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PRINCIPLES

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MANUAL

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PRACTITIONERS

AND

STUDENTS

FOR

BY

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F.
(OF

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INSTITUTE
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ECONOMICS

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PAULA,
CHARTERED

ACCOUNTANTS

AND

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STUDENTS*

ACCOUNTANTS
AND

CO.) "

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PREFACE
subject

THE

works,

of

books,

and

therein
has
of

of

intended

providing

cost, that

will

have

familiar

of

classes

of

various

discuss
audit.

Acts

of

Parliament
been

be

run

that
the

to

that
of

purpose
for

these

one

with

will

testing

examinations.

work
ground-

ing
underlyowing

hand,

For

the

which
but

1908,

all

reason

have

at

of

the

which

every

examination

text

of

ciples
prin-

sections

with

to

been

root

auditors
the

had

have

same

if

included.

hundred
the

would

as

for

have

important

been

prove

their

it

to

such

investigations
would

be

must

reasons

other

the

to

have

contains
in order

and

that

omitted,

familiar,

the

of

auditing

book

(Consolidation) Act,

appendix

preparing

to

every

must

thought

and

whole

to

which

the

reasonable

specialised subjects,

apply

refer, have

to

the

the

considerably,

so

Companies

is

at

whole
of

On

audits

included,

were

that

The

object

the

stepping-stone

the

omitted

impossible adequately

auditor

book

general principles

principles

with.

I have

space,

condensed

times

the

student

the

explain

to

different

the

size, and

cover

every

subject dealt

all these
be

This

with

students,

form

so

to

which

and

each

the

all

and

endeavoured

with

lack

with
;

contained

matter

works.

larger
I

audit

every

for

of convenient

deal

the

practitioners only.

primarily

book

of

standard

cumbersome

and

lengthy

part

for

written

been

govern

considerable

the

that

vast,

so

somewhat

necessity, are

is

is

Auditing

of the

value

knowledge

tions,
ques-

book,

to

with

and

students
a

view

it
for
to

PREFACE

Va

would

this

take

Mr.

Herbert

Jacobs,

W.

Coates,

M.A.,
that

assistance

readers,

from

acquire

B.A.,

and

hope

for

afforded

greatly

whom

thorough

A.C.A.,

have

they

thanking

Mr.

and

the

David

valuable

very

me.

suggestions

any
this

practical

sincerely

most

Barrister-at-Law,

LL.B.,

appreciate

shall

of

opportunity

little

or

book

knowledge

may
of

the

opinions
assist

principles

auditing.

of

F.
17

COLEMAN

STREET,

LONDON,

E.C.2

R.

M.

DE

PAULA.

to

CONTENTS
CHAPTER

INTRODUCTORY
PAGE

BETWEEN

DIFFERENCE

ACCOUNTANCY

AND

AUDITING
.

OF

MEANING
AUDIT

AUDIT

AN

......

BOTH

EMBRACES
BALANCE

PROFIT

AND

LOSS

ACCOUNT

AND

SHEET
......

MAIN

OBJECTS

AUDIT

OF

DETECTION

OF

ERRORS

AND

FRAUD
....

DIFFERENT

CLASSES

ERRORS

OF

OF

ERRORS

THEIR

AND

DISCOVERY

COMMISSION
......

ERRORS

OF

OMISSION
......

ERRORS

PRINCIPLE

OF

......

DIFFERENT

CLASSES

FRAUD

OF

MISAPPROPRIATION

OF

AND

CASH

THEIR

OR

DETECTION

GOODS
...

FALSIFICATION

OF

ACCOUNTS
.....

ROUTINE

CHECKING
.......

EXTENT

AUDITORS*

OF

INVESTIGATIONS
...

INTERNAL

CHECKS

AUDITORS'

THE

AND

POSITION

IN

THERETO

REGARD

.....

COMMENCEMENT

OF

NEW

.11

AUDIT
.

AUDIT

PROGRAMME

NOTES

DURING

12.13

AUDIT
.

METHOD

OF

WORK

CONTINUOUS

TICKS,

AND

PERIODICAL

CALLING

.13

BACK

BETWEEN

APPOINTED

THE

UNDER

INDIVIDUALS

OR

.15

AUDITS
.

DIFFERENCE

POSITION

STATUTE,

OF
AND

AUDITORS

BY

PRIVATE

16

FIRMS.
.....

PARTIAL

18

AUDITS

QUALIFICATIONS

BY

REQUIRED

AN

CHAPTER
ROUTINE

CHECKING
CASH

AND

II

CHECKING

CASTINGS

.19

AUDITOR

AND

VOUCHING

POSTINGS

22

BOOK
........

SALES

AND

BOUGHT

DAY

23

BOOKS
.

RETURNS

AND

ALLOWANCES

CASH

.23

BOOKS
.

PETTY

23

BOOK
......

POSTAGE

.23

BOOK
.

vii

CONTENTS

viii

PAOB

23
JOURNAL
JOURNAL

TRANSFER

BOOKS

SALARIES

AND

WAGES

SHEETS

STOCK

BOOKS

BILL

AND

SALES

LEDGERS

BOUGHT

PRIVATE

AND

IMPERSONAL

AND

BOOKS,

26

THEREOF

DETECTION

OF

BALANCING

THE

IN

DIFFERENCES

LEDGER

..""""

29
VOUCHING

.....

BOOK

CASH

BANKERS'

BOOK

PASS

SIDE

DEBIT

VOUCHING

"

BOOK

PAYING-IN

BOOKS

RECEIPT
CASH

RECEIVED

CASH

SALES

DEBTORS

FROM

RECEIPTS

MISCELLANEOUS
RECEIVABLE

RENTS

INTEREST

AND

INTEREST

ON

DEPOSIT
RECEIVED

.....

INVESTMENTS

OF
OF

SALES

....

.37
SIDE

RECEIPTS,

ETC,

ACCOUNTS

SETTLED
OF

BY

BOUGHT

CONTRA
LEDGER

39

ACCOUNT

39

ACCOUNTS

40

CHEQUES

CAPITAL

POLICY

INSURANCE

....

CREDIT

ENDORSED

....

UNDER

RECEIVED

SUBSCRIPTIONS

PAYMENT

37

ASSETS

SUNDRY

AMOUNTS

VOUCHING

AGENTS

LOANS

ON

RECEIVABLE

SALES

FROM

RECEIVED

INTEREST
BILLS

"

DIVIDENDS

COMMISSIONS
AMOUNTS

......

40

EXPENDITURE

41

WAGES
.........

43

SALARIES
.........

TRAVELLERS'
PETTY

COMMISSIONS

AND

EXPENSES

43
...

43

CASH

POSTAGE

44

BOOK

CHAPTER
VOUCHING
BOUGHT

DAY

BOOK

BOUGHT

DAY

BOOK

III

(CONTINUED)
46

.......

RETURNS

AND

49

ALLOWANCES
.

SALES

DAY

BOOK
.

49

CONTENTS

IX

PAGE

DAY

SALES

BOOK

RETURNS

ALLOWANCES

AND

51

.
.

BILLS

RECEIVABLE

BILLS

PAYABLE

51

BOOK

52

BOOK

......

52

JOURNAL

..........

LEDGERS

BOUGHT

53

.......

LEDGERS

SALES

CHAPTER
THE

IV

AND

PROFIT

LOSS

BALANCE

ITEMS

GROUPING

AND

SHEET

58
IN

GOVERNING

TRADING

PREPARATION

ACCOUNT

PROFIT

59

ACCOUNTS
.....

PRINCIPLES

THE

ACCOUNT

LEDGER

IMPERSONAL

AND

54

OF

61

......

62

ACCOUNT

LOSS

APPROPRIATION

.....

62

ACCOUNT
.....

OF

ADJUSTMENT
PROVISION

NOMINAL

FOR

PAYMENTS

IN

SUNDRY

ACCOUNTS

OUTSTANDING

LIABILITIES,

ADVANCE

AMOUNTS

"

ETC.

PRINCIPLES

GOVERNING

BALANCE
DEFINITION
MAIN

OF

OBJECT
OF

FIXED

OF

BALANCE

66

....

67

SHEET
....

70

.......

70

......

POSITION

AS

REGARDS

VALUATION

OF

73

ASSETS

CHAPTER
VALUATION
VALUATION
CASH

AND
IN

BANK

THE

65

SHEET

ASSETS

AUDITOR'S

PREPARATION

ASSETS

ASSETS

FLOATING

.65

......

BALANCE

OF

VALUATION

THE

SHEET

63
65

......

RECEIVABLE
.

THE

AND

VERIFICATION

VERIFICATION

OF

OF

VARIOUS

ASSETS
ASSETS

77

HAND

77

BALANCES

INVESTMENTS
INSCRIBED
DEBENTURES
DEBENTURE

80

STOCKS
AND
BONDS

......

REGISTERED
AND

SHARES
SHARE

WARRANTS

IN

COMPANIES
TO

BEARER

81
81

CONTENTS

PAOB

BOOK

DEBTS

BILLS

RECEIVABLE

....

STOCK-IN-TRADE
CONSIGNMENT

ON

GOODS
WORK

PROGRESS

IN

MACHINERY

PLANT

AND

LOOSE

TOOLS,

ETC.

FITTINGS

AND

FIXTURES

FURNITURE,
HORSES

VANS

AND

CARTS
HARNESS

...

BUILDINGS
LOANS

AND

LAND

LEASEHOLD

AND

COPYHOLD,

FREEHOLD,

....

....

PATENTS

.....

COPYRIGHTS

....

.101

GOODWILL

VI

CHAPTER
DEPRECIATION,

AND

RESERVES,

SINKING

FUNDS

DEPRECIATION
FLUCTUATIONS

THE

IN

FLUCTUATIONS

THE

IN
ASSETS
OF

OBSOLESCENCE

AND

ESTIMATION

OF

OF

OF

PROVIDING

FLOATING

.105

FOR
OF

106

DEPRECIATION

LIFE

OF

REGISTER

COST

OF

METHODS

FOR

FIXED

MAINTENANCE
WRITING

INSTALMENT

AND

MAINTENANCE

OFF

DEPRECIATION

INSTALMENT

DEPRECIATION
INSURANCE

POLICY

ANNUITY

.108
.

SYSTEM

.109
110

RESERVES

.111
.111

.112
113

SYSTEM

SYSTEM

RE-VALUATION
THE

SYSTEM

FUND

AND

SYSTEM
.

REDUCING

107

PLANT

MACHINERY
PLANT

.105

TIME
.

WORKING

104

ASSETS

FIXED

ASSETS

EFFLUXION

THE

OF

VALUES

WASTING

OBJECT

MAIN

VALUES

MARKET

DEPRECIATION
THE

MARKET

113
.

AUDITOR'S

DUTIES

AS

REGARDS

.114

115

DEPRECIATION
.

RESERVES
SPECIFIC
GENERAL

RESERVE

RESERVES
...

116

...

117

RESERVES
FUNDS

\\Q

...

INVESTMENT

OF

GENERAL

SURPLUS

OF

ASSETS

RESERVE
..

REPRESENTING

xi

CONTENTS

PAGE

.120

FUNDS

SINKING

122

SECTIONS

1908,

POWERS

LIST

ANNUAL

AND

.136
ON

COMMISSIONS

138
DURING

SHAREHOLDERS

TO

INTEREST

OF

.139
.

BOOKS

STATUTORY

(1) REGISTER
(2) MINUTE
(3) REGISTER
(4) REGISTER

141

MEMBERS

OF

141

BOOK

.142

DIRECTORS

OF

SPECIAL

POINTS

IN

MEMORANDUM

ARTICLES

OF

1908

OF

OF

143

AUDIT

THE

THE

TO

PRIOR
OF

145

COMPANY

.145

CAPITAL
OF

1917

.....

COMMENCEMENT
SHARE

OF

COMPANIES

DOCUMENTS

LEGAL

OF

TO

AUDIT

THE

.144

ASSOCIATION

EXAMINATION

WITH
THE

ASSOCIATION

OF

VIII

UNDER

ACTS,

.142

CHARGES

CONNECTION

COMPANIES

AND

MORTGAGES

OF

CHAPTER

AUDIT

AND

CONSTRUCTION

ISSUE

SHARES

PLACING
PAYMENT

REPORT

COMMISSIONS

UNDERWRITING

.134
.

MEETING

STATUTORY

THE

.125

.129

SUMMARY

AND

AUDITORS

OF

AUDITORS

OF

AUDITORS

AFFECTING

REMUNERATION

DUTIES

AND

(CONSOLIDATION)

PARTICULARLY

AND

VII

COMPANIES

THE

OF

.122

RESERVES

REGARDS

AS

POSITION

APPOINTMENT

CHAPTER

ACT,

....

AUDITOR'S

THE

RESERVES

SECRET

.146

SHARES
THE

BOOKS

SHARE

TRANSFER

AUDIT

TRANSFER

FEES

UPON

AN

ISSUE

OF

SHARES

147
.

.149
.

.150
150

DEBENTURES
DEBENTURES

ISSUED

PRELIMINARY
PROFITS

AS

TO

THE

.154

EXPENSES
PRIOR

.153

SECURITY

COLLATERAL
.

DATE

OF

INCORPORATION

155
.

CONTENTS

xii

PAGE

156
ARREAR

CALLS

IN

CALLS

PAID

157

ADVANCE

IN

SHARES

FORFEITED

DIRECTORS'

FEES

DIRECTORS'

EXPENSES

DIRECTOR'S

MANAGING

BOOKS

MINUTE

REMUNERATION

DIVIDENDS
DIVIDENDS

INTERIM

SHARES

PREFERENCE

ON

DIVIDENDS

DIVIDENDS

VOUCHING

DIVIDENDS

UNPAID

DIVIDENDS

PREFERENCE

CUMULATIVE

OF

ARREARS

IX

CHAPTER

PROFITS

AVAILABLE

CAPITAL

PROFITS

WASTING

DIVIDEND

FOR
....

ASSETS

DEPRECIATION
CAPITAL

PLANT

OF
LOSSES

MACHINERY

AND

....

CONCLUSIONS
THE

DIVIDEND

FOR

AVAILABLE

PROFITS

.......

INTERESTS

POSITION

CREDITORS

OF
THE

OF

AUDITOR

174

QUESTION

THIS

REGARDS

AS

1 75

SUMMARY

CHAPTER
THE

THE

POSITION

LEGAL

OF

AUDITOR'S

AN

POSITION

AUDITOR

POSITION

TO

UNDER

AUDITORS

OF

THE

PRIVATE

FIRM

COMPANIES

176

AUDITOR'S

LIABILITY

FOR

AUDITOR'S

LIABILITY

AS

REGARDS

THIRD

ESTATE

LONDON

AND

.178
.

BUILDING,
GENERAL

ETC.,
BANK

SOCIETY

V.

WOOLLEN
OIL

KINGSTON

CO.
STORAGE
COTTON

V.

179

SHEPHARD

.179

CASE
.

THE

PARTIES

DECISIONS

LEEDS

LONDON

.178

NEGLECT
.

IRISH

1908

ACTS,

1917

TO

LEGAL

.176

182

TYSON
CO.

V.

MILLS

SEEAR
CASE

HASLUCK
.

AND

CO.

183
183

CONTENTS

Xlll

PACK

BOLIVIA

OF

REPUBLIC

DUMBELL'S

EXPLORATION

BANKING

.187

LTD.

co.,

WILDE

AND

OTHERS

V.

CAPE

186

LTD.

SYNDICATE,

AND

.187

DALGLEISH
.

.188

CONCLUSIONS
.

APPENDIX

EXAMINATION

.191

QUESTIONS
.

INDEX

203

TABLE

OF

CASES

WITH

REFERENCES
PACK

Galloway

Schill,

v.

Seebohm
K.B.

(1912,
Neuchatel

v.

41

135
Co.

1)

Ch.

General

v.

354)

Asphalte

(1889,
Corner

167

Commercial

"

(1894,

Ltd.

Co.,

"

Ch.

Trust

239)

170
.

Guinness

v.

