $45 If in examining a manufacturing corporation using a cost system in their shops, you find a large difference be- tween the general books and the cost in the cost books, in what accounts would you probably be able to trace the dif- ference ? Question 346 Is there any difference between a thorough audit and an examination? If so, state fully wherein they differ. Question 3^7 Give a statement as to the duties of an auditor in rela- tion to the bookkeeper and to his clients, and, if auditing a corporation, as to the stockholders of the corporation, cov- ering confidences and personal contact. 82 C. p. A. AUDITING QUESTIONS Question SJ^S A firm of brickmakers, under the terms of their 20 years' lease, agree that at the close of the term they will level the ground, cover with soil, and generally restore to previous conditions for agricultural purposes. (a) How would you deal with this liability in the ac- counts of the firm ? (b) Assume five years of term have expired and none of the work done and no provision made. How would you adjust matters at this date? Question SJf.9 The following are the accounts of the Real Estate In- vestment Company on June 30, 1906. State (limiting your answer to 200 words) the manner in which you would con- duct an audit. BALANCE SHEET, JUNE 30, 1906. Assets Real estate improved $450,000.00 unimproved 175,000.00 Office furniture 6,850.00 Investments in stock of other companies 76,000.00 Rents accrued but unpaid 20,500.00 Cash 22,150.00 Total assets $750,500.00 Liabilities Capital stock. 10,000 shares $100 each, $50 paid $500,000.00 Mortgage bonds (5%) 200,000.00 Reserve for depreciation 18,625.00 Income account 31,875.00 Total $750,500.00 PENNSYLVANIA 83 INCOME ACCOUNT FOR THE YEAR ENDING JUNE 30, 1906 Credits Rentals $84,500.00 Interest on investments 3,000.00 Total credits $87,500.00 Debits Interest on mortgages $22,000.00 Taxes 6,950.00 Water rents 4,225.00 Repairs and alterations 11,500.00 Office and miscellaneous expenses 6,635.00 Fire insurance 610.00 Title insurance 417.00 Legal expenses 2,500.00 Auditors' fees 788.00 Profit for year 31,875.00 Total $87,500.00 Arising out of the last question, having completed the audit, draw up a short and concise report to the directors, calling their attention to any points in the accounts to which notice should be specially directed. Question 350 In your audit there are two possibilities against which you would rigorously guard : (a) The overstating of debtor balances. (b) The understating of creditor balances. Set out all practical checks you can think of. 84 C. P. A. AUDITING QUESTIONS Question 351 A concern engaged in building locomotives wishes to equip their machine shop with some new machinery of standard types, and determines to have it made in their own plant by their own workmen from material which they have in stock. By this means it will cost much less than if they bought it from outsiders. They desire consequently to charge ^'Machinery and Large Tools" account with the cur- rent market price of the machinery so produced, on the ground that their workmen, while making it, have been de- tached from other profitable employment. Discuss this question pro and con, and say what you would advise to be done, giving your reasons. Question 352 To what extent would you criticize the management in your report? Question 353 Describe an audit of a trust company doing a banking business, acting as trustee for estates, trustee for bondhold- ers of a corporation, and issuing title, surety and fidelity bonds, giving your views as to how you would arrive at the liability of the company as to the title, surety and fidelity bonds. Question 35Jf. The report to the Comptroller of the Currency by the Blank National Bank on June 15, 1906, and again on July 20, 1907, showed as follows : PENNSYLVANIA RESOURCES June 15, 1906 July 20,1907 Loans and discounts $3,551,140.20 $3,670,785.13 U. S. bonds to secure circula- tion and U. S. deposits. . . . 547,000.00 450,000.00 Premiums on U. S. bonds. Bonds, securities, etc 85 13,000.00 12,000.00 370,244.25 410,570.75 70,694.16 129,198.80 613,753.18 520,734.39 Banking house, furniture, etc Due from banks and bankers Royal Bank of Dublin, Ireland 36,215.48 42,486.15 Due from approved reserve agents 537,456.91 472,646.47 Checks and other cash items.. 24,247.54 83,411.83 Exchanges for Clearing House 281,933.18 199,179.10 Notes of other national banks 2,850.00 200.00 Fractional currency, etc 495.55 1,974.61 Lawful money reserve in bank 411,218.15 522,225.80 Redemption fund with U. S. Treasurer 20,250.00 24,250.00 Total $6,480,498.60 $6,539,663.03 LIABILITIES Capital stock paid in $600,000.00 $600,000.00 Surplus fund 500,000.00 550,000.00 Undivided profits less expenses, etc 115,754.47 109,566.46 National bank notes out- standing 408,000.00 400,400.00 Due to banks and bankers 956,437.76 1,119,598.80 Individual deposits subject to check 3,463,436.50 2,802,915.26 Certificates of deposit 33,665.00 15,585.56 Certified checks 6,226.71 4,124.50 Cashier's checks outstanding.. 142,978.16 402,472.45 United States deposits 144,000.00 45,000.00 Bonds borrowed 110,000.00 Notes and bills discounted 490,000.00 Total $6,480,498.60 $6,539,663.03 Accounts current received from the Royal Bank of 86 C. P. A. AUDITING QUESTIONS Dublin show a credit balance in favor of the Blank National Bank on June 15, 1906, of £7,624/8/4, and on July 20, 1907, of £9,337/14/6. (a) You are retained by the board of directors of the bank to make an examination on July 20, 1907, and to make an audit in connection therewith of the accounts from June 15, 1906. State how you would propose to carry out these instructions, describing your process in the order in which you think the several steps should be taken, and discussing carefully each item shown on the foregoing statements, to- gether with such other accounts appearing in connection with your answer to part (d) of this question as you think should be examined. (b) Do the ledger balances against the Royal Bank of Dublin show the correct status of this account ? How would you prove that they do, and, if you found the balances stated above to be wrong, what entry would you make to correct ? (c) Describe more fully the "liability ledger" (or what is known in some banks as the ^'credit ledger" and in others as the "line ledger") and state whether you think it should prove with any general ledger account or be kept by single entry purely. If the former, show how you would accom- plish your purpose. (d) From the foregoing and your knowledge of bank- ing, outline a system of accounts suitable for the Blank Na- tional Bank, describing (in sufficient detail to indicate your understanding) the principal books and blanks used in the several departments, but showing no forms. Question 355 What are the distinguishing features of : Mortgage bond? Collateral trust bond? Income bonds ? PENNSYLVANIA 87 Question 356 What is the purpose and method of registering stock certificates and other corporate securities? Question 357 The following are summarized trial balances of a manu- facturing company as of December 31, 1906, and June 30, 1907: December 31, 1906 June 30, 1907 Capital stock $300,000.00 $300,000.00 Debentures 100,000.00 100,000.00 Cash $25,127.96 $34,321.90 Inventory 351,362.14 396,609.50 Accounts payable 15,256.59 19,690.23 Accounts receiv- able 24,200.50 54,009.16 Real estate build- ings, etc 110,910.54 115,602.73 Stocks and bonds 21,650.36 22,321.14 Unexpired insur- ance 1,550.25 1,824.67 Surplus 119,545.16 119,445.16 Profit and loss account, 1907 85,553.71 $534,801.75 $534,801.75 $624,689.10 $624,689.10 The books of the company were audited as at December 31, 1906, and in making up the accounts at that date the auditors made the following adjustments of the above trial balance figures : (1) Transferred to profit and loss $8,462,14, which had been improperly charged to real estate and buildings. (2) Wrote off $3,600 for depreciation of buildings, etc. gg C. p. A. AUDITING QUESTIONS (3) Brought into account expense liabilities amount- ing to $1,250 which had been incurred in 1906, but were not entered on the books until Jan- uary, 1907. (4) Reduced the value of inventory by $14,920. The auditors were again called in at June 30, 1907, and found that the adjustments made by them at the previous audit had been ignored so far as the books were concerned. They also found that during the half year $1,000 had been charged to buildings instead of to expense account ; that no provision had been made for depreciation during the year amounting to $1,800, and that the inventory of June 30th was overvalued to the extent of $9,840. On the other hand, the insurance unexpired was incorrectly calculated and should have been $2,774.67 instead of $1,824.67. (1) Prepare the audited balance sheet at June 30, 1907. (2) State the amount of the profits for the half year as audited. (3) Prepare schedules showing how the audited balance sheet is made up and how it can be connected with the book figures. Question 358 What is the distinctive difference between an insurance company that is known as a "mutual company," and one that is known as a "stock company" ? Question 359 You are retained by the Appliance Manufacturing Com- pany to audit its accounts for the year ending June 30, 1907, and to prepare the balance sheet, trading and profit and loss accounts for the year. You are expected to write a brief report of not less than PENNSYLVANIA 89 200 and not more than 400 words dealing with your audit, showing its scope and discussing au)^ matters relating to the accounts which may seem to you to be of interest. The company was incorporated on July 1, 1906, and its balance sheet on that date showed as follows : ASSETS Cash $12,680.92 Bills receivable 2,200.00 Book accounts receivable 19,501.33 Merchandise material on hand.... 9,554.43 Machinery and tools 129,355.01 Furniture in office and store 11,762.18 Expenses of incorporation 500.00 Book accounts receivable in sus- pense 1,983.40 Good-will 40,000.00 Total $227,537.27 LIABILITIES Bills payable $10,901.07 Book accounts payable 15,617.04 Capital stock 200,000.00 Reserve for suspended accounts receivable 1,019.16 Total $227,537.27 The trial balance of June 30, 1907, was as follows : Cash $5,259.80 Notes receivable 5,048.75 payable $16,922.81 Sales 240,172.56 Materials and supplies 52,088.94 Sundry merchandise bought 2,869.80 Selling wages 22,400.04 Manufacturing wages 88,317.70 Miscellaneous receipts 549.20 Office salaries 5,802.50 go C. P. A. AUDITING QUESTIONS Trial Balance (Continued) Manufacturing expenses 15,353.16 Office expenses 2,496.14 General selling expenses 3,491.50 Advertising 2,064.33 Light, heat, and power 3,121.97 Rent of factory 4,000.00 " " store and office 1,860.29 Repairs to machinery, etc 845.78 Delivery expenses 2,201.01 Interest and discount 738.40 Commissions 5,089.30 Machinery and tools 132,817.24 Dividend (paid January 10, 1907) . 6,000.00 Furniture, etc., in store and office 12,016.45 Book accounts receivable 58,935.20 payable 18,311.16 Expenses of incorporation 500.00 Reserve for suspended accounts.. 320.59 Good-will 40,000.00 Capital stock 200,000.00 Accounts receivable in suspense.. 2,316.84 Totals $475,955.73 $475,955.73 The inventory of merchandise and material amounts to $12,453.90. You discover the following facts not disclosed by the books : (a) Invoices not entered: Maryland Steel Co., dated June 15, 1907, for steel $165.00 York Safe & Lock Co., dated June 1, 1907, for office safe : 110.00 Vulcan Coal Co., dated May 20, 1907, for coal 42.50^ $317.50 (b) The company made in its shop for its own use five machines, in the construction of which it used material cost- ing $525, and the mechanics' wages amounted to $760. i PENNSYLVANIA 91 Question 360 Wherein do municipal accounts differ from private ac- counts as to capitalization and revenue ? Explain fully as to the receipts and disbursements of funds. Question 361 Describe the functions and method of operation of a stock exchange clearing house and point out the differences between a stock exchange clearing house and a bank clearing house. Question 362 The B & E Company is a wholesale trading concern, having its headquarters in Lancaster, Pa., and maintaining branch stores in a number of cities; Richmond, Va., among others. These branch stores receive their goods upon con- signment from the head office ; keep the accounts with their customers ; make collections thereon ; keep local bank ac- counts; pay current expense bills and remit their excess funds from time to time to the head office. The manager of the Richmond branch is employed on a small, fixed salary and a commission based on the sales, the latter compensation being forwarded to him quarterly by check from the Lan- caster office. Without intending to steal, he adopted the habit of anticipating the arrival of his check and withheld collections received from customers, making no entries therefor upon the books for the time being, but being care- ful, however, not to hold any one item longer than a few days, thus constantly replacing out of the current receipts items previously withheld. Upon receipt of his quarterly check for commissions he would at once make good the amount he had in the above manner advanced from the com- pany's funds to himself. C)2 C P. A. AUDITING QUESTIONS (a) If you were instructed to audit the accounts of B & E Company, including those of the branch offices, would your audit disclose this condition, and, if so, concisely and carefully describe the course you would pursue. (b) What criticisms have you to offer relative to the administrative plan of the B & E Company as outlined above? (c) Describe clearly the form of accounts you think is best adapted to this business if it were operated in accord- ance with the methods best suited, in your judgment, for the management of a business maintaining branch stores. Question 363 You are instructed by the receiver of an importing and trading concern to examine the accounts and report to him : (a) The financial position of the concern, and (b) The causes that have mainly contributed to the failure. In your answer, prepare a statement of the assets and liabilities in such form as you think should be used for the information of the receiver and the creditors, and under (b) state the matters to which you would direct your attention, having in mind the nature of the business, and how you would proceed with your investigation. Question 36^ The North & South R. R. Company has demolished its old wooden station at a certain city on its line, and has erected in its place a larger and more ornate structure of brick and stone at a cost of $100,000 in excess of the book value of the old building, after deducting the salvage. Bear- ing in mind that this expenditure of $100,000 does not ma- terially increase the earning capacity nor decrease the oper- PENNSYLVANIA 93 ating expenses of the company, what disposition should be made of this item in the accounts ? State the general prin- ciples that should govern an accountant in dealing with this class of expenditure, whether occurring in a railroad or any- other property. Question 365 Describe a system of internal check for use in a gas company to protect it from loss of revenue. Question 366 What methods would you adopt in an audit of a street and interurban railway to prove the earnings ? If you found that proper precautions had not been taken, describe the plans you would recommend to such a company so as to insure the collection of all of its earnings. Question 367 A coal mining corporation proposes to issue bonds of the denomination of $1,000 each, to the amount of $500,000, on January 1, 1911, bearing interest at 6% per annum, pay- able semiannually, January 1 and July 1. Under the terms of the mortgage a fund equal to ten (10) cents per ton of coal shipped is to be set aside semiannually for the first three years and at the rate of twelve (12) cents per ton thereafter, the fund to be used as follows : ( 1 ) To pay the interest on the bonds. (2) After paying interest the balance is to be used to redeem and cancel bonds at par as of the dates on which the interest is paid; any balances remaining in the fund thereafter to be added to the fund of the next period. 94 C. P. A. AUDITING QUESTIONS It is estimated that the tonnage will be 400,000 tons each six months for the first three years and 500,000 tons each six months thereafter. Prepare a tabular statement showing concisely the oper- ations and the result of the carrying out of the proposed plan based on the foregoing estimates. Question 368 You are called on to make the annual audit of accounts of the Manufacturing and Trading Corporation, for the year ending Tuesday, 31st May, 1910, a concern owning its own plant subject to a mortgage, the interest on which is due semiannually, January 1 and July 1. It markets its own product and several hundred men are employed in the manufacturing plant, wages being paid weekly on Wednesdays for time up to and including pre- ceding Fridays. The financial books are kept double entry, all the general accounts and the accounts payable being in one large bound ledger. The main property and operating accounts are : Merchandise, for purchases of material, etc., sales of product, and adjustments in respect of both ; Wages, for all wages paid ; Factory Expenses, including repairs to machinery and building, machinery supplies, power, and insurance; Expense account, for salaries of ofificers, office force, and salesmen, advertising, traveling and other general expenses ; Real Estate, Machinery and Equipment, Bills Re- ceivable, Bills Payable, Accounts Payable, and Mortgages. The customers' accounts are in a separate ledger. The other books and records are : a bound order book, a bound sales book, a main cash book (discount columns both sides) containing entries of payments by check and in currency — any cash receipts from customers being usually retained at the office and used for making currency payments; and checks drawn for amounts slightly in excess of pay-roll PENNSYLVANIA 95 requirements, the excess going into the drawer ; a pay book or journal containing entries of purchases of materials and adjustments thereof, adjustments of sales, bills receivable, and other items of a general nature; a bills receivable and payable book; capital stock ledger, certificate book, and fer book ; minutes ; time records and pay-rolls. The inventory has been prepared by the company, the valuations being at selling prices less an allowance for cost of marketing. The minutes disclose no authority for the amounts of salaries drawn by or credited to the officers. (a) State the work you would propose to perform in making the audit. (b) Write a comprehensive report on the audit and on the balance sheet and profit and loss account which you would submit, and (c) State the recommendations, if any, you would make regarding methods of accounting and administration. Question 369 The Indiana Manufacturing Company manufactures steam engines and does a large repair business upon engines and other classes of machinery. What accounts would you provide for expenses (other than selling) which cannot be charged directly to jobs or shop orders ? Describe the va- rious methods of distributing these general expenses, fre- quently spoken of as "shop burden," to the several shop or- ders. Which method would you recommend for use in a factory : (a) Containing a large number of costly machines? (b) Where relatively few high-priced machines are used and where there is a large proportion of bench work by skilled employees? 5|6 C. p. A. AUDITING QUESTIONS Question 370 The books of the Mapes & Manning Company, man- ufacturers of and dealers in farm implements, show for the past five years net profits as follows : 1906 $177,000 1907 143,000 1908 206,000 1909 16,000 1910 98,000 You are instructed by a banking syndicate to examine the accounts of the company and report upon the profits during the above period. In the course of your examination you ascertain the following facts: Current liabilities were not taken into the accounts, as follows : January 1, 1916, for New buildings $42,000 Accrued wages 5,300 December 31, 1906, Repair charges $2,600 Accrued wages 2,900 December 31, 1908, Merchandise invoices $6,800 Current expenses... 5,400 December 31, 1910, Accrued wages $3,200 Materials and sup- plies 4.600 Shop equipment.... 8,400 At December 31, 1910, the company engaged two real estate experts to appraise its land and buildings. The lower of the two showed a present value of $587,000, and this valuation was adopted by the board of directors, who in- structed the bookkeeper to charge Real Estate account and credit Profit and Loss at the above date with the difference PENNSYLVANIA 97 between the foregoing amount and the book figures of $560,000. A mortgage of $200,000, bearing 5%, remained upon the property during the whole of the period under review, and interest on this mortgage was charged before arriving at the book profits. Satisfactory provision was made in each year for de- preciation of buildings, machinery, etc. Revise the profits for each year in accordance with the facts disclosed by your examination, and draft the form of certificate you would be prepared to give thereon to the bankers for prospectus purposes. Assuming that after submitting this certificate to your clients they prefer instead to publish a certificate showing the average profits for the five-year period, what position would you take and what form of certificate would you be willing to sign? Question 371 A manufacturing concern is required to carry a six months' supply of a certain kind of raw material, and, as the material is not of the kind that can be purchased every day, they must purchase it at any time it is offered to them. For this reason the prices fluctuate sometimes very considerably. When they purchase this material, they pay cash for same and have the material shipped in as wanted. What method would you use in arriving at the cost of this raw material used during any one month in manufacturing? Question 872 A textile mill, employing some YOO hands, operates five departments with a superintendent or head foreman in each. About 500 hands are paid upon a piece-work basis, 50 on a part piece-work and part day rate, according to the duties qS c. p. a. auditing questions assigned to them from day to day; 100 are on a straight day rate basis, while the remainder are paid weekly salaries but no overtime. Describe clearly and concisely the methods you would recommend for assembling and recording the data entering into the weekly pay-roll. Also state how you would have the pay-roll prepared and the wages, as shown thereon, paid to the hands, having in view both economy in the clerical work and securing of proper safeguards against frauds. Question 373 (a) How should advancements which appear in the inventory and appraisement of a decedent's estate be treated by the executors in distributing the principal to the heirs? (b) In the absence of instructions in the will, what dis- position should be made of sale of "rights" or "warrants" by an executor? (c) An executor of an estate in Pennsylvania forecloses a mortgage owned by the estate, and title is taken to the property, the property remaining in the estate at the time of filing his account. How should the transaction appear in his account? Question 374 The following is a financial statement of the Homestead Land Company on commencement of business, January 1, 1908: ASSETS LIABILITIES Land $500,000 Capital stock $100,000 Cash 70,000 Bonds author- Discount on bonds 5,000 ized $500,000 Less not sold. 25,000 475,000 Total $575,000 Total $575,000 PENNSYLVANIA 99 The land shown represents 10,000 acres, which were acquired at the rate of $50 per acre. The bonds issued by the company are dated January 1, 1908, maturing January 1, 1928, and bear interest at 5% per annum, payable July and January 1st. Under these bonds the company is re- quired to pay into the hands of the trustee, as a sinking fund for their redemption, the sum of $50 for each acre of land for which the company has received full payment and conveyed title. (Note that the company has complied with this requirement during the year and the trustee has advised, at December 31, 1908, that he had in his possession the sum of $153,500, of which sum $3,500 represented interest on the funds in his hands.) The object of the company is to divide its property into 10-acre plots, which it sells at the rate of $75 per acre when paid for in cash, or $100 per acre when the plots are sold on the instalment payment plan. This latter plan provides for the payment of $20 per acre in cash at the date of pur- chase, and the balance to be covered by four notes of equal amounts, maturing one, two, three, and four years after the date of purchase; the first two notes not bearing interest, but the two latter to bear interest at the rate of 5% per jannum. During the year ended December 31, 1908, 300 plots were sold for cash and title conveyed to the various purchasers ; also during the same year 300 plots were sold on the instalment plan" as outlined in the foregoing. -Expenses not subject to inference from the foregoing: Administration. .. ........ .$2,500 Salaries. . 5,000 , Advertising. . .............. 5,000 Taxes accrued, not paid. . . . 2,500 Prepare a balance sheet at December 31, 1908, and a profit and loss account for the year ended on that date. lOo C. p. A. AUDITING QUESTIONS Question 375 In a given trade, goods are purchased on terms of 6% discount for cash in ten days, or net thirty days. In certify- ing a balance sheet in this trade, how would you deal with the question of this discount in stating the value of the in- ventory of merchandise on hand? Give your reasons for the treatment you would advocate. Question 376 You are retained to make an examination of the ac- counts of a hardware manufacturing company, and prepare a balance sheet and a statement of its earnings for the past ten years, the examination to be of sufficient scope to enable you to issue a certificate to the balance sheet and also to give the assurance that the statement of earnings presented is substantially correct. Give an outline of your audit procedure, showing to what extent you would carry your examination in respect to the several classes of assets and liabilities, and, if it were stated to you that depreciation of the plant and equipment had been provided for through the inclusion in the manu- facturing cost of expenditures for new additions and bet- terments, what method would you take to ascertain the ex- tent of such provision? Question 377 A company issues $1,000,000 bonds (denomination $1,000 each), dated January 1, 1910, bearing interest at 5% and maturing January 1, 1920. These bonds were sold at 80% of their par value. The mortgage provides for a sinking fund to be created by annual payments of $50,000, and at December 31, 1911, the balance sheet of the company, among other items, shows the following which relate to these transactions : PENNSYLVANIA lOi Discount on bonds debit, $ 160,000.00 Trustee of sinking fund debit, 102,000.00 First mortgage bonds. credit, 1,000,000.00 On January 1, 1912, the trustee purchased 113 bonds out of the funds in his possession at $900 each, which were cancelled. State what entries should be made in respect to these transactions; also give your views as to the proper treat- ment of discount on bonds, both as to when they are pur- chased and cancelled, as in the foregoing, and when they are not redeemed until maturity. Question 378 You are instructed to examine and report upon the accounts of an electric lighting company in Upper Wood- land, Penna., on behalf of a banker with a view to his pur- chasing and operating the property. The company supplies light and power to manufactories, the municipality, miscellaneous business establishments, resi- dences, etc., under the usual varieties of contracts. (1) Describe fully the information usually required for a complete report. (2) Upon arriving on the field you find that the only records of the company's financial operations are a bank account, a meter readings book, copies of bills rendered to consumers but no consumers ledger, miscellaneous paid and unpaid bills for purchases and expenses, and capital stock books. The principal owner of the company being in the supply and contracting business has financed and constructed the property, but his operations in respect of same have not been spread on the company's accounts with exception of partial payments on account which appear in the bank ac- count. Describe fully your procedure in procuring the necessary information for your report. 