(1883,
Le

Lievre

22

(1893,
Leeds

Estate

Irish

Woollen

Oil

v.

Shephard
179

Bank

Case

682)

179

Tyson

v.

L.R.,

13)

1900,

Storage

Co.

182

Seear

v.

L.R.,1904,

(Acct.

Society

787)

Ch.

Co.

(Acct.

179

etc.,

Ch.

General

(1895,

174

491)

Building,

and

Ireland

Gould

v.

36

of

349)

Q.B.

(1887,

/^Jfcondon

Ch.

Dennes

"

....

Corporation

Land

31,

Hasluck

Co.

"

1)

183
.

Kingston
(1896,

Republic

of

Ch.

Bolivia

(1914,
Dumbell's

Mills

Cotton

Ch.

(Acct.

331)

183

Exploration

Banking

Case

Syndicate,

Ltd.

139)

L.R.,

186
Ltd.

Co.,
1900,

181)

187
....

Wilde

"

Others

(Times,

v.

Cape
28th

"

May,

Dalgleish
1897)

.187
.

and

Accountancy

between

Difference

AUDITING

OF

PRINCIPLES

THE

Auditing.
former

In

preparationof
"

agreement of

the

of account,

part of

between

clearlyunderstood
that if accounts

by

is far from

merely

being the

to

would

involved
thereafter

check

and

to

in any

correct

in

doing

point

out

Sheet

as

proper

audit of the whole

audit

Sheet
the

being correct,

at

is

does

all,but

together with
thereto

of
the

in such

himself
satisfy

books,
and

and

the

be
not
was

Sheet

Accountants,

figuresin
be

as

this

particularly

clients that

they are not

certifya Balance

cannot

conducted

have

they

apart from

accountancy"

Sheet

that

the

Balance

prepared by others,

and

accounts

the

wider, namely,

much

something

of the business.

preparation of

Balance

manner,

Sheet

of the transactions

denotes

examination

Balance

they should

unless

entail

not

would

as

would

deal with

to

they

quite distinct

would

he

books.

their
And

the

; he

far

as

the

expert

an

be, that the Balance

the

so,

to

audit.

by

as

auditor

an

work

and

Account

Balance, and

called upon

when

an

Loss

as

way

positionshown

often

acting simply

be

with

carryingout

an

Trial Balanc"

accordance

to

audit

agreeingthe

say would

but

An

of books, the

all he could

experts, are
careful

set

Trial

the

is instructed

accountant

an

themselves, except

agree
the

certifythat

way,

not

the books

necessary

was

would

thought

This, however,

accuracy.

Profit and

He

is not

accountant,
professional

from

of

preparingthe

accountant,
not

If

case.

be that

Sheet.

Balance

to

then-

accounts

prepare

it being

business men,

many

preparedby

are

auditing

and

accountancy

guarantees
necessarily

he

be described

may

nowadays, the all-important

accountant's work is that of auditing.
professional

difference

The

the

but

Work/'

Accountancy

as

Balance, and

Trial

the

; in fact to what

accounts

in books

of transactions

detailed records

of the

accuracy

arithmetical

of the

checking

the

chieflyto

confined

was

accountants
professional

of

work

the

years

vouchers

auditor

may

honestlycertifythat, in

his

relating
be

able

opinion,

INTRODUCTORY

such

Balance

true

and

is

Sheet

audit of

Loss

be included

must

it entails

Balance

The

company,

is often

affixed, for the

form

in

of

set

auditor's

an

all the
books

balance

upon

nominal

accounts

Profit
have

latter account.

of

positionof
Sheet

may

be

the

and

ascertainingwhether
true

In
and

or

reflection of the financial

auditors
practice,
Profit

and

certify
;
the

accounts,

not

qua

but it must
the

of

and

is to

his

Balance

do prepare

duties

check

and

as

financial

Sheet
the

there

view

Sheet
after
there-

they

preparing

is additional

the

concern.

and

accountant

The

to

shows

that, when

auditor.

report upon

Balance

is that

accounts

this work

that

this

business

the Balance

acting qua

the

the combined

audit

positionof

is

date

to

whole

the

be observed

accountant

it

marised
sum-

after

transfer

by

an

Account, which

auditor, and

quite outside
auditor

Loss

often

in

be reflected in the

such

not

case

given

independent investigation with

an

all-

which

to

Account,

and

primary object of

the

the

is the

contains

of account,

should

in

entry, includingthe

Loss

transactions

concern,

item

of the transactions

in its books

all such

Sheet

closed

been

account

which, in the

to

double

and

former, and

every

appearing at

and

whole

The

should be recorded
effect

balances

kept by

the

of that

report refers and

Balance

the

verification of

the

Sheet, however,
one

books.

the

in the

of

is the

and

by

other

examination

important document,
of

shown

the balance
or

of

information

involves

form

some

detailed

as

affairs

the

the

to
as

Sheet

Account,
in

Sheet.

Balance

him, and

to

of

to exhibit

as

so

up

state

according

Balance

the Profit and

of the

view

correct

particularconcern,
explanationsgiven
An

properlydrawn

and

to

of

duty

completed

an

work

of others.

Main

Objects
Errors

and

of

an

Audit"

diction

of

of

Fraud.

of
The^^^Ppp^purposes
and

Detection

errors

and

an

audit

fraud.

are

Errors

the

prevention
may

consist

simple to discover,

of

entail

may

This work
if

make

that

considerable

be

may

is

There

at

seen

checking
revealed

agreement of the books

the

working

in the

Sales

in the

find its way

in the

account

Sales

be affected.

not

part of

be

to

calculations
should

an

ascertain

and

he should

in order
carried
with

to

some

all

are

business

whose

that

than
the

errors

of

agreement

are

far

the

Trial

as

more

the

the

will

considered

whole

of the

Books, but
he
here

is

he

auditing,

and

internal check
such

interest

commission,
of

the

accounts

the

will

independentlychecked

Important calculations

omission

while

Balance

it is not

of the calculations

mortgages, etc., however, should

of

Trial

the

check

to

in the

eventually

Bought Day

depreciation,reserves,

Errors

mi

of the customer's

debit

so

duty

these

satisfyhimself

out.

affect

not

Sales Account,

ordinary way,

Sales and

that

test

and

be

be ext"

amount

hence

the

to

Ledger,

auditor's

of the

and

of the

posted

In the

the staff of the

by

credit

the

will be

amount

same

will

example, if by

wrong

Day Book,

the

to

prices,the

will not

Book, this total will be included

Day
of

casting up

of

out

for

occur.

except by

often

mistakes

audit, for such

the

by

it

discrepancies

the

in calculations

Errors

errors

errors,

postingsuntil

castingsand

the

discovered.

are

exactly locatingthe

of

way

no

checking.

in this way

as

ledgers the

which

in

once

books

the

large businesses

in

introduced,

various

the

in

be

thus

detail

of

amount

ledgers are
self-balancing

of

agreement

will

presence

considerablyreduced

be

can

the

difference

total

the

up

affect

detection

actual

revealed, although the

errors

their

and

Balance,

Trial

the

casting will

postingand

in

mistakes

will

calculations

postings,castings,and

incorrect

included

be

checking

this head

Under

disclose them.

should

books

of the

tively
compara-

are

ordinary routine

the

as

omission, and

of

or

commission

of

principle.Errors

of

errors

of commission

either

of clerical errors,

AUDITING

OF

PRINCIPLES

THE

be

on

is

being

dealing

those

as

there,

capital, loans,

checked.
difficult to
former

Balance;

discover

will not
such

errors

affect
will

INTRODUCTORY

omission

the

include

to

invoices

enter

of sales from

Book, the omission

salaries

omissions, which

point

forms

later on,

in the

falsification of such
of

the other

through lack

of assets

preparation of
that
of

the

it must

between
an

upon

of routine

be

borne

Errors

will be
The

very

may

of

have

should

as

of

errors

make

enormous

an

errors,

allocation
tion
valua-

the

revenue,

inadequate

the
In

an

make

such

incorrect

debts.

that,

business.

is to discover

capitaland

in mind

of
should

accountancy, and

bad

principles

the

this

rule, no

tion
connec-

amount

principle
"

these

research.

difference

whereas, the effect of clerical errors

in

probably

small.

detection

auditor's

quiteunintentionally

incorrect basis, and

may

or

considerably;

enquiry and
only by intelligent

of this nature

the accounts,

purposely

auditor

checking will disclose

be discovered

made

fraudulent

accounts

an

and
provisionfor depreciation

can

arise

knowledge

correct

expenditure as

such

the accounts

by

accounts

include, for instance, the

will

which

of

most

and

to falsification of accounts,

if he
thorough investigation

most

of

the

hand, they may

knowledge

extensive

complete

committed

be

amount

it is necessary

Hence

part of his

of omission

constitute

affect

may

of

the

governing

Errors

so

principlemay

if intentional,they may
on

such

accounts.

accidentally,and
but,

out,

affect the results shown

considerably, and

Errors

such

in the business

is

programme

discovered.

be

intentionally,
may
very

the

length

some

of this

carried
efficiently

and

should

omissions

other

at

checks

performance

his audit

If, however,

thoroughly

is

with

the internal

upon

itself to assist him

duty.

and

discovery of

the

dealt

Day Book,

important part of the duty of the

large business he is compelled to rely

certain extent

will be

Bought Day

very

auditor, yet in
to

Although

accounts.

Sales

the

non-provisionfor interest, rent,

outstanding

in the

of

errors

is

duties,as in this way

feel confident

very
the

that the accounts

important part

proprietorsof
are

accurate,

of

an

business
and

that

PRINCIPLES

THE

affairs is

positionof

the

important part

more

AUDITING

OF

clearlyshown

of the auditor's duties

by far

but

the

is,the detection

of the moral
check
preventionby means
This is the main
audit.
for
created by a periodical
reason
his appointment in the majorityof cases
; for instance, the
Companies (Consolidation)Act, 1908, provides that every
of

fraud, and

its

shall

company

Sheet

Balance

is not

reason

directors

of

preparing

business

body

as

is

being

their

position of

have

carried

and

on

to them

whatever

positionof

checked

were

on

of

behalf

object
that
or

that

of the

of his

auditor

is

he

accounts

is to

adopt

of his audit

the directors and

things,he
to

duty

should

ascertain
to

show
accounts

The

satisfythe

acts

directors

the
be

not

attitude

an

main

shareholders

of

; in fact he should

thought

suspicion
endeavour

mistrust

between

staff of the
company.

Above

be tactful.
that

the hands

such

audits.

creatinga spiritof hostility

and
and

shareholders.

is absolutely
independent

It must

should

the

conduct

appointed, who

of the business.

auditor

to

behalf of the shareholders.

employees

himself

this

unless

by either

an

the

financial

accounts

being committed

to avoid

there

the

is

during the conduct

all

an

the

in
entirely

make

shareholders,and
whose

be

they chose,

appointment

fraud

no

the

affairs

that

reason

directors

the

could

independentlyon

It is for this

is the

directors,who

the

by

shareholders,therefore,would
directors, who

that

the

ascertaininghow

what

representativesof

the

but

except by reference

The

the

The

of

means

no

business

of

shareholders.

accounts,

the

as

every

necessarilysuspect

fraudulent

company,

submitted

accounts

the

shareholders

the

shall audit

auditor, who

an

is laid before

that
that

shareholders
the

appoint

His

everything

positionis

is in

that

he is

order, that

it is

his

employers which he must cany out.

He
need, therefore,adopt no attitude of mistrust
holders
j the shareare
adopting an ordinarybusiness precaution,and
have

appointed

him

to

see

for himself

that

the

accounts

in order in all respects,and thereafter he

has to report
to the shareholders
to this effect ;
of his
or, in the event
are

INTRODUCTORY

correct

he must

one,

is the

positionshown

the

agreeing that

not

this fact in his

state

and

true

report,giving his

reasons.

Fraud
of

cash

either of the

take the form

may

goods,

or

falsification of

the

or

misappropriation
the

accounts

of
unaccompanied by misappropriation.Misappropriation
be concealed either by omittingto enter receipts,
cash may
or

the

the auditor
first,

Book

Cash

discovered

by

stock

records

are

it is almost

in use,

of

taking place

Fictitious

is

losses

That

itself. The

fraud

invoices,

this

nature.

of stock

by fluctuations

falsification

in

this will not

percentage of gross profitto sales,but

the

be

kept ; in fact, unless such records

appropriatio
impossibleto discover small misindicated

be

will

of vouchers,
of

such

can

difficult to detect, unless

more

this nature.

may

Book

payments

evidence

direct

other

of goods
Misappropriation
accurate

men's
till books, sales-

as

Cash

examination

careful

sheets, and

wages

in the

receiptsshown

the

for in the

revealed.

discrepanciesbe

discover

to

only by comparing originalrecords

accounted

cash

the

etc.

order

diaries,counterfoil receiptbooks,

books, cash

agents' returns,
with

check

must

originalrecords, such

with

desk

are

In

by entering fictitious payments.

of accounts,

are

the

locate

panied
unaccom-

difficult to

misappropriation,is usually far more

discover, as this is generallyperpetrated by

directors

managers

by actual

or

fictitious

by showing
obtain

who

further

wish

in
profits

credit,

to

bolster up

to

order

increase

to

pay

the

concern

dividends,

commissions

due

to
to

disposalof their holdings

the
such
in the company
at high prices. In
as
cases,
fraud is committed
by responsibleand trusted officers of
be particularly
auditor must
the company,
vigilantif
an
he is to discover it,as probably he will be given intentionally
false information
and
explanations. He can, therefore,
themselves,

or

only

discover

care

and

and

with

such

skill,and

research.

view

frauds

to the

by

by making

the

exercise

most

of considerable

exhaustive

enquiries

Checking.

Routine

observed

be

It must

must

go to the foundations

he must

In

built up.

been

is made

in order

work

be

cannot

becoming submerged

of

audit.
take

not

himself

bearing

in mind

or

Although
important

purely of

what

checking is
the
but

errors

be

may

of the

audit

routine

must

routine

work

he

must

"

tick

which

discover
the

are

audit

an

of the

is

In

and
interesting,

be

clever

audit

consists

this routine

in

audit

apt

done

work

fact, represents
is built

up

to

become

out

the
how

this

takes

likelyerrors
these

way

if the

in the whole
frauds

or

work

junior has

any

become

natural

upon

checking

plan

of the

that

might

be detected

will

and

should

they

part the

latter would
the

it is

devolves

staff,and

exactly what

very

but

thoroughly

often

of the auditor's

engaged upon

place,and

likely

by nothing else, probably

up

it should

think

are

keeping
book-

most

are

work,"

the

of

will be discovered.

that

to

audit, what

checking.

impossibleto
of principle
if

is backed

juniormembers
they

fraud

or

importance, and,

checking in

essential

endeavour

take

it

outset

auditor

detail and

errors

upon

This part
intelligently.

that

an

and, consequently,somniferous

monotonous

the

the

at

must

intelligent
plan,constantly

called

utmost

only clerical errors

most

have

auditor

an

spots in the system

it is

foundations

if the

The

weak

the

respect of which

occur.

fraud

fact,

endeavour

constantly vigilant;

definite and

upon

in
to

which

in the

be

must

in

in all cases
s;i
things for granted, but must
on
point by making proper enquiries. He
every

work

must

He

examine

books

the

strongly emphasised that

avoid
an

which

upon

dischargehis duties, but

to

too

and

of account

lines upon

the

show

to

auditor

these, the

followingchapters, an

the

principle

enquiries;
intelligent

make

originalrecords, and

of

of

simple

very

errors

discover

to

checking

and

errors

reveal

actual books

the

behind

go

clerical

order

In

frauds.

clever

or

routine

mere

if ever,

will seldom,

frauds, and

the

that

disclose

only

audit will

an

AUDITING

OF

PRINCIPLES

THE

by

far

the

more

aptitude,he

10

of

auditor

behind
investigations

occasional

to

continuous

by

internal audit

carried

the work

of each

of which

means

checked

allowed

be

keep, or
entry

have

any

should

account

no

on

control

part of the internal check,

checking
checking
take

place except

fraud

make

and, therefore,
auditor

should

the
^checking

checks

are

here

and

one,

an

as

books

carried

pay
also

out, and

may

have

time

more

important parts
The
internal

he should

extent

to

checks

of the

of the

they make
much

it

greater,

check.

The
when

to

his

by checking

this

system is

efficient

an

considerable

detail

work, and

attention

omit

auditor

an

to check

entries,depends entirelyupon
of the

not

to

extent

thus
the

will
more

audit.

which

and

do

system, and

test

If the

devote

to

between

checks

moral

whole

rely thereon

regards a large part

as

of

specialattention to any weak

satisfyhimself that the internal

there, haphazard.
auditor

for

fraud

extensive

but

valuable

tillsfor

efficient system

an

of detection

investigatethe

should

he

points ;

act

valuable

very

to

self-

of

system

automatic

means,

any

chance

the

allowed

be

Internal

staff.

the

impossibleby

difficult and

more

of first

books

result of collusion

the

as

of

members

various

not

difficult for any

internal check, it is very

to

is

there

Where

wages.

ledgers should

time-recording clocks

receipts,and

cash

For

form

to

dently
indepen-

staff.

also may

as

is

the

cashier

the

made

be

balancing ledgers may

staff itself,

the

of

ledgers.

the

over

practically

entries in, the

make

to

means

individual

clerks in charge of the

example, the

themselves

by

on

members

other

by

books

the

internal check

An

tests.

checking, and

of detail

considerable amount

limit his

thus

AUDITING

OF

PRINCIPLES

THE

particularcase,

the
and

rely safely upon

may
the

whole

whole
this

of

of the
the

detail

stances
circum-

questionmust

be

decided

by each auditor for himself. In this direction he

requiresconsiderable skill,experience,and judgment, and
the

of
efficiency

skill with

which

his audit
he

will

deals with

depend largelyupon

this

question.

the

11

INTRODUCTORY

of

Commencement

commencing

Before

received

from

He

with

familiar

statute,

should

of the

nature

exact

to

details

of the

This

complete

essentials much
he

saw

The

of account,

which
of

system

and

In any

His

is

that

recorded

that

should

should

every

transaction

or

fraudulent

no

also

study

such

concern,

as

case

will

or

appreciate the
be

the

of

books

charge of each,

that

settlement

he

to

whole
if any,
will

see

decide

may
and

cover,

how

the

that

the

far,

internal

system

any
case

in the

become

be made.

documents

Articles of

company,

if

case

therefore, consider

does

can

legal

Acts in the
others,special
the

more

properly
books, that there is no possibility
altered purposelyor accidentally,

entries

any

the

be

partnership,the Memorandum

in the

much

rely upon

can

endeavour

being omitted

and

process,

detail involved

must,

system, in order

in the financial

of items
and

auditor

directions, he

check.
such

in the

labour involved.

clerks in

of the

large business, the

whole

what

over

list of all the

must
ground his investigations

in

the

would

be to obtain

the

counting-house.

names

and

carefullythe
what

shown

should

he

enormous,

and

the

of

thoroughly investigatethe
book-keeping and the internal checks,

in vogue.
be

the

step should

next

after

than

tions.
transac-

recorded

are

will

he

readilythan

more

further

no

affairs, and

of

grasp

be

exercise

to

himself

appreciatewhat

roughly

him

the

accounts

to

and

see

with

various

machinery,materials,and
will enable

knowledge

ask

of

scope

make

the

that

will understand

he

the nature

should

transactions

of the

books, and

audit

he will

in this way

nature

himself

of the

is to

example, he
be possiblehe

is the

should

instructions

the

business, and
particular

If, for
if it
factory-,
the factory,as

from

or

acquaint

next

technical

the

auditor

an

the
employing him, precisely

those

his duties.

audit,

new

ascertain,by reference

Audit.

New

The

.governing

Partnershipin
and

case

the

the
of

case

Articles of Association
with

contracts

of

auditor

vendors

and

Parliamentarycompanies,
of

trust.

He

should

12

make

during

the

Programme.

Audit

the

the first year

annual

one,

auditor

should

prepare,

audit

recorded

details of the work

exact

that

the

may

initial

persons

it will be

and

as

that

seen

clerk,maps

if,in future

audit, they

perform,

and

remains

to be

method

is

hands

of

the

audit

will

their

the

required

are

control, and

will be

very

to

not

upon

the

skill and

the skill and

upon

in

much

of
efficiency

staff; and, in fact, the

depend,

competency
of the

competency

is

charge of the particularaudit.

of procedure, and
objection to this mode

one

is, that

clerks in

the

and
responsibility,
It

manner.

audit

to

of the staff in

There

that

the
of

but
principals,

member

that

In

done.

adopted,

the

of the

reference

are

principalcan see at any time

been
has
completed, and what
unless some
such
a largepractice,
of necessity lose
must
principals

work

large amount

very

they

staff

further, the

part of the

what

of the

by

see

can

the

ground,

of the necessary

work

what

of

certain that

be

members

different

in the

audit

whole

then

may

the whole

years,

exactly

programme

He

case.

cover

the

engaged upon

the

programme

is to

set

the

lose

may

work

in

them,

is the

upon

out

carrying out

to recommend

basis

that
the

they

same,

additions

must

and
and

of

sense

automatic

an

impressed upon

conducted, and

be

encouraged

be

charge

out

carry

should

when
intelligence
be

be

of the

scheme

the exact

out

staff will

the audit

be

performing each part of the checking

Thus,
when
they complete the same.
his responthe principal,
or
in this way
sible

of the

circumstances

to

place,after carefullyconsidering the

first

should

performed by
being provided in order

his staff,columns

and

the auditor

programme,

of

course

supervisethe

or

in which

preparationof, an
the

the

during

an

If the audit is to be

and

be familiar

he must

audit.

of the

course

the

affect

likelyto

are

of which

with the terms

and

accounts,

that

clauses

of the

notes

AUDITING

OF

PRINCIPLES

THE

therefore,
which
use

they

the
their

should

improvements

13

INTRODUCTORY

the

that

it is

serious

important

The

question as

during the
mistakes

should
of all
the

would

in

be

performed,

It must

be

probably

some

Method

thereof ; but

notes

are

be

auditor

considerable

of

the

for accountants

might

explanationsand
latter

were

appreciatedlater,

liabilities is considered.

should

after

he

anything go

the
who

work

wrong,

actually

was

actually

were

that, if proper

find himself

in

in

records

position

difficulty.

Work.

regards

conducting

perhaps those
longer available, so

kept, the

In

work

what

these

whom

when
no

drafts

the

future, the auditor

exactly

by

auditor

years

be

to

Again, all working

in the

show

that

been

not

have

that

of this will be

an

have

missing

appertaining thereto.

schedules

importance

of all

also should

kept, as

received, and

it will

as

be made

visit to another.

remembered,

performed,
not

notes

questionsarise

question of

the

is

there

occur,

queries he raised, what

he

which

make

they

all matters

and

position to

given. The

charge

the

what

information

when

adjusted

should

be filed and
and

should

important questions that arise,and

and information
instructions
given
Notes

one

should

this way,

As

verbal

from

of accounts,

were

of all

adjusted,

should

the

unimportant queries and

All

make

to

upon

invoices, etc., all queries that

remembered
papers

one

settled and

necessary

and

this reason,

reconsider

auditor

an

is

audit

an

management.

settled

notes

opinion.

be

important

vouchers,

of

of

made

be

what

of

should

it is not

and

date,

to

up

on,

time.

to

to

course

difference

some

principalsshould

goes

Audit.

during

Notes

time

as

kept constantly
develop. For
may

the

time

important,

be

flaws

that

from

programme

by

should

scheme

otherwise

as

for it is most

scheme,

the

in

the
work
to

actual
of

methods
an

to

audit, the

adopt specialand

be

adopted

common

distinctive

when

practiceis
ticks for

14

AUDITING

OF

PRINCIPLES

THE

that

the different classes of transactions

checked, such

are

forwards,
specialticks for castings,cross castings,carry
ticks should
These
vouchers, pass book, contras.
postings,
be made
rule should
and
a
be as distinctive as possible,

as

ticks

similar

that

accounts

whose

concern

clients

or

On

themselves

to

with

work

there

any

are

which

be

drawn

into

weak

points

concealing frauds.
for the

each

periodstand

be

in the

auditors

Many

discussingtheir

whose

audit,

of
purpose
different coloured

use

the

entries of

the

clearly.

out

callingback, audit clerks should

When

whether

of the

scheme

in this way

periods,as

they

accounts

ascertain

to

advantage of for

different

inks

audit.

the firm

object may

taken

be

may

account

the

auditing,as

are

no

Naturally,the
be explained to
not
should junioraudit

employees of

the

staff of the

the

by

ticks should

their clerks.

allow

clerks

used

under

are

various

of the

meaning

be

to

not

are

be

careful

most

easily be
speak clearly, as otherwise mistakes may
passed. For example, "70 6s. 3d. may be posted "76 3s.,
to

and, in order
"

ty

"

to

should

be

emphasised thus,

should

this amount
six-three"

All

bad

should

in

with

erasures

it should

knife

be
or

specialtick
seen

in the

afterwards

after the

items

whether

altered

indistinct

and

Whenever

checking the
up

for

the

figuresthat
should

be

the correct

until

they

period, and
are

entered

completed

at

Some

on

in
one

On

no

account

pencil. Each

invariable

that

adopt
it may
before

made

for

side of any

at the

this often

been

same

account

auditors
so

be

good plan is

figurein
should

the
no

an

were

Another

have

should

that

seen

alterations

figure,as
auditor
possible,
an
books

be

made.

ticked.

were

to write

Seventy pounds-

of altered items,

case

the auditor

"

as,

be allowed, and

be

the

thre'
Seventy-six-

castingand posting.

rule to this effect should

a

callingback,

when
"

alterations

figures and
and

both

back

called

be

carefullyexamined,
figureis taken

this mistake

avoid

mistakes.

saves

refuse to

commence

completelywritten
should

he

check

stage of the work

if possible;
sitting,

for

example.

15

INTRODUCTORY

if

Cash

checkingthe

should

checked

be

vouchers

meantime,

has

of the

of the

should

work
of

incomplete,and

clients'

the

missing

staff

in

the

should, therefore,be completelychecked,

books

time

whole

in

checking

the

in the entire control

are

of his audit.

with

being tampered

be borne

which

pointsto

the exact

during the

always

all

of

is left

carried,unless the books

auditor

made

notes

hands

month, the whole

dangerous loopholeis provided. Each

being kept of

been

risk

the

most

part of the work

records

off, and

in

are

for

vouchers

otherwise, if the

"

books

the

Book

during

The

audit

the

mind, and preventive precautions

taken.
After

postings of

the

should

same

should

scanned

accurately done.

It is

extremely

checking additions, unless

when

plan

is to

cover

until

after

the

is almost

Audits
audit

is

total

the
total

has

and
be

may
one

continuous

audit

is

where

one

of the

period

of the

checking is effected at
The advantages of a
discovered
can

being
when

be rectified

in mind.
the

The

auditor

frequentattendances

mistakes

taken, and

good

column

the

In this way

at.

attends

at

it

continuous

regular intervals

monthly

say

quarterly,
periodical

or

possible. A

as

does

not

accounts, when

until the

attend
the

whole

of the

time.

one

continuous

after

soon

pass

periodical.A

or

auditor

the

to

Audits.

auditor

the

carefullyand

missed.

be

to

errors

task,

be

casting up

Periodical

where

is

arrived

duringthe period of the accounts,

checkingthe books to date as far

they

these

mechanical

easy

care

when

been

impossiblefor

Continuous

are

items, and

unticked

for

checked, the

been

investigated.
carefully
checking of additions is a very
is important that
this should

it

end

have

be

The
but

be

book

any

they

audit

have

been

are, that

mistakes

committed, when

the whole of the circumstances

easily,
lessened
for fraud are
opportunities

attends
act

as

at
a

short
valuable

intervals, and
moral

his

check, and

16

AUDITING

OF

PRINCIPLES

THE

Again,
book-keepers up to date with their work.
before it
fraud take place,it should be discovered

the

keep

should

is not

auditor

the

large proportions. As

attained

has

detailed
more
pressedfor time, he can carry out a much
has to
the whole of the work
when
audit than is possible
At the end of the period,
time.
be accomplishedat one
will have
greater part of the detail checking

the

as

after the accounts

are

auditor

audit, the

is the

points, than
As

year.

will

the

suit

probably
than

at

one

time.

The

chief
the

auditor's

checked

has

the

going

on,

important
only
the

once

it

year,

arrangement
work

the

items

is that

disadvantage

auditor

overlook

own

of

whole

the

is

spread evenly over

is

the

if he has

better

after

work

with

touch

attends, say,

if he

case

soon

continuous

of what

likelyto

is less

and, therefore, he

of

prepared. By means
is kept in constant

obtaining a knowledge

business, thus

will be able to finish the audit

auditor

completed,the

been

be

may

this

and

them,

perform

to

al4

danger

specialprecautions taken, as
suggested previously,such as special ticks for altered
items, and the checking completely through of each part
recognised and

should

be

of the

work.

the

case

the

as

of

This

periodicalaudit taking some

book-keepersgenerallyhave

during the absences

alterations

that
be

avoided

and

The

it is

the

books

quitepossible

dangers

These

made.

complete,

to

to

access

auditor, when

auditor

between

only

can

adopting systematicmethods,

the

Appointed

under

Individuals

or

is under

private individual
example,

an

Auditors

of

Position

Statute,

and

by

Private

Firms.

difference between

appointment
For

be

days

being constantlyvigilant.

Difference

by

might
the

by

of the

in

entirely eliminated

is not

danger

the

positionof

statute, and
or

auditor

an

where

firm, should

be

appointed under

auditor
is

whose

appointed
noted carefully.
the Companies

he

18

PRINCIPLES

THE

do, and

no

outside
responsibility

work, he should write

of

out

the

any

limitations,

he

terms

in

be

may

he

for what

exactly

show

responsible.In order
for a partialaudit,

not

was

clients often

arrange

appreciatethat
employee

the

and

seek

contracted

the fraud

he contracted

in all

will be

should

he

he

rightlymay

do

that

word

in

he

other.

had

arrangement

arisen, as

have
could

be

in

the

they

do

not

ingly.
accord-

they

blame

may

whether

to

be

this

or

what
he

not

Having regard

discovered

he have

is not

in

writing,the

understanding

received

instructions

it will be

thus

of

case

to
one

if,as suggested, the original

writing,

exact

ascertained

the

that

ground, whereas,
particular

never

But

been

expense,

for instan

"

as

will say

part of the work, and

against the

could

do,

the

that

say

save

difficult positionindeed, for

very

cover

and

was

responsible.Now,

do, should

to

probabilityhis clients

that

was

to

the

depend entirelyupon

originalcontract

If the

accountant

he

but

years,

were

reduced

"

him

questionwill

responsible.The

to the work

hold

to

it will

circumstances,

the accountant
is

defrauding them

been

has

accountant

in such

what

to

the auditor's liabilitiesare

If, therefore,anything goes wrong

an

in after

questionsarise

if

that

emphasising

contract, and, therefore, for what

of the

terms

actual

the

made,

arrangements

positionto

his instructions.

by

letter to his clients,exactlysetting

the

so

accept

can

commencing

before

and

Thereafter,

covered

work

the

he

that

them

explainto

should

to

he

AUDITING

OF

scope

at

once,

such

no

difficulty

work

of the

reference

by

taken
underthe

to

correspondence.
Some

firms

of

case

of

partnerships,to

Sheet, in which
and

been,

or

been

the Balance
as

"The

write

attention

also to the

has

Sheet

make

accountants

is drawn

fact that

our

to

the

any

reference is made

report of such

Sheet
and

every

and

Balance

Sheet has not

at

to this

is to be
such

in the

tance,
pointsof impor-

Balance

only partly,audited,
a

custom,

report with

foregoing Balance
with

it

the

foot

of

report, such
read

date."

in

junction
con-

There

19

INTRODUCTORY

this

are
procedure,as accounts
constantly being produced to third partiesfor various

is much

recommend

to

such

purposes,
Accounts

purchasers of

or

have

entered

with

the

or

the
the

accountants

the

case

third

above

to his

of

understands

he

has

Loss

and

many

deal with

to

upon

the technical
whose

concern

knowledge
not

of

make

to

beginners seem

agrees,

only

Account

to

and

them

subject,and
of circumstances.

set

the

business

is called upon

he

competent

is

essential,but

auditor, for the

distinct from

to think

such

bu31'n^gQ,
practical

accounts

tancy.
accoun-

provided they
book-keepingand that the

everything must
check

his

details and

and

how

check

any

accountancy
a

different

exactly

prepared, he cannot
of
complete master

able to follow the system of

auditor

are

an

is called

auditing is quite apart

Trial Balance

and

have

must

thoroughly understand

will

Many
are

be

to grasp

alone

auditor

an

apply his knowledge

of any

audit.

science

be

must

be able

that

unless

to

He

to

with

without

accounts

systems of book-keepingin many

must

be able

methods

principalsor

the

upon

of time

course

should

therefore,he

and

all,he

in

businesses, and
accounts

his

absolutely complete
knowledge of book-keeping and accountancy, /

different

many

thus

arisingwith

Auditor.

of

First of

auditor

an

be

not

adopted invariably,
in
absolutelysecure

be

required by
qualifications

andj"orough
as

have

qualifyingreport.