102 C. P. A. AUDITING QUESTIONS Question 379 What recommendations would you make for preventing fraud in the following departments of a bank : (1) Depositors' accounts? (2) Loans? (3) Revenue and expense accounts? Discuss fully your recommendations and give the rea- sons in support of them. Question 380 (a) Outline the revenue and expense accounts of a life insurance company and their proper treatment at annual closing periods. (b) In the annual report of a life insurance company to the Insurance Department of Pennsylvania, what is com- prised under the captions: "Non-Ledger Assets"? "Non-Ledger Liabilities"? Question 381 You are retained by the prospective purchaser of a busi- ness to make an examination of the accounts covering a period of five years ended December 31, 1911. The vendor has furnished the following statement to the prospective purchaser : Gross profits— yearly average $315,000.00 Expenses— " " 220,000.00 Net profit— " " $95,000.00 PENNSYLVANIA Also balance sheet as follows : Assets: Cash $ 20.000.00 Accounts receivable 250,000.00 Bills receivable 50,000.00 Merchandise on hand as inven- toried : 500,000.00 Deferred charge for commissions due salesmen 10,000.00 103 Total $830,000.00 Liabilities: Accounts payable $120,000.00 Bills payable 200,000.00 Accrued commissions 10,000.00 Capital 500,000.00 Total $830,000.00 You find from the books that the following items con- stitute the entries in the Profit and Loss account for the period : Gross Sales Selling Expenses 1907 $1,000,000.00 1907 $175.00000 1908 900,00000 1908 125,000.00 1909 1,250,000.00 1909 160,000.00 1910 1,000,000.00 1910 115,000.00 1911 1,000,000.00 1911 115,000.00 Cost of Goods Sold Administrative and General Expenses 1907 $650,000.00 1907 $100,000.00 1908 600,000.00 1908 95,000.00 1909 925,000.00 1909 80,000.00 1910 700,000.00 1910 75,000.00 1911 700,000.00 1911 60,000.00 Note: Gradual reduction of administrative expenses effected by proprietor taking smaller compensation for his own services each year. I Losses incurred through failure to collect sundry debtors* I04 C. P. A. AUDITING QUESTIONS $45,000, and $65,000, respectively, were charged to the pro- prietor's capital account. The terms under which the business is to be sold are based on the value of the net assets at December 31, 1911, plus an amount equivalent to one-half of the net profit for the five years. On this basis the vendors have asked for $737,500. Write such a report as you would submit to your client (using the figures and other information contained in this question), with the proper exhibits and comments upon them as to features which would be of interest to your client as a purchaser of the business. Question 382 Describe methods for determining on behalf of the in- surance companies the value of a stock of merchandise on hand at the date of a loss by fire in a trading establishment under each of the following conditions : (1) Where the inventories are taken but once a year at the annual closing of the books. (2) Where a card or loose-leaf record is kept of quantities only of each article. (3) Where monthly book inventories are arrived at by extending cost of sales in the sales records. And what special considerations would there be to which your attention should be directed before arriving at your conclusion ? Question 383 You are called upon to close the books of a contractor in a building operation. Describe fully and specifically what you would take into consideration in the closing of the said books. PENNSYLVANIA I05 Question 38J,. Write fully your mode of procedure in making an audit of a municipality. Give full particulars, with an illustra- tion, using your own figures. Question 385 A manufacturing company, owning many patents and constantly acquiring new ones, some by way of outright purchase and about an equal number being taken out as the result of the efforts of its own experimental department, asks you to outline the best method of dealing with this account, having in mind : (a) The ascertainment of costs of manufacture. (b) The annual balance sheet which is submitted to stockholders and to the general public. Outline fully your views on this subject. Question 386 Messrs. Brown & Wilson have applied to the Pennsyl- vania National Bank for a loan of $20,000, and have sub- mitted the following profit and loss account and balance sheet : PROFIT AND LOSS ACCOUNT For Year Ending June 30, 1912 Stock at July 1, 1911 $50,000.00 Purchases 40,000.00 Wages and salaries 8,000.00 Office expenses 7,000.00 Miscellaneous expenses 15,000.00 Interest on loans 2,700.00 Bad debts 800.00 Profit 37.000.00 I $160,500.00 I06 C. P. A. AUDITING QUESTIONS Sales less returns $80,000.00 Stock at June 30, 1912 75,000.00 Dividends on investments 5,500.00 $160,500.00 BALANCE SHEET, JUNE 30, 1912 Assets: Book debts $250,000.00 Stock as per inventory 75,000.00 Investments at cost 50,000.00 Good-will 10,000.00 Lease of premises 5,000.00 Furniture 1,000.00 Cash 500.00 $391,500.00 Liabilities: Trade creditors $344,500.00 Loans 27,000.00 Partner's capital at July 1, 1911.. $8,000.00 Profit for year 37,000.00 $45,000.00 Less drawings during year 25,000.00 20,000.00 $391,500.00 The bank has handed you these accounts and asked for your opinion as to the advisability of making the loan and as to the form in which the accounts are presented. Question S87 What do you understand by "Perpetual Inventory"? How is it maintained and how may it be verified? What would you require in relation to such an inventory before accepting it in a balance sheet under your audit without qualifying your certificates? I PENNSYLVANIA I07 Question 388 A manufacturer owes $100,000 on his plant at 6% per annum, due at the end of five years from date. He secures an agreement, however, to pay the debt in equal annual in- stalments which will include principal and interest. What amount is he required to pay each year? Question 389 A company, whose accounts you are auditing, shows among its assets an item of $100,000 for a lease upon a warehouse. The lease was acquired ten years ago and has still forty years to run. The book value consists of $50,000 paid for the lease at the time it was acquired and an addi- tional $50,000 expended upon rebuilding property five years ago. Nothing has heretofore been written off the asset ac- count and its present realizable value is conservatively esti- mated at $150,000. In preparing the accounts for the present year the fol- lowing methods have been proposed by various officials, and you are asked to decide which one should be adopted, giving your reasons therefor, as well as the reasons upon which you base your decision in rejecting the others : (1) The property being worth more than the book value, nothing should be written off. (2) Such profits as it is not desired to distribute in dividends may occasionally be written off in reduction of the account. (3) An equal one-fortieth part should be written off annually. (4) A sinking fund should be created that would produce $100,000 upon the expiry of the lease. Io8 C. P. A. AUDITING QUESTIONS Question 390 The Atlas Trading Company leases a store for a period of ten years at a total rental of $450,000, to be paid in monthly instalments of $3,750 each. Before the lease goes into effect, however, an arrangement is entered into whereby the company agrees to pay $25,000 on the date upon which the lease takes effect. For this payment they are to receive a credit of $30,000, applying on the total rental of $450,000, the difference between the amount of the credit and the amount actually paid being intended to represent compound interest on the advance. Under the revised lease the company agrees to make monthly payments for the original period of ten years at the rate of $3,500 per month. State concisely how you would treat upon the books of the company the transactions arising under this lease. Question 891 The Scranton Land Company is incorporated and pur- chases fifty acres of land, which it subdivides into blocks and lots. It then negotiates the sale of first mortgage bonds secured upon the whole property in an amount equal to one- third of the purchase price of the property. From the pro- ceeds of the bonds sold, the company proposes to make streets, sewers, sidewalks, and carry out other necessary improvements before placing the lots upon the market for sale. Sales of lots are to be made upon contracts calling for payment as at date of execution, amounting to 10% of the sale price of each lot sold, the balance to be paid in monthly instalments of 10%, each title to pass to the purchaser as soon as he has paid one-half. Outline a system of accounts to show the original in- PENNSYLVANIA 109 vestment, bonded indebtedness and the application of the proceeds of the bonds, the contracts for sale of lots, the liquidation of these contracts, and having particular refer- ence to the ascertainment and distribution of profits. Question 392 Prepare a sample statement of an administrator's final account for presentation in a probate court. Question 393 The duly appraised inventory dated January 1, 1910, of the estate of John D. Hamilton, deceased, contained the following item : 50 Shares Plumbers National Bank $100 each par value at 550 . .$27,500.00 The bank for a period of years has consistently paid semiannual dividends of 12%. On February 1, 1910, the bank declared its usual 12% semiannual dividend; wishing to increase its capitalization it paid the dividend in cash, and gave its stockholders the option of buying new stock to the amount of the dividend, at par. The executors indorsed and returned the dividend check, receiving in exchange the six shares of new stock. Thereafter they sold stock as follows : March 1, 2 shares, at $500 each March 3, 2 shares, at 495 each March 15, 4 shares, at 480 each The income of the estate is payable to two sisters of the decedent, Helen H. Winter and Sarah H. Samuels, during their lives, and a brother, William B. Hamilton, is the residuary legatee. no C. p. A. AUDITING QUESTIONS In respect of the above transactions show the effect thereof upon the interests of each of the three beneficiaries. Give your calculations in full. Question 39 Jf What are the present requirements of the Interstate Commerce Commission relative to the treatment of depre- ciation in the accounts and reports of railroad companies? Question 395 You have audited the accounts of the Standard Man- ufacturing Company for the year ending June 30, 1913, and are asked to give a certificate covering the balance sheet and profit and loss account for the year, this certificate to be published by the company in its printed annual report. Draft the form of certificate you would give in each of the following circumstances: (a) if the company has given ef- fect in its accounts to all the adjustments you have deemed necessary; (b) if the company has provided for everything except depreciation upon its factory buildings and equip- ment; and (c) if the company has not agreed to the follow^ ing adjustments which you have urged: (1) additional re- serve for loss on trade debtors, $20,0,00; (2) liabilities for damage claims estimated at $12,000; and (3) oyervaltiation of the inventory, $18,000. In considering the relative effect and importance of these adjustments it rriay be assumed that the profits before adjustment have been for^ the year under audit '$100,000. The purpose of this question is to disclose the candidate's knowledge of the principles governing an accountant in the issuance of audit certificates, and in considering replies due weight will be given to form and phraseology. PENNSYLVANIA III Question 396 Prepare a comprehensive report together with rough sketches of the necessary forms recommending a system for the collateral loan department of a national bank having loans secured by stocks and bonds aggregating $10,000,000, the majority of which are loans to brokers. Of the total loans $4,000,000 are time loans and the balance demand loans, and in number they aggregate about five hundred. The bank maintains an audit department, and provision should be made outlining a system for continuous daily audits of the loan department. It is understood that the bank will not adopt any system which will result in a delay in effecting the daily transac- tions or cause annoyance to its customers. Question 397 You are engaged to audit the accounts of the X Com- pany, manufacturers of hosiery — this company operating four mills, the product of which consists of numerous grades and styles. The company is without a cost system but endeavors to ascertain its costs by taking the estimated quantities of cotton or silk to which is added a labor cost determined by tests, and to the total thus obtained an arbi- trary percentage is added to cover general expenses, etc. The general books consist of a ledger, cash book, jour- nal, and voucher record. Invoices are entered after approval and have stamped thereon the date of approval. The re- ceiving record consists of loose memoranda in pencil con- taining the name of the party from whom materials were received and the number of cases, but no further details. Give full particulars as to the steps you would take to verify: (a) The inventory (b) The liabilities 112 C. P. A. AUDITING QUESTIONS Question S98 A real estate company for the purpose of obtaining cash to be used in developing a large tract of land assigns the mortgages, taken in part payment of land sold, to a trust company as trustee, whereupon the trust company delivers bonds to the real estate company, which are then sold to the general public. You are called in to examine the books of the real es- tate company and discover an apparent sale of land has been made to a syndicate, the members of which are directors of the company. Payment for the land sold to the syndicate was made by means of notes and mortgages of the syndi- cate. The mortgages were delivered to the trustee, bonds received and sold for cash. The minute books contain an agreement with the syndicate members to repurchase the land from the syndicate at the price paid by the syndicate therefor. How would you treat this transaction in pre- paring the balance sheet of the real estate company, and what comments, if any, would you make in your report? Question 399 Describe and illustrate by condensed forms the books, etc., required to record to the best advantage the operations of: (a) The loan department of a large national bank. (b) The trust department of a large trust company. Discuss the best method for disbursing salaries in a bank having a staff of one hundred people, and what records thereof would you suggest be kept ? How would you vouch charges to board fees in a bank audit ? How should collection charges to customers or deduc- tions for same be handled and recorded in order that they PENNSYLVANIA 113 may be properly accounted for and susceptible of easy audit ? State all the reasons for an auditor confirming collateral loans by correspondence with the borrowers. Question JfOO Discuss fully the items that would appear in the balance sheet of a stock and bond brokerage firm at the close of the fiscal period. In closing the books at the end of the period what items should receive special consideration and adjustment in or- der that the accounts may reflect the true financial condi- tion and the correct results of operation? Question Jf.01 Describe in sufficient detail and in such manner as to be readily understood by your client, the books and records you would recommend for the proper handling of cash receipts and cash disbursements in a large importing and jobbing concern having several thousand customers in the city and throughout the Eastern states. Your answer should comprise a description of the books, etc., with rough condensed outline of forms, and also prescribe how the funds should be handled and safeguarded; and should dis- close the probable conditions and the problems that would have to be solved. Question J^02 Describe your method of verifying a pay-roll of a man- ufacturing concern employing 2,500 men, some of whom are piece-workers and the balance on day rates. Question 403 A coal mining company owning the mines it operates, 114 C P. A. AUDITING QUESTIONS having $500,000 5% bonds outstanding, redeemable by an annual sinking fund to be derived from profits, and with a floating debt of $100,000 represented by notes payable, makes the following statement of its operations to a banker who asks you to examine and criticize it, to wit : PROFIT AND LOSS ACCOUNT For Year to 30th June, 1913. Sales of coal, 250,000 tons $300,000.00 Mining labor $215,000.00 Supplies, expenses and repairs. . . . 30,000.00 245,000.00 $55,000.00 Rents and miscellaneous income 12,000.00 Steel car earnings, net of repairs 20,000.00 $87,000.00 Selling expenses, including agents' commissions $10,000.00 General office expenses 4,000.00 Legal 500.00 Taxes 2,500.00 Interest and discount 35,000.00 $52,000.00 Net profits $35,000.00 What comments or criticisms would you submit? Question JfOJf. A department store having twenty-five departments re- tains an accountant to revise their old system, and to thor- oughly reorganize their books so that the firm could, by looking at one book, know at all times the exact standing of each department. Explain fully your idea as to plan and contents of such a book ; also give a full explanation as to the accounting system you would provide for the C. O. D. business of a department store. PENNSYLVANIA II5 Question Jf05 A contracting firm have agreed to dissolve partnership, A continuing the business. There is no provision in the partnership papers governing a dissokition. A had 2/3 interest and B 1/3 interest. They have quite a number of unfinished contracts. In arriving at a settlement what ac- counts would you find it necessary to deal with and how would you treat each one? Explain fully and, if necessary, supply your own figures. Question J^06 Describe fully an audit of an automobile factory, espe- cially the inventory and agents' accounts. Question 1^.01 (a) In auditing the accounts of a steam railroad com- pany what procedure would you adopt to verify the equip- ment account, and also the specific liabilities for equipment? (b) State the requirements of the Interstate Commerce Commission relative to depreciation in railroad accounts. Question k08 Devise a timekeeping system for a concern employing mechanics, helper in machine shop, moulders, pattern- makers, helpers in pattern shop, yard laborers, etc., and give your reasons in full. I Question 409 "A" and "B" are partners, carrying on a business in Winnipeg. On January 1, 1910, after adding profits for the past half year, "A's" capital amounted to $150,000 and I Il6 C p. A. AUDITING QUESTIONS "B's" to $100,000. On that date they take into partner- ship *'C/' upon the following terms, viz. : he is to bring in capital amounting to $25,000, and each partner is to be credited with interest on his capital at 6% per annum. All profits in excess of $25,000 are to be shared equally by the three partners. Accounts are to be prepared and profits and interest credited half-yearly. *'C" is to be credited with a salary of $5,000 per annum. On June 30, 1910, the profits divisible after debiting *'C's" salary, which he has drawn, but before charging interest on partners' capi- tal, amounted to $75,000. The partners' withdrawals which are not chargeable with interest were : *'A," $12,500 ; "B," $10,000; and "C," $3,750. Draw up partners' sepa- rate accounts as they should stand on July 1, 1910. Assume that instead of a profit, a loss of $75,000 had occurred. How would you have treated it in the accounts in the absence of any direct provision in the partnership agreement relative to losses? MARYLAND Question J/^IO A chemical manufacturing company which had paid $90,000 for six patents of equal value, sold one of these patents during the first year of its existence and received in payment 5,000 fully paid shares (par $10) in a sub- sidiary company formed for the purpose of working the patent. In the second year the chemical company sold the 5,000 shares of stock to the subsidiary company for $25,000 cash. How would you, as auditor, expect the 5,000 shares, or proceeds of them, to be treated in the accounts of the chemical manufacturing company at the end of the first and second years, respectively? 117 WASHINGTON Question 411 State briefly your duties as an auditor in reference to the following matters : (a) Machinery the value of which has not been regu- larly depreciated (b) Loans from bankers (c) Doubtful debts (d) Good-will Question Jfl2 How would you, as auditor of an incorporated com- pany, satisfy yourself of the existence of shares or bonds given as security for loans to the company ? Question JflS A firm of export merchants desires a thorough inves- tigation of the past year's transactions, having reason to suspect fraud. State concisely upon what lines you would proceed to satisfy yourself that: (a) Goods had been taken out of the store on bond in the way shown by the books. (b) They had been shipped to account of proper consignee. (c) That no goods had been removed without being charged. (d) That no fictitious entries had been made in the books. ii8 WASHINGTON II9 Question Jf-lJ^ The following is the trial balance of the Blank Manu- facturing Company as taken from its books at December 31, 1912, the accounts being arranged in the alphabetical order shown by reason of their having been taken from the alphabetically indexed loose-leaf ledger of the company : TRIAL BALANCE Dr. Cr. Accounts payable $190,500.00 Accounts receivable $369,926.00 Accrued salaries and wages 1,608.00 Advertising 12,96L00 Bad debts written off 3,107.00 Bills payable 58,000.00 Bills receivable 14,000.00 Bond discount (to be written off during life of bonds) 12,667.00 Bond interest payable 4,166.50 Capital stock — common 750,000.00 Capital stock— preferred 320,000.00 Cash in bank and on hand 58,828.50 Credit department expenses 1,973.50 Depreciation of buildings 545.00 Depreciation of machinery and equip- ment 2,232.00 Depreciation of office equipment 700.00 Depreciation of workmen's cottages... 1,800.00 Directors' fees 600.00 Discount on bonds charged off 506.50 Discount on purchases 7,608.50 Discount on sales *. . . 8,937.00 Federal corporation tax 1,538.00 First mortgage 5% 30-year gold bonds (dated May 1, 1908) 500,000.00 Freight and cartage inward 4,381.00 Freight and cartage outward 3,431.00 General office expenses 1,771.50 Good-will 250,000.00 Insurance 3,115.00 Insurance premiums unexpired 1,81 l.(X) 120 C. P. A. AUDITING QUESTIONS Trial Balance (Continued) Interest on bills payable 10,075.00 Interest on bonds 29,166.50 Income from investments 30,752.50 Inventory raw materials, 12/31/11 (cost) 122,686.00 Inventory estimated goods in process, 12/31/11 (cost) 43,211.00 Inventory manufactured goods, 12/31/11 (cost) '. . . 222,930.00 Inventory raw materials, 12/31/12 (cost) 115,812.00 Inventory manufactured goods, 12/31/12 (cost) 256,609.00 Inventory estimated goods in process, 12/31/12 (cost) 39,220.00 Inventory fuel, factory supplies, etc., 12/31/12 (cost) 20,031.50 Inventory raw materials, 12/31/12 (cost) 115,812.00 Inventory estimated goods in process, 12/31/12 (cost) 39,220.00 Inventory manufactured goods, 12/31/12 (cost) 256,609.00 Maintenance of buildings 2,273.00 Maintenance of machinery and equip- ment 3,321.50 Maintenance of workmen's cottages... 1,760.00 Manufacturing power, heat and light. . . 7,461.00 Miscellaneous factory expenses 2,240.00 Miscellaneous selling expenses 2,881.00 Non-productive labor 17,931.00 Office equipment 14,000.00 Office salaries 4,875.00 Officers' salaries and expenses 12,092.00 Organization expenses 8,940.00 Organization expenses written off 928.00 Patent rights ; 28,637.00 Patent rights written off 1,981.00 Patterns and drawings (appraised value) 19,000.00 Patterns and drawings written off 321.50 Plant site (cost) 120,000.00 Plant buildings (cost) 218,000.00 Plant machinery and equipment (cost). 316,817.00 Productive labor 210,642.50 Purchasing department expenses 2,836.00 Raw materials purchased 468,212.00 . WASHINGTON I2i Trial Balance (Continued) Rent of workmen's cottages 7,300.00 Reserve for depreciation of buildings... 21,635.00 Reserve for depreciation of machinery and equipment 57,351.00 Reserve for depreciation of office equip- ment 3,100.00 Reserve for depreciation of workmen's cottages 18,140.00 Reserve for doubtful accounts 2,608.00 Returns and allowances on purchases.. 1,931.00 Returns and allowances on sales 2,377.00 Sales of manufactured products 874,160.50 Sales of waste materials 1,064.50 Sales agents' commissions 4,922.00 Salesmen's expenses 3,632.50 Salesmen's salaries 9,250.00 Sinking fund investments 26,077.00 Stock of subsidiary and allied corpora- tions (cost) 343,500.00 Surplus 272,237.50 Taxes on plant and equipment 10,181.00 Taxes payable 3,857.00 Workmen's cottages (cost) 58,000.00 $3,537,661.00 $3,537,661.00 You have audited the books of the company for the year 1912, and during your examination the following matters have come to your attention : (1) You have ascertained from the minute book of the company that the following semiannual dividends were de- clared on December 31, 1912, which, however, were not payable until January 15, 1913: 3% on preferred stock ..$ 9,600.00 3% on common stock 22,500.00 A similar dividend was declared on June 30, 1912, and paid on July 15, 1912. (2) You have found that there were outstanding lia- 122 C. P. A. AUDITING QUESTIONS bilities at December 31, 1911, which had not been taken into account in closing the books at that date, such items being paid in the year 1912, viz. : Productive labor $1,752.50 Non-productive labor 614.00 Manufacturing power, heat and light 214.00 General office expenses 115.00 Office salaries 110.00 Taxes for year 1911 6,324.00 Interest on bonds 4,166.50 Interest on bills payable 975.00 $14,271.00 (3) You have found that the following expense items paid in advance at December 31, 1911, were not taken into account in closing the books at that date, viz. : Insurance premiums unexpired $1,609.00 Interest prepaid on bills payable. . . . 2,438.00 $4,047.00 (4) You have discovered errors in the extensions and prices of the inventories at December 31, 1911, as follows: Raw materials — To be increased .... $1,921.00 Goods in progress — To be decreased . . 595.00 Finished goods — To be decreased. . . 1,054.00 (5) Having examined the accounts receivable ledgers carefully, you are of the opinion that the reserve for bad and doubtful accounts of $2,608 is insufficient, and having dis- cussed the matter with the management of the company it is desired to increase the reserve to $5,000, $1,500 of the increase to be considered as applying prior to December 31, 1911, and the balance to the year 1912. WASHINGTON 123 (6) After an examination of the plant and equipment ac- counts, you are satisfied that the additions charged during the year are proper capital expenditures, the amounts of these additions being as follows : Plant buildings $ 9,000.00 Plant machinery and equipment. . . . 11,817.00 Office equipment 1,500.00 In your opinion the depreciation provisions during the year have been insufficient, although you are of the opinion that the provisions to December 31, 1911, were adequate. You should increase the depreciation charges for the year to the following rates : 2%% on the ledger balance 01 Plant Buildings ac- count at December 31, 1911. Y%% on the ledger balance of the Plant Machinery and Equipment account at December 31, 1911. 10% on the ledger balance of Office Equipment ac- count at December 31, 1911. (7) Errors in the prices and extensions of the inven- tories at December 31, 1912, have been discovered, and changes should be made as follows : Manufactured goods — To be in- creased $2,712.00 Goods in progress — To be decreased . . 375.00 Raw materials — To be decreased. . . . 9,225.00 (8) No provision has been made for the interest accrued at December 31, 1912, on bills payable, the same amounting to $2,925.50. (9) You have learned that bills receivable formerly held by the company, not yet due, amounting to $10,000, had been discounted at December 31, 1912. : 124 ^- ^' ^- AUDITING QUESTIONS (10) While no change is to be made in the proportions of organization expenses and patent rights written off during the year and the Good-Will account is to be left at the trial balance figure, an adjustment in connection with the Bond Discount account is considered necessary. While the sum of «$50G.50 written off during the year is the proper yearly proportion necessary to extinguish the bond discount during the life of the bonds, clerical errors have been made in prior years, and the proportion of bond discount shown in the trial balance, viz. : $12,667, is therefore incorrect and should be changed to the proper amount. (11) The amount shown for taxes payable at December 31, 1912, is but one-half of the amount of taxes assessed for the year 1912. (12) All of the authorized issue of common stock was outstanding, but while only $320,000 of the 6% cumulative preferred stock was outstanding at December 31, 1912, you have ascertained that the authorized issue of the same was $750,000. Make the necessary adjusting journal entries to properly state the financial position of the company at December 31, 1912, and the profit and loss account for the year. Prepare summary showing cost of goods sold to be carried to the profit and loss account as a single item. Prepare profit and loss account, grouping the expenses other than those applying to the cost of goods sold, under selling expenses, general and administrative expenses, etc. Prepare balance sheet. Show percentage of gross profit on net sales and per- centage of gross profit on cost of goods sold. Note: In submitting your answers to this problem use all of the separate accounts shown and do not combine items of a similar nature in preparing either the balance sheet or the profit and loss statements. WASHINGTON I25 Question Jflo The directors of a mining corporation, of which you are auditor, decline to provide what you consider an ade- quate depreciation of wasting assets. What attitude would you assume in these circumstances? Question Jfl6 Discuss generally the duty of an auditor in relation to the question of depreciation, and illustrate your argument by dealing with such items as: Lands and buildings Lease of coal mines Good-will Outside investments of fluctuating value Question 417 Do you consider it necessary, and, if so, why, for an auditor of a corporation to peruse the minutes of directors' and shareholders' meetings? Question Jf.18 A lumber mill, owing to slack business, stops manufac- turing, but not selling. During the period of shut down the mill is almost entirely rebuilt; the old machinery thor- oughly overhauled; new and additional machinery added, and an entire and more efficient arrangement of the entire plant had. During the previous six years the book value of the plant had been reduced by the following deprecia- tions : On buildings, 10% per annum on original cost. On m.achinery, 6fc per annum on original cost. 126 C. p. A. AUDITING QUESTIONS You as auditor for the company are asked to advise to what accounts the cost of rebuilding, of overhauling, and of the additions are to be charged. Give your answer, stating fully your reasons. Also advise as to when, in your opinion, depreciation should be taken into consideration on the rearranged plant if active operations are not resumed for six months after the completion of the changes. Question ^19 (a) In auditing the accounts of a steamship company operating freight and passenger steamers and doing a coast- wise as well as a foreign trade, how would you verify : (1) The passenger earnings? (2) The freight earnings? (3) Other earnings? (b) State what earnings other than from passengers and freight a steamship company may have. (c) A steamship company operating steamers upon in- land rivers where the fuel used is cord wood, considers the fuel cost per trip as shown by the trip statements too high and they suspect fraud. You as auditor are asked to make an investigation. State what your procedure would be. Question 1^20 The Gendron Corporation operate coal mines, saw- mills, a logging railroad and have their own timber hold- ings. All of the accounts are kept in one large ledger, with the usual books of original entry, at the general office in New York. They engage the services of yourself to audit the books for the year ending June 30, 1909. The follow- ing is a copy of the trial balance. 127 WASHINGTON GENDRON CORPORATION Trial Balance— June 30, 1909. Plant equipment— Mine A $31,955.26 New plant— Mine 7 62,173.27 Stumpage, cut for sawmill 7,524.26 Capital stock $581,500.00 Betterment to Mines 3 and 4 2,783.42 Local purchase logs 51,66 Sawmill repairs 1,360.31 Cash 7,436.05 Development— Mine No. 1 3,822.37 Timber and land 240,305.26 Planing mill repairs 341.43 Accounts receivable 76,421.91 Mine engineering tools — Mine 1 225.00 Petty cash — mines 750.00 Lumber — outside purchases 79.20 Lighterage on lumber 57.95 Mine administrative salaries and supplies 2,195.22 Petty expenses at mines 1,649.28 Tenant houses at mines 2,117.22 Lumber, logs, etc., on hand 50,853.60 Sawmill pay-roll 4,141.41 Planing mill pay-roll 2,421.95 Commissary purchases — lumber 8,642.58 Feed and labor — mine stables 925.75 Electrical repairs at mine 467.97 Commissary pay-roll — lumber 726.65 Logging pay-roll 200.00 Unexpired insurance premiums 3,918.49 Mine cars 6,139.78 Lath mill pay-roll 249.65 Electrical plant — mine 3,190.00 Interest on loans covering mine plant construction 7,226.73 Mines warehouse — stock on hand 1,743.22 Lath mill repairs 7.27 Railroad equipment 74,710.38 Railroad pay-roll and expenses 2,241.86 Camp equipment 22,192.34 Camp pay-roll 1.549.75 Yard and shed repairs 112.10 Logging railroad track 47,769.13 128 C. p. A. AUDITING QUESTIONS Trial Balance (Continued) Office salaries — lumber 1,021.67 Unclaimed miners' wages 246. 1 7 Coal, sales 57,280.78 Building material on hand at mine 810.75 Interest on funds to develop Mine No. 1 240.00 Mine office furniture and fixtures 1,459.17 Mine officer's house furnishings. ........ 513.29 Mine railroad track and switches 3,916.82 Telephone line — mill to woods 436.56 Freight on logs to sawmill 1,614.40 Camp boarding house equipment 1,500.00 Interest and discount — lumber 422.09 Mine store expense and labor 2,472.83 Mine store freight 472.98 Sawmill machine shop 2,328.53 Outside investment 1,949.90 Advanced to new coal corporation 1,373.27 Mill plant 324,982.92 Lumber sales 28,033.11 Lath and shingle sales 2,392.45 Insurance — mill 85.30 Operation Chicago office — lumber 1,000.00 Allowances and discounts — coal ship- ments 637.40 Repairs and expenses — mine stables 124.22 Mine office — salaries and supplies 1,562.23 Mine eng. — salaries and supplies — Mine No. 1 625.00 Traveling expenses — mine manager 221.67 Interest — current loans at mine 125.00 General office expenses — lumber 853.80 Discount on lumber sold 1,931.60 Bills payable 172,667.50 Accounts payable — audited 24,287.03 Bonds on timber lands 35,000.00 Taxes — mines 178.53 Insurance — mines 1,271.11 Legal expense — mines 785.00 Royalty on coal mined 4,989.77 Mining labor 29,871.23 Surplus 195,764.45 Sales of wood 186.00 WASHINGTON 129 Trial Balance (Continued) Rent of dwellings and miscellaneous in- come — lumber 278.00 Yard filling and tunnel extensions at mines 2,743.22 Delivery of coal to tipple 3,571.28 Maintenance of way — mines 710.11 Maintenance of air — mines 739.10 Props, ties, and caps 497.17 Mine foreman — salary 800.00 Maintenance of mine cars 209.38 Mine machinists' and engineers' wages.. 1,378.78 Smithing — mines 672.10 Fuel — mine power house 297.51 Removal of slate 551.98 Deadwork at mines 47.21 Electrical supplies at mines 2,488.55 Insurance during construction of mine plant 937.97 Norfolk & Western Ry. claims at mines 71.59 Repairs to miners' houses 171.19 Legal expense — in re right of way to mines 342.68 Live stock at mine 3,850.00 Taxes during construction of mine plant 313.71 Mine commissary purchases 8,427.60 Rental from miners' houses 1,572.27 Cartage and sale of coal to tenants 70.09 $1,099,277.85 $1,099,277.85 They have agreed to a plan whereby the coal mine oper- ations will be taken over by a new corporation and therefore ask that you separate the lumber and coal accounts, and make up a separate set of statements in detail to cover each busi- ness (balance sheet, surplus account, profit and loss account and statement of operations) ; the capital stock to stand as part of the lumber accounts. I30 C. P. A. AUDITING QUESTIONS You find as follows : (1) Bills Receivable account was balanced and closed, but among the records and papers of the company, you found bills receivable for lumber accounts amounting to $2,791.17 previously charged oflF, but now considered good and collectible. (2) Mine No. 1 is in a state of development and has not been as yet operated. (3) Of the accounts receivable, $15,180.92 cover coal shipments. (4) Of the bills payable, $50,725.00 cover mine in- vestments. (5) Unexpired insurance premiums include $726.10 on mine policies paid for account of the new corporation. (6) Taxes paid in advance, $78.53 on mine properties. (7) Of the surplus before closing the accounts, $98,- 958.44 arises from mine operations prior to the year ending June 30, 1909. (8) Of the accounts payable, $12,790.79 cover mine bills audited. Show the necessary journal entries to adjust the ac- counts in accordance with the foregoing explanations. The Black Diamond Fuel Co. secures a charter and capitalizes with an authorized issue of $250,000 common stock and $200,000 of preferred stock. The common stock is subscribed for as follows : The Gendron Corporation $150,000.00 W. Wilson 50,000.00 A. Smith 50,000.00 on the following terms : (a) The Gendron Corporation to transfer all assets and liabilities as shown by your statement covering the mines WASHINGTON 13 property to the Black Diamond Fuel Co. Any equity to apply as part payment on the subscription, balance to be paid on call. (b) Wilson and Smith each pay $25,000 in cash, bal- ance on call. Show the proper entries : (1) To make the transfer on the books of the Gen- dron Corporation, and (2) Entries to open books of Black Diamond Fuel Co. and balance sheet after so doing. The Potlatch Lumber Mfg. Co. is incorporated for $1,500,000, of which the Gendron Corporation subscribed for 25%, the Block Lumber Co., 50%, and the Columbia River Lumber Co., 25%. The Potlatch Co. agreed to take over the lumber business of each of the three concerns named. It is understood that balances due to the con- tributing companies on purchase account are to be applied as part payment of their stock subscription. (a) The Gendron Corporation agrees to dispose of its plant for $250,000, reserving its timber holdings ; railroads and other equipment; amount due from Black Diamond Fuel Co. on account of mining department advances, and $8,000 of accounts receivable not considered collectible. Also, it assumes all liabilities except accounts payable. (b) The other companies submit the following balance sheets : BLOCK LUMBER CO. Balance Sheet Cash on hand and in bank $6,410.81 Bills receivable 2,131.55 Bills payable $77,191.94 Lumber, logs, etc 52,176.59 Unexpired insurance premiums 1,317.58 132 C. P. A. AUDITING QUESTIONS Balance Sheet (Continued) Mill supplies and extras 819.26 Teams 2,859.65 Standing timber and lands 300,000,00 Accounts payable 15,197.94 Surplus 401,321.76 Mill plant 60,500.00 Accounts receivable 67,496.20 $493,711.64 $493,711.64 COLUMBIA RIVER LUMBER CO. Balance Sheet Cash $438.72 Bills receivable 6,008.91 Lumber, logs, etc 97,303.43 Unexpired insurance premiums.... 417.93 Mill supplies, etc 742.59 Teams 62.50 Bills payable $39,604.38 Standing timber and lands 42,811.83 Tug boat 2,019.39 Outside investments 6,300.00 Mill plant 30,000.00 Accounts payable 7,912.84 Surplus 172.093.42 Accounts receivable 33,505.34 $219,610.64 $219,610.64 (1) Draft opening entries for the Potlatch Lumber Mfg. Co. (2) Prepare balance sheet after books have been opened. (3) Draft closing entries for the Gendron Corporation. (4) Prepare general balance sheet of the Gendron Cor- poration after so doing. ILLINOIS Question J^21 What is the best method for carrying additions to plant on the books of a manufacturing corporation? Give rea- son for answer. Question J^22 What is the auditor's responsibihty in the matter of vouchers for payment? What is his responsibihty where there are not any regular vouchers? Question J^2S Can an examining accountant satisfy himself of the general correctness of inventories without himself taking the quantities and verifying the prices, extensions, and additions? Give full particulars. Question Jf2Jf Where the books of a copartnership or corporation show large additions to buildings and machinery, consisting of portions of pay-rolls, without explanation, what means should be taken to prove or disprove the accuracy of the charges? Question Jf25 State whether depreciation is an element of the cost of manufactured products. If so, why? 133 134 C. P. A. AUDITING QUESTIONS Explain form of journal entry necessary to carry de- preciation on the books, and explain how it would be shown on the balance sheet. Question Jf26 In auditing the accounts of a railroad company, what is necessary to determine whether the equipment has been fully maintained? Question Jf27 Are working or job orders, covering a company's ex- penditures on its own account, of any value to the auditor when examining the general books? Question 428 In auditing the books of a business which is to be dis- posed of and where the seller guarantees to the purchaser the open accounts receivable, what action, if any, should be taken by the auditor as to such accounts receivable ? Question J^29 After the organization of a corporation, it proceeds to construct a manufacturing plant, paying for the same in cash realized from the sale of capital stock at 80 cents on the dollar. When ready for operation, what items would be included in the cost of such a plant? Question 1^30 You are auditing the annual accounts of a company, which possesses amongst other assets a leasehold ware- house, the lease of which has still another forty years to run from the date of the last balance sheet, at which time ILLINOIS ns it stood on their books at $100,000, and this amount still remains unchanged. The lease was acquired ten years ago on the formation of the company and is considered to have a realizable value of about $150,000. The outlay has been incurred as to $50,000 by rebuilding two years ago, since which time nothing has been written off. No systematic treatment of the subject has been adopted, but considerable sums have been written off from time to time out of the profits earned in the previous years. Dividends are only payable out of the profits of the company. As auditor of the company you are asked to decide between the following views : (a) Nothing need be written off at all, because the property would now sell for what it stands at or more. (b) The most convenient plan is to continue applying occasionally such profits as it is not desired to distribute in dividends. (c) An equal 40th part should be written off annually. (d) A sinking fund should be created and compounded so as to produce $100,000 in forty years. Criticize each of the above plans, stating which you rec- ommend, if any, and why. Question JfSl You are appointed the auditor of an estate the assets of which consist of real estate (improved city and farm lands), corporation stocks (common and preferred), rail- road bonds (with coupons attached and without coupons attached), and first mortgages on farm property. How will you verify the revenues from the various classes of assets, and what procedure would you take to verify the existence of these assets ? In your first audit what would be the first two things you would examine? 136 C. p. A. AUDITING QUESTIONS Question. 4S2 An investigation of the details of an inventory dated January 1, 1904, brings to light the following entry : Contract dated July 1, 1903, for delivery of 20,000 tons of between January 1st and June 30th, 1904, at $25.00 per ton, the market price at date of inventory being $27.50 — $50',000.00. Discuss the validity of the above entry under the fol- lowing circumstances : (a) In the preparation of a certified balance sheet for stockholders' meetings. (b) In investigation on behalf of a client who is considering the purchase of the majority of the capital stock of the company. (c) In investigation and preparation of certified balance sheet for the company (the company being your clients) which they desire to sub- mit to their bankers. Question J^SS A corporation has a capital stock of $100,000. It has assets at inventory value amounting to $160,000. With a view to reducing the number of its enterprises, it sells two of its stores for $85,000 at inventory value. This $85,000 is distributed among its stockholders. What entries should be made upon the books, and what procedure would you recommend in order to safeguard all interests in making such distribution? Question 43^ A company incorporated with a capital of $200,000, fully paid up, has sold its stock at a premium of 25%, thus ILLINOIS 137 realizing in cash $250,000. The by-laws, which cannot be amended except in a stockholders' meeting and after proper notice of such amendment, having been mailed to each stockholder ten days prior to the meeting, contain a pro- vision that the $50,000 so received over and above the capi- tal stock at par, shall be placed to the credit of a special reserve account, and that this fund shall not be applicable towards the payment of dividends. At the close of the first fiscal year, it is found that the company has made a net profit of $4,000 after charging $6,000 for depreciation on the buildings and machinery. The directors desire to pay a cash dividend of 5% and pass a resolution ordering that the depreciation referred to above shall be charged against the above special reserve account instead of against profit and loss, and they then proceed to declare a dividend of 5%. Discuss the above situation from the standpoint of an accountant. Question ^35 While auditing the accounts of a jobbing firm, the cashier and bookkeq^er disappears. The client believes he has been guilty of embezzlement, and asks the auditor to report as quickly as possible to him, what sum, if any, has been taken. The auditor tests postings of cash from cus- tomers without finding irregularity, and also finds that re- ceipts have been taken and are on file, for all moneys ac- tually paid. Where would you look under such circum- stances for the method pursued by the probable embezzler in covering a shortage? Question JfS6 Give method of preparing a balance sheet where ledgers have not been closed. 138 C. p. A. AUDITING QUESTIONS Question 437 In the case of a consolidation of three manufacturing concerns, how would you determine the good-will of the consolidated company? Question J^38 When auditing the accounts of a wholesale grocery- house it is found that a fire has just destroyed the entire stock of merchandise. What course would you follow to approximate the inventory? Question J^39 At the first annual audit of the books and accounts of an electric street railway company the books show an actual investment exceeding $1,000,000, while the aggregate amount of repairs and renewals for the year have been but $10,000. What course should the auditor follow in pre- paring profit and loss account for the year? Question J^JfO Criticize the following profit and loss account and bal- ance sheet of a private firm trading in provisions, from the point of view of a bank which contemplates advancing $20,000 to firm. The clerical accuracy of the books has been verified. PROFIT AND LOSS ACCOUNT (Year Ending December 31st, 19(J5) Stock at 1-1-5 $50,000.00 Purchases 40,000.00 Wages and salaries 8,000.00 Office and general expenses 7,000.00 etc.* 15.000.00 ^Rather unusual, but according to copy. ILLINOIS Profit and Loss Account (Continued) Interest on loans 2,700.00 Bad debts 800.00 Profit 37,000.00 $160,500.00 Sales, less returns $80,000.00 Stock 31-12-5 75,000.00 Dividends on investment 5,500,00 $160,500.00 BALANCE SHEET Assets Book debts $250,000.00 Stock as per inventory 75,000.00 Investments at cost 50,000.00 Good-will 10,000.00 Lease on premises 5,000.00 Furniture, etc 1,000.00 Cash in hand 500.00 139 $391,500.00 Liabilities Trade creditors $344,500.00 Loans 27,000.00 Partners' capital account at 1-1-5 $8,000.00 Profit for year 37,000.00 $45,000.00 Less : Drawings during year 25,000.00 20,000.00 $391,500.00 Question 4^1 Before certifying a balance sheet what steps should an auditor take to satisfy himself of the accuracy of the valua- tion placed upon the following assets : I40 C. R A. AUDITING QUESTIONS (a) Stock in trade (b) Investments (c) Plant and machinery (d) Cash in hand at branch establishments (e) Patent rights (f) Patterns Question 4-^2 It is contended that it is unnecessary to write off de- preciation on : (a) Freehold premises (b) Plant and machinery provided that they are maintained in a full state of effi- ciency out of revenue. Give briefly your own views on this subject. Question JiJ^S A corporation issues bonds, proceeds to be used for construction purposes. If bonds are all sold at a discount, to what account should the discount be charged? If sold at a premium, to what account should the premium be credited ? Question Jt-J/-Jf. In a public utility proposition, how does the auditor best determine the reliability of the revenue? In passing upon discounts and bad debts, how would you state them in reports ? Question Ji-^5 Finance corporations holding a large number of shares in other corporations are in the habit of valuing their ILLINOIS 141 securities for balance sheet purposes at either (a) cost price, or (b) market price at the date of the balance sheet. Discuss the respective merits of the two methods and say which you consider the soundest from an accountant's point of view. Question JfJf-G You are called upon to audit the books of a "holding company," owning 90% of the stocks of six large manu- facturing companies scattered over the United States. From the books of the "holding company" you are re- quested to prepare a certified balance sheet and profit and loss account, it being stated that it is not to be used for publication, but will be mailed to one of the shareholders who appears to be disgruntled. Balance sheets and profit and loss accounts of the subsidiary companies signed by their respective secretaries, are produced for your inspec- tion but you are refused access to the actual books of ac- count of these companies. Explain fully what your course of action would be in this matter and your reasons therefor. Question W You are called upon to audit the books of account of the executors and trustees of an estate. The executors completed their duties 18 months after the death of decedent. Explain the essential features of an audit of this character. Question kh^ A construction company is carrying out work on a num- ber of contracts. At the close of its fiscal year, these con- tracts are in all stages of completion, from those which are just begun to those which are almost finished. How should you compute their value as an asset in the balance sheet ? 142 C. P. A. AUDITING QUESTIONS Question J/-Jf9 In determining the result of the operations of a com- pany whose business requires the use of a large number of tools and implements, what general rule would you con- sider? Question Jf50 In presenting a balance sheet, what items are matter of fact and what items are opinions, and, taken as a whole, are you establishing a fact or an opinion? Question J^51 Can, or cannot, a going concern, employing a salaried manager and superintendents, charge any part of their sala- ries to cost of improvements or extensions that may be added to the plant at intervals? In either view, why? Question J^52 You are elected the auditor of a corporation by the holders of both common and preferred stock and it is your duty to safeguard the interests of both classes of stock- holders. The preference stock bears Y% and is non-cumu- lative. Mention what precautions you would adopt to safe- guard the interests of the preference shareholders, giving reasons therefor. Question Jf53 A club obtaining its revenue from initiation fees, dues, restaurant, wines, cigars, billiards, and cards, has a treas- urer who reads to the directors at each monthly meeting, a statement of the receipts and disbursements of the month just prior. What are the advantages of such a statement and wherein does it fall short? ILLINOIS 143 Question JfBJf Referring to the preceding- question state how you would handle initiation fees in the preparation of the club's annual report containing balance sheet and profit and loss, and give your reasons therefor. Question 455 The firm of Catchem and Cheatam engage in a restau- rant business where all sales are for cash, with the express purpose of at a later date selling out same on the strength of the large profits shown on the books. With the object in view they grossly pad their sales every day and make compensating fraudulent entries on the disbursement side of the cash book purporting to represent cash withdrawals of partners, and all records by which the cash sales might possibly be verified are destroyed. Catchem and Cheatam make a proposition to Mr. A. to sell their business to him and, on the showing of profits made by the books, Mr. A. seriously considers the same, but engages a certified public accountant to make an examination. The accountant for- tunately discovers the fraud. How did he probably dis- cover the fraud and what was his method of procedure ? Question ^56 The audit of a corporation on the instructions of its president, reveals the following condition : ASSETS Real estate, plant and machinery. . $500,000.00 Merchandise of all kinds 200,000.00 Bills receivable 50,000.00 Accounts receivable 275,000.00 Sundries accrued 4,500.00 Cash 37,500.00 I $1,067,000.00 144 C. P. A. AUDITING QUESTIONS LESS LIABILITIES Bills payable $250,000.00 Accounts payable 40,000.00 290,000.00 Net resources $777,000.00 The capital of the corporation is $1,000,000 with deficit of $223,000. The audit brings out the fact that included in the accounts receivable is an item of approximately $50,000 due by the president of the company. In certifying to the balance sheet the president requests you not to show as a separate item the amount due by him, but to include it as shown above in the accounts receivable for the reason, you are informed, that your certificate is to be used for the purpose of selling $250,000 bonds secured by mortgage on the real estate, plant, and machinery, the proceeds of which will be used to liquidate the present bills payable. The president of the company is reported to be worth $200,000 over and above the value of his stock in the above company. What course of action would you take? State the reasons therefor. If the certificate was stated to be for the purpose of handing certified balance sheet to their bankers or to present to annual meeting of shareholders, then what would be your course of action, and why? Question J/-57 The senior member of a firm of certified public account- ants employing about fifty assistants, having arrived at an age when he no longer cares to be actively engaged, retires ; but the partnership agreement provides that he shall still retain a one-fourth interest in the profits on account of the good-will attached to his name. Three years after he has ceased to be actively engaged in the business, the profits ILLINOIS 145 drop considerably, and fearing that his partners are not acting squarely he proceeds to audit the accounts of the firm. If you were in his place how would you proceed to audit same and satisfy yourself that everything was prop- erly accounted for or otherwise? Question j^58 An auditor is engaged by a man who is buying an inter- est in a firm, for the purpose of reporting upon the assets and liabilities of the firm as at a given date and upon the profits of the three years just prior. Upon the auditor's report he purchased an interest in the firm and in its assets and liabilities. Six months later it is discovered that there were bills payable due by the firm amounting to $10,000 at the time the auditor made his examination and not reported upon by him, and that these bills had continuously been due by the firm for one year prior to such examination, but no record of same had been made upon the books. Under what circumstances could the auditor be considered guilty of negligence in not discovering this fact and under what circumstances could he be considered entirely free of any blame in the matter ? Question J/-59 An auditor is called upon to verify a balance sheet, and upon investigation he finds that unexpired insurance, interest paid in advance on discounted notes, taxes accrued, interest accrued on demand notes and bonded indebtedness, royal- ties, etc., are not included in same. He is informed that it has not been the custom of the corporation to include in their balance sheet such items, as they offset one another, and that the directors do not desire any change in the prac- tice they have adopted. Discuss this proposition, stating reasons for your conclusions. 