Qualifications
varied.

professional

fact, this may

were

acted

relations

be informed

may

in

course

have

partieswho

The

they

position would

of difficulties

reference

which

who

seriously misled

bearing

accounts

others

to

business

be

may

intending

to

way

into

enter

by him, whereas,

If the

case.

this

advances.

or

business, and

persons

and

name,

audited

to

of

production

accountant's
been

Such

in

the

propose

firm.

the

by

furnished

often

are

partners

obtaining credit, loans

as

that,

be in

order, and

the

preparation

Balance

Sheet, and

of
to

the

the

Profit

sign

his

THE

report. The

agreement

be

all its

; he must

do

may

find himself

opposed to

his

regardlessof

the

long

the

run,

integritywill

it may

reputationhe
of far

in

considerable

whole

the

first

the

must

never

and

is

he

must

he

has

be

pass

for

the

than

auditor

any
be

must

endowed

be
of the

much

In

for absolute

him

to

work

is

it is essential

that

carefullydone.

He

it is in order

exhaustive

its nature
if he

is not,

enquiries until
One

of affairs.

state

He

his client

unless he understands

exact

be

must

himself.

must

but

nature,

and
intelligent

ascertained

he

he

duty faithfully,

gain

An

case.

absolutelysatisfied that
make

will thus

influenced

to

upon

thoroughly and
item

any

his

out

possess

circumstances

in such

and

mechanical

knowledge,

pressure.

duty

have

perseverance,

should

his

greater value

aintakin,

somewhat

indirect

to carry

effects

prove

loss

temporary

duty is,

his

interests,and

own

the courage

have

he must

proves
books.

the

and

easilyled

be

not

spiteof direct or
when
in positions

it in

to

of

of

of affairs, and

man

what

knowing

but

able

with

Balance

his scientific

to

things a

all

character

by others,

the

Trial

addition

In

above

be

tact and

is

the

r^L""f

bearings.

must

he

of

^n^fkrflhl* Hfll frinwfcdg*. and

pf auditing in
complete master j)f the pripriples

auditor

must

AUDITING

arithmetical accuracy

nothing, except the

An

OF

PRINCIPLES

20

of the

greatest dangers is to pass entries which are not completely

the auditor
is fearful of displaying
understood, because

ignorance by asking questions.

for

himself, he should, without

information, for

should

he

If

he

fail,ask

affect

to

ascertain

cannot

for the
possess

necessary

knowledge

which, in fact,he does not, he

that
would

will be
be

far

the

case

instance,technical

experience.

An

more

will make
mistakes
inevitably
damaging to his reputation than

if he

asked

details of which
auditor

must

for

professionaladvice, must
requirements and circumstances
avoid

making

for information

recommendations

he has not

be

upon,
had

practical, and

appreciate
of the

the

previous
if asked

practical

business, and

which,

though

for

thus

perhaps

21

INTRODUCTORY

theoretically

perfect,

of
it

that
it

is

is

of

part

no

asked

for,

insist

cannot

if,

But

deficient

state

In

describe

questions

it

is

be

duty

recommendations
the

impossible
bound

to

to

is

generally
he

carried

out.

book-keeping

of

be

accurate

prepare

report

unless

however,

being

system

noted,

advice

advice

tactfully

given

be

must

give

to

his

practice

is

it

stances
circum-

the

the

upon

so

accounts,

unsatisfactory

affairs.

the

length

his

example,

would

of

which

it

if

upon

that

he

then

for

in

though

to

But

auditor's

an

appreciated

much

business.

particular

the

unfitted

entirely

are

an

foregoing
audit

in
the
and

chapter

should

the

be

the
based

subsequent

detail

work

difficulties

general
been

have

chapters
of

that

an

principles

audit,

constantly

set

it

is

and
arise

out

upon
at

some

proposed
the
in

various

practice.

to

II

CHAPTER

THE

of

checking
of

part

and

it is very

will

auditor

the

upon

take

In

vogue.

the

internal
should

postings

auditor

is

often

do

to

this

part of

and

requested

of

case

and

castings
proportion

deciding
of the

this

what

but

do

and

particular case

lay

to

assuming

the

that

would

carried

should

Ledgers

BOOK.
be
are

in

use,

an

by

are

not

to

hard

and

check

be remembered
In

efficient

by

out

whole

but
the

if

of

an

the

22

Book

the

by checking

is

that

outline

whole

of

in

necessary
circumstances
it is

rules.
the
of

sible
impos-

However,
books

the

have

checking

auditor.

castings

self-balancingSales

Cash

of

tested

do, the

cautious

inf

staff

the

the

the

fast
and

is

often

he

check

to

judgment

following is

The

checked,

These

what

internal

balanced,

CASH

is

usual

or

practice

of

not

are

accountant.

qua

and,

balancing

accounts

it must

there

some

any

been

be

in

the

too,

probability,

being all-important,and

down

proper

the

balanced

postings.

to

The

is

castings

books,

purpose.

where
are

the

in

there

cases,

in all

of

checks

the

necessary

acting

necessary

only,

these

the

depends

where
of

balance

work, and

is

he

books

and

internal

whole

carefully

which

to

and

duties, though

so,

the

this

be

direction,

in

preparation

out

it is not

concern,

the

for

somewhat

this

the

to

found

large business,

check,

does

extent

checked"

be

the

to carry

if he

that

will

auditor's

an

The

businesses,

check,

be

checking

books

the

small

instructed

consequently, it

it should

book-keeping
of

is

that

in

checking

case

practicallyno
and

of

out.

considerable

work

this

important

his

system

postings forms

though

intelligentlycarried

and

Postings.

and

castings

audit,

an

mechanical,

and

Castings

Checking

VOUCHING

AND

CHECKING

ROUTINE

and
and

postings
Bought

being provided

with

CHECKING

ROUTINE

AND

it may

be

Bought Ledger

cash

for this purpose,

analysiscolumns

the totals of the Sales and

into the total accounts,

and

postingschecked

Personal

whole

the

of

to the

items

the

that

checked

are

of the

proportion only

detail

But

Ledgers.

auditor

the

been

have

checking

The

sufficient if

invariably
Impersonal Ledger postingsshould be|

checked, in order
these

23

VOUCHING

posted

the

latter items

of these

ascertain

may

to

correct

should

all

that

accounts.

done

be

never

mechanically,but the nature of each should be observed,

debited
to
especialcare being exercised with all amounts
capitalaccounts, no such entries being passed until the
auditor

is satisfied

properlydealt
SALES
check

with

same

kept, and

in

are

The

BOOKS.

auditor

Impersonal Ledger
proportion

order, and

are

books.

DAY

the totals to the

if

the

in the

BOUGHT

AND

accounts,
and

that

and

of the

should

to the

detail

total

castings

postings.

RETURNS
checked

be

ALLOWANCES

AND

and

accounts,

the

to

PETTY

be

CASH

The

postings should

be

checked,

Cash

the

Petty

the

to

Petty

Cash

Book

whole

the

totals

and

should

the

to

detail

total

castingsand

being scrutinised.
of

both

the

Cash

to

the

item

checked, each

BOOK.

Book

The

Impersonal Ledger

largeproportion of

postings should

BOOKS.

the

castings

postings
and

Book,

Impersonal

from

those

and
the

from

Personal

and

Ledgers.
POSTAGE
will be

BOOK.

If there

sufficient if

petty cash

into

castingsof

this latter book

find

defalcations

small

be called for at odd

times, and

checked,

no

that

same

the

TRANSFER

item

the

not

JOURNAL.

drawn

It is very
with

and

common

from
the
to

postages, and,

be lost
a

castings
in every
The

check, it

Postage Book,

the

sight of, but should

checked.
portion carefully
and

being passed until

is correct

internal

amounts

in connection

should

All

proper

checked.

therefore, this book

JOURNAL.

the
occasionally

checked

are

is

postings
the

auditor

should

be

is satisfied

particular.

totals

should

be

checked

to

24

postingsshould

and

WAGES

castingsof

the

is satisfied that

RECEIVABLE

BILLS

postings
total

the

completely

and

particularconcern,

is

double

no

as

entry check

great, so that the whole

checked

be

can

BOOKS.

PAYABLE

AND

here will not be very

to

there

that

All

totals.

these

upon

castings

the auditor

unless

checked

been

staff of the

the

be remembered

it must

the

SHEETS.

STOCK

AND,

be checked,

have

they

independently by

and

BOOKS

should

these

proportionof

checked.

be

SALARIES

AND

and

(ifany)

the total accounts

AUDITING

OF

PRINCIPLES

THE

of the

totals

the

"

The

castings

being checked

if the

ledgersare

kept

LEDGERS.

The

or

accounts

detail

the

upon

self-balancingsystem.
SALES

BOUGHT

AND

proportion
checked, and
schedules
the

of

the

all the

ledgers are

as

the

time

same

unticked
and

one

certain
be

that

further
The

must

should

be

All
be

the

cas

the
checked, wi-

carefullyscanned

for

is the

In

case.

unticked

any

items,

event, notes
as

in the

should
of

event

balancing,it may be discovered that upon

these entries,differences
investigating
be found.
may
foregoingchecking is based upon the assumption

first

be

the balances

should be most

such

is

efficient internal check, and

an

Personal

control.
to

with

the

not

there

Book,
of

such

of any

books

that

LEDGERS.

ledgersshould

account

items, which

made

the

each

agree

if

and

that

seen

the

carefully
investigated,
ticked as having been passed accidentally
account
no
of the audit staff,unless the auditor
is absolutely

on

by

of these

to

on

of the accounts,
be

be

accounts.

PRIVATE

AND

balances

date

lists of balances

respectivetotal

IMPERSONAL
and

at the

should

be checked

it should
self-balancing,

totals of the various

upon

should

able
consider-

castings of the above

balances

of balances

whole

entry

Ledgers, Impersonal Ledgers,

exercise

all under

are

If this

carried

that

is not

the

further, and
his

separate and
case,

the

judgment

and

and

Cash
books

independent

checking

in this connection

the

will have

the

experience, but

auditor
it is

26

Accountants

instructed

often

are

this is sometimes

cases

badly kept. If the ledgers

self-balancing system, it will
check

the

errors

are

of

these

discovered.

But

details

to

check

and

Trial Balance

castings of

the

should the
it should

the

be

in fact do

account

is not

the

checked

alreadyand

scanned

for unticked

first

checked
the

All

entry.
and

of

10s., "10, "100, is

may

be

an

item

be

may

ledgerson
and

of debtors

the
the

should

be

the

to

creditors.

Balance

Trial

and

the

difference

exact

ledger balances,
checked,

two

errors

the

also

as

time

same

sides of each

are

also should

as

of the

of

books

the

figuresshould be refrom
sometimes
possible,

doubtful

It is

difference,to gather

probable nature
forward.

things to do would

totals of the

and

the

carry

far

At

clear.

of the

amount

the

be

checking

items,

bad

made

is

to

easilypassed if this
been
of the postingshave
the whole
should be
ticked, each ledgeraccount

agree
If

case.

which

merely

task

the

of the balances.
the

that

seen

in

once

necessary

various

the

accounts

bringingdown

the

upon

this system

where

the

When

kept
at

seen

checked, when

be

ascertained.

will be

be

schedules

the

should

been

been

have

particularledgers until

castings of

Thereafter, the
schedules

of

balances

the

have

of the first

One

troublesome.

more

the

wider, and

force, the field is much

books

where

is

method

and

care

it will be

lie,and

ledgersdifferences

task, in the

laborious

considerable

carrying out of which

in
especially
necessary,

books, and

balance

to

and

arduous

an

AUDITING

OF

PRINCIPLES

THE

For

same.

probably

an

If the

difference

posted to

the wrong

idea

some

example,
in

error

is divisible

side of

difference

to

as

casting

or

by two,

it

ledgeraccount,

for

instance, a difference of "14 8s. 4d., representing an

of debits over
excess
be accounted
for by an
credits,may
of

amount

instead

"7

of the

therefore, be
are

4s.

2d.

credit of
scanned

often caused

columns, such

having

as

an

been

account.

for items

of

posted

to

The

books

this

posted

as

debit

should,
ences
Differ-

amount.

by figuresbeing entered

5s. 4d.

the

in the wrong

"5 4s., in

which

case

CHECKING

ROUTINE

there would

posted

arise

mistake

such

Any

will

item

such

any

is

there

only

they

"4

18s. 8d. ;

be

calculated
of the

amount

in

practice,the

time

short

any

and, if

error,

so,

should

difference

singleentry

or

debit, as the

be

for which
case

may

spent in trying to find the

"

cuts

is time

and

wasted,

checking until

continue

is to

way

"

these

by

6s. 3d.

whether

represent

may

"170

or

for,and, if found, checked.

be looked

correspondingcredit

no

difference

give the

27

VOUCHING

exactly equallingthe

as

Often

be.

of

It should

should

amounts

checked,

difference

3s.