146 C. p. A. AUDITING QUESTIONS Question Jf60 In the examination of the accounts of a brewery, how would you determine whether the amount of beer produced and disposed of during the year was in proper relation to the conditions disclosed by final inventories ? Question Ji.61 An interurban railway company, wishing to provide against possible accidents, adopted the plan of depositing 2% of their gross receipts each month in a local savings bank as a reserve for that purpose, charging the funds so set aside to an account which they designated "Reserve for Accidents." The total fund for the year amounted to $4,869.26, out of which they paid $950 for accidents occur- ing and settled during the twelve months, debiting such payment to Accident account, and leaving a cash balance in the bank on December 31, of $3,919.26. The bookkeeper endeavored to close the books by show- ing the $4,869.26 as a charge against operating for the year arising out of accident liability, carrying over the bal- ance in bank ($3,919.26) to provide for future accidents, and making a corresponding credit to the "Reserve for Accidents" account. This left the company with cash assets of $3,919.26 not represented on the books. Wherein did the bookkeeper err and what entries should have been made to show the transaction correctly ? Question Jf62 In making an audit of a large bank where many of the bills discounted are in the form of demand notes upon which partial payments of principal and interest are per- mitted to be made, and where in many instances the cus- tomer, as he hands in his check, does not wait to see an ILLINOIS 147 indorsement of the payment actually made at the time by the bank employee, how would you assure yourself that none of the entries covering such partial payments were held over until the next day, while the check or currency might be slipped into the teller's cash? Question ^63 In the examination of the accounts of an important railroad, it appears that none of the invoices and material purchased appear on the company's books until they have been approved by the purchasing agent and division super- intendents, although the various storekeepers' reports show that much of the material and supplies has actually been received. How would you proceed to determine the liability of the mine the real position of the railroad with respect to pur- chases not taken up on the voucher register? Question Jj.6Jf In examining the affairs of a private country bank, it is ascertained that no record of certificates of deposit has been kept except in the general ledger. It also appears that partial payments have been occasionally made on certain certificates which are still in the hands of the depositor. How would you proceed to determine the liability of the bank with respect to certificates of deposit outstanding? Question Jf-65 Assuming that all cash discounts on purchases made during the year have been taken advantage of, and the ledger account shows a substantial credit, to what account would you close the balance? In the case of a jobbing concern? Of a manufacturer? 148 C. p. A. AUDITING QUESTIONS Question Jf66 In the case of a street railway which allows its con- ductors to sell tickets covering transportation for ten and twenty-five rides at a lower rate than it demands for cash fares, how would you apportion the revenue so received, bearing- in mind that at the end of each month many tickets remain unredeemed. Question Jf67 In a large country store containing several departments considerable produce is taken in the grocery section from farmers and others, for which trading orders are issued redeemable in merchandise only through the other depart- ments. How would you determine the profit or loss in each department ? Question 468 A trading and mining company maintains five general stores at each of five separate stations, and concentrates its supplies each year at Station A, which is the only one ac- cessible by railway, and distribution is made from thence by means of wagon and pack trains. The cost of goods laid down at Station A is 10% above invoice prices at the company's general office in Montana; and the agent at Station A is instructed to rebill all shipments to Station B at 20% above original invoice cost; to Station C at 35% ; to Station D at 40%, and to Station E at 50%, the experience of several years bearing out the general manager's state- ment that such additions are approximately correct and cover actual cost of transportation. In auditing the accounts for the purpose of certifying the annual balance sheet, you ascertain that certain goods at Station D amounting to $10,000, are inventoried by the agent at that point at 70% above the original invoices ILLINOIS w which you have examined at the home office. He states that Station E, being overstocked, shipped him several lots of merchandise at price billed out to E by Station A, plus 10% for estimated cost of handling and repacking at E ; and to this D legitimately added 10% for cost of transportation from E back to D. In your visit to other stations you find many similar instances where goods have been moved back and forth and each time the shipping station has added 10% for handling and repacking. Out of a total inventory at all stations of goods origi- nally costing $200,000, the summary shows final extensions of values aggregating $325,000, of which not more than $75,000 is covered by cost of transportation, leaving some $50,000 represented by internal charges added between the different stations. Review the foregoing statement and give your method of handling such accounts. Question 4^9 In making an audit of the accounts of a corporation, would you consider it part of your duty to verify the trans- fers of the certificates of capital stock occurring during the period covered by your examination ? Question 470 In financing a manufacturing company, it is considered necessary to arrange for an issue of $300,000 first mort- gage 5% 20-year bonds, $500,000 6% non-cumulative pre- ferred stock which may be retired any time after five years, and $1,000,000 common stock. The bonds are disposed of at 90% of their face value and proceeds used for erecting buildings and purchase of machinery and equipment. I^o C. P. A. AUDITING QUESTIONS The preferred stock is sold at 85 and one share of the common stock is given with each share of preferred stock, the common stock remaining being disposed of at 40. How could you deal with the discount in each case? Question J^ll A company whose capital stock is $250,000, divided into $100,000 6% non-cumulative preferred shares and $150,000 common shares, begins its life with an excess of liabilities over real assets to the extent of $10,500, which sum is debited to Suspense account. During the first few years small losses are made and carried forward on the Profit and Loss account, but finally sufficient profits are earned to wipe out the losses of the previous years and leave a balance of $16,500. The holders of the preferred stock claim that any sur- plus profit, after payment of the preference dividend, should be used to extinguish the Suspense account. The holders of the common stock claim that all of such surplus is properly available for their dividend on the ground that the original deficiency carried to Suspense ac- count was in efYect a charge to good-will. Give briefly your understanding of "good-will." State how you would deal with it in this case, and whether the directors may pay any dividend on the common stock. Question Ji.72 A suburban traction company, after equipping its line at a very considerable expense for overhead trolley and operating same for several years, decides to adopt the third-rail system. Extensive changes are necessary in changing power-houses, rearranging tracks and altering cars, involving an expenditure of $25,000. In addition, ILLINOIS 151 considerable machinery and rolling stock, the original cost of which had been treated as a capital outlay and was car- ried on the books at a valuation of $25,000, is rendered obsolete and is disposed of for e$3,500, showing a loss of $21,500. The profits from operation for the year are $18,000. State how you would recommend that the matter be dealt with in the company's accounts, and whether the company can pay a dividend. Question Jf-73 In examining the partnership accounts of Black & Brown you ascertain that the capital of $20,000 has been provided equally, and the articles of partnership provide that if any excess capital is supplied by either partner, in- terest at the rate of 5% per annum shall be allowed. Black pays in $5,000 additional and is credited at the end of the year with 5% on same, which equals $250, which is debited to Brown. State whether you consider this correct and give reasons for your answer. Question J^7Jf. In the examination of a business you find that all past due accounts receivable are promptly charged to a sus- pense account and the suspense account is plainly stated on the balance sheet among the assets. Do you consider this satisfactory; or what form of account would you recom- mend should be set up to care for such items ? Question J/.75 State how you would deal with the following items of account in making an audit of an Illinois company: 1^2 C. P. A. AUDITING QUESTIONS (a) Premium paid for a lease. (b) Commission on an issue of capital stock. (c) Discount on an issue of bonds, proceeds of which are used for plant construction. (d) Expenses incidental to organization. (e) Cost of removing certain machinery to a different part of the works and adding some new ma- chinery. Give reasons for your answers in each case. Question Jf.76 In large businesses internal auditors, members of the staff of the concern, are frequently the only ones employed. Where this is the case, do you think it desirable that pro- fessional certified public accountants should be engaged? If so, give your reasons. Question Jf.77 Assuming that you have been appointed auditor to a corporation or private firm on its formation, and have been asked to state for the guidance of the cashier and book- keeper the requirements you would expect to have been ful- filled when you come to make the audit, write out detailed instruction in the form you would actually give them Question ^78 What evidence would you require, first, as to the exist- ence of assets (other than book debts) shown in a balance sheet; and, secondly, as to the correctness of the amounts at which they were entered in the books ? ILLINOIS 153 Question 470 Does an auditor's duty in any way extend beyond the careful examination and certifying of the books and ac- counts submitted to him ? Discuss different theories. Question 480 To what extent do you consider it an auditor's duty to examine into and report upon the stock inventories and the methods by which the stock has been taken and valued ? Question 481 A company shows among its assets $2,675 as unexpired insurance on January 1, 1907. On February 1, 1907, the plant is destroyed by fire and a total loss of $57,875 oc- curs, which the insurance company pays. How would you treat the $2,675 unexpired insurance item? Question 482 In auditing the accounts of a manufacturing company would you consider it proper to allow the Profit and Loss account to be credited with profit on uncompleted work? Question 483 State your understanding of a ''continuous audit." What are its advantages over a yearly or half-yearly audit? Can you point out any special dangers to which it is exposed ? Question 45-1 Explain shortly the effect of a fall of the Tael on each of the following: 154 C. P- A. AUDITING QUESTIONS A Chicago concern carrying on a general trading business in China. A Chicago corporation owning a railroad in China. A Chicago-Chinese bank. Confine your answer to the effect that the variation in exchange should have on the published accounts. Question Jf.85 A corporation purchased a business as a going concern on January 1st, 1908, with a right to the profits from Oc- tober 1st, 1907. Its capital is : 5% first preferred stock $250,000.00 6% second preferred stock $250,000.00 Common stock .$124,000.00 The year's profits to September 30th, 1908, are found to have been $38,320. What appropriation of such profits would you consider to be correct ? Question J/.86 A cash book exists with three columns on each side, viz., debit side: Discounts, Cash Receipts, Bank; credit side: Discounts, Cash Payments, Bank. In making an audit, you find that the cashier closed his cash book at the end of a month, bringing down a cash bal- ance of $177.91; you count his cash and find that he has only $119.12. On going carefully through the month's transactions, you find that $45.37 paid in cash had been entered in the bank column; the total of a previous page of cash receipts, $2,516.25, was brought forward as $2,- 525.75; the discount $2.50 on an account paid had been entered in the cash column as a payment instead of in the discount column ; $10 received from a partner for payment ILLINOIS 155 of private account had been included in the cash in hand, but not entered in the cash book. Rule a form of cash book as above, enter the balance brought down, and make entries to correct the errors above described. Show the deficiency still existing, and state how it should be dealt with. Question ^87 Reply to the following letter : Dear Sir: We wish you to audit our accounts for the past ten years and to report thereon. In your report please state what dividend may in your opinion be fairly expected in the future if the business is taken over by a corporation with a paid up capital of $500,000. The capital of the partners during the period named has been $375,000, and the profits divided have averaged over 15%, as shown by the accounts you are asked to verify. Yours very truly, Smith & Brown. Question Jf.88 An attorney-at-law joined an established firm in part- nership without having the books investigated, relying on the firm's statement that they are making a certain profit. After several months have elapsed, the new partner, not being satisfied, instructs you to audit the accounts for the year immediately prior to his joining the firm. You dis- cover that no break has been made in the books for years ; what steps would you take to ascertain the exact profit for the year? Question J^89 In the case of a corporation the management suggests the diminution or suppression of depreciation on plant and machinery on these grounds: 156 C. p. A. AUDITING QUESTIONS (a) Nothing need be written off, as the plant is ac- tually more valuable, owing to a rise in the cost of similar machinery. (b) Repairs have been fully maintained, and the plant is as good as ever. (c) To charge depreciation to the same extent as in a good year wnll prevent a dividend, with con- sequent outcry by stockholders, and fall in the price of shares. Combat these arguments. Question J^90 A corporation formed to invest in certain classes of securities has made a serious loss on paper, by a fall in the price of some of its purchases, while it has earned enough on income to pay the usual dividend. How should this be dealt with in the annual accounts? Question 491 A fraudulent cashier has embezzled some of the money passing through his hands. The books are kept on a double- entry system, and he has access not only to the cash book, but also to the journal and ledger. Point out eight distinct methods by which he may try to conceal his theft. Question Jf92 The directors of a certain company desire you to make a thorough audit of the accounts and state in your certifi- cate "that the books are correct and all transactions have been properly recorded." Draft the form of certificate you would give. ILLINOIS 157 Question J/-93 State the items of income or expenditure which you would add to or take from the profits of a firm (as shown by the books) in preparing a certificate to be used in the pros- pectus of a company which has been formed to take over the business. Question Jt-OJf. A company organized June 30th, 1909, purchased the plant and business of a private firm as of January 1, 1909, i.e., the company is to have the entire profit which may have been made from January 1 to June 30. How would you apportion the year's profits in making up the accounts on December 31, 1909 ? Question Jf95 A newly organized company permits its shareholders to pay in advance of certain calls made against their subscrip- tions, and allows them interest on such advances. How should interest so paid be treated in the accounts, or is it dependent upon subsequent profit? Question Jf96 During the audit you are making of the accounts of a corporation, you become aware of a claim agamst the com- pany which you think is likely to be enforced, but which the directors do not recognize, and for which they will make no reserve. What would you do in the circumstances? Question Jf97 A corporation is established for working a patent of which ten years are expired, and for which a sum of money has been paid. How should the company deal with this asset, and what is the duty of the auditor in respect of it? 158 C. p. A. AUDITING QUESTIONS Question 498 How should an incorporated coal company estimate the value of its colliery in its balance sheet from time to time, first as a freehold, secondly as a leasehold ? Question 499 In the case of an incorporated company making consid- erably more profit than usual in one year, owing to exten- sive purchases on a rising market, would you advise de- claring a proportionately larger dividend, or what would be your recommendation? State your reasons. Question 500 In auditing the books of an importing and domestic wholesale wine and liquor dealer, how would you assure yourself of the correctness of the inventory as to the bonded stock ? Question 501 Beyond the mere detailed checking of purchase invoices to the ledger accounts with dealers, can you suggest any steps that might be taken which might be advisable with the view of the prevention of fraud? Question 502 A corporation invests its reserves outside its business. On the audit of the accounts explain what steps you would take to verify the full receipt of the investment income and the safe custody of the trust funds? Question 503 Upon the audit of the partnership accounts of a manu- ^actiti^g business the following conditions are revealed : ILLINOIS 159 (1) Sales toward the end of the period are unusually- large. (2) A large deposit in bank is made on the closing fiscal date, which amount is credited to the bank two weeks later. (3) Machinery sold has been credited to merchandise sales. (4) A loan to the firm has been credited by mutual consent to the capital account of one of the partners. (5) Depreciation or discount from the value of a certain class of the inventory instead of being 30% as in prior years, is shown as 10%. What would you deduce from these facts, and what would you feel called upon to do by way of extended in- quiry or report in each of these instances? Question SOJ/. A Chicago corporation does business in Brazil where its capital is invested, a balance sheet and profit and loss account in Brazilian currency being sent over at the end of each year for amalgamation with the Chicago accounts. During the last year assume that a heavy fall in exchange took place, say from 54 cents per milreis to 36 cents. At what rate of exchange would you take the Brazilian assets for the purpose of the American balance sheet ? Would you treat the buildings, machinery and plant differently from the floating assets? Explain. Question 505 The $500 6% bonds of a corporation are issued at $450 redeemable at par, by ten annual drawings. How would you treat these bonds in the profit and loss account and balance sheet? l6o C. P. A. AUDITING QUESTIONS Question 506 The following profit and loss account is presented to you for audit by the directors of a company, who intimate their willingness to modify it in accordance with your sug- gestions. How would you redraw it so as to show the exact profit for the period under audit? By Interest on invest- ments $4,660.00 " Inventory 17,806.00 " Sales 83,236.00 " Balance from last year 2,627.00 " Sundries 12.00 " Reserve fund transferred .... 2,000.00 Inventory , . 15,325.00 Bad debts 1,242.00 Interim dividend. . 5,000.00 Depreciation 650.00 Purchases , . 66,728.00 Directors' fees. . . . 2,000.00 Proposed dividend 4,000.00 Salaries , 2,463.00 General expense.. 3,791.00 Wages 7,402.00 Balance 68.00 $110,341.00 $110,341.00 Question 507 What, in your opinion, is the best method of stating the profit and loss account of a trading corporation so that it shall give the greatest possible desirable information to the stockholders. Question 508 A corporation took an inventory of its stock on Decem- ber 31, 1910, at which time it was overdrawn at its bank about $25,000. It kept its cash book open (as of December 31) for the greater part of January, during which time there was collected from customers over $240,000, and $176,000 of this was applied to payment of liabilities accruing in January. ILLINOIS l6l State the effect of these January transactions upon the financial showing and your attitude as auditor in certifying to the statement. Question 609 During the past fiscal year a concern under audit has not shown profit sufficient to justify paying a dividend. The manager in order to avoid showing a loss disregards the usual depreciation reserve charges for structures, plant, machinery, tools, and implements. What would be your view as auditor under the circum- stances? Give reasons as a feature of your report. Question 510 In reviewing the schedules of open customers' accounts receivable for the purpose of setting up a reserve against irrecoverable amounts, how would you proceed? Lay out your method and state what conditions would prompt in- quiry as to a possible default in any one item. How should a reserve for cash discounts on outstanding accounts receivable be computed ? Question 511 In an audit if: (a) Cash is received but not properly accounted for. (b) Cash is paid for goods that were never delivered. (c) Cash is paid for wages that were not earned. All with fraudulent intent; state concisely what means you would devise to prevent such happening in the future. Question 512 What is the auditor's duty as to the inventory of a manufacturer's stock on hand : l62 C. p. A. AUDITING QUESTIONS (1) As to the prices of raw material. (2) As to quantities of all items. (3) As to the extensions, additions, and summaries. (4) As to the conditions of schedules and summa- tions comparatively with those of the opening of the term. (5) As to obsolete, spoilt, uncatalogued, or pattern goods. (6) As to its effect, in ratio, as a total on the gross profit. Question 513 Distinguish between a ^'continuous" and "completed" audit, and state what you understand by: (1) a cash audit; (2) a financial or balance sheet audit; and (3) a general audit. Question 51Jf What general procedure would you follow in auditing the receipts, or debit side of the cash book, of a manufac- turing company where the transactions were not too numer- ous to render a complete detailed audit impracticable, and state what features of the audit you would omit where the transactions were too numerous to permit of a complete detailed audit. Question 515 In the balance sheet of a concern under audit you find the accounts receivable and payable to be as follows: Accounts receivable: Chicago (head office) debtors $95,650.00 St. Louis branch account 2,425.00 Atlanta branch account 4,730.00 New Orleans branch account 1,725.00 Accounts payable: Chicago (head office) creditors $41,500.00 New York branch account 7,200.00 Montreal branch account 3,752.00 ILLINOIS 163 What adjustments in the balance sheet, if any, would be necessary in order that an unqualified certificate might be given ? Question 516 Criticize the following balance sheet from both the auditor's standpoint and that of the company's financial position; assuming that the bonded indebtedness outstand- ing is $200,000. A. B. COMPANY BALANCE SHEET— DECEMBER 31, 1911 Assets Real estate, buildings, plant, machinery, equipment, and other permanent investments, including good-will $1,000,000.00 Investments in stocks and bonds at cost (market value $60,000) 100,000.00 Current Assets: Inventories: Raw materials $170,000.00 Finished stock at selling prices, less discount 5%.. . . 100,000.00 Consignment (selling value) . 50,000.00 Supplies (estimated) 200,000.00 $520,000.00 Accounts and bills receivable, including advances to em- ployees 125,000.00 Stock in treasury (unissued): Preferred $150,000.00 Common 137,225.00 287,225.00 Investments in subsidiary com- panies 225,500.00 Cash and miscellaneous items.. 50,500.00 1,208,225.00 $2,308,225.00 l54 C. P. A. AUDITING QUESTIONS Liabilities Capital stock: Preferred stock $500,000.00 Common stock 750,000.00 Bonds and bankers' loans 575,000.00 Current Liabilities: Accounts payable $15,225.00 Other indebtedness 231,000.00 Accrued items 2,000.00 248,225.00 Reserves: For depreciation $50,000.00 Less: Renewal expenditures written off 65,a)0.00 Balance (debit) $15,000.00 For bad debts 20,000.00 Other contingencies 5,000.00 10,000.00 Surplus (less dividends paid) in- cluding appreciation in real es- tate and other capital assets and profit on inventorying raw ma- terials at market prices 225,000.00 $2,308,225.00 Question 517 You find in the course of an annual examination as of December 31, the following: (1) A credit balance in the cash account of $625.00 (2) In the credit ledger a debit balance for cash charged to Davis & Co. on July 31 for 375.00 (3) In the debit ledger a credit balance for cash paid by Jones & Co. on December 31 250.00 (4) A debit balance also in the debit ledger to Winslow & Co.: July 1, Mdse $50.00 Aug. 20, Cash & discounts $50.00 Aug. 3, Mdse 60.00 Oct. 3, " " 75.00 Sept. 15, Mdse 75.00 Dec. 1, " " 100.00 Oct. 10, Mdse lOO.OO Dec. 31, Balance 60.00 December 31, Balance.. . .$60.00 What would be your views of each of these items ? ILLINOIS 165 Question 518 A company insures the life of its manager for its own benefit in the sum of $50,000, the annual premium being $1,250. Explain the method you would adopt of treating the disbursement at the annual accounting during the period the policy was in force. Question 519 How far is an auditor entitled to probe into matters beyond the term which he is instructed to audit, and for what purpose should he do so? Question 520 In the course of audit of an investment and brokerage corporation you find that the directors have written up the value of some of the securities, which they contend is in harmony with current market values. The accounts show that the dividend proposed to be paid has not been earned unless the increment in value referred to is included as a profit. What is your view of the proposed procedure of the directors? If you concur with their proposed action, state your reasons; and if not, state the procedure, as auditor, you would follow. 'Question 521 (a) In the accounts of a wholesale dry-goods company, under what, if any, circumstances is it permissible to carry forward to a subsequent period the whole or any portion of the expenditures for salesman's salaries or commissions and traveling expenses. (b) In the accounts of a lumber company owning large tracts of standing timber, how should the book value of "Stumpage" be disposed of? What do you understand by "Stumpage"? NEW JERSEY Question 522 The general business public frequently makes no distinc- tion as between a bookkeeper and an accountant. What is the distinction ? Define in your own words : (a) A bookkeeper (b) An accountant (c) An auditor (d) A practicing public accountant and auditor Question 523 A business man sends for you and talks to you thus: "I want my books and accounts examined. I am informed and believe them to be all right, but I want to be assured of it beyond doubt. I also want to know the condition of my business, as the books show the same, at this date. I also want to know if the business has made money or lost money, and in either case what amount. What will the *job' cost me, and how long will it take to find out ?" (a) How would you deal with such a case? (b) What would you require to have furnished to you so that you could ascertain the facts wanted ? Question 524 Good-will : (a) What is good-will? (b) What part does it play in corporations? 1 66 NEW JERSEY 167 Question 525 Three gentlemen have been associated as partners in a certain manufacturing enterprise. At the close of the year they desire an honest and fair adjustment of the result and division of the resulting gains. They have agreed to abide by your decision. They furnish you the following facts : (1) Anderson, Brown & Cristy are equal partners in a manufacturing enterprise. (2) Each partner to receive 6% interest on his aver- age investment. (3) Cristy, as superintendent, to receive yearly sal- ary of $3,000. (4) Brown keeps a general store, at which the oper- atives deal, and Brown has agreed to allow Anderson and Cristy 5% on his sales to the operatives. (5) Brown's sales to the operatives amounted to $1,575. (^) Anderson to receive for his services as selling agent 10% on the net profits as existing be- fore his percentage is taken. (7) Anderson's average investment for the year is $9,750. (8) Brown's average investment for the year is $5,750. (9) Cristy's average investment for the year is $5,000. (10) Leaving out the interest, salary, and Anderson's and Cristy's percentages, the net gain for the year is $15,000. What share of the $15,000 is each partner entitled to? Prepare a sheet that will show under separate heads : Accounts, with items, of Anderson, Brown, Cristy. Distribution of the gain. MICHIGAN Question 526 What IS the general course for an accountant to follow when called upon to audit the books of any business?. Question 527 How would you classify the accounts in preparing a statement of the following : (a) Gas and electric light company? (b) Electric railroad? (c) A manufacturing business? Question 528 Should depreciation be written off the accounts of a corporation whose property is of a wasting nature, such as a quarry or a mine? Give reasons. Question 529 The J. B. & B. Coal Company has acquired a leasehold right to a certain area of coal, and also owns a freehold coal. What would you require, as auditor, to satisfy your- self that revenue was bearing its proper annual charge in respect of the coal mined? Question 530 Chart the following accounts of a street railway com- pany under their proper classification and logical order, as to the assets (active, fixed, and passive), liabilities (funded, floating, reserves and capital), expenses (transportation, 1 68 MICHIGAN 169 including operating of power plant and car service), (general, including administrative, emergencies, and fixed charges), (maintenance, including repairs and deprecia- tion), and revenue, (a) from operations and (b) from other sources. Organization expenses, preliminary engineering and superintendence, right of way, track and roadway, notes payable, cash in office, profit and loss, power plant wages, salaries of general officers, damages, taxes, electric line, in- vestment real estate, debentures, vouchers payable, stocks and bonds of other companies, hired power, wages of conduc- tors and motormen, car service supplies, insurance, first mort- gage bonds. Ninth National Bank, cleaning and sanding track, printing and stationery, legal expenses, rent of land and buildings, notes receivable, shop tools and machinery, passenger receipts, rolling equipment, dividends, material and supplies, freight receipts, interest on deposits, track rentals, common stock, sinking funds, good-will, mail re- ceipts, sale of power, dividends on securities, salaries of clerks, removal of snov/ and ice, advertising and attrac- tions, storeroom expenses, steam plant, items in suspense, impairment and surplus, first preferred stock, repairs to equipment, reserves, accounts receivable, second preferred stock, second mortgage bonds, fuel and water for power buildings, and fixtures. Question 531 A $100 bond is issued at $115 and is payable as to $35 on allotment, and to the remaining $80, in four equal instal- ments at intervals of two months, the first instalment being due two months after the allotment. If after a year a divi- dend of $6 is paid on each bond, what is the average rate of interest on the investment for the whole year ? lyo C. P. A. AUDITING QUESTIONS Question 532 John Adams, a capitalist, contemplates purchasing the stock of the American Grain Exporting Company, a cor- poration organized with a capital of $200,000, divided into 1,000 shares preferred stock and 1,000 shares common stock, par value $100 each; 6% dividends payable upon the preferred stock before any dividends are declared upon the common stock. This stock has been offered to Mr. Adams at $60 per share for the preferred and $40 per share for the common. You are requested to audit the books of the company and give your opinion as to the value of the stock. You find the following accounts to be correct, covering a period of one year : Cash $900.00 Accounts receivable: Good $15,000.00 Doubtful 4,000.00 Bad 6,000.00 25,000.00 Plant and machinery 75,000.00 Horse and wagons 4,000.00 Merchandise — inventory 29,000.00 Good-will 50,000.00 Furniture and fixtures 2,000.00 Expenses 3,000.00 Wages 15,000.00 Purchases 325,000.00 Claims and rebates , 8,000.00 Ordinary repairs 9,000.00 Sales $260,400.00 Mortgage on plant 25,000.00 Accounts payable 42,000.00 Surplus 18,500.00 Capital stock 200,000.00 Totals $545,900.00 $545,900.00 MICHIGAN lyi Inventory submitted, $129,000. The company started business six years ago and built the plant and machinery and purchased the property pertaining to fixed capital. Write the report, commenting upon the advisability of the purchase, and submit profit and loss statement and balance sheet, after closing books. Question 533 The cashier of a firm has disappeared. The cash book is left written up and balanced off, the custom being to pay any cash balance into the bank each day. What course would you take to ascertain whether there were any defal- cations, if you were called upon to audit? Question 53J/- What is the average date of the following: (a) $114 due April 10; $140 due April 26; $320 due May 22; $976 due June 6? (b) June 3, $375 on 30 days' time; June 28, $420 on 60 days' time; July 16, $560 on four months' time; September 4, S228 on 90 days' time? (c) Dr. May 16, $437, Cr. May 23, $400; Dr. May 31, $324, Cr. June 16, $300? Question 535 (a) If instructed to carry out a monthly audit by the auditing committee of a club, what steps would you take to ascertain whether any speculations by the servants or stock clerks were being carried on in connection with the kitchen and cafe? (b) What system would you recommend to prevent dishonesty on the part of the various employees, from the time orders are placed for buying the provisions and sup- plies, until the accounts of members are paid to the cashier and banked? 1^2 C. P. A. AUDITING QUESTIONS Question 5S6 (a) A man invests $2,000 in 3% stock at 84, and $5,000 in 4% at 96. After three years he sells the former at 72, and the latter at 101. What rate of interest has he received during the three years on his investment? (b) And to vi'hat extent has the value of his capital changed? Show by figures how you worked out the answers. Question 537 An American firm has an extensive trade with Spanish and ' English customers, to whom goods are invoiced in Spanish and English currency, and payments are accepted made by bills in those countries. This firm's principal business is, however, in the United States. Explain in what manner you would arrange the books to be kept, and the titles of any special accounts that might be necessary to keep. Question 538 Jones and Brown are partners, sharing profits equally. Their capital as it appears on the books of the partnership on the date they dissolve partnership is : Jones, $2,000, and Brown, $500. The total amount owing by the firm is $5,000, which includes $1,000 due to Jones on a loan, and $500 due to Brown on a loan. The whole of the assets of the firm realize $6,000. Prepare your own accounts and supply details for closing up the partnership, showing the position in which the partners stand with each other. Question 539 How would you deal in a life insurance company's ac- counts with premiums received, bearing in mind the fact that premiums are always paid in advance? Should you apportion them? Explain fully in your answer. MICHIGAN 173 Question 6^0 A certain issue of $100,000 4% bonds is dated Septem- ber 1, 1908, and interest begins at that date, but interest is payable on February 1 and August 1, and the principal (with four months' interest) is payable December 1, 1912. What is the value of these bonds on a 3.60 basis at the date of issue? What is their value at the same basis if pur- chased on December 1, 1908? (Note that you are inter- polating into a five-month period, not a six-month, in the beginning.) Question 5J/-1 An ice company sells coupon books which are paid for in advance. What accounts would be required for the pur- pose of correctly auditing the sales and deliveries in order to determine the exact earnings at any given time? Question 5J^2 What do you understand is the purpose of the Com- mission on Economy and Efficiency appointed by President Taft? Question 5JfS Give the arguments for and against figuring interest on a manufacturing investment as a part of the cost of pro- duction. Question 54 In auditing a business, you find that the market value of securities owned by it has depreciated during the year to an amount equal to the earnings of the business proper. In making your report how would you treat that situation? 174 C. P. A. AUDITING QUESTIONS Question 5^5 If you were appointed auditor of a club, such as the Fellowcraft Club, in which receipts are from dues and cafe services, what method would you prescribe for keeping the accounts so that you might be able to make a check upon the goods side of the institution? FLORIDA Question 5J/-6 A company is organized in New York to lend money on real estate mortgages in Florida. What examination should an auditor make of such mortgages, and how would he guard against duplicate mort- gages on the same property? Question 5Jt-7 A new company sells some of its property at a premium. State how these premiums should appear in the accounts. Question 5^8 Suppose you had certified the balance sheet of a manu- facturing concern, and were asked by a stockholder why you had certified it as correct when some of the assets were not salable at the figures placed against them, what reply would you make ? Question 5Jf9 A firm has been doing business for you ten years, during which time no audit has been made and nothing has been charged off on account of bad debts. There are six hun- dred accounts on the ledger. State how you would verify and classify them. 175 176 C. p. A. AUDITING QUESTIONS Question 550 Give your opinion as to the advantages, or disadvan- tages, of bound and of loose-leaf ledgers ; and give at least two methods for preventing improper abstracting of leaves from loose-leaf books. Question 551 In auditing a large concern, such as a mining company operating a number of distinct plants, how should you satisfy yourself that the following items were properly ac- counted for and safeguarded ? — (1) Advances on pay-rolls, both cash and merchan- dise. (2) Unclaimed wages. (3) Purchases which are made by one purchasing agent for all the plants. Question 552 On certain lines of business (e.g., real estate companies, sewing machine agencies, retail furniture houses), a large portion of the sales are made on the instalment plan, and at the close of any period a large number of such transactions may be uncompleted. How should the profits from such uncompleted sales be treated in the balance sheet ? Question 553 Define secret reserves, and state the duties of an auditor in connection therewith. Give your opinion as to the advantages or dangers arising from such reserves. FLORIDA 177 Question 55Jf While examining a bank, you find that many indorsed notes have been extended beyond their original dates. Is such a good practice? Name at least two methods for guarding against any danger arising from it. Question 555 In auditing the accounts of a business where accounts receivable are kept in a sub-ledger, with a proper controlling account in the general ledger, give your opinion as to the extent to which the sub-ledger should be checked, under various circumstances. Question 556 How would you show in your report of an audit you had made, fluctuations in the value of the following securi- ties owned by the concern : (a) Real estate (b) Stocks and bonds (c) Material on hand In some cases the present prices are higher; and in some they are lower than when the securities were bought. State your idea of the general principles governing such variations. Question 557 You are consulted by a wholesale grocery house whose accounts are supposed to be kept by double entry, and are asked to examine the record of the chief bookkeeper who also acts as cashier and who is suspected of dishonesty. He has been in charge for six months ; the cash book, journals, and ledger appear to have been kept day by day, but the lyS C. P. A. AUDITING QUESTIONS general ledger has at no time been in balance, nor do the customers ledgers balance with the controlling account in the general ledger. The volume of business is large and there are 1,500 open accounts in the customers ledger. State fully what steps you would take. Question 558 On closing the audit of a year's business you find that many items under "Accounts Receivable" are of long stand- ing. State what special examination you would make of these to determine their value, and what, if any, remarks you would make thereon in your report. Should the treasurer, or other officer, object to the amount you wish to write off or to provide for by a re- serve account, what would your action be? If on a second audit, a year later, you find that many of the same items still remain unchanged, what action would you take? Question 559 When auditing at the end of its first year's business the accounts of a land development company, organized for the purpose of buying, developing, and selling lands, state what books and documents you would require to complete your work. Question 560 In auditing a hotel managed on the European plan, where proper accounts are kept and perpetual inventories of stores on hand are maintained, what form of monthly statements would you suggest, especially in connection with the operation of the dining room and wine room? FLORIDA 179 Question 561 Give the general duties of the auditor of a corporation in this country, compare them with the same duties in Eng- land, and give your comments on the differences between the two systems. Question 562 You are engaged to audit the books and accounts of a concern after the books have been closed and the balance sheet and profit and loss statement have been prepared, and you find the following items are included in the profit and loss statement : Increase in value of stocks held $1,000 Increase in value of real estate held 10,000 Profit from sale of the company's treasury stock.. 1,200 Profit from sale of real estate 5,000 Profit from stocks and bonds sold 800 Criticize these entries, and, if you think them erroneous, state how you would correct them. Question 563 Give in detail a method for verifying the payment of interest on coupons from bonds of a company you are auditing, and state how proof of such payments should be presented to you. Question 56^ In auditing the accounts of a merchandise broker, how would you verify his statement of brokerage due to him from the houses for whom he sells ? Supposing that many of these items were on shipments not made at the time of the audit, how would you treat them in your statement of assets ? l8o C. P. A. AUDITING QUESTIONS Question 665 You are called in to audit the accounts of a mercantile corporation and find that the market value of its real estate holdings has greatly enhanced. Previously it has been car- ried on the books at cost. The managing director now asks that there be added to the Real Estate account an amount sufficient to represent its increased value. Would you consent to this and, if so, how would you show the increase in preparing the profit and loss account and balance sheet? He also wishes to add to the Real Estate account in- terest paid on money borrowed to pay for it. Is this right? Supposing it to be right, how would you show it in pre- paring your profit and loss account and balance sheet? Would your answer be changed if the concern were one buying and selling real estate exclusively? Question 666 As to inventories : Describe what you consider the correct attitude of an auditor regarding inventories generally, and especially when preparing a balance sheet for a bank : Real estate company Wholesale grocer Orange grove Steamboat company Question 667 Describe a perpetual inventory, its advantages and disadvantages, for each of the above businesses. Question 568 You are called in to audit the books of the Fla. Land & FLORIDA l8i Homeseekers Co., a corporation capitalized at $250,000; the par value of the stock is $100 per share. Among other ledger accounts, you find accounts with balances as follows : Capital stock Cr. $250,000.00 Treasury stock Dr. 25,000.00 An examination of the stock certificate book shows you that certificates in the amount of $15,000 have been issued. Reference to the subscription record informs you that stock in the sum of $225,000 has been sold and charged to the ledger accounts of the various subscribers. You find that $45,000 has been credited to these accounts for cash paid in. The by-laws provide that no certificates shall be issued except for fully paid stock. You find that the com- pany has in its safe $5,000 worth of certificates of its own stock which it has bought back from subscribers whose ledger accounts have been cre'dited for the amount. The company has not begun to do business yet and no transac- tions other than those mentioned have taken place. Draw the company's balance sheet, giving your reasons for the results shown therein. Question 569 Define and differentiate between : (a) Debenture bond (b) Mortgage bond Question 570 Your clients send you the annual profit and loss account of a wholesale grocery house that sells about three millions a year. Your clients ask that you advise them whether or not the profits shown for that year are correct. Your time l82 C. p. A. AUDITING QUESTIONS is limited, and, therefore, you are unable to make a detailed audit of the books to ascertain whether the profit and loss account submitted to you is correct or not. What method would you follow to ascertain the approximate correctness of the account submitted to you? Describe in detail what your operations would consist of. Question 571 A municipal board built a number of new buildings during the last year, buying its own material and paying its foremen and carpenters by the day. You are told that one of the buildings cost much more relatively than the others, without apparent reason, and you are asked to submit a plan which will determine the facts in the case and locate abnormal charges. What plan would you suggest? Question 572 You are called in to audit the accounts of the S. P. Brown Co., a corporation, at the close of its first business year. The company began business Jan. 1, 1912. You find the following trial balance on the bookkeeper's desk : Cash $895.00 Capital stock $50,000.00 Accounts receivable 35,000.00 Accounts payable 47,450.00 Bills payable 10,000.00 General expenses 27,842.85 Salaries 4,644.29 Sales 127,402.95 Purchases 104,948.51 Furniture and fixtures 5,943.43 Cost of charter 375.00 Real estate 55,203.87 $234,852.95 $234,852.95 FLORIDA 183 You find that the General Expenses account includes the following items : Commissions paid for selling capital stock $5,742.00 Compiling a list of possible customers for cir- cularizing purposes (the list was only com- pleted and ready for use by the end of the year) 3,000.00 Insurance 542.97 License 457.84 Office supplies 400.00 The balance of the account represents freight on pur- chases. The unexpired insurance is $22.65. The unexpired license is $271.48. It is desired to make the profits show up as well as pos- sible consistent with the truth. It is not desired to write off anything for depreciation. You find that the Real Estate account includes : Taxes to the amount of .$ 947.84 Merchandise inventory ... 10,454.92 Draw the balance sheet. Question 573 Doe & Co. allow their bookkeeper to sign all checks. In verifying the bank account as it appears in their ledger you find that after allowing for outstanding checks the ledger balance agrees with the balance shown by the bank pass book. You find, however, a credit in the ledger of $1,000, and upon looking up the journal reference find this entry : Profit and loss to bank. .$1,000.00 $1,000.00 with no explanation. You find no cancelled check to ac- count for this entry, and upon examining the bunch of can- celled checks returned by the bank you find that they total l84 C. P. A. AUDITING QUESTIONS $1,000 less than the amount actually paid by the bank as shown by the pass book. What is the implication and how- would you verify it? Question 57 Jf- You are engaged to certify to a balance sheet of a whole- sale grocer, and to make such further audit as you may con- sider necessary as the work progresses. Write such a report and certificate as you would render after having completed the work and found some auditing necessary {e.g., in connection with salesmen's accounts), bearing in mind that your certificate will be read by persons unacquainted with the exact instructions given you or with the details of the business. Question 575 In auditing the accounts of a company you find that no depreciation has been charged against its plant and ma- chinery but all repairs have been charged against revenue. You find that the land upon which the buildings and ma- chinery of the company stand has greatly enhanced in value and that nothing showing this has been placed on the books. How would you handle this situation? Question 576 (a) The bookkeepers of Jacksonville Mercantile Co. find that accounts receivable as taken from the ledgers amount to $14.50 more than the balance shown by the controlling account. There are 5,000 open accounts. The bookkeepers have been checking back for weeks in the effort to locate the difference, but have given up in despair. You are engaged to locate it. Formulate your plans. (b) What method would you adopt to verify the cor- rectness of Accounts Receivable, Bills Receivable, Accounts Payable, and Bills Payable? COLORADO Question 577 What plan would you suggest to minimize the risk of fraud in the following : Pay-rolls ? Accounting of cash receipts? Invoices of purchases? Question 578 State with reasonable fullness (not less than 800 words) the various steps, the details and objects therein, in the audit of one of the following classes of audits : A bank. Wholesale mercantile house. (Specify nature of busi- ness.) County treasurer's office (Colorado). City clerk's office, where the clerk is the collecting officer, except of taxes, which are paid to him by the county treasurer. Question 579 Under what circumstances can a bookkeeper cover up forced footings and postings during the course of the audit, so that ordinarily you would not detect the same, unless certain precautions are taken? State what these precau- tions should be. 185 l86 C. P. A. AUDITING QUESTIONS Question 580 (a) Of what use can the various items of "Checks" listed on deposit tickets be in an audit ? (b) Under what circumstances will the same prove to be of no value ? Question 581 (a) State what points you would observe in the auditing of vouchers covering disbursements. (b) State your method and procedure in an audit, in determining that you have seen all vouchers, even though some of them have been credited to personal accounts, and payments have been made to "apply on account." Question 582 After completion of the audit which you described in question No. 578, state what matters you would refer to in the diction of your report, and what schedules you would show in support of the audit made. Question 58S State where you feel that your duty ends in the correc- tion of errors located during an audit after the books are closed. Question 58^ Upon beginning the work of an audit of a company whose business and the conduct of the same are compara- tively unknown to you, how would you proceed, and what general precautions would you take? Give a brief outline of how you would spend the first day or two. Question 585 What points in an audit are to be observed in the veri- fication of notes receivable held as securities? OHIO Question 586 State the proper treatment of the following accounts in determining the profit or loss of a business for a specific time: (a) Insurance Premiums Paid (b) Doubtful Accounts Receivable (c) Interest Accrued on Notes and Accounts Re- ceivable (d) Interest Accrued on Notes and Accounts Pay- able (e) Contingent Claims for Personal Injuries (f) Depreciation Question 587 A sale company has completed a manufacturing plant, the machinery and equipment cost being $250,000. It is assumed that because of the nature of the business the entire machinery and equipment will have to be replaced every several years. In such a case how would you recommend that current repair and maintenance charges should be handled ? Question 588 In making an audit in which you have the right to make correcting entries on the books of the company, how would you require the following items to be charged — Capital account or Revenue account ? — 187 l88 C. P. A. AUDITING QUESTIONS ,(a) Premium given for lease (b) Cost attending giving of mortgage (c) Commission paid for selling capital stock (d) Brokerage on purchase of investment (e) Accrued interest or dividends included in the cost price of an investment (f) Preliminary and organization expense in the formation of the company (g) Insurance premiums paid in advance (h) Cost of replacing an old machine with a new machine of greater value (i) Premium paid on the purchase of a security Question 589 (a) You are called upon to audit the books of account of a concern, and discover that for the fiscal year under your inspection it has not shown sufficient profit to justify the payment of any dividends. The manager, in order to make a profit showing, has failed to set up the usual re- serves for depreciation of buildings, plant, machinery, tools, etc., nor has he sufficiently allowed for losses in the collec- tion of accounts receivable, etc. In making your report of audit, what would you do under the circumstances? Give your reasons