"176

as

AND

the

the

errors

are

revealed.
After

balances

the

above, it is sometimes

possiblyalso

and

Ledgers,

detail, it may
be, is not great. If the
thereafter to
discovered, it will be necessary
It is well to have

Ledgers.

of first

entry checked, but

if this

has

agreed with

been

check

to

unnecessary

the

still undiscovered, the

postings of
is
call

to

first

brought

back

the

on

to

as

well

schedules

to

of the

accounted

for

by

light. Some
from

checking

the

check

the

error

in

Book,

of the

each

When

is
the
crepancy
dis-

prefer

accountants

books

the

to

be

check

to

of

ledger account,

castings and

balance

the

checking balances,
with

opening balances

previous period,as
an

the books

it may

cause

ledger

the

of balances.

schedule

the

to

the

the

difference

the

will have

Ledgers, until

to

Cash

Book,

castings. If

completelychecking

time

same

Pass

the

turn

of the

case

accountant

postings

entry, thus

at

it is

Sales

the

in the

is not

error

castingsof

the

Private

Ledger, in which

Bought

the

the

Sales

suggested
completely

as

good plan to check

postings of the Impersonal and

castings and

the

checked

been

have

difference

the

bringingdown

the

the

may

be

commencing

balances.
As
the

last resort, it is sometimes

ledgers,in
arises,and

analysing
upon

each

order

to

discover

also in what

ledger

necessary

in which

ledger the

direction it lies.

account

under

ruled analysispaper.
specially

to

various
For

This

analyse
ence
differmeans

headings,

example, in

the

28

of

case

be

Sales

follows

as

the columns

Ledger

balance

debited

Goods

Transfers
Total

headings

items

Sundry

the

the debit side would

on

"

Opening

and

AUDITING

OF

PRINCIPLES

THE

credit side would

the

on

be"

credited ;

Cash

Discounts

and

Allowances
Debts

Bad

Returns

Transfers

Sundry

off ;

written

Bills Receivable

Items

ClosingBalance

Total.
The

of each

cast

cross

will prove

sheet

arithmetically

that

analysisis correct, and that the ledgershave been cast

correctly.The total of the opening balances should agree
the

with

list of the

the

debited
Sales

should

agree

Books

Day

with

errors

in

of the

allowances, etc., and

posting or

analysingthe
credited

the Sales

to

according
time

and

cases,

at

once

as,
not
a

the

labour

and
to

difference,it

casting. In
Book,

the

same

debts

can

the

total

cash

can

analysis of

be

must

way,

bad

Ledger

shown

as

be

with

ledger.

the

by

represent
the

while

to

the

Owing

checking

the

totals
to

the

extreme

analyse the ledgers in

whether, instead of doing

commence

totals

discounts

involved, it is doubtful, except in

it is worth

the

agreed. By

and

agreed

goods

so, it is not

better

ledger postings, etc.,

completion of the analysis,the actual mistake

discovered,but only the fact that it lies somewhere

is

on

certain

for

to

whether

this way,

Cash

total sales

the

if there is

"

total of the

previous period, the

ledger,and

instance,that

in

it is in the

certain

book

posting of

of
the

in

prime entry
sales,in which

CHECKING

ROUTINE

postings of

the

event,

until the

29

VOUCHING

AND

sales will have

the

checked

be

to

is found.

error

Vouching.
is the

Vouching
of

success

audit

an

thoroughness with
Vouching does not
Cash

the

every

transaction

and

auditor

that

means

and

traces

alone

himself

various

to

the

entries

ascertain
who

the

does

vouching.

the

to

base

In

most

in

appear

confines
books

the

entries in the

facts

true

can

his

audit

by vouching,

part of

audit

should

An

of

books

show

is blindfold

auditor

frauds

with

conducted

be

possibly

auditor

efficient

and

only

can

it is essential that

that

so

therefore, only by

thorough

on

clever

cases

"

an

of affairs.

discovered
an

if he

to
book-keeper chooses
tentionally
be purposely or uninmay

evidence

real state

not

for

stances
circum-

the

as

external

meaning and

incomplete,and he may
importance,which affect the

information

such

of account

it is in this way

and

By

will be

utmost

contrary

examining

they

as

information

disclose,and

full

the

properly

books.

the

books

the

source,

materially. The

very

in

transactions

his information

such

behind

goes

the

accounts

order, has been

correctlyrecorded

of the

of

satisfy an

validity to

is in

ascertain

can

matters

only

sufficient

entries to their

he

examination

the

business, togetherwith documentary

of

is

is done.

work

inspectionof receipts

includes

but

auditor

the

the

whole

the

intelligenceand

the

part of the

merely

of

account,
pass

this

transaction

such

the

that

upon

mean

of

authorised, and
this

depends

which

evidence

other

of

Book,

with

auditing,and

essence

very

great

care

be
this
and

intelligence.
When
rubber

specialtick, or, better,

impressed upon the document

checking vouchers,
should

stamp,

inspected,and
distinctive,as

be

this cancellation
the

of the

object is, that

produced again

in

denote, by the

place where

the

support of another
the

voucher
may

same

should

be

not

be

It is well to

item.

voucher

is

marked,

the

30

invoice

when
receipted,

should

ticked

be

correspondingvoucher
Whilst

careful

will

attention

subsidiary
Such

has

have

will

contracts,

be

inspected. When

made
have

various

by

the

of any
be

to

further

information

may

of

information
documents
minutes

or

and

such

have

for rent,

outstandings

end

noted, such

or

of the
the

as

to

rates,

period

scrutinised,and

be

any

documents.

salaries,etc., the

for at the

be

which

to

the

vouchers

should

apportionments

the

auditor, he

the

additional

when

examining

provided

when

way

matters

when

payment

entry in

paid subsequently,or

insurance, commissions,

covered

The

before

are

Articles of Association,

as

taxes,

Book.

from

authority is required,or

subsequently,if

and,

derivable

include

when

once

accepted.

of

be

to

example, an

auditor,

distinctive

been

note

information

cases

in

for

as,

the

to

originalvouchers

the

make

should

twice

Bought Day Book,

vouching the Cash

the

books

taken,

been

produced

be

may

vouching
the

it has

for which

purpose

AUDITING

OF

PRINCIPLES

THE

notes

will

that

period. Other

purchase pricesof

important materials, this information being most valuable

for the purpose
of verifyingthe prices at which
such
materials
taken
into stock.
are
the
By such methods
re-examination

thereby
CASH
the

BOOK.

Cash

Before

Book,

is

an

his
settling

auditor

should

system of internal check

regard

lines upon

thereto.

which

(1) Has
books

documents

obviated, and

ti;

saved.

the whole
with

of

the

The

such

of first entry ?

in this

vouching

enquire carefullyinto
(ifany) that is in force

followingsuggestions show

enquiriesshould

cashier

for

programme

control
If so,

direction, since the

made

be

of any

of the

specialcare

should

opportunitiesfor

the

"

ledgersor
be taken
fraud

are

cheques

and

thereby increased considerably.

(2) Who

postal

opens

orders

bankers, and
(3)

Who

the

letters,and

are

immediately crossed
also marked

enters

the

"

account

cheques

and

all
to

payee
moneys

the

only

clients'
"

received

into

CHECKING

ROUTINE

bank

all

(5) Who

makes

(6) What

the

books

current

(7) Is
Cash

with

Book

(11) How
and passed
which

for

are

prior

only

payee

"

up

Book

agreed

as

regards

to

collect debts

cash

records

internal checks

and

do

returns

are

such

and

received, checked

accounts

payment

draws

the

drawn

in

cheques

Are

of

payment

"not

the

cheques
crossed

accounts

negotiable"

"account

and

letters ?

(14) Who

checks

Book, and
makes

despatch of

(16) Who

writes

who

there

are

If so, to what

what

controls

(15) Who

and

agents allowed

invoices

(13) Who
covering
Cash

only when

is the Cash

income

or

signature

to

kept,

checks

agents make
are

(12) Who

completely

Book

concern

or

issued

they subject, and

travellers

receiptbooks?

key, and

by whom,

travellers

the

receiptsfor

the

internal

(10) Are
to

Cash

miscellaneous

sales and

off

unused

upon

and

up

often, and

(9) What

due

used

are

Pass

the

kept

lock

under

Books

(8) How

sends

rough

daily?

and

out

control is

they kept

the

into

actuallypays

who

receiptsbanked

received

moneys

Are

31

VOUCHING

(4) Are

the

and

paying-in book,

the

AND

despatchingof

the

the

how

receiptsfiled

such

are

the

debtors

entries

ledgers?
Upon the completion of

and

statements,
to

same

posts the

cheques

receiptsfor payments

out

the

the

from

with

and

the

controls

who

the

Book

Cash

to

the

will draw

up

the

scheme

paying specialattention
and

all

this

investigation,the

of his audit
to

places where, from

loopholesare likelyto be

any

of the

Cash

auditor

Book,

weak

his

pointsin the system,

experience,he sees that

found.

He

should

point

out

32

it is

objects of

strengthened. There

and

improved

the

system, and, although

part of his duties, in practiceprobably he would

the system could
in which
to the manner
them
as

no

advise
be

in the

weaknesses

his clients any

to

AUDITING

OF

PRINCIPLES

THE

such

of
receipts

all

from

business

the

first is to

The

system.

main

two

are

sources

all

that

ensure

accounted

are

for, and, therefore, every precautionshould be taken, by

it as difficult as possible
of internal checks, to make
means

that

ensure

that
a

in

recorded

received

actuallyhas
BANKER'S
Cash

the

Banker's

both

should

should
Book
that

and

The

through

and

which

audit

Pass
takes

period,and
the Pass

When
Pass

order

into

Pass

the
it may

that

fide transactions

placesome
there

are

the

Book, it should

in the Pass
committed
of moneys,

period

and

and

Pass

drawn,

date

Book

be

of

the

for
that

seen

which

time

after the

do

the
such

appear

close of the financial

outstandingsthat

of

side of the

be

that

seen

the

country cheques, which

Book

by

debit

for

the

the

few

days
"

still not

are

Book, enquiriesshould be made

case

Book,

Book, though in the followingperiod. If the

checking

in the

the

in the reconciliation statement,

through
bond

are

in

the

at

in

of the

Book

paid

with

same

being ticked,

end

the

Book

Pass

the

appear

succeeding period,in
outstandings

payee

Pass

entries

both

cheques,

not

traced

is

vouching

items

the

agreeing the Cash

checked, thus

be

in the

with

at

accounts,
should

back

reconciliation statement

are

the

the

individual

The

Book

balances.

that

checking of

the

Pass

be

and

is properly

of the first steps in

called

be

Book

Cash

the
the

be

Book.

Pass

Book

Cash

and

account,

One

should

Book

the

made,

are

the amount.

BOOK.

PASS

payments

that the transaction

of

is to

second

properly authorised

been

expense,
books

the

fraudulent

or

has

payment

fidebusiness

bond

and

improper

no

every

misappropriated. The

be

receiptsto

for the

as

Cash

may

because

to the

Book

dates

through
with

agree
not

many

reasons.

"

the

except

be credited
frauds

are

simple expedient of delayingthe banking

defaultingperson having the use of such

34

with

concerned

entries that

the

back

is thrown

the

possibility
consequently,he

checks, and

internal

the

upon

with

as

appear,

omitted

been

receiptshave

that

AUDITING

OF

PRINCIPLES

THE

indirect

evidence.

initialled

been

have

Books

should

counterfoils

such

received

moneys
also

and

of cheques
splitting

The

have

cheques

that

whole

the

promptly,
splitimproperly.

arise in this way.

may

of

bank

the

been

not

Book

Cash

the
the

that

into

paid

been

has

Paying-in
proportionof

with

ascertain

this is to

of

object

the

bank,

the

by

checked

be

of the

counterfoils

If the

BOOK.

PAYING-IN

payment

Co., of (say)"50 in settlement of their account

is misappropriated,
and, consequently,does not app"
A. B. "

by

Book

either the Cash

If it is left in this state, after

Ledger.
and

order

to

C.

D.

A.

B.

the

Co.

"

of

paid

to

of time

accounts

counterfoils

into

be

may
of the

in the

Cash

and

when
initialling

for

thus

manipulated.

latter case,
with
is

the

the

counterfoils

Book

Cash

bank

and

these

RECEIPT
be

tested

the
he

been

should

check

BOOKS.

The
Cash

the

with

counterfoils

Book,

the

Cash

Book

"

for this

of

reason

to

obtain

its

bank

agree
fraud
from

possession,

Book.

Receipt Books

though
may

length

in which

where

to

Cash

the

cases

endeavour

the defaulting party

anticipated,
with

In

cashier.

to the

made

been

is

reveal this

may

omitted

have

may

way,

comparison

originalpaying-in slipsin

should

with

the

auditor

suspected,the

the

by

in has

this

certain

Paying-in Book

paying

as

defalcation

the

fraud, unless the production of the counterfoils

for

debtor,
Book

In

bank.

the

and

account

new

another

(on account) "50, and

Co.

is closed

account

transferred
the

is

from

cheque

"

C. D.

"100

Co.'s

"

and

"50,

cheque

of the

later

Co., for "100 is entered

"

B.

A.

this up,

cover

payment,
immediately. Therefore, in

be discovered

would

the fraud

attention

" Co. for

to A. B.

being made
application

on

time

unliquidatedaccount,

to be directed to this

be bound

would

Sales

in the

Co.'s account

A. B. "

or

if this

make

may

check

them

Receipt Books

is

agree
with

CHECKING

ROUTINE

impressionsare

carbon

system,

blank

prevent

to

the

should

books

CASH

RECEIVED

example,

statements

account

open

receipt of

he

CASH

SALES.

not

should

make

desk

out

cashier,

bank, and

by

upon

those

who

control

way

in

the

if, for

respect of every
the

as

cash

debtor,

once

draw

attention

given

for the

payment

of Cash

Salesmen's

with

the

the

way

cash

sales.

auditor

to

vouch

he should
disclaim

efficient

all

the

and

cash

point this

out

sales

If there

is

faulty,it
sales, and
to his

in
responsibility

system is put into force.

paid

should
no

is

the

summaries

the desk

auditor

pay
in

use,

Books, and

with

of cash
the

same

system there is is bad

Desk

agreed

total

is in

daily

prepare

taken

takings

such

system

cash,

should

customer

record

such

and

the

impressionsbeing

should

the

the cash

the salesmen

receive

to

who

should

with

largeshops

account

bill,carbon

When

in the

In

is

If automatic

be tested

this bill the

staff

and

should

auditor

Sales, an

system in vogue.

any

be checked

proportion of

and

that

discovered,

been

not

check

misappropriation of

upon

sales from

cash

summaries,

an

for

statements

will at

case

on
a

Book.

Cash

totals should

what

best

no

the

be

to

the

allowed

be

counting-house
the

monthly

this head.

automatically,and
Desk

in

sent

the

In

for under

accounted

The

of

used, the tillrecords

tills are

to

collecting

accounted

is to arrange

statement,

largelydependent upon

but

In

made.

has

should

and

out

credit has

fact that

books

can

certain

the

obtained.

cash

ledgers,any

the

on

being

cash

are

is almost

received

to the

the

taken

Book.

debtors

sending

preparation or

the

DEBTORS.

from

handle

collect and

with

FROM

received

the cash

forms

in

manipulate

precautions are

receipt

Cash

the

according to

them

on

tested

be

that

counterfoil

the

difficult to

seen

receipt

3"

VOUCHING

preferredto

more

travellers'

way,

same

are

also be

It must

this way.

be

to

former

the

as

AND

of
these

cashier's
into

the

check

system,

if

or

impossiblefor

in such

stances
circum-

principalsin writing,

this connection

until

an

36

check, and

difficult to

somewhat

of the

depends upon the nature

examples,together with
the

vouch

should

with
the

the

due

is

The

kept.

checked

be

to the

should

arrears

receivable

are

(ifany) and
collected by agents.

in

book

which

the

received.

amounts

call
occasionally

each

agents'

All

tenant

empties

In the

case

has

rent

collector enters

and

initials for

In

the

auditor

for

all the rents

that

see

with

rent-roll

such

cases,

production of

the

therein have

DIVIDENDS.

Interest

the

should

books, and

such

entered

one

Book

Cash

the

to

carefullyenquiredinto.

be

The

rent-roll,if

the

to

sometimes
weekly properties,

of

ascertained.

according

received

rents

if the rents

accounts,
and

counterpart leases and agreements

in this
should be examined, and

amounts

be checked

should

auditor

an

The

will then

amounts

by which

"

tenants

exact

following are

The

items.

are

required

evidence

the

methods

the

RECEIVABLE.

RENTS

way

same

Receipts

Miscellaneous

RECEIPTS.

MISCELLANEOUS

AUDITING

OF

PRINCIPLES

THE

accounted

been

for.
INTEREST
received

AND

from

investments

should

counterparts of the interest and

letters

covering

bonds

by

themselves

the

have

of the

that

been

be

have

received.

client's bankers, the

The

auditor

must

interest in respect of every

and

accounted

INTEREST
vouched

with

COMMISSIONS
vouched
AMOUNTS
from

with

the

If the

bonds

bankers

see

are

in the

will be

all the

that

investment

have

seen

interest

what

collectingthe
Book

the

or

it will be

off

torn

the

of bonds, the

case

been

with

warrants,

inspected,and

due, the entries in the Pass

voucher.

checked

be

dividend

cheques. In

should

coupons

should

when

the

dividends

and

hands

coupons
sufficient

dividends
been

or

received

for.

DEPOSIT.