therefor fully in such form as you would sub- mit them in your report. (b) In what way, if at all, would you report the fact that a trusted office manager had overdrawn his salary ac- count at various times, in no case more than $300, all of which has been returned before the time of the annual audit? State your reasons fully. Question 590 (a) How would you account for the proceeds of sales to customers without checking each entry? OHIO 189 (b) In passing upon the value shown in the inventory, how should the auditor treat materials costing $10 per unit when the market price is $8 per unit, and when the market price is $12 per unit ? State reasons fully. Question 591 Does an auditor's duty in any way extend beyond the careful examination and certifying of the books and ac- counts submitted to him ? Discuss briefly different theories. Question 592 (a) The auditor of an incorporated company which has been accustomed to making investments in interest pay- ing securities, in making his statement to the directors pre- sented a balance sheet showing a surplus of $65,000. After discussion, the directors determined they did not wish to declare a dividend out of this surplus and gave their auditor the following order: ''Decrease this surplus by investing $50,000 in the 5% bonds of the X Y Z Railroad Company." Presuming there was an item in the aforesaid balance sheet of cash $75,000, what effect will the carrying out of the director's order have upon the surplus of $65,000. (b) What is an audit? Make a definition. Question 593 (a) What is the difference between an audit and an investigation ? (b) What is your understanding of a cash audit? (c) What is your understanding of a balance sheet audit? igo C. P. A. AUDITING QUESTIONS Question 59^ (a) A client consults you in regard to auditing his books and asks your opinion as to the relative merits of a "continuous" audit and a "completed" audit. Explain the advantages and disadvantages of each. (b) Give your views concerning the J)est methods of auditing cash receipts — also cash payments. Question 595 If you found that the land of a manufacturing corpora- tion had been reappraised at a higher value than its former book value which represented its cost, and such increase had been carried to profit and loss, what would you do and say about it in your report of audit ? What if the value had been reduced ? State your reasons for your action fully. Question 596 (a) A manufacturing corporation consigning its pro- duct to a large number of independent sales agents is some- what in doubt as to how this consigned merchandise should be accounted for on its books. What method would you recommend? Describe fully. (b) How may the accounts in a trial balance be best arranged to facilitate the preparation of a "Statement of Condition" ? Question 597 Given the following accounts appearing on the ledger of a company whose books you are asked to audit : Accounts Receivable Cash Good-Will Notes Receivable OHIO 191 Real Estate Machinery and Equipment Organization and Promotion Expense Inventories Accounts Payable Accrued Interest Accrued Wages Notes Payable Mortgage Bonds Capital Stock Sinking Fund Sinking Fund Reserve Outline your method of procedure in making a balance sheet audit, and state what you regard as necessary in making such an audit. Question 598 Assuming the data is the same as given in the preceding question, outline your method of procedure in making a "Detailed Audit" and state to what extent and how you would verify the different items enumerated. Question 599 What do you regard as the proper method of presenting a "Balance Sheet" ; that is, as to form and as to arrange- ment of the items thereon. Question 600 Prepare a manufacturing, a trading, and a profit and loss statement (without using figures) and include therein the following items : Insurance of factory Freight inward ig2 C. P. A. AUDITING QUESTIONS Interest allowed on partners' capital Salesmen's commissions Labor in getting raw material from freight cars to warehouse Cash discounts received from creditors Royalties paid for use of patented process in manu- facturing Returned sales Rent of factory- Depreciation of office building Cash discounts allowed to customers Depreciation of machinery Freight outward Interest on capital borrowed to purchase machinery Allowance to customers for damaged goods Question 601 What would be your method in the preparation and arrangement of working papers during an audit and their preservation after an audit? Question 602 An audit discloses payments for insurance during a year to be $1,600, which is approximately a normal yearly expenditure, and the unexpired insurance, unadjusted, amounts to $600. No account was raised for unexpired in- surance at the beginning of the year. What adjustment should be made on the books and how made? Question 60S Give auditing reasons for discontinuances of a method by which petty disbursements in a manufacturing concern are made directly from cash receipts. Suggest alternative procedure. LOUISIANA Question 60Jf. If an appraisal by a recognized appraisal company or engineer is furnished you on the properties, machinery, franchises, etc., of a client which does not accord entirely with your views, would you accept figures as shown by the appraisers or endeavor to establish your own in making up a statement of condition at the date of appraisal? Why? Question 605 If asked to certify to the correctness of a statement of a building and loan association, how would you proceed to prove correctness of Mortgage Notes, Paid-up Stock, and Current Stock? Question 606 Explain the difference between cost and book value? Question 607 If you are unable to properly verify customers' accounts what would you do ? 193 GEORGIA Question 608 In the construction of a large building the proprietors issue $800,000 20-year 6% bonds which are disposed of to the contractors at 85% of their face value. You find, upon examination, that the discount of 15% has been charged to Construction account in the first place, and then into Building account. State whether you consider the final entry legitimate or not, and give reasons. Question 609 You are elected the auditor of a corporation by the holders of both common and preferred stock, and it is your duty to safeguard the interests of both classes of stock- holders. The preference stock bears 7% and is non-cumu- lative. Mention what precaution you would adopt to safe- guard the interests of the preference shareholders, giving reasons therefor. Question 610 After auditing the books of a manufacturing company for a period of ten years you are asked to give a certificate as to the net earnings of the business for those ten years for the purpose of a sale based on the earning capacity of the property. What items of expense heretofore charged an- nually through the Profit and Loss account- may be properly eliminated in the preparation of your certificate; and why? 194 GEORGIA 195 Question 611 Describe in detail the method that should be used to verify the securities representing the investments of a com- pany under audit, in the case of (a) real estate, (b) mort- gages on real estate, (c) certificates of stock, (d) railway bonds. MISSOURI 'Question 612 Outline the work you would consider necessary in the audit of one of the following: (a) Bank (b) Stock brokers' accounts (c) Building and loan association (d) Lumber company (c) Coal mining company Question 613 A corporation was formed to acquire certain assets, the agreed-on purchase price being $100,000. It was after- wards found that title to some of the assets could not be transferred without considerable expense, and the vendor agreed to an abatement of $10,000. This latter amount was credited to a reserve fund and that account was charged with the cost of perfecting the company's title, amounting to $6,000. There was also charged to the account the pre- liminary expenses in the formation of the company, and the balance of the account, amounting to $1,000, was cred- ited to profit and loss. As auditor, would you object to these entries, and how would you suggest they should be dealt with, giving your reasons therefor? Question 61^ In the accounts of a parent and subsidiary company, it is found that the latter owes the former a sum of $100,000 196 MISSOURI 197 on current account, and $50,000 on notes payable. These notes have been discounted by the parent company. How would you treat the items in consolidating the accounts of the two companies ? Question 616 In the audit of a company's accounts you find that a number of invoices, dated prior to the close of the com- pany's financial year, have not been taken up on the books. On inquiry you are informed that the goods in question have not been inventoried. Explain fully the grounds you would advance against this treatment. If the officials re- fuse to alter the accounts, would you consider it necessary to mention the point in your certificate? Question 616 Under what circumstances would you advise the con- solidation of the accounts of a parent company with those of its subsidiary companies? Question 617 In the case of a controlled company whose assets and liabilities are all consolidated in the balance sheet of the parent company, how would you treat in the consolidated balance sheet the capital and surplus accruing to the mi- nority stockholders? Question 618 In auditing the balance sheet of a railroad company as at June 30, 1912, it appears that the company have included amongst the general liabilities a dividend on preferred stock due July 15, 1912, whilst per contra they have included under current assets the cash appropriated and deposited for the dividend. Do you consider the treatment correct ? igS C. P. A. AUDITING QUESTIONS Question 619 In the preparation of the return for corporation tax purposes for the year 1911, how would you treat the in- clusion of : (a) Corporation taxes estimated due for the year 1911? (b) Corporation taxes for the year 1910 paid in 1911? Question 620 Outline the programme of a detailed audit of one of the three following companies. You are required to certify the balance sheet and profit and loss account. (1) Wholesale and retail dry-goods store (2) Brass foundry (3) Electric light and power company Question 621 After completing the audit of a corporation for one year you have been requested to furnish your client with a certificate as to the correctness of his balance sheet. Your examination, however, disclosed the following facts : (1) Owing to the manner in which the books have been kept it was impracticable to ascertain the correctness of all the charges to the property and fixtures accounts, although you have verified the charges for the past year. Depre- ciation at proper rates has only been written off these accounts for the year covered by your audit. (2) Merchandise valued at $50,000 has not been in- cluded in the inventory, nor has the corresponding liability been placed on the books. (3) The customers' accounts receivable aggregate MISSOURI 199 $200,000, but the collection of an account of $50 is, in your opinion, doubtful, and no provision has been made for same. (4) Customers' notes receivable of $10,000 were dis- counted with the company's bankers a few days prior to the date of the balance sheet. Draft the certificate which you would be prepared to furnish to your client as to the correctness of his financial statement. Question 622 How would you vouch the following items and what papers would you examine in support of these transactions : (1) Thos. White & Co., furniture purchased $325.00 (2) Alex. Green, real estate for plant site 7,500.00 (3) American Sprinkler Co., sprinkler system installed.. 35,725.00 (4) John Mace, stumpage purchased 3,625.00 (5) Burns Trust Co., bonds purchased at par, $3,000, less commission, $30 , 2,970.00 (6) Machinery constructed by company 10,500.00 (7) Alex. White, traveling expenses for a week 37.67 (8) Commerce Bank Co., note payable discounted 987.50 Question 623 As a public accountant, you are asked to prepare and certify to the balance sheet of a company at December 31, 1913. The president of the company informs you that a tentative balance sheet, a copy of which is submitted to you, has already been issued by him to the company's bankers and note brokers. He is consequently anxious that you accept his classification of assets and liabilities. On an examination of the balance sheet the following points come to your notice : (1) Included under Real Estate, Plant and Equipment, is an item of $25,000, representing the cost of certain un- improved real estate which the company had purchased five years ago, intending to build a branch factory. 200 C. P. A. AUDITING QUESTIONS (2) The accounts receivable are stated at $571,435.25, an analysis of which shows its composition to be as follows : Customers' accounts $325,671.10 Due by officers and employees 30,131.05 Capital stock subscriptions, not fully paid 175,500.00 Advance payments on merchandise purchased.. 31,000.00 Bonds due October 31, 1915 9,133.10 Total $571,435.25 (3) The reserve for loss on customers' accounts is shown as a separate item on the liability side of the balance sheet. (4) The accounts payable of $301,210.96 include a balance of $31,231.35 due to a subsidiary company. State as briefly as possible how you would deal with these items in preparing your balance sheet, and in what instances you would accept your client's classification. Question 62Jlf You are examining the accounts of a corporation and find that the directors have not depreciated the buildings, machinery, and equipment, on the ground that the real estate has increased. Draft a memprandum to the board of directors, setting forth your views and stating the correct manner in which the values of these assets should be re- corded on the books. Question 625 You are auditing the accounts of the A. B. C. Paper and Pulp Company of St. Louis, at October 31, 1913, and you find that the entire output of paper is sold under con- tract to Smith & Co., Kansas City, at $43 per ton f.o.b. Kansas City, deliveries being made upon order of purchaser. MISSOURI 20I This price of $43 per ton is made up of the following com- ponent parts: Cost of manufacture, including factory overhead.... $25.00 Selling and administration expenses 1.00 Freight — St. Louis to Kansas City $3.00 Expenses of delivery to railroad .50 3.50 Profit to A. B. C. Company 13.50 Total $43.00 At what figure would you permit the A. B. C. Com- pany to inventory the paper on hand at the date of your examination? Please give full explanation in support of your answer. Question 626 You are auditor for the Jones Grocery Company, oper- ating a large store in St. Louis. After the completion of your last examination the client has discovered that Smith, the cashier, had appropriated certain moneys. Upon in- vestigation, it was learned that his practice had been to make checks in favor of wholesalers. These were duly signed by Mr. Jones and handed to Smith for mailing. Cer- tain checks were held out by Smith, the indorsement being forged. In making the daily deposit for the grocery com- pany. Smith substituted these checks for currency which he retained. It is suggested by your client that you were guilty of negligence in not locating this defalcation. Draft a letter to your client explaining why you did not discover the defalcation, also stating how you would build up an organization to prevent defalcations of this kind in the fu- ture. Question 627 You are engaged by a bank to make an audit for the purpose of reporting the correct net income of a certain 202 C. P. A. AUDITING QUESTIONS company for the past year. The directors of the company have already reported to the bank that the net income for that year was $100,000. Your examination discloses the following facts: (1) Depreciation amounting to $20,000 was not provided for. (2) According to the terms of a trust deed, under a bond issue, $10,000 per annum should be credited to a sinking fund. (3) Dividends of $10,000 on the preferred stock issue were payable on the date after the closing of the company's books. State in what respects the net income as reported by the directors to the bank is incorrect, and explain how each of the above items should be treated in the company's ac- counts as at the date of the audit. Question 628 You are making the examination of a financial state- ment of a manufacturing company for credit purposes. Your letter of verification from the note broker disclosed the fact that notes aggregating $70,000 have been sold by him and the proceeds not remitted to your client until fifteen days after the closing of his books. These notes of $70,000 represent part of notes aggregating $100,000 which were sent to the note broker for discount one month prior to the date of closing, $30,000 of which have not yet been sold by the note broker. No entries have been made upon the books of your client for these transactions. The client claims that he has the right to offset the liability for the discounted notes with the proceeds in the hands of his note broker, as these proceeds had not been remitted to him until after the MISSOURI 2C3 closing of his books. State your opinion with regard tc this contention. Question 629 A corporation recently organized has expended a con- siderable amount for advertising its products in newspapers, magazines, and on bill boards. What consideration would guide you as to the amount to be written off annually ? Question 630 On what basis should an inventory of a car builder company be prepared ? Deal specifically with the following classes of material : (1) Lumber purchased from a sawmill in "green" state. (2) Cars under construction — four-fifths completed: (a) When $1,000 per car will be lost on com- pletion of contract. '(b) When $1,000 per car profit will be real- ized. (3) Castings manufactured by the company. MINNESOTA Question 631 Discuss "the proper method of treating discounts, freight, and haulage on goods or equipment purchased," "on goods sold." Question 632 Discuss "the limitations of an investigation of a busi- ness on behalf of a projected purchasing company." To what extent would fraud by employees of the vendor bear upon the subject? Question 633 In what respects would an investigation of a business on behalf of a retiring or deceased partner differ from one on behalf of a projected purchasing company? Question 63J^ Discuss "the proper method of presenting the condition and earnings of a holding company which owns from 75% to 100% of the stock of a number of subsidiary corpora- tions." Question 635 As authorized by the board of directors, you are engaged to make an investigation of the Minneapolis Grain Com- pany for the purpose of preparing a certified balance sheet as 204 MINNESOTA 205 at August 31, 1910, to submit to the banks in order to secure credit. The company is incorporated for $100,000, divided into 1,000 shares of $100 each, all of which have been issued. The trial balance taken from the books of the company is as follows: Wheat Flax Oats Barley Coal Wood $2,500.00 Bills payable Bills receivable 5,000.00 Accounts receivable 40,000.00 Capital stock Options or trades 80,000.00 Interest 15,000.00 Elevators 100,000.00 Insurance 7,000.00 Memberships 7,500.00 Capital stock — Vienna Farmers Elevator Co 500.00 Taxes 2,500.00 Repairs and maintenance 5,000.00 Furniture and fixtures 2,000.00 General expense 20,000.00 Salaries 25,000.00 Expense account 1910 crop 500.00 Accounts payable Cash in bank and on hand 23,000.00 Surplus $50,000.00 30,000.00 25,000.00 25,000.00 5,000.00 75,000.00 100,000.00 500.00 25,000.00 $335,500.00 $335,500.00 On August 31, 1910, the company has inventories of grain, coal, and wood amounting to $50,000. In accordance with instructions, you do not make any allowance for depreciation on the elevators, neither do you accrue taxes, insurance, or interest. All other accruals have already been made. 2o6 C. p. A. AUDITING QUESTIONS Prepare balance sheet with certificate attached to be sub- mitted to the bankers, and state what steps you have taken to satisfy yourself of the correctness of the assets and lia- bilities of the company. Question 636 Describe the methods known to you of allowing for depreciation. Which method do you consider the most correct? Give reasons. Question 637 A company under its articles of incorporation is re- quired to set aside a certain percentage of its profit at the close of each year to provide a sinking fund for the retiring of its bonded indebtedness when it matures. Give the en- tries necessary to be made in the books setting up the re- serve at the close of each year, also the entries required on the books when the bonds are paid off at maturity. Question 638 Give the general headings of the classification of the revenue and expense accounts which are required to be kept by a railroad under the Interstate Commerce Commission. Question 639 Trade discount on purchases is a deduction from the cost of purchases. Cash discount on purchases is an addi- tion to income. Explain fully. Question 6JfO What different considerations govern the valuation for balance sheet purposes of "fixed" and "current" assets? MINNESOTA 207 Question 6Jfl A mercantile concern sustains a partial loss by fire. The books are modern except no cost accounting is incorporated. The end of the fiscal year is December 31, when a physical inventory is taken; the fire occurred in October and was evidently a two-thirds loss, with full insurance. While the adjusters are at work you are called in to satisfy the firm as to their loss, so that they may be prepared for discussion with the insurance companies. Outline your procedure and state how you arrive at the actual loss. Question 642 State briefly your procedure for discovering frauds or errors in the accounts of a company because of: (1) Merchandise charged to customer but still in store. (2) Merchandise received into store, but not re- corded on books. (3) Merchandise delivered but not charged to cus- tomer. (4) Cash received but not entered in cash book. Give your suggestions as to method of bookkeeping, etc., for preventing these in the future. Question 6JfS In your examination of the Horses and Wagons ac- count of a company you find the following transactions have taken place : (1) Purchase of new horses to replace dead ones. (2) Horses exchanged and payment made for dif- ference in value. 2o8 C. P. A. AUDITING QUESTIONS (3) Loss of horses and wagons through accident, covered by insurance. How would you suggest such matters should be treated in the Horses and Wagons account? Question 6J/.Jf. Define "Internal Check" and give five suggestions with a view to efficient control and the prevention and detection of fraud. Question 6J^5 State concisely how you would treat branch accounts in the head office books, and your reasons for so doing. Question 6Jf6 Referring to the previous question, in preparing a com- bined operating statement, what special accounts should be examined ? Question 6J^7 State the special features which pertain to the audit of the books and accounts of a milling company. Question 6^8 State the special features which pertain to the audit of the books and accounts of a theatre. Question 6^9 State your understanding of the term "Contingent Liability" and give three examples of how it may occur. How would you treat such a liability on the balance sheet ? MINNESOTA 209 Question 650 You are called upon to investigate the accounts of a corporation for a period of ten years and to certify to the following : Net sales in each year. Net profit in each year. Actual cash introduced into the business. Discuss the proper method of procedure to arrive at these figures, not overlooking the fact that the company has several branches who sell to each other and that the capital stock was partly issued at a premium. Question 651 When certifying a balance sheet do you object to the bulking of several assets in one account? If so, why? Give one example where it is policy to do this. VIRGINIA Question 652 A & Co. acquire the plants of B, C, D, and E, assuming their assets and HabiHties at book values, the purchase price being one-half of the amount shown by the Surplus account of each. Without going into lengthy detail, but just con- sidering the three items, Assets, Liabilities, and Surplus, what entries would you make to set up these accounts in the ledger of A & Co. ? Question 653 If it was found, after acquiring the above plants, that large amounts had to be expended in improvements to bring the plants up to their rated efficiency : (a) Give a concise but full explanation of how you would classify such expenditures, naming the accounts you would debit and credit. (b) Would such expenditures have any relation to the 50% equity A & Co. were supposed to have purchased? (c) State your reasons for the preceding answer. Question 65Jf. What disposition would you make of any depreciation reserve account when constructing the balance sheet? State your reasons for above answer. 2IO VIRGINIA 211 Question 655 State whether depreciation is an element of the cost of manufactured products. Question 656 In a cash book, in which all accounts paid by customers were entered at the gross amount and allowance, freight, etc., were treated as disbursements, and the net amount covered by the remittance was put in bank, and all cash book disbursements were covered by checks properly en- tered, you find that the cash book and bank balance agree. Explain how a shortage could actually exist under these conditions. Question 657 A lumber company issues the followmg statement, and one of the stockholders submits it to you, as he cannot un- derstand how 135,000 ft. sold at average of $8.15 per M can produce a profit of $880 with a cost of $6.50 per M. Make your report with reasons why the statement is in error and illustrate with a new statement of operation applying the inventories where they correctly belong at proper value, and showing the cost of each operation and the cost of the material as it works through from operation to operation. PINE TOP LUMBER COMPANY STATEMENT OF OPERATION— JUNE 1, 1913 1^^°^^ Average Sales: Cost 100,000 ft. rough lumber $750.00 $7.50 35,000 " dressed " 350.00 10.00 Total income $1,100.00 $8.15 212 C. P. A. AUDITING QUESTIONS Expense Logging, 400,000 ft $1,200.00 $3.00 Hauling to mill, 300,000 ft 300.00 1.00 Sawing at mill, 200,000 ft 300.00 1.50 Planing, 50,000 ft 50.00 1.00 $1,850.00 $6.50 Less: Inventory (estimatt^d values): 100,000 ft. logs in woods @ $2.50 $250.00 100,000 ft. logs at mill @ 4.00 400.00 50,000 ft. rough lumber @ 7.00 350.00 15,000 ft. dressed lumber© 8.00 120.00 1,120.00 Cost $730.00 Profit 370.00 $1,100.00 Question 658 A and B join in business and turn over to the new firm furniture : A— $2,000.00 B— 1,500.00 which leaves A an equity of $500. A claims that B should pay him this amount because he (A) already owns the fur- niture and if the firm pays him it will be out of earnings or money to half of which he is actually entitled, and that he would actually and that he would virtually be paying him- self, with his own funds, for something he now owns. B claims that payment by the firm is a correct settlement. Which one is right, and state your reason so clearly that no further doubt could remain with the other party. Question 659 State how you would verify the Plant account for a concern that had been actively engaged in the manufac- turing business for 20 years — the books not showing any credits to Plant account nor Reserve for Depreciation. MASSACHUSETTS Question 660 How do you ascertain the correctness of the issue of stock of a corporation? State the names of the books wherein such records are kept and tell how the books are opened and operated ; also state what course you would ad- vocate to prevent an overissue of stock. Question 661 A corporation issued its note for $30,000. The note became due during the term which you were auditing. A note for this amount, corresponding in all particulars with the note record, is submitted to you as evidence that the amount has been paid. Said note is marked "paid" but does not bear the signature, or paid stamp, of the bank to whom it is purported to have been paid. The treasurer asserts that possession, by the corporation, of this note is sufficient evidence of its payment. State, (a) your opinion thereof, and (b) your reasons. Question 662 For several successive terms, a corporation has regu- larly deducted $15,000 from its inventory of stock in pro- cess ; the inventory prices being conservatively below market value. Then, for the quarter ended June 30, 1908, while following the same conservatism regarding prices, the $15,000 deduction was discontinued, and the treasurer made his statement of earnings during the term, based upon 213 214 ^- P- ^- AUDITING QUESTIONS the inventory amount of stock in process. State, (a) whether you agree therewith; (b) the reasons for your agreement or disagreement; and (c) if you disagree with the treasurer's treatment of the matter, how you would deal with the item in your statement of the earnings and of surplus. Question 663 In reporting to the Bank Commissioner on the condi- tion of a corporation borrowing from savings banks, state briefly the extent to which you would verify each of the items usually found in the balance sheet. Question 66J^ A water registrar, who handled all collections, and kept the books, but who was not allowed to sign checks, bor- rowed from the funds, and in the month of December in each year secured outside funds to replace the shortage, so that his cash was always found correct on December 31, date of closing. He entered disbursements on the cash book under date of approval of same, and not on day of payment, so that his cash book never showed the true cash on hand, except in the last few days of the year. Several auditors approved his accounts, until finally one of them discovered the trouble in the regular course of his work. Why did the former auditors fail to detect the condition of affairs? Question 665 In the general ledger of a corporation is a controlling account for the accounts receivable ; the individual accounts relating thereto being kept in an accounts receivable ledger. MASSACHUSETTS 215 The balance of the controlling- account is $550,000. The total of the balances at the debit of the individual accounts is $590,000; the total of the balances at the credit of the individual accounts is $40,000. The corporation issues to banks, a balance sheet showing its accounts receivable as $550,000. State, (a) v^hether you approve of same; (b) if you differ, what you would enter in the balance sheet; and (c) your reasons. Question 666 In auditing the accounts of a corporation, what steps do you take to ascertain the correctness of its ledger accounts with a selling house? Question 667 State fully how you would verify the bank account of a concern depositing with six banks, and making frequent transfers of funds between them. Question 668 Of what value in auditing is a unit of production ? Question 669 A client (A. B. Co.) presents you the following state- ment as of January 1, 1912 : ASSETS LIABILITIES Gash $10,600.27 Notes payable $20,000.00 Accounts receivable.. 30,219.73 Accounts payable.... 30,140.10 Merchandise 39,320.14 Profit and loss 5,000.04 Machinery 10,000.00 Capital stock 40,000.00 Loans to directors.... 5,000.00 $95,140.14 $95,140.14 2i6 C. p. A. AUDITING QUESTIONS You are required on January 10, 1912, to make suffi- cient examination and audit to certify the statement for credit purposes. State fully how, and to what extent, you would verify the different items, and draw formal certificate covering same. Question 670 A corporation takes from its customers their notes in partial settlement of their accounts. Some of these notes are discounted by the corporation, and with its unlimited indorsement. Notes Receivable account is credited with the notes discounted; and Interest account is charged with the discount. State, (a) your procedure in auditing the notes receivable transactions; (b) how you would ascertain what notes are not matured; and (c) how you would deal with the latter in the certificate of your audit ? Question 671 In auditing the accounts of a tax collector, what should be done to determine if he accounts for the interest on over- due taxes paid ? Question 672 You are auditor of a manufacturing corporation which has been operating five years and which has, amongst other accounts, the following, viz. : Plant account, $700,000 ; Re- serve for Depreciation, $200,000; Surplus, $100,000. The officers ask you to certify a statement embracing the above items in the following form, viz. : "Plant," $700,000 ; "Sur- plus and Reserve accounts," $300,000. State, (a) whether you approve same; and (b) the reasons supporting your answer. MASSACHUSETTS 217 Question 673 How would you audit the accounts of a tax collector ? Question 67J^ The officers and directors of a Massachusetts corpora- tion have executed and submitted to you, for your signature as the auditor chosen under the provisions of the statutes, their certificate of condition, April 1, 1912. At the same time, the treasurer asks you to prepare the corporation's ^'Return" to the tax commissioner, April 1, 1912, showing, therein, valuations of the merchandise and accounts receiv- able which the treasurer claims to be fair cash values, but which are less than the respective amounts included in the certificate of condition. State what action you would take, (a) regarding the certificate of condition; (b) regarding the tax ''Return"; and (c) the reasons supporting your answers. Question 675 Your visit as auditor of the Iroquois Savings Bank of Pittsfield happens to be concurrent with that of the ex- aminers from the Bank Commissioner's office. State in detail what modifications, if any, you would feel justified in making in the scope and thoroughness of your audit. Question 676 A corporation has on its books $210,000 of accounts re- ceivable, of which $49,000 are long overdue, and apparently worthless. The inventory of finished goods, taken at con- tract price, less 5%, amounts to $124,000, and from this sum has been deducted $45,000, *'to provide for any losses." How would you deal with this state of affairs in report- 2i8 C. p. A. AUDITING QUESTIONS ing to the Bank Commissioner on the condition of the cor- poration for savings bank loans? Question 677 The "system of internal checking" of a savings bank calls for regular observance by the board of investment, whether the records of collateral received, and changes thereof, on loans, accord with the votes of the board. Un- der these conditions, and in the case of loans on collateral security, state, (a) whether you would write to each bor- rower to send you the details of the note, together with a list of the collateral deposited therewith; (b) whether you would ascertain the market value of the collateral ; (c) what action you would take if you thought that the character of the collateral was inferior, or that the margin was insuffi- cient. State, (d) whether you would restrict the extent of your general audit because of a high degree of excellence in the **system of internal checking"; and (e) the reasons supporting your answers. Question 678 A corporation in closing its fiscal year has some 60 items of current liabilities, which it enters on its books as follows : (Sundry accounts) $53,827.34 Accounts payable . $53,827.34 On the first day of the new year, the bookkeeper makes the following entry : Accounts payable $53,827.34 (Sundry accounts) $53,827.34 How should the auditor deal with this condition? MASSACHUSETTS 219 Question 679 You are instructed to audit the accounts of a corporation having the following assets : cash, accounts receivable, mer- chandise, machinery, real estate, expense paid in advance; and the following liabilities : accounts payable, notes pay- able, capital stock, reserve for depreciation of plant, reserve for sales discount, and taxes accrued. To what extent would you consider it necessary to verify these items, and what reference to such verifications would you make in )^our report? Question 680 After taking an inventory of the finished goods of a con- cern, it was found that all were not on hand that should have been. Select some business with which you are familiar, and state what steps you would take to account for the discrep- ancy. Question 681 In the verification of a bank account, would you ever check the list of paid checks returned by the bank, and, if so, what might you discover ? Question 682 A corporation has been accustomed to charge the pur- chase of machinery to the Machinery account at cost, and each year to change the Manufacturing account and to credit a reserve for depreciation account with an amount which will offset the cost of the machinery by the time it is estimated that it will be advisable to scrap the machines. During the period that you have been employed to audit the account, you find that the corporation has sold two ma- 220 C. P. A. AUDITING QUESTIONS chines for $500 each, and this amount has been credited to the Machinery account. One of them cost $1,000, and the amount reserved for depreciation on this machine is $600. The other cost $1,500, and the amount reserved for depre- ciation is $850. Make the adjusting entries to correct the books. Question 683 If you were auditing the books of a savings bank at the close of its fiscal year, how would you verify the cash book entries for loans on deposits which were made and repaid during the year ? Question 68Jf The engraved copper rolls used to print patterns on calico are inventoried by the concern at the market value of the copper in the rolls. In your certificate to the Bank Commissioner should, (a) the amount be classified as part of the current assets, or as a portion of the plant items ? (b) State the reasons supporting your answer. Question 685 A corporation in paying two bills, fastens the bills to- gether, adds to the first bill of the two the amount of the second bill and sends these with a check for receipt. When returned, only the top bill is receipted. Do you consider this a valid voucher? If not, how could you satisfy yourself at the office of the corporation ? Question 686 A certified public accountant, having performed the duty at the close of several years, takes up for a year just MASSACHUSETTS 221 past, the examination of bonds — the property of an institu- tion. At his last examination he found coupon bonds in three classes, registered as to principal, registered as to principal and income, and unregistered. In his examination o£ the books of account of the institution, he found that bonds had been bought during the year. To make an efficient examination in the most expeditious way, how might he treat these various classes? Question 687 It was the custom of a treasurer to print and circulate an annual report covering the transactions of the year, and a statement of condition. A "Profit and Loss Account" was stated in substantial detail ; that is, stating the balance at beginning of the year, and adding or deducting such items as the result of transactions required. The books and the treasurer's account were examined by a certified public ac- countant, and on the printed report in addition to the treas- urer's name there usually appeared "Examined and Ap- proved," followed by the name of the accountant as such. The examiner also usually gave a formal certificate of ex- amination. The examination for a certain year shows the books of account to be correct as a record, and payments were vouched; but the treasurer not only changed the "make-up" of the "Profit and Loss Account" by including items not before included (among which was an arbitrary increase in value of real estate), but also omitted to men- tion these items, and stated the "Profit and Loss Account" as a single general amount. The examiner objected but was overruled. What action should the examiner take? Give a reason for your answer. 222 C. P. A. AUDITING QUESTIONS Question 688 A. B. is a heavy speculator on margin on the stock ex- change, buying and selHng in numerous transactions a large variety of securities. His broker, C. D., renders him' monthly a statement of transactions and an account current. State the steps you would take to completely audit C. D.'s monthly account current and statement. Question 689 The Citizens Relief Association prints stamps of various denominations ranging from 5 cents to $1. The bulk of them remain in the custody of its treasurer. He supplies a limited quantity of them to the manager, w^ho from time to time issues them to benevolent persons in exchange for their face value in money. This money is retained in the manager's office to cash stamps presented by applicants for aid. How would you audit this phase of the association's activities ? NORTH CAROLINA Question 690 (a) What support would you require in the case of a corporation purchasing its own stock at a premium or dis- count? (b) State how the transaction should be treated on the books. Question 691 (a) In case of the absence of a voucher system, and there are no supports for disbursements except book en- tries or cancelled bank checks, state how you w^ould satisfy yourself that the disbursements represented proper and regular transactions. (b) State how you would satisfy yourself of the regu- larity and correctness of a pay-roll that was not signed by payees. Question 692 In what manner could there be a shortage of cash, when all receipts had been regularly entered, and the cash book and bank accounts reconciled, and how detected? Question 693 With wdiat special reference should capital expenditures be examined? Question 69J/^ What are the distinctive features in the support of the disbursements in governmental accounting? 223 224 C. P. A. AUDITING QUESTIONS Question 695 Under what conditions can the additions of the cash book be verified without actually adding same, and state the advantages ? Question 696 To what extent is it necessary to verify the classifica- tion of expenses? Question 697 In an audit of a set of books provided with proper con- trolling accounts, to what extent would you check ledger postings ? Question 698 In the audit of the books of a corporation, covering a period of three years, for a bond house contemplating the placing of a large issue of bonds, to what particular points would you direct your special attention? MAINE Question 699 In your judgment should or should not a state auditor be required by law to be the holder of a C. P. A. certificate? Give your reasons fully. Question 700 You are called to audit a savings bank in Maine, and find that said savings bank is carrying commercial accounts ; that is, accounts subject to check, on which no interest is being paid. You also ascertain that the State Bank Ex- aminer is fully aware of this fact and that he has allowed said savings bank to continue to carry this class of accounts. What would you consider it your duty to report concerning this particular matter to the trustees and depositors? Would you consider it your duty at all to advise with the State Bank Examiner relative to the matter ? Question 701 In making an audit of a Maine corporation you find that its assets, as a going concern, exceed its liabilities by only a few thousand dollars. You also discover that the cor- poration, in direct violation of the National Bank Act, is borrowing, under different names and indorsements, much more than 10% of the bank's combined capital and surplus from a national bank with which it does business. Would you consider it your duty to bring this fact to the attention of the bank? Or to the attention of the Bank Examiner? State your reasons fully. 225 226 C. P. A. AUDITING QUESTIONS Question 702 A Rockland, Maine, corporation, incorporated under the general law of Maine, acquires several plants that are found to be run down and in poor condition, and they re- quire extensive outlay for repairs and renewals to bring them to the required state of efficiency. Should outlay be charged against capital or against revenue? Give your reasons fully. Question 703 Explain the various measures you would adopt to verify whether or not all cash received has been duly accounted for on the books of the concern you were auditing. Question 70Jf A balance sheet audit discloses satisfactory conditions with the exception of insufficient allowance for losses in collection of accounts receivable. In case your client should not consent to adjustment, draft form of certificate that would be proper under the circumstances. Question 705 Outline working papers and office records necessary to handle detailed semiannual audit of a wholesale mercantile house. INDEX (References are to A Acceptances and bad debts account, 135 dishonored, evidence of, 135 in bills receivable balance, 136 of bills due consignor, 304 Accountancy ethics of, 270 Accountant distinguished from bookkeeper, 522 public, 522 Accounts assigned and concealed, 306 audit of general ledger, 597 branch, in head office books, 645 construction, bond discount charged to, 608 controlling ledger, 105 customers', verification of, 607 differentiation of, 44 horse and wagon, 643 income and expenditure, 114 partnership, 103 payable, discounts on, 152 receipts and payments, 114 revenue and expense, Interstate Commerce Commission r e - quirements, 638 significance of balances, 44 technical errors in, 183 Accounts receivable auditor's view of, 428 bad, how determined, 8 checking against controlling ac- count, 576 how written off, 558 227 question numbers) kept in sub-ledger without con- trol, 555 not verified, 290 of long standing, 558 on balance sheet, 54 overdue and worthless, 676 past due in suspense account, 474 reserve for bad, 510, 704 suspense, 281 Accrued interest (See "Interest") Administrator (See "Executor") Advertising, how written off, 629 Agent, life insurance report, audit of, 272 Agent's accounts, corrections in, 131 Allowances on merchandise returned, 233 verification of, 106 Amortization of manufacturing plant debt, 388 Appraisals, should auditor accept, 604 Assets bills receivable, 11 commissions as, 98 correct valuation of, 6 depreciation of, 27, 11 1" fixed and current, 640 manufactured goods, 11 objection to grouping, 651 open accounts, 11 overvaluation of, 548 proof of existence, 478 proof of value, 478 proper grouping of, 651 228 INDEX (References are to Assets — continued raw materials, ii stocks, bonds, etc., ii unusual, 143 Audit advantages of, 483 after closing books, 562 balance sheet, 593 bank, when to begin, 249 cash, 212, 513, 593 classes. of, 513 concealed accounts, detection of, 306 continuous (See "Continuous Audit") differs from investigation, 593 disbursements, 180 disposition of charges to plant, 475 commissions, 475 discounts, 475 organization costs, 475 premiums, 475 distinguished from examination, 335, 346 first, 2, 257 for ascertaining profits of cer- tain period, 488 for limited period, 225 for purchaser, 532 from cash book and journal only, no from invoices and vouchers, no general course of, 526, 578 kinds of, 175, 513 machinery, 53 merchandise, 53 objects of, 12 of agency accounts, yy of bank, 578, 612 of capital account, 588 of cash, 177, 277 of city clerk's office, 578 question numbers) of coal mining company, 612 of county treasurer's office, 578 of dry goods store, 181 of familiar business, 334 of iron manufacturing plant, 185 of lumber company, 612 of machinery, 87 of mercantile house, 578 of outstanding accounts, 189 of partial payment accounts, 228 of partnership accounts, 103 of pass book, 70 of personal accounts in general ledger, 97 of premium on lease, 475 of real estate, 53, 168 of revenue account, 588 of securities, 177 of stock broker's books, 245, 612 of trustee's accounts, 103 of unfamiliar business, 250, 584 requirements of, 523 semiannual, 39, 258 single-entry, 71 valuation of machinery, 53 valuation of merchandise, 53 valuation of real estate, 53 verification of inventory, 241 what constitutes an, 108 without cash book, journal, or ledger, 149 without subsidiary ledgers, 161 Audit, complete distinct from continuous, 513, 594 for brass foundry, 620 for electric light company, 62a for dry-goods store,. 620 of general ledger, 5981 Auditing procedure, 526' Auditor acting for opposing parties, 280 action on proposition, 523 INDEX 229 (References are to Auditor — continued as regular employee, 476 certificate of (See "Certificate") co-operation with local account- ant, 261 criticism of management, 352 failure to discover fraud, 664 instructions for cashier, 477 protection against imposition, 213 relation to clients and bookkeep- er, 347 report of (See "Report") test of ability, 69 Auditor's duties as to appraisals, 604 as to certificates, 91, 124 as to cost values and deprecia- tion, 157 as to depreciated machinery, 411, 624 as to depreciated real estate and other values, 416, 624 as to errors in closed books, 583 as to good-will, valuation of, 155 as to instructions, 519 as to loans, doubtful debts and good- will, 411 as to manufacturer's inventory, 512 as to minutes of corporation, 417 as to missing stock certificate, 169 as to report on net profits, 78 as to secret reserves, 170 as to statement of condition of business, 323 as to stock inventories, 480 as to theories of examination and certification, 479, 591 as to validity of transactions, 88 question numbers) as to value of outstanding stock, 158 in absence of current records and trial balance, 76 in confidential and personal mat- ters, 347 in England and America, 561 in first audit, 2 when not allowed to inspect all branches, 167 Auditor's responsibility for certificates, 52 depreciation allowances, 10, 138 discounts, 10 inventories, 10 omitted items in audit, 458 pay-rolls, 10 Auditor, State qualification of, 699 Automobile concern acceptances unpaid in inventory, 298 audit of, 406 goods in warehouse omitted from inventory, 298 inventory and agents' accounts, 406 B Balance sheet and trial balance, 49 assets and liabilities, 186 betterments, i certification of, 196 certification of assets, 441 certified for credit purposes, 635 certified form of, 432^ correct annual income in, 47 correctness, how tested, zz cumulative dividends unpaid, 120 depreciation of plant in, 90 doubtful debts in, 40 230 INDEX (References are to Balance sheet — continued enhanced values of property in, 34 example of, for criticism, 516 expenditures in, correct annual, 47 form and arrangement of, 599 influence on stock sales, 288 interest paid, 90 items of fact or of opinion, 450 items omitted from, 459 leases, how treated in, 41 liabilities in^ 204 losses on collections in, 262 maintenance and repair items, i mortgage bonds in, 173 partners' accounts in, 72 payments for work in process in, z^^ premiums unpaid, 119 preparation without closing ac- counts, 436 proof of assets, 478 revision after certification, 81 unexpired insurance in, 90 unsold goods in, 79 with supporting schedules, 263 Bank account deposits with banks, 667 verification of, 667, 681 Bank balance, correctness of, 142 Bank commissioner auditor's report to, 676 co-operation with auditor, 675 Bank pass book as voucher for cash book entries, 70 for audit purposes, 70 Bank, private audit of unpaid checks charged to depositors, 89 liability for unrecorded certifi- cates of deposit, 464 question numbers) Banks audit of, 25, 194 audit of national, 354 books for national, 399 collateral' loan department of, 396 inspection of securities, 64 loans from savings, 663 overdrafts on, 174 reconcilement account for checks outstanding, 129 reports of national, 354 reports to bank commissioner, 663 safeguards against fraud, 379 time of beginning audit, 249 verification of balance, 58 verification of partial payments, 462 Bank teller cash shortage of, detection, 221 "proof" of, 291 Beneficiaries, audit in interest of, 137 Betterments and renewals as affecting profits, 321 average profits, effect on, 36 how charged, 163 in balance sheet, i in profit and loss account, i items chargeable to, 324 of public service corporation, 232 replacing old machines, 588 Bills payable analysis of account, 256 assumed by corporation, 164 Bills receivable as securities, 19, 585 at end of fiscal period, 133 audit of, 104, 133 discounted, 86 fraud by substitution of, 275 . INDEX 231 (References are to Bills receivable — continued indorsed and discounted by firm, 670 on balance sheet, 54 overdue and dishonored, 319 verification of, 135, 585 Bills, validity of receipted, 685 Bonds audit contemplating issue of, 698 average interest rate on, 531 collateral trust, 355 commission on, 96, 98 debenture and mortgage, 569 discount on, 277 entries for sale of, 2>77 given as security, 412 income, 355 mortgage, 355, 569 of insurance companies, 197 of other companies, 320 of trust company, 353 on balance sheet, 28, 54 periodic purchase payments, 531 redemption of in ten drawings, 505 treatment in profit and loss ac- count, 505 value as affected by interest, 540 verification of, 611 Bonds, construction discount on, 59 entry for discount or premium on, 443 expense of sale, 59 Bonds, coupon audit of purchases, 686 registered and unregistered, 686 verifying interest payments, 563 Bonuses, as salary, 2>7 Book values (See "Values") Bookkeeping, separate ledger bal- ances, 48 Brazil, exchange accounts on, 504 question numbers) Brewery, inventory and sales, 460 Brick plant, liability for restora- tion of real estate, 348 Brokerage business, dividends on inflated securities, 520 Brokerage on investment pur- chase, 588 Broker, merchandise audit of brokerage due, 564 audit of shipments not made, 564 Broker, monthly statement of, 688 Broker, stock, doing banking busi- ness, 341 Broker, stock exchange audit of books of, 245 balance sheet of, 400 Building and loan association audit of books of, 115 audit of mortgages, 318 auditor's statement for, 605 examination of accounts, 331 Business accounts of departmental, 2)Z7 apportionment of profits after sale, 494 audit for prospective purchaser, 458 audit of books for sale of, 428 basis of sale, 18 examinations for purchaser, 381 vendor's statement, 381 Calico printing concern inventory of copper rolls, 684 report on, for bank commis- sioner, 684 Capital account expenditures for, y^ items chargeable to, 42, 96 Capital expenditures (See "Ex- penditures") 232 INDEX (References are to Capital stock balance sheet to effect sales of, 288 premium on, 160 Car building company inventory of cars under con- struction, 630 inventory of castings, 630 inventory of raw material, 630 Car trust notes, in balance sheet, 204 Cash audit of, after close of fiscal year, 104 audit of, defined, 212 audit of receipts and payments, 200, 314, 594, 703 audit of, when complete, 277 audit of, when not deposited, 314 checking pass book and deposits, 16 detection of shortage, 55, 221, 692 net investment certified, 650 omission of entries, 5 payments, audit of, 7, 200 prevention of false accounts for, 511 shortage in, 55, 221, 656, 692 speedy audit of, 201 verification of, loi Cash book agreement with bank balance, 656 and bank pass book, 235 and journal, 134 disbursement items in, 656 erroneous entries in, 486 gross entries of receipts in, 656 how verified, 85 of absconding cashier, 533 question numbers) partial and complete audit of, 514 problem of shortage in, 656 reconciled with bank balance, 692 three-column form of, 486 verified without adding, 695 Cashier, irregularities in books, 276 Certificate, auditor's correct form of, 91, 230, 492 for building and loan associa- tion, 605 for company's prospectus, 493 for layman unacquainted with business, 574 for mercantile agency, 327 of balance sheet of grocer, 574 of correctness of balance sheet, 621 of net earnings for ten-year period, 126 of net earnings of manufactur- ing company, 610 qualified form of, 179 qualifications in, 290 to balance sheet, 290 valid form of, 124, 178 Certified public accountants audit in interest of retired part- ner, 457 employment as auditors, 476 prepared balance sheet submitted for approval, 623 Charitable organization collectors' accounts, 171 Check book for audit purposes, 26 Checking five methods of internal con- trol, 644 for prevention and detection of frauds, 644 gas company accounts, 365 INDEX 233 (References are to Checking system for general journal, 215 for purchase journal, 215 for savings bank, 677 Checks as vouchers, 60, 141 listed on deposit tickets, 580 list of returned, 681 paid, audit of, 223 shortage in