ON

the

entry in the Pass

RECEIVED.
the

Interest

Commission

RECEIVED

FROM

agents will be checked

Accounts

with

will

be

Book.

Commissions

AGENTS.

Deposit

on

received

will be

rendered.
Amounts

the accounts

received
rendered

by

CHECKING

ROUTINE

agents, which

the

the

passed by
INTEREST

being

LOANS.

ON

agreement

loan

should

whatever

or

inspected,it

be

provided for

interest there

the

The

RECEIVABLE.

BILLS

PROCEEDS

SALE

THE

OF

been

has

being

be
that

seen

for.

Proceeds
with

checked

be

will show

note, which

contract

should

INVESTMENTS.

OF

should

sale of investments

it

Book,

accounted

been

have

received

amounts

Bills Receivable

the

to

all bills due

the

and

for.

accounted

checked

checked

been

have

loan

The

is of the

there

that

seen

should

accounts

37

VOUCHING

management.

evidence

other

AND

the

the

net

of

broker's
stockto

amount

received.

be

PROCEEDS

sale of

In the

should

received
a

of

therewith

Such

the insurance

or

society should
and

with

in connection
Cash

The

ETC.

with

the

and

compare

Book.
this way

the
He

when

should

by

it may

be

payee

the

found

club

or

receiptbooks,

SIDE
the documents
of the

examining these,
note

spondence
corre-

of subscribers.

vouching

of the

name

to

insurance

the

by,

produced

credit

side

invoices, and
Book, will consist of receipts,

accounts,

order

POLICY.

of

counterfoil

majority of

the

in

means

rendered

CREDIT

VOUCHING

RECEIPTS,

by

with

publishedlist

the

in

companies.

checked

be

spondence,
corre-

documents

INSURANCE

Subscriptionsreceived

SUBSCRIPTIONS.

the

cases,

other

AN

accounts

account

price.

checked

be

with, and
brokers

sale

amount

auctioneer's

examined,

be

UNDER

should

amounts

by auction, the

any

of

evidence

whatever

other

sale, and

RECEIVED

with

the

In

of the

ascertain the amount

AMOUNTS

with

must

Proceeds

ASSETS.

sale

catalogue.

contract

connection

of

case

checked

be

marked

SUNDRY

OF

will be checked

sundry assets

is available.

and

SALE

OF

with

dates
that

the

upon

accounts

receipted

auditor

an

should

in the Cash

name

the

of the

account,

that

should

for in
have

38

charged

been

Account

the

year

under

case

taken

that

mistake

be

that

thus

also be scrutinised,in order

back

in

payments
view

to

succeeding

ascertainingthat

charges, and that

not being paid by
of the

name

should

in the

the

of each
in

amount

having

no

case

should

of

that

it should

terms,

be

person'saccount

checked

form

of

as

Book,

bearing the
an

with

that

any

seen

in

with
has

books.

the

initialled

been

the

invoices

of

the

that
In

creditor

state

printed receiptswill be recognised,then

full
receiptshould be accepted without
invoices

it is very,

creditors'

or

receiptsfor amounts

account

of

should

be

simple for
the

bond

cashier

"2

stamp,

are

fideinvoices
; for

this

far better

over

should

bear

to

reason

and

merely receiptedin
and

with

scrutinised

printed receiptforms,

creditor's rubber

invoice

being

compared

passed for payment, and

ledger is debited therewith.

fraudulentlyreceipted by

receiptsupon

it

be

and

in the

official

should

that the account

receipts,if

especialcare,

than

addressed

paid through

are

that

properly dealt

enquiry. Receipted
be

voucher

see

account

only
other

been

been

the proper

that

to

are

therefore,

"

are

in order

occurs

Cash

the

have

auditor

the

accounts

busi:

proper

business

the

whom

is debited

amount

vouchers

of individuals

benefit of trade

the

dates should

The

privateaccounts

sometimes

amount

discounts

as

If

past, and

books.

s^The

The

charged

obtain

may

that

seen

the

in the

are

and

be examined.

vidual

same

privateaccounts
to

has

there

scrutinised,with

be

the

party

business, as

the

should

to

or,

of goods
particulars

The

the

support of fraudulent

in

years.

rendered

services

suppliedor

the

that

guard against the

to

being produced

years

future

in the

suppressionof accounts
have been inflated.
profits

the

the

precautionsare

discovered

be

hand, it may

On

accidental, in

proper
made

are

previous

review.

fraudulent

been

of

that

seen

of the

been

have

may

mistakes

such

no

other

the

by

borne

it should

which

on

Loss

such

hand,

one

to the Profit and

being

are

year

AUDITING

OF

PRINCIPLES

THE

those

evidence
ink.
a

All

penny

ROUTINE

stamp, and

auditor

the

stamped, though

so

receipt upon
with

evidence

of

and

this

he

this

satisfied

the

should

point out
only,

ground
voucher,
and

payment

that

is not

affected

businesses

send

the

by

if otherwise
auditor

he

is

requiresis
is in order,

transaction

the

not

are

accept such

to

all the

as

that

any

refuse

cannot

39

VOUCHING

AND

CHECKING

non-stamping of

mere

receipt.
Some

be

receiptto
there is

of these

returned

such

the

that

is considerable

payee

has

should

that

particularsand

be

receiptprinted

attached,

verify that

the

amount,

as

there
be

may

is

fraud

extremely
receiptsare produced, the
correspondinginvoices or

such

the

the

receipt forms

such

such

insist that

should

accounts

and

no

received

completed fraudulently,and
auditor

payees,

of

are
given
particulars
and
they are not good

as

payment,

Where

of

form

own

In both
cheque forms.
unsatisfactoryones
very

of the

difficult to detect.

the

by

form

receiptsare

danger

their

of the

point of view,

nature

evidence

have

the back

upon

auditor's

the

to

as

or

cases

an

and

completed

growing practiceto

at the foot

from

with remittances

he

that

so

see

may

the

is in accordance

payment

therewith.
CONTRA
should

ACCOUNTS.
be

traced, the
of account

statement

PAYMENT
of

payments

invoices

best

which

confirms

LEDGER

in settlement

of

will

have

been

by

contra

being

voucher

BOUGHT

OF

settled

Accounts

account

subsequent

settlement.

the

In

ACCOUNTS.

the

case

Bought Ledger accounts,

the

vouching

the

examined

when

Bought Day Book, and, therefore,it will not be necessary

to call for these again when
vouching the Cash Book, the
creditors'

being sufficient.
receipts

that

debited

are

receiptsare
the

to

production of invoices
are

contracts, and

and

transaction, so

in order

case

of

payments

Impersonal Accounts, however,

but the auditor

sufficient,

not

of the
same

In the

must

accounts,
that

he

insist upon

giving full

may

mere

see

that

ticulars
parthe

further,he may have to refer to minutes,

other similar evidence, before he can
pass
;

40

part of
payments requiresgreat

Book

In such
the

where

cases

auditor, in lieu of

of the

has

payee

received

the

is it

nor

amount,

cannot

often

are

be

all

found,

produced
should

these

An

in

evidence

which

be

not

to

as

that

endorsement

the

as

to

endorsed

good evidence

circumstance

only

The

forged.

be

payment,

of

made

cases.
acceptedas vouchers, except in special
cheque is not a legalreceipt,it affords no

the nature

Cash

the

duplicatesbeing obtained.

receipt,but

be

these

cheques

endorsed

the

cases,

should

insist upon

should

auditor

the

in

and

missing vouchers,

of

care.

Notes

CHEQUES.

ENDORSED

vouching

the

This

payments.

such

AUDITING

OF

PRINCIPLES

THE

the

may

endorsed

cheques might be considered sufficient vouchers, is when

is well known
to the auditor,
the signature of the payee
and

evidence

there is other
it is in

that

order, and

examples being,
should

be

it has

directors'

obtained, if

been

duly authorised,
fees, salaries,and
partners'

that

in such

Even

drawings.

of the payment,

to the nature

as

cases,

however,

receipts

proper

it is advisable, with

and
possible,

partners'drawings, that the partners should be

their respectivedrawing accounts
requested to examine
to be in order, to
and, if they find them
periodically,
regard

to

initial the

same.

CAPITAL
most

EXPENDITURE.

vouched,
carefully

payments
The

Capitalexpenditureshould

in

are

questionas

upon

the

examples

order, and

view to
are

of

the

ascertainingthat

will be

payment.

the

capitalcharges.
required depends

proper

documents

to what

nature

The

following

are

"

PLANT,

MACHINERY,

Invoices

and

be made

in order

maintenance

FURNITURE,

receiptswill

are

AND

ascertain

and

that

added

to

BUILDINGS.

solicitor's statement,

payable should

be

be

to

capital charges,
LAND

with

be

seen.

FIXTURES,

required,and
that
no

the
The

showing
If the

the

enquiry

items

repairs

and

are

ETC.
should

bona

fide
of

expenses

capitalaccount.
contract

the

of

sale and

the

purchase consideration

buildingsare

being erected,

42

preparationand checking of

the

for what
In

they

the

and

back

taken

entered

in to the

handed

should

of the

being entered
week, the particulars

end

the

Wages Book

and

be

in

up

independentlychecked

as

in the

should

be

handed

should

cashier, who

have

and

cash

case

week's

wages.

due

each

to

cash

sorted

thus

should

should

who
responsibleofficial,

they leave the works, foremen

being present to identifythem.
paying

person

Book,

which

or

the

should

the

pay

the

who

know

The

thereafter

bearing

the

Book

Wages
to

some

workpeople as
the employees

cashier

and

initial the
returned

be

the

amount

handed

be

should

wages

of

exact
can

number, after which

or

name

little bag

proceed to

amount

exact

place the

then

in

wage-earner

individual's
the

should

He

the

to

actual

the

over

should

cashier

for

cheque

control

no

The

preparation of this book.

draw

Book

complete, the Wages

When

the

Wages
to

the

office.

wages
The

above

is but

basis upon

that

the

cash, and

the

the

business

brief sketch

system, but

wages

of

payment
and

the same,
the

the

should

wages,

independentcontrol.

should

watch

take

the

under

be

The

principals
system carefully,

wages

part in

of the

handling

watch

or

the

actual

of the hands.

payment

the system,
investigating

an

efficient one,

as

follows
Check

system should be built up is,

works, the preparation of the

checking of

either
occasionally

After

of

every

in the

entirelyseparate
of the

which

records

Wages Book,

and

wages

time-workers.

of the

the

office at

sheets

or

and

be

piece-workcards or sheets, which should be

These
by the piece-workerand the foreman.

the

the

out

upon

initialled
cards

given

particularsshould

foreman,

the

by

is

work

the

as
piece-workers,

of

initialling

Wages Book

the

done.

have

case

AUDITING

OF

PRINCIPLES

THE

the

auditor

should

and

assuming

check

that

it is

the

Wages Book

the

calculations;

"

the

castingsand

proportion of

CHECKING

ROUTINE

Check

the

cheque

drawn

See

Wages

the

that

taking part
and

the entries in the

with

these

weekly

clerk should

in which

should

auditor

check

All

director.

alterations
in the

be confirmed

should
the
In

be

monthly
some

travelling,but
actual

be

receipt can
adopted,
checked

the

by

the

should

should

entered

in

these

be
books

according

travellers' books,

seeingthat

all

into account

CASH.

PETTY

end

at the

which

for the

which

the

the

end

ensuing week
of this

the

Cash

and

and
are

should

been

the

receipted,
brought

are

be

kept

upon

the

petty cashier is given a round

month,

period, the

with

Book,

period.

to be sufficient to
or

is

traveller's

the

expenses

of the financial
cash

is estimated

method

travellers

the latter have

Petty

Imprest system, by
sum

to

commissions

unpaid

no

auditor
The
receiptedby him.
far as possible,
and vouch
the
as

cheques drawn,
that

be

for all

carefullywatched
the

should

and

be

their

for which

latter

this

for

charge

to

insisted upon

be

Where

expenses.

fixed amount

railway fares, etc.,

as

book

be entered

and

When

should

or

should

should

management.

book, which

partner

payable

allowed

are

should

obtained.

amounts

check

allowed

are

vouchers

expenses
the

by

The

Salaries

the

EXPENSES.

AND

they

except such

expenses,

paid,

where

expenses,

with

for commissions

travellers

cases,

with

way.

due

amounts

ruled

entered.

salaries

the

the

official and

be

are

traveller,in which

for each

kept

should

initialled

be
in

same

checking

in which

salaried

payments

COMMISSIONS

TRAVELLERS'

kept

cheques drawn

latter should

which

Book,

be

book

The

the

time

the

and

week,

of every

actual

the

all

by

should

Book

entered.

be

initialled

Wages Book.

monthly salary

or

columns

Salaries

SALARIES.

the

been

for

cards

with

by callingfor

system

piece-work

Book

has

stages

the

Occasionallytest
records

Book

various

in the

Cash

the

by

shown

as

Book

Wages

totals of the

weekly

43

VOUCHING

AND

as

the

cover
case

petty cashier

his expenses
may

should

be.

At

balance

44

cheque for the

for the period.

Petty Cash

The

in

analysis columns,

with

impersonal

postings to

for

insisted upon

it is

where

cases

be made

should

than

other

the

On

cash.
balances

obtain

initialled
On

money.

petty cashier,have
last

the
in hand

of the

day

should

say,

of

should

be

5s., and

in

should
to the

access

allowed

be

not

number

account

no

ruled

receipts,dockets
of the expenditure,
and
by the person actually

giving details
be

be

Vouchers

accounts.

impossibleto

should

clerks

and

save

above,

out,

the

expending

to

all payments

should

dockets

such

should

Book

order

petty cashier

the

total disbursements

of the

amount

exact

check

should

cashier, who

the

to

it,and, if it is in order, hand

vouch

and

produce it

and

his book

AUDITING

OF

PRINCIPLES

THE

petty cash,

borrow

to

financial

anyone,

from

petty

period,all

cash

be

paid into the bank, and on the

first day of the ensuingperiod,the petty cashier should be
The only
given a cheque for the agreed fixed round sum.
utilised for

sums

for
specially
be

this purpose

into

paid

should

petty cash

cheques

all sundry small

"

bank

the

be the

and

drawn

receiptsshould

passed through

Cash

the

Book.

The

auditor

should

petty cash, and

check

the

from

should

check

heads
the

end

the

auditor
the

is not

then

should

balance

to

the

counted

POSTAGE

at

been

proportion of

the

and

that

by

the

at

which

he
with

He

If the

in hand

balance
the

and

attends, and

Petty

he
the
the
at

bank,
it

agree

Book.
book

at

and

payments,

paid into

the

should

vouchers,

Petty Cash
balancing,the

of

checked

cash

should

the cashier, and

the

date

date

been

not

He

Book.

analysed.

the

count

shown

of the

nature

they are
period has

of the

at

balance

Petty Cash
initialled by

which

done

checked

has

system of

cheques drawn

the

into the

least

at

into the

faulty.

or

postings,and

observing the

under

with

Book

the book

time

same

report if it is weak

castings and

the Cash
that

see

carefully
enquire

If this

should
the

Cash

be

balance
Book

date.

BOOK.

The

auditor

should

see

that

there

ROUTINE

is
he

should

check
drawn

amounts

Postage
the

internal

efficient

an

amount

Book,
is

AND

CHECKING

this
from

and

large.

check
book

the

counting

45

VOUCHING

the

upon

occasionally,
Cash

Petty
the

balance

and

postages,

checking
Book

into

in

hand,

the
the
if

III

CHAPTER

(continued)

VOUCHING

whole

THE

system

auditor,

the

opportunities

direction, the

whether

question

depends

is

exhaustively

the

can

if there

is

this
The

be

evolved

no

system,

considerable

exercise

Books

Day

Bought

in

great.

very

system

should

auditor

an

one,

exercised

are

available, and

staff

check

and

care,

bad

fraud

for

investigated

be

is not

effective

really

the

upon

there

or

should

control

if strict

as,

goods, checking

ordering

regards

as

authorising payment,

and

invoices,

by

Book.

Day

Bought

and

Ledgers.
All

order

numbered
with

should

orders

head

the

by

of

countersigned

Goods

the

with

and

duplicated

and

out

requiring

inr
and

goods,

the
as

partner

being

should

be

Book

checked

After

with

being

the

services

placed

head
were

kept

and

the

the

to

entrance

and

quantities

particulars

these

and

checked
Goods

the

and

weights
the

upon

by

checked
the

ordered.

thus,

"

entered

invoice

department
Having

invoice

by
been

The

to

should
whom

as

to

these

prices should

previous

or

clerk,

Book,

references

invoice.

the

46

the

Inwards

quotations, estimates,

of

at

Book.

particulars, quantities
books

be

delivered,

are

checked,

Inwards

Order

should

goods

be

invoices
the

Book

as

should
Goods

the
The

by

is

responsible official, such

Inwards

works,

weights

be

Books~prtwided

issued

made

be

and

director.

or

in

Order

order

department

the

by

in

every

should

specially printed

on

up

that

so

Orders

automatically.

out

bound

forms

leaves,

carbon

made

be

be
the

checked,

invoices.

initialled

goods

or

initialled

47

VOUCHING

entered in the

Bought Day Book,

filed in the

and

order

clerks in

The

account

no

on

particularsof

passed, the

and

should

post the entries

to

the

anything

do

with

cheques in payment
No

Ledger

been

has

official should

prior
forward

for

be

authorise
so

he

should

unless

Book,

Day

efficient

very

examine

should

internal

should
the

prevent

place
same

and

his

Inwards

Bought Day Book

When
examining an
to the

with

put

which

checks

audit

stamp
of

cases

Books

in the

should

he

case

invoice, the

each

it, so

upon

as

second

be called

to

time.
Order

suspicion,the

should

tested

Bought

the

is in force

there

he

items

the

paid

invoices

but

agree.

being produced

one

Goods

the

check, in

in
Occasionally,especially

Books

same

As

accounts

creditors' accounts

is satisfiedthat

proportion.

auditor

he

cheques,

the

the

the

responsible

of the

compare

the

check

until

payment

drawing

the

with

payment

auditor

of the

drawing

the

date, and

to

up

Bought Ledger, seeing that

The

Bought Ledgers, nor

for

passed

posted

doing

to

should

Books

of accounts.

should

accounts

be

Day Book.

in the

Bought Day

to

should

the invoices numbered

and

entries

of the

charge

have

they

of the

invoices

the

for, and

therewith.

should

invoice, specialattention

be

followingpoints

(1) That

"

the

of

name

creditor

the

with

agrees

the

entry in the Bought Day Book.

(2) That

the

invoice

is addressed

the

date

and

falls within

auditor's

the

to

clients.

(3) That
Day Book,
(4) That

all trade

(5) That

the

net

with

agrees

the

discounts
amount

that

in

the

period under
have

agrees

been
with

Bought

review.

deducted.
the

Day

Book

entry.

(6) That
been

checked

(7) That
account.

the

invoice

in every
the item

is

has

been

initialled

as

having

way.

analysedto

the proper

impersonal

48

particularsit

the

from

(8) That

AUDITING

OF

PRINCIPLES

THE

be

to

appears

business charge.

proper

(9) If partners'or directors' private accounts

passed through the Bought Day Book, that they
(10) That
be

any

is debited

capitalcharge, and

proper

are

personalaccounts.
invoice charged to capitalappears

to their

charged

are

to

the correct

to

account.

Profits
invoices

therefore,at the end

during the last

ensuing period also

in

should

be

In

order

invoices

charged

that

at

the

sent

to

every

auditor

creditor

who

Ledger, requestinghim
owing,
and

due

notices should

such

no

of these

bear

If all these

the

date

it is

agree,

invoices have

which

statements

should

regards

been

omitted.

seeing

financial

the

proof that

as

the

nothing

accounts,

the books

with

agree

is

auditor, who

on

be

Bought

showing

These

effect.

arrange

in the

if there

or

all

should

notice

statement

to the

of

satisfied that

Bought Ledger

the

clients,and, therefore, that,

rate,

date,

that

to

creditors' books

any

dates

the

any

account

an

produced

statements

period ends.

has

that

at

be

with

them

compare
that

him

to

Sheet

to furnish

notification

Balance

of the

the

review.

be

may

come

file for

included, his clients should

been

date

have

whether

see

periodunder

to the

the

that

have

balance

called for, and

be

may

into the

trace

invoice

The

weeks.

few

therein examined, to

the invoices

and

Book

big lines of goods which

all

Bought Day Book

of the

Inwards

for the Goods

ask

should

suppression of
period the auditor

the

easily by

inflated

be

can

the

vidual
indi-

of the auditor's

these

accounts,

at

with

simple fraud may be perpetratedin connection

purchases by enteringinvoices twice in the Bought

Day

Book,

very

credited.
are

drawn,

in

each

In due
one

course

being

misappropriated. Both
creditor's
account,

the

the

case

and
sent

at different
to

the

cheques
balance

account

being

dates, two

cheques

creditor's

upon

creditor
are

which

and

debited

the
to

will agree

other
the
with

50

AUDITING

OF

PRINCIPLES

THE

invoices
despatched immediately. The
of carbon
should be press copied,or duplicatedby means
leaves, and from these copies of the actual invoices,the
and

prepared

should

works

the

should

Day Book

Sales

in

recorded
The

against are

the

In

the

same.

omits

cash

the
such

In

items.

could

this fraud
the

Sales

Book

Day

duplicateinvoices,

only

with

Order

quently,
conse-

by comparing

with

the

as

Outwards

Books, Goods

of

of these

originalrecords

such

appropriate
mis-

to

all,and,

detected

be

if he

in payment

at

inflation of sales will be done

The

etc.

books

in the

him

records

no

the

of books,

set

circumstances,

will appear

transactions

where

business,

possiblefor

be

guard

inflation of the

cheques remitted

or

these

should

the

whole

the

sales, it may

enter

to

gate-keeper,and

auditor

an

small

over

goods leaving

Book.

that

of

control

clerk has

head

by

of sales and

omission
case

All

up.

out

Outwards

points

main

two

checked

be

Goods

written

be

Books.

object of

the

improperly increasingthe profitsor decreasingthe losses,

and to guard againstthis,also,the Sales Day Book
entries
should be tested with the originalrecords, in order that
the

auditor

be

may

satisfied that

bond

fide transactions.

Day

Book

should

ordinary way,

In

be

where

is

check, it will be sufficient to

The

fact that
invoices

creates

auditor

the
and

check

elect to

spend

seem

to

Book

postings,which,

and
be

proved by
far

better

the

exhaustively,but
a

test

reliable system
a

Order

their time

it may

be, have

in

testing

internal

the entries.

auditors

Many
the

Sales

checked

been

entries

Day

already

their time

the

the

occasionally,

checking

client's staff,whereas

occupied

Sales

Books, duplicate

Books

great value.

are

in

of

proportion of

Outwards
of

sales entered

suspicion, the

calls for the

Goods

moral

of

cases

checked
there

all the

would

with

the

originalrecords.
When

checking

be careful

charged

to

out

see

the

Sales

that, if any

through

the

Day Book,

the

old assets

have

Day Book,

these

auditor
been
amounts

should

sold and
have

51

VOUCHING

been

but

have

with

met

with

agrees

in

method,

management,
Sales

acts

as

cash

received

in the

Cash

Book.

of the

most

check

In

effective

sales

the

upon

debtors

has

for

means

the

the

upon
entered

as

that

the

in

whole

accounted

been
is

fraud

where

cases

the

by

for

suspected,one

detecting discrepanciesis
of such

sending out

statements,

repliesreceived.

the

Sales

Day
system

up

Books

and

Returns

regards these credits

as

enquired into, as it
be passed through

be

credits may
cover

all

to

Sheet,

check

is also evidence

from

for the auditor to control

should

sent

Balance

of the

valuable

most

Books, and

Day

of the

The

be

to

properly controlled

when
to be

proves

debts, it

and

date

the

is sometimes

which

statement

account.

request that they will confirm the fact if the balance

ences.
differwith their books, and, if not, point out any
This

book

for

at

concern

sales

the

upon

practice,is

asset
particular

the

to

check

of the

debtors

the

credited

been

excellent

An

in the totals credited to the sales account,

included

not

misappropriationsof
should

Therefore, all credits

is

Allowances.
Sales

the

to

possible that

in

this

received

cash

improper

in

way,

Ledgers
order

from

debtors.

authority

require the

to

of

and the credit note should be initialled

official,
responsible
of carbons.
and press copied,or duplicatedby means
The
auditor
should carefullyscrutinise all large credits, and,
if necessary,

notes,

examine

documents,

the

correspondence, Goods

credits made

Inwards

amounts

make

the

more

favourable, allowances, etc.,

are

to

by

Balance

should

the

Profit

and

are

credit
The

etc.

be examined
in order

Loss

held

to

Account

back

until

Sheet.

Book.
will

book

particularsas
they

of the

Receivable
this

copy

considerable, as sometimes,

results shown

after the date

In

are

as

Books,

after the close of the year

if the

Bills

such

when

disposed of.

be

entered
the
The

all bills

same

auditor

become

should

received, and
due, and
see

that

how
the

52

proceeds of

bill

every

accounted

are

amount

debtor's account

in the Sales

and

Book,

Pass

accounted
make

Ledger,

the

in

balance

the

and

Cash

the

and

date

the

and

of

should

be

bill will be

every

details

the

shows

been

Book

at

hand,

in this way,

"

Bill Book

The

for.

up

auditor

the

inspectedby

into

in

be

particular

to the

still current

are

should

Sheet

Balance

the

that

those

bill is

Bills that have

Ledger.

will be traced

discounted

or

if

for, or,

thereof is debited

dishonoured, the

met

AUDITING

OF

PRINCIPLES

THE

that

Account
the Bills Receivable
upon
be seen
in
that
these are
it should

agreement.
Book.

Payable

Bills

they

bills that
and

they should

met

are

It should

be

Account

in the
the

by

shown

that

seen

the

Bills

Payable

in the

Book,

vouchers.

as

the Bills

upon

as

Those

Cash

produced

be

balance

is in

Ledger

book, and

off therein.

will appear

bills should

returned

the

marked

be

paid

been

have

in this

be entered

All bills acceptedshould

Payable

agreement with the details

as

Book.

Journal.

Journal,of

The

Bill Books,
for

etc.,

as

all

shares
for

entries

opening

various

there

the

no

are

appearing

vouched

be

in the

many

on

other

example, the acquisitionof

the

vendors, the issue and allotment

of

debentures, closingentries such

capital, entries
miscellaneous

profitsor losses upon

various adjustingentries
examples, it will be seen
nature,

they affect

and

that

correcting errors,
sale

the

that

of

the final accounts

these
of

are

to

the

as

provision

bad

debts,

etc., and

writing

capitalassets,

of this nature.

they

the

as

for

items, such

of

varied

fully,
care-

extraordinary
specialbooks of first
Journal will be such

outstandings, depreciation,reserves

interest

most

all

will pass

Journal

entries ; for
from

assets

and

the

for which

The

Bought and Sales Day Books,

the

parts, should

are

through

transactions

entry.

which

From

items

are

and

above

the
of

off

very

great importance,as

considerable

extent.

It

53

VOUCHING

is, therefore, essential

actual

depend

upon

should

auditor

the

evidence
the

that

transaction.

of the

nature

require will

will

auditor

the

In

opening entries recording the acquisitionof

of

see

that

the

entries.

of

the

To

vouch

this

whole

it may

way

opinion of
off.

bad

doubtful

and

The

of the whole

The
found

in

will be

great

debts

should

The

few

the

or

with

to

the

Payable Book,

and

of the

entries to be

rough

idea

of

how

matters

Journal, and

the

at

exercise

should

auditor

Ledgers

the

balances

checked

case

of creditors

of the

auditor

period have

enquiriesshould
upon

the

be

and

Journal, will

castingsof

check

Ledgers.

Later, these

an

Bought

The

the
regularly,
end

inspection

an

in the Sales

for

what

large

able

be

to

Ledgers.
postings

In the

been

reserved

experiencehe needs to
his work efficiently.

tested.

and

In
in the

not,

or

amount

examples

it is that

of

cussion
dis-

by

detail,but it will be realised

more

skill and

inspected.

depreciationhas

Book, Bought Day Books, Returns

Bills

case

management.

whether

vouched.

vouching

perform this part

Bought

the

contained

be

in

when
of

amount

of

Journal, together

important

care

in the

checked

only be verified
by

can

only a

dealt with

how

once

adequacy

are

of them

some

ascertained

of the accounts

above

with

auditor, sufficient

written

and

correctlyin

be

to

be

only

question

be

the

under

contract,

of shares

etc., will have

depreciationcan

of the

case

tion
prospectus, directors' minutes, applica-

the

for

allotment

the

assets

effect to

given

are

an

letters,contracts,
Provisions

inspectsuch

must

thereof

terms

company,

auditor

the

contract,

vouch

entry passing through this book.

thoroughlyevery
The

that

from

should
been
made.

the

to

schedule

goods

whom
see

that

credited
The

Bought Ledger

balances

purchased

are

most

is the

checked,

of creditors.

invoices

and

checked

be

up

to the account

best

Books,

been

have

Cash

the

Allowances

Ledgers should

the
on

from

to

the

; if not,

valuable

production

54

of creditors' statements,
in

are

in

goods

date

the

see

Book

these

be

found

may

therefore,the

in the

claims

agreed
should
claim

to

of

way

be
to

for all

made

by

in

included

being referred

note, otherwise

he

in these

provision is
under

made

this head,

satisfied with

in the

Any

debit

balances

examined,
carefully
are

bond

should

for him

with

fide amounts

allowances,

possiblebad
Sales
The
should

that

see
or

spondence
corre-

are

auditor

the

large,upon

by

mat

subject

the

are

such

Sheet

Balance

refer to the

the

been

not

ample
likelyliability
that

see

If he

will be

matter

deal with

is not

in his

one

report.

Bought Ledgers should

of such

to

be

ascertainingthat they

for

example,

for

debit balances

are

go into them

adequate

doubtful

the

have

for any

to

view

owing

If any

etc.

the

standing,the auditor should

and
official,

circumstances,

accounts,

in the

to

accounts

upon

It

that

the

provision made,

it will be necessary

that

the

dispute,and,

includingthe legalcharges.

the

cases,

adequateprovision
outstandingliabilities. If
see

report. In the case of claims that

pending lawsuit, the auditor should

the

he should

and

made,

his audit
of

of

in stock.

in

are

involved

amounts

not

may

such

and

"

as

before

or

goods through

creditor which

for

provided

or

least

"

accounts

insist,if the
at

disagree

be examined

been

have

on

books

the

such

accounts

Of

agree,

goods

such

been

not

enquiries should

should
is made

have

statements

careful

most

not

creditor

in

accounts

creditors.

the
may

the

by

the

followingperiod. In

certain

that

of

confirmingthe dates

"

goods

that

that

statements

trace
carefully

should

Inwards

Goods

books

credited

and

received

auditor

prove

Sheet, but

auditor's clients until the

the

these

debited

Balance

of the

been

have

such

been

have

may

AUDITING

the

cases

some

as

with

agreement

course,

OF

PRINCIPLES

THE

with

of

long

responsible

is made

reserve

returns,

for

any

debts.

Ledgers.
postings,castingsand
be

checked

in the

same

balances
way

of the Sales
as

in the

case

Ledgers
of the

55

VOUCHING

Ledgers,

Bought

balances, each

but

should

account

ascertainingwhether

to

doubtful
first for

provide

to

necessary

should

make

all accounts

auditor

the

view

bad

and
ask

should

debts, and

certificate

is

management,

Ledger Accounts,
to

auditor

the

list of

the

upon

balances,

doubtful, and

be

list of bad

in the

for

same.

him

to

appear

included

not

are

that

for the

of, or query

note

The

one.