canceled, 573 unpaid, audit of, 68 Chemical manufacturing company audit of, 410 patent rights of, 410 Clearing house bank, 361 stock exchange, 361 Club accounting method as check on loss of goods, 545 initiation fees in annual report, 454 monthly audit of, 535 monthly statement of treasurer, 453 prevention of dishonesty in, 535 Coal mining company bond issue, 367 books, audit of, 420 profit and loss account, 403 reserve fund for redemption of bonds, 367 segregation of accounts, 420 sinking fund for bond redemp- tion, 403 trial balance, 420 valuation of leasehold, 498 valuation of plant as freehold, 498 C.O.D. business, accounting sys- tem for, 404 Collateral, bank loan department, 396 question numbers) Collateral trust bonds, in balance sheet, 204 Collector of taxes, audit of ac- counts of, 671, 673 Commission house, audit of, 344 Commission on economy and effi- ciency, 542 Commissions, paid for selling stock, 588 Complete audit (See "Audit, Complete") Comptroller of currency, bank re- port to, 354 Consignments, 596 Consolidation (See "Merger") Construction accounts items chargeable to, 21 Construction bonds (See "Bonds, Construction") Construction companies profits on unfinished contracts as revenue, 159 unfinished contracts in balance sheet, 448 Contingent claim, effect on audit, 496 Contingent liability (See "Lia- bility, Contingent") Continuous audit advantages and dangers, 483 distinguished from complete, 513, 594 Contracts adjustment of unfinished, 405 profits on, in revenue account, 159 Contractors losses in cost ledger, 302 closing books of, 383 profit of, 190 Controlling accounts checking ledger postings, 697 use to auditors, 105 534 INDEX (References are to Copartnership capital unpaid, 299 interest credits, 299 Corporation audit of, for bond sale, 456 audit when business is large, 29 balance due president in balance sheet, 456 books, audit of, 191 books, initial entry, 191 books to be audited, 61 branches, audit of, 260 constructing plant from pro- ceeds of stock sales, 429 expenditures of, 96, 144 first audit, 9, 62, 572 general audit of, 679 merger of, 267, 294, 307 officer interested in purchases, 218 officials, salaries of, 57 preliminary expenses of,'6i3 proceeds of sale of assets, dis- tribution of, 433 profits from absorbed company, 485 purchasing own stock, 690 stock ledger of, 82 "sundry accounts" entry, 678 transfer book, examination of, 166 Corporation accounts, shares at discount, 45 corporations controlled by hold- ing company, 330 Corporations, financial methods of valuing securities, 445 Cost accounting of manufactur- ing association, 345 Country store, trading orders for merchandise, 467 question numbers) Coupon bonds (See "Bonds, Cou- pon") Credit application for bank, 386 application of manufacturing company, 628 application of trading concern, 440 Cumulative dividends, unpaid in balance sheet, 120 Currency, accounts for fluctua- tion of, 296 Customers' accounts, 607 Debts doubtful, 40 writing off bad, 549 Decedent's estate (See "Estate") Defalcations (See also "Fraud") by absconding cashier, 533 by bookkeeper, 268 by cashier, 268, 2y6 by manipulating books, 308 detection of, 51 of grocery house cashier, 626 of trading house manager, 362 through cash book balances, 533 through false entry to profit and loss, 573 Deficiency, created by deprecia- tion, 206 Department store accounting system for, 404 sales checks, audit of, 316 Depositors ledger, 222 Deposit slips, use of in audit, 580 Depreciation and cost values, 157 as cost element, 425, 655 book entries for, 425 charged to reserve funds, 434 deduction for, 27 INDEX 235 (References are to Depreciation — continued diminished reserve for, 503 furniture and fixtures, iii, 145 in an electric lamp company, 293 in balance sheet, 90, 425 in railroad accounts, 407 methods of allowance for, 636 of assets, 27, iii on absorbed company's plant, 325 on buildings, 127 on efficient premises and plant, 442 on machine shop, 128 on manufacturing supplies, 338 on plant and machinery, 65, 66, III, 127, 145, 575, 600 relation to bonus stock, 165 reserve for, 242, 489 reserves for in balance sheet, 654 Deterioration (See "Deprecia- tion") Disbursements audit of, 180, 313 from cash receipts, 603 in governmental accounting, 694 of manufacturing company, 313 vouchers for, 691 Discounts as affecting inventory, 375 book entry for, 443 cash, on purchases, 465 check on, 100 entries for, 631 how verified, 106 on mortgage bonds, 107 on outstanding accounts, 189 on sales of stock and bonds, 470 on securities, 139 question numbers) reserve for, 510 trade and cash, 639 Dishonesty (See also "Fraud," "Theft," "Defalcation") of cashier, 193 Dividends accrued, book entry for, 588 and depreciation reserve, 434 at expense of depreciation re- serve, 509 cumulative, 120 from general surplus, 220 from stock premiums, 217, 266 in excess of profits, 338 method of checking when paid, 216 on common and preferred stock, 471 on profits from rising market, 499 on sole basis of receipt and dis- bursement statement, 156 paid from surplus, 338 without formal declaration, ZZZ Drafts, payment by, 226 Dry-goods concern audit of, 181 commissions of salesmen, 521 expenses of salesmen, 521 ledger balances, 48 Earnings of electric lighting companies, 321 of gas companies, 321 of railroads, 321 omitted from profit and loss, 146 Earnings, net correct statement of railroad, 20 how determined, 112 of past periods, 126 236 INDEX (References are to Electric lighting plant accounts and records of, 378 classification of accounts, 527 depreciation of, 293 earnings of, 321 examination of accounts, 328, 378 Embezzlement audit in case of, 80 by bookkeeper, 308 by bookkeeping cashier, 435 by cashier having access to books, 491 detection in bank, 326 in jobbing house, 435 methods of detection, 491 Equipment, book entries when destroyed, 22 Errors in merchandise returned, 233 Estate of decedent assets, audit of, 431 audit of principal and income, 343 distribution of, 343, 373 funds with trust company, 322 mortgage holdings, 373 sale of rights or warrants, Z73 stock and dividends as part of, 393 Ethics, accountancy, 270 Examination distinguished from audit, 335, 346 Exchange effect of variation, 484 on China, 484 Executors audit of books of, 447 final accounting of, 392 statement for probate court, 392 Executor's accounts audit of, 130, 187 question numbers) documents for audit of, 147 Expenditures capital and revenue, Jz, 96, 121 taken from profits, 493 treatment of corporation, 96 Expenditures, capital, 693 for charitable institution, 102 for gas company, 102 for manufacturing company, 102 when closed to profit and loss, 30 Expense charged to "improvements," 30 charged to manufacturing ac- count, 148 classification of, 696 omitted from profit and loss, 146 Export trade investigation of fraud in, 413 Factor's accounts, interest on, 303 Fiduciary accounts, audit of, 198 Finished goods, inventory of, 676, 680 Fluctuation of currency, 296 of prices of materials, 556 of real estate values, 556 of stock and bond values, 556 Footings and postings of controlling accounts, 697 prevention of fraud in, 579 Fraud failing to record sales, 236 in bills receivable account, 275 in books of water registrar, 664 in cash accounts, 511, 577, 642 in factory pay-rolls, 234 in merchandise accounts, 642 in payment of wages, 17 INDEX ^n (References are to Fraud — continued in pay-rolls, 176 in purchase invoices, 501, 577 of grocery house bookkeeper, 557 organization favoring, 268 prevention of in bank, 379 prevention of in pay-rolls, 577 prevention of through checking, 644 through cash book, 308 through time sales, 315 Freehold of coal company, 529 Freight entries for, 631 entry in profit and loss, 600 Furniture of partnership, 658 Gas companies audit of amounts due from cus- tomers, 94 betterments and operating ex- penses of, 324 capital expenditures of, 102 classification of accounts, 527 depreciation charges, 206 earnings of, 206, 321 examination of accounts, 328 writing assets up or down, 207 Going concern, good-will of, 195 Goods on approval, treatment in statements, 154 Goods on consignment audit of, 79 book entries, 31 Goods unsold, audit of, 79 Good-will account with, 92 definition of, 524 effect of writing off, 202 in annual statement, 92 in taxation statement, 155 question numbers) of acquired company, 274 of corporations, 524 of going concern, 195 of subsidiaries, 203 value of, 153 when profits are good, 274 Grocery house (wholesale) audit of accounts after a fire, 438 audit of falsified books, 557 audit of profit and loss account, 570 cashier's defalcation in, 626 Guarantors, payments by, 209 H Hardware manufacturing concern, audit of, 376 Haulage, entries for, 631 Holding company accounts of subsidiaries, 446 accounts receivable of merged companies, 208 audit of books of, 446 certified balance sheet for, 446 statement of condition, 634 Hosiery company, audit of, 397 Hotel, monthly statement for dining and wine room opera- tions, 560 Ice company accounts requisite for audit of earnings, 541 advanced sales of coupons, 541 Importing and trading company accounts with foreign custom- ers, 537 certificate of correctness of books, 297 fall in exchange values, 504 statement of affairs, 363 238 INDEX (References are to Income added to profits, 493 as offset to paper losses, 490 auditor's report on, for bank, 627 directors' report on, for bank, 627 from invested reserves, 502 percentage statement, 265 Income bonds, in balance sheet, 204 Incorporation, preliminary ex- penses of, 588 Indorser, liability of, 86 Industrial corporation, examina- tion of accounts, 329 Inflation of profits, 301 Injuries, personal claims for, 586 Instalment sales audit of uncompleted sales, 552 of real estate company, 552 of sewing machine agencies, 552 Insurance adjustment for unexpired, 602 audit of, 289 entry in profit and loss state- ment, 600 in balance sheet, 90 on merchandise, 271 policies, audit of, 238 premiums paid in advance, 588 unexpired, after fire loss, 481 unexpired, in balance sheet, 459 Insurance companies audit of, 25 bonds and premium values for balance sheet purposes, 28 mutual and stock forms of, 358 securities account of, 172 stock and bond transactions, 197 valuation of risks, 382 question numbers) Interest accrued as part cost of invest- ment, 588 accrued, audit of, 248 advanced on discounted notes, 459 as affecting bond values, 540 as affecting earnings, 18 as part of cost, 543 average rate on stock invest- ment, 536 in balance sheet, 90 on advances by stockholders, 495 on bonds bought at premium, 14 on undrawn credit balance, 333 Interstate Commerce Commission rules as to depreciation, 394, 407 rules as to replacement and equipment, 240 Inventor's royalties, audit of, 292 Inventory agreement with cost records, 287 approximate, after fire, 438 auditor's view of, 566 correctness of, 423 cost or market price in, 188, 590 effect on, of later collections, 508 of corporation assets, 433 of finished goods, 676, 680 of grain company, 635 of manufacturer's stock, 512 of paper company, 625 of orange grove, 566 of real estate company, 566 of steamboat company, 566 of stock in process, 662 of stocks, 24 of wholesale grocer, 566 real estate in, 219 validity of prices, 432 INDEX 239 (References arc to Inventory — continued verification of, 151 Inventory, perpetual acceptance for balance sheet, 387 advantages and disadvantages, 567 definition of, 387 how kept and verified, 387 Investments in qualified balance sheet, 290 Invoices checking of, 117 not inventoried, nor on books, 615 Iron manufacturing plant, audit of books, 185 Jobbing accounts, single-entry system, 295 Jobbing business auditor's report on embezzling bookkeeper, 435 discount account of, 465 organization of, 295 Job orders, 427 Journal checking system for, 215 detecting false accounts, use in, 229 functions of, 134 K Kiting, 239 Labor as profit and loss item, 600 Lead company, certificates of sale in balance sheet, 285 Leased property, entries for ex- penditures on, 205 Leasehold of coal company, 529 question numbers) Leases as assets, 305 asset value of, 430 audit of unexpired, 389 in balance sheet, 41 in profit and loss, 41 methods of writing oflF, 389 of railroads, 205 premium for, 588 rent of prepaid, 390 Ledger accounts audit of, 666 balance sheet audit of, 597 verification of, 598 Ledger, cost concealed losses in, 302 of manufacturing concern, 300 Ledger, depositors loose-leaf form, 22.'2 Ledger, forms of, 550 Ledger, general controlling accounts in, 665 departmental accounts in, 2>Z7 Ledger, loose-leaf for depositors, 222 objection to, 222 Ledger, stock verification of, 82, 255 Ledgers, subsidiary postings, 224 Letter of firm to auditor, 487 Liabilities correctness of, 13 in balance sheet, 204 Liability, contingent definition of, 649 examples of, 649 in balance sheet, 649 Life insurance of company's manager, 518 premiums charged to disburse- ments account, 518 240 INDEX (References are to Life insurance agent (See "Agent") Life insurance company apportionment of premiums, 539 assets and liabilities of, 380 premium accounts, 539 purchase of agent's interest, 284 revenue and expense accounts, 380 Loans security for, 173 shares and bonds as security for, 412 Locomotive plant, 351 Loss and gain account, reflecting fluctuating values, 95 Losses fire, adjustment of, 289, 641 obscured by dividend payments, 509 on collections, 262 Lumber company book value of stumpage, 521 depreciation accounts of, 418 renewals and betterments of, 418 report on operations and inven- tories, 657 statement to stockholders, 657 M Machinery and tools audit of, 53, 449 cost entries for, 682 depreciation of, 682 in locomotive plant, 351 sales of, credited to merchan- dise, 503 Machine shop, depreciation of plant, 128 Maintenance and repairs charged against revenue, 575 question numbers) dividends and, 182 how charged, 163 in balance sheet, i in profit and loss account, i reserve for, 242 Manufacturing accounts balance of, 44 expense chargeable to, 148 Manufacturing concerns accounting system of, 368 accounts for expenses, 369 appraisal of real estate of, 370 audit of, 25, 357, 368, 672 audit of hardware, 376 audit of hosiery company, 397 average profits of, 35 balance of cash discount ac- count in, 465 balance sheet of, 359 bond sales at discount, 470 certificate for annual report, 395 certificate of profits, 370 classification of accounts, 527 cost accounts of, 345 cost ledger of, 300 depreciation of plant, 65, 66, 370 examination of accounts, 329, 370 expense distribution in, 369 general audit of, 414 inventories, 188 net profits of, 38, 78 profit and loss statement of, 600 purchase of raw material, 371 report of auditor on, 359 sales of old machinery, 43 stock sales at discount, 470 trial balance of, 414 voucher for wages, 99 Manufacturing cost salaries chargeable to, 56 INDEX 241 (References are to Manufacturing cost — continued wages chargeable to, 56 Mercantile house locating accounting errors, 576 market value of real estate, 565 profit and loss account in, 162 trading accounts in, 162 Merchandise audit of, 53 correcting entries for unsold, 131 entries for consignments of, 596 in bond and warehouse, 298 test of credits for, 55 verifying account with, 264 Merger good-will value in case of, 437 of coal, fuel, and lumber con- cerns, 420 of companies, 267, 294, 307 report for prospective, 247 Milling company, special features in audit of, 647 Mines and quarries, depreciation of, 528 Mining company, depreciation of wasting assets, 415 Minute book, use to auditor, 311 Misappropriation (See "Fraud" and "Theft") Mortgage bonds discount on, 107 in balance sheet, 204 premium on, 107 Mortgages canceled or fictitious, 318 cost of giving, 96, 588 guard against duplicate, 546 how verified, 611 on Florida real estate, 546 Municipal corporations accounts of, distinguished from question numbers) private accounts, 360 audit of accounts of, 384 books, audit of, 342 building operations of, 571 expenditures of, 109 payments, audit of, 109 receipts and disbursements of, 360 N National bank (See "Banks") National Bank Act, 701 Net profits, determination of, 46 Notes extended beyond datings, 554 legal evidence of payment, 661 Notes receivable (See "Bills Re- ceivable") O Obsolescence of manufacturer's stock, 512 of street railway equipment, 472 Opening entries, how verified, 62 Operating expenses, amounts chargeable to, 324 Operations percentage statement, 265 special accounts, 646 statement for, 646 Organization expenses as assets, 192 Outstanding stock, accounts, etc. (See "Stock," "Accounts," etc.) Overdrafts of doubtful value, 174 Paper and pulp company, inven- tory, 625 Parent company accounts with subsidiaries, 614 balance sheet of, 210 242 INDEX (References are to Parent company — continued consolidation of accounts with subsidiaries, 6i6 Partial payments, theft in con- nection with, 462 Partnerships adjustments on dissolution, 538 admitting new partner, 409 debits and credits in, 340 debits for furniture, 658 dissolution of, 405 division of profits, 340 documents for audit, 103 interest on capital, 46 interest on capital advances, 473 investigation or retirement or decease of partner, 633 items for audit, 503 ledger accounts, audit of, 116 manufacturing accounts of, 503 papers, use to auditor, 312 partners' accounts in balance sheet, 72 partner's additional capital, 50 Patents accounts with, 385 as an asset, 497 Payments, average date of, 534 Pay-rolls concealing fraud, 176 correctness of, 691 debited to plant, 231 fraud in, 234 of textile mill, 372 verification of, 151, 402 Percentage, use of in presenting reports, 265 Perpetual inventory (See "Inven- tory, Perpetual") Piece rate, in textile mill, 372 Plant account with in absence of de- preciation reserve, 659 question numbers) additions to, 421, 424 enhanced values, book entries for, 34 enhanced values, treatment of, 282 entries for cost of, 429 maintenance and repair charges, 587 outlays for, 163 pay-roll charges to, 231 repairs charged to, 182 Postings (See 'Footings," etc.) Preferred stock (See "Stock") Premiums accounting entries for, 547 bond, 107, 443 bond, entry for, 443 life insurance, 284 on company stock, used for dividends, 160, 217, 266 on proprietary article, 119 on securities, 139 Price, selling contingent on market price, 285 Prior periods, as affecting audit, 191 Profit and loss arising from assets and lia- bilities, 143 balance of, 44 classifying items, 251 enhanced values in, 34 entries for real estate values, 595 entry for incompleted work, 482 example of account for audit- or's revision, 506 expenditures debited to, 47 fluctuating assets in, 253 from contingent claims, 586 from depreciation, 586 from interest accrued, 586 from stock and bond purchases, 325 INDEX 243 (References are to Profit and loss — continued income credited to, 47 in mercantile house, 162 leases, how treated in, 41 of street railway, 439 of trading company, 440 on doubtful bills receivable, 586 on insurance premiums paid, 586 Profits affected by repairs and renew- als, 36 annual, how found, 146, 650 at expense of depreciation re- serve, 589 auditor's certificate as to, 52 average annual, 35 falling off of, 211 for current year from continu- ous accounts, 488 from bond investments, 320 inflation of, provision against, 301 net, of manufacturing corpora- tion, 38 Property, uninsured, 238 Public service corporation depreciation reserve of, 232 Public utility corporation discounts and bad debts, 444 revenues of, 444 Purchases checking invoices of, 501 fictitious, detection of, 93 fraud in by vendor, 632 not entered in books, 463 prevention of fraud, 501 Railroad companies, steam audit of, for limited period, 225 audit of net earnings, 20 construction account, 21 question numbers) dividend cash deposited, as as- set, 618 earnings of, 321 equipment and liabilities there- for, 407 equipment destroyed, 22 examination of accounts, 328 expense for new stations, 364 maintenance of equipment, 426 preferred stock dividend as lia- bility, 618 purchases of, not entered on books, 463 replacements, rules for, 240 Railroad companies, street accounts for obsolete material, 472 audit of earnings, 366 chart of railroad accounts, 530 classification of accounts, 527, 530 collection of earnings, 366 first annual audit, 439 monthly adjustment of revenue, 466 profit and loss account for, 439 reserve for accidents, 461 Raw material, detection of theft of, 23 Real estate (See also "Real Es- tate Business") increased valuation in profit and loss account, 595 investments in, verification of, 611 mortgaged, in balance sheet, 219 reduced values in profit and loss account, 595 Real estate business accounts, audit of, 349 audit of, 53, 248 balance sheet of, 349, 568 244 INDEX (References are to Real estate business — continued bond issue against mortgages on, 398 enhanced values and book values, 575 expenses of, 374 financial statement of, 374 first audit of development com- pany, 559 income account of, 349 sale of lots on contract, 391 sale of mortgage bonds, 391 sale of plots and acreage, 374 Reconcilement account with bank, 129, 235 Reconciliation of cash, 254 Registrar of corporation audit when absent, 336 audit when present, 336 Relief association, audit of, 689 Renewals (See "Betterments") Rent, in profit and loss statement, 600 Repairs (See "Maintenance") Report of auditor as affecting loans, new capital, or sales, 242 as to contemplated merger, 247, 267 in interest of purchaser, 532 on factory products, 241 on goods in inventory, 241 on grain exporting company, 532 on lumber company's statement, 657 supporting schedules to accom- pany, 582 when books are improperly kept, 332 when books are properly kept, 322 question numbers) Reports from local accountants, 261 Reserve funds abatement of cost credited to, 613 depreciation chargeable to, 434 distinguished from reserves, 132 investment of, 15 Reserves distinguished from reserve funds, 132 for steamship company, 75 for telegraph company, 75 income on invested, 502 Reserves, secret advantage and danger of, 553 auditor's duty toward, 553 auditor's view of, 170 Restaurant, fraudulent conduct of, 455 Revenue account and expenditures, y^ items chargeable to, 42, 96 uncompleted contracts as items of, 159 Royalty audit of inventor's account with, 292 capitalization of owned, 279 dividend on, 279 in annual statement, 87 in profit and loss statement, 600 Salaries bonus for extra services, Z7 chargeable to extensions or im- provements, 451 of corporate officers, 57 overdrawn, 589 Sales accounting for proceeds of, without checking, 590 INDEX 245 (References are to Sales — continued amount of net, 199 audit of padded cash, 455 by consignee, book entries for, 31 cash verification of, 106 increased at end of period, 503 omission in books, S returned, check on, 93 returned, in profit and loss statement, 600 time, fraud through, 315 Salesmen, commissions of, 600 Savings banks audit of, 84, 677, 701 audit of, concurrent with ex- amination, 675 verification of cash book, 683 Secret reserves (See "Reserves") Securities depreciation of as affecting re- port, 544 discounts and premiums on, 139 examination of, 19 fluctuating values of, in audit, 556 losses on paper compensated by earnings, 490 of insurance companies, 197 premium on purchase of, 588 registration of, 356 verification of, 123, 172, 585, 611 written-up values, 520 Shares (See "Stock") Shareholders (See "Stockhold- ers") Single-entry system, ascertaining profits under, 63 Sinking fund entries for, 6z7 for retiring bonds, 637 how set up, 113 use of, 113 Social club, verifying cash of, 269 question numbers) Speculation broker's statement to specula- tor, 688 Statements financial, for credit purposes, 628 of assets and liabilities, 669 of corporation treasurer, 687 profit and loss, errors in, 562 profit and loss, for trading and manufacturing business, 600 Steamship companies earnings, audit of, 419 fraud in trip statements, 419 reserves, 75 Stock, capital auditor's appraisement of, 532 books and records for, 660 company's own, 273 in balance sheet, 54 issued at discount, 45 of insurance companies, 197 overissue of, 660 Stock certificate book, audit of, ZZ^ Stock certificates registration of, 356 transfer of, 252, 469 Stock exchange broker (See "Broker, Stock Exchange") Stock exchange clearing house, 361 Stockholders capital and surplus accruing for minority, 617 interest on advances by, 495 preferred and common, 452 safeguarding interests of, 452 Stock ledger, 82, 255 Stock (merchandise) correct inventory of, 480 inventory value of, 24 Stock outstanding amount of, 244 246 INDEX (References are to question numbers) Stock outstanding — continued proof of value, 158 verification by transfer ledger, 309 Stock, preferred dividends on, 471 safeguarding holders of, 609 Store, country trading orders for merchandise, 467 Stumpage book value of, 521 definition of, 521 Subsidiary companies accounts with parent company, 614 acquirement of, 652 assets on books of controlling company, 207 audit of, 551 capital and surplus in balance sheet, 617 capital stock of, without market value, 214 central purchasing plant, 551 expenditures on, 653 outlays for, 702 pay-roll advances, 551 profits of, 209 relation to parent company, 210 Subsidiary ledgers, 224 Supporting schedules, accounts covered by, 263 Surplus accrued from royalties, 279 decreased by debit to invest- ment, 592 dividends paid from, 338 Suspense account accounts receivable in as assets, 281, 474 entries in, 125 good-will carried in, 471 Tael, discount on exchange, 484 Taxes accrued, in balance sheet, 459 bank check as tax voucher, 246 interest on overdue, 671 return for corporation, 619 return to commissioner of, 674 Textile mills pay-r9lls of, 2)7^ piece-work basis in, 372 Theaters, audit of books and ac- counts, 648 Theft detection of, 193 of raw material, 23 of stock, 150 of tools, 184 prevention of, 184 through collusion of salesmen and cashier, 316 Time-keeping system, 408 Title charges for transfer, 613 transfer of, 613 Tools (See "Machinery") Trading accounts balance of, 44 in mercantile house, 162 Trading concerns audit of apparent defalcations, 362 branch store accounts, z^^j 4^8 profit and loss account of, 507 report on for bank, 440 Transactions, miscellaneous correctness, how certified, 622 Transfer book (ledger) and stock outstanding, 309 Transfer books, auditor's view of, 166 Treasurer, audit of receipts, 314 Treasury stock, in balance sheet, INDEX 247 (References are to question numbers) Trial balance compared with balance sheet, 49 errors, detection of, 83, 118 itemized for balance sheet, 635 of grain company, 635 of manufacturing company, 357 Trust company as trustee, 353 audit of, 353 books and accounts of, 399 Trustee's accounts, audit of, 103 U Unit of production, 668 bank check, for tax payments, 246 cash, audit of, 67 checks as, 60, 141, 226 for disbursements, 581 for labor costs, 74 legality of form, 226 receipted bills for unreceipted, 685 reproduction and second pass- ing of, 7 reproduction, prevention of, 122 unacceptable in corporation audit, 283 Values, increased book entries of, 34 on balance sheet, 34 Values, cost and book, 606 Verification of accounts payable, 576 accounts receivable, 576 balance sheet, 459 bank loans, 194 bills payable, 576 bills receivable, 576 bonds and stocks, 227 building and loan accounts, 115 cash, loi, 106, 177, 194 discounts, 106 inventories, 151 journal entries, 229 pay-rolls, 151 returns and allowances, 106 securities, 177, 194, 243 social club cash, 269 stock ledger, 255 Village accounts, verification of, 140 Vouchers audit in absence of, 422 audit of, 3, 313, 422, 581 W Wages audit of unclaimed, 551 fraud in payment of, 17 voucher for, 99 Wasting assets, depreciation for, 529 Water supply company auditor's failure to detect fraud, 664 fraud in cash book of, 664 registrar of, 664 Wine and liquor accounts, 500 Wool consigned to dealers, 339 inventory of, 339 purchases and sales of, 339 received on consignment, 339 Working orders, as proof of ex- penditures, 427 Working papers for semiannual audit, 705 preparation, arrangement and preservation of, 601 Work in process, payments for in balance sheet, 32 Work unfinished, credited to profit and loss, 482 \ -s\- -ii^^i^? 0^ 25 CENTS '''"'''00^-VS,U02. 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