Ledger

with

reserve

opinionof

the Sales

examining

the

doubtful

and

that, in the

reserve

When

sufficient

Sales

the

scrutinised

be

not

or

list of the bad

to the

as

is

debts

checking

when

doubtful

and

which

debts

(if

any) suppliedto him.

If the cash
been

has

posted

all accounts

good

Balance

that

whose

accounts

take

advantage

discounts.

of cash

occur

(1) Where

where

payments

made

cheques

(4) Where

bills

(5) Where

the

beyond

Account

unknown,"

hand, he

other

of

following

the

account

small

where

to

appears

is about

done

bills have
the

been

the

same

be
as

has

the

dishonoured,

account.

constantly being

debt

notes

been

renewed.
for

owing

credit which

period of

appear

"in

time

is

siderably
con-

customary

"

upon

the

in solicitor's

such

account,

hands,"

"

as

in bankruptcy,"

liquidation," disappeared and

"

address

etc.

queried accounts,
the

the

trade

to

are

stopped,"
or

upon

invariably

particulartrade.

(6) Where

All

who

or
irregular,

are

on

or

and, therefore, debited

"

all debtors

past.

(3) Where

in the

good

the

any

of the

account.

on

the balance
(2) Where
although the
increasing,
in the

On

date

as

"

cash

are

as

period

will pass

since the

paid

paid regularly,and

all accounts

circumstances

payments

been

have

he will also consider

are

query

auditor

ledger,the

the

to

Sheet, and

should

since the close of the financial

received

list of bad

or

and

such

of them

doubtful

debts

as

do

not

appear

suppliedto

the

56

auditor, should
and

his

the

list

"

the

"

good,"

columns

should

whole

the

will be

based

and

be

from

about

doubtful
of the

be

that

good,

will be

Reserves

for

sometimes

by

method

is not

auditor

should

to

only

the

of

that

the

that

way

of
sufficiency

the

circumstances

This

is

most

cases

considerable
the

which

be

bad

the various

the
sum,

of

total
and

of

total

circumstances

further

vision
pro-

estimated

are

certain

debts

to

calculated

are

t{ietotal

on

been

sufficient

opinion

for bad

book

and

all doubtful
of

the

by
been

formed

doubtful
and

as

debts

enquiring

looking accounts.

auditor's duties, for in

an

book

debts

of the
the

one.

be

can

debtors' accounts,

the amount

positionshown
not

is

reserve

important part

have

supplied,

for the

reliable

represent sales that have

but

should

percentage

reserve

into

Such

period; however, this

and
if it is adopted, the
recommended,
proceed as explained above, and thus

examining

affects

the

doubtful

turnover

is by

many

upon

to be

prove

and

way

satisfyhimself
The

doubtful.

be

large

probably from 1
sufficient provisionunder this head.

bad

the

upon

or

past experience it will be

from

as

proportionwill

5 per cent,

debts

bad, and

the

cover

per cent., of the

50

depends

that

seen

information

the

addition, there

be

be

to
to

to

probably
completion,the

respect of the remaining debts that

in
to

In

40

be extended

is sufficient to

debts

is

debt

each

that

it should

upon

this

debts, but

case.

headed

column, and, if

Upon

estimated

those

"

amount

estimated

debts

proportion
might

the

noted.

be

doubtful

and

of

to

cast, and

be

of the

proportion

As

doubtful

or

as

should

for bad

reserve

columns

with

"remarks."

"

bad,"

doubtful, his estimate

received

ruled

it should
official,
responsible

the

will be

for.

for

column

with

discussed

ledger,(2) good, (3) bad, (4) doubtful,

per

further

into

as

responsibleofficial,
good plan is to have

with

into

gone

explanationsasked
of queried accounts

(1) balance
and

be

AUDITING

OF

PRINCIPLES

THE

reserve

accounts.

credited to

paid for, and

amounts

to

materially
The

debtors

Trading Account,
if,in fact, part of

IV

CHAPTER

THE

AND

PROFIT

checked
must

General

Ledger,

Book

Bill

and

Books,

of each

checked

on

that

he

and

balance,

the

the

Profit

the

built

and

up,

of the

this

is

so

auditor
detail

the

Impersonal
bear

checking

of

indirectlyaffects
and

either

Every
were,

the

to

him,

they
Loss

the
and

will

find

Account

exact
58

are

correct

; and

whether

accurately and

engaged

and

Impersonal
the

these

item

kept.

An

upon

the

directly

and, therefore,

recorded

classified
their

or

the

from
are

and

been

every

as

Sheet

that

true

has

when

accounts,

are

and
in

mind,

final

that

way

Ledger

out

material

see

how

On

exercised,

concern

upon

making

carried

be

of the

satisfy
properly

Balance

to

exhibit

audit, that

an

the

Profit

account

alive

in

details

in such

affairs

duty

be

account.

the

and

largely depends

not

the

to

as

of the

should

that

Account

auditor's
so

up,

state

or

correctly

Loss

balances

may

be

of

most

the

now

in order,

must

the

Books,

details

work

the

contains

it is the

drawn

properly
view

and

of

of

should

auditor

are

intelligence

Impersonal Ledger

which

see

keen

and

particular

the

part

from

account

the

items

in

this

but

that

such

described

mechanically,

Each

or

is

Day

the

sufficientlythe

that

should

account

order

which

verified, andthe

be

Balance.

checked

has

classified, and
no

Trial

the

to

from

checked,

been

should

account

of

postings

totals

the

have

carefully,in

himself
up

will

etc.,

detail

the

Impersonal

checking

The
and

Ledgers,

the

to

exhaustive

the

Journal,

castings

examined

SHEET

Bought

attention

importance.

utmost

Cash

his

turn

and

Sales

the

auditor

the

BALANCE

Ledger.

Impersonal
HAVING

AND

ACCOUNT

LOSS

he

place

nature

of

in

Sheet.

Balance
should

must

correctly,

correct

Ledger

or

be,

all the

as

it

detail

PROFIT

THE

making

items

should

59

ETC.

ACCOUNT,

balance

the

up

LOSS

AND

appreciatedand

be

understood.

Profit and

The

summaries,

therein

amounts,

and

details and
items

of

individual

of the auditor

must

like nature

items

separate

to examine

summarising

the

of

number

are

and

see

such

grouping
only

that

of

actions
trans-

grouped together,
heading given fairlydescribes every

the

item ;

component

duty

correctly.He

items

is, that

of

Sheet

Balance

of the

most

say,

that

see

and

Account

composed

are

is done
and

that

is to

it is the

to

Accounts.

Loss

that

included

the

in

Items

Grouping

are

classification,

incorrect

otherwise, by

be made
to be
by the accounts
may
absolutelymisleading. For example, this will be the case

results shown

the

repairsto plant are debited to

Plant and Machinery Account, or if,in framing the Balance
such
accounts
Sheet, debit balances upon
as
Preliminary
Expenses, Advertising Suspense, Payments in Advance,

if

charges

revenue

and,

take

to

are

included

the

term

extreme

an

under

contained

above

do

assets

in the

not

resultingin

debit

the

The
which

be

exact

exact

the

in which

should

only

such

Ledgers,
owing

as

amounts

forward

all,and

Profit

Loss

and

be included

of the final accounts,

should

should

Account

and

Balance

opinion,

and

in

be

appear

Sheet,

are

respect of which

not

are

spent,
tancy,
accoun-

Sheet

until
Such

Account.

liquidassets,
described clearly,
so
be appreciated.

separatelyand
positionof affairs may

items

Balance

in the

stated

form

items

the

but

sense,

not

book

trade

whereas
at

For

Debtors."

cover

concern,

Sales

off to

transactions
the

Sundry

Account,

represent moneys
of
balances, which, as a matter

carried

be

should

that

"

represent moneys

items, therefore,should
but

heading

in the

written

are

"

Loss

and

Profit

case,

the

ordinary

must

they

as

Sundry Debtors
payable to the

and

owing
debts

"

such

with

the

headings under

and
classified,
in the

Profit

all matters

of

the

order

and

Loss

personal

opinions differ.

The

60

reflection of the
of

items

like nature

and
intelligible,

that

clear and

must

to

make

there

is

the

only
and

clear

accounts

is

there

suppressionof

no

true

that

see

grouped together,that

are

sub-division

sufficient

is

He

of affairs.

state

questions, provided

these

the accounts

by

positionshown

the

that

with

concerned

is not

auditor

AUDITING

OF

PRINCIPLES

THE

material

facts.
final accounts

The
it may

disclose

and

indication

accounts

"

examining

the

the

details

and

appreciated,and

be

all such

and

accounts

result of

the

trading

positionat

date

the

in order, and

giving

results of the

The

period of

the

the

of

accuracy

therefore,

It is for this purpose,

are

summaries,

correct

are

actions
trans-

is

all the transactions

not

nature

of affairs,

appointed,namely, that he may examine

or
detail, and thus satisfyhimself whether

that the auditor

into

the

can

be verified.

the summaries

during

out

only by going behind

transactions

various

carried

from,

accounts

business

effect of all the

been

have

such

to the financial state

as

combined

the

that
the

of detail items, and

be, thousands

merely give an

built up

summaries

mere

are

for

period, and

the

the accounts
of

fair indication

the

financial

the

Sheet.

Balance

of the

that

the
Principles Governing
and
Trading, Profit
Loss,

of

Preparation
and

tion
Appropria-

Accounts.
Auditors
are

the

have

drawn

up

accounts,

form

criticise the

to

further,they often

give

to

or

advice

are

in

in which

requested to
this

of
the

placeto

auditing,it

Sheet, before
the audit
an

accounts

passing to

must

should

tancy
accoun-

is

the Profit and

thereof.

auditor

to

thought that it will not be out

of the principles
brieflysome
governing

consider

preparationof

prepare

connection, and,

therefore, although this subject belongs more

than

accounts

For
have
be

the

Loss

Account

detailed work

and

connected

it is essential that, before

a

correct

drawn

up,

knowledge
in order

Balance

as

that

to

with

criticising,
how

such

all necessary

information
understood.

Accountants

accounts

not

are

should

accounts

Trading

and

Account,

non-trading

is the

and

The

depends
but

the

account

various

be

from

the

object of

This

the

given

ascertained.

carried out

of

sources

of

disclose the

to

as

income, and

in

companies

earning
the

use

or

term

Loss

Account.

merchant

or

trader,

the difference between

goods

been

have

purchase price of
"

the

gross

difference

therefore, represents the

and

various

the

total

is called

difference

be

up

is to show

for which
the

may

of Profit and

this account

period, and

the

but

during

transactions

case

called

Expenditure Account

drawn

In the

of

case

is

into

losses incurred

instead

the total amount

and

Some

ACCOUNT.

TRADING

the

results of the

the

group

entered

so

and

same.

Account

Revenue

to

of the

nature

expenses
the

In

Loss

hospitals, clubs, private

Income

an

should

received

obtaining

the

the

upon

amounts

the

of

form

exact

Profit and

the

profitor loss

final

the

turer
manufac-

or

Expenditure Account,

transactions

that

the

sections, viz., the

three

as

namely,

same,

revenue

period,so

merchant

corresponding account

generally the Income

various

into

such

concerns

for

that, therefore,

AppropriationAccount.

the

individuals, etc., the

object

of

Manufacturing Account,

or

but

their

simple as possible.

as

generallydivided

is

easily

that

forget

to

accountants,

Account

Loss

will be

that

general public, and

be made

Profit and

The

for

61

ETC.

form

apt

are

prepared

the

of

information

ACCOUNT,

disclosed in

be

may

LOSS

AND

PROFIT

THE

sold

during

such

profitor
between

goods.

loss," and,

bujdng

the

prices.
selling

In the

case

be debited

of

with

the cost

carriage thereon,
in order

sold.

are

only

with

The

and

to convert

that

included

manufactorer, the Trading Account

the

should

The

of the

the

such

materials

direct costs
as

materials, includingthe

manufacturing

Trading

be such

raw

of
vary

expended

wages

into the finished articles

Account

should

production,and
directlywith

opening and closingstocks

will

will have

be

debited

the

items

the turnover.
to

be

brought

62

into

for

Trading Account,

the

AUDITING

OF

PRINCIPLES

THE

against

sales of

the

the

period that are credited must be charged only the cost of

the goods sold, but, probably,part of the goods sold will
have been purchased in previous periods,and a proportion
included
of the goods purchased during the period,and
purchases, will not
to adjust this, stock

in the
order

sold.

been

have

taken

be

must

Therefore, in
close of

the

at

is
period,and thus the Trading Account
debited with the opening stock at cost price,that is,with
the cost of goods purchased during previousperiods but
sold during the periodunder review, and credited with the
closingstock, that is,with the goods purchased during the
current
period but not sold, and which must, therefore,
to the next
be charged on
period during which, in the

financial

each

the

ordinary course,

of the chief

One

is to

Account

profitbears

objectsof

ascertain

and

another

auditor, and

the

as
strictly

enquire most
PROFIT

Trading
which

Loss

AND

Account

latter

that

those

obtained

in the

is the

business

to the

from

balance

Profit and
with

It should

the

upon

Loss

Account,

miscellaneous

any

sales, such

rents, interest,

as

be debited

and

profitor

loss upon

transactions

for such

period.

to the
a

Trading Account,

net

APPROPRIATION

of

The

with

every

loss,or charge of the business for the period,other

expense,

case

carefullyby

reasons.

is credited

account

the

between

as

watched

be

ACCOUNT.

discounts, etc., received.

carried

the

to

siderable
con-

fall is considerable, he should

or

is carried

income, other than

than

this percentage

should

gross

is of

proprietorsof

the

to

Trading

the

this information

in

if the rise

the

that

percentage

value

variations

The

period

one

the

sold.

preparationof

the

sales, as

the

to

commercial
business.

will be

same

ACCOUNT.

The

partnership,shows

loss between

the

partnership.

the

case

of

company,

balance

which

loss

account,
of such

with
the

thus
of the

whole

profit or

division

partners in accordance

In the

the

net

AppropriationAccount,

the

is

in the

profitor

the terms

of the

Appropriation

the

includes

Account

the balance
transfers

general reserve
shareholders,

the

amongst

any
iinal

for distribution

deficit,as

the

case

be.

may

Accounts.

Nominal

of

Adjustment

Trading, Profit

The
Accounts

from

built up

are

and

Impersonal Ledger,

closed

by

former

All

accounts.

carefullyby
all the

auditor,

the

classified and

included

in

charges and

that

losses

have

been

review, and

under

due

amounts

that

The

auditor

should

Provision

RENT,
ETC.

for

RATES,

The

each

should

with

regard

Liabilities,

seeing

the date

included

WAGES.
should

The
be

date

that

any

of the Balance
the amount

in the

previous year,

to

up

etc.

WATER,

AND

demand

inspectledger accounts,
the

period

and

accrued
Sheet

debited

is

been
to

that

all the

by

covered

unpaid

provided

to such

corresponding nominal
see

that

each.

to

GAS, ELECTRICITY

should

taxes, etc., payable have

paid

with

TAXES,

also compare

those

for the

"

accounts

the methods

and

already,

Outstanding

and

payment

period
sundry

and

Bought Ledger

receipts,carefullynoting

proportion to
He

adopt

auditor

notes, and

expenses,

the

in advance

than

dealt with

been

into

this

properly adjusted and brought

standing
followingare examples of various out-

"

have

In

outstanding

brought

payments

liabilities,other
which

correctly

been

have

into account.

checked

been

have

three

satisfied that

be

may

all

see

be

must

final accounts.

the

must

being

to the

thereon

business

the

connection, he

he

contained

accounts

accounts

that

so

of

transactions

nominal

all such

nominal

Appropriation

accounts

of the balances

transfer

the

and

Loss,

the nominal

in the

an

final

the

or

period,
the

paid,

available

amount

the

period,and

dividends

and

representingthe

for

loss

the last

from

63

ETC.

ACCOUNT,

profit or

net

forward

brought

to

balance

LOSS

AND

PROFIT

THE

for.

account
account

rents, rates

and

included.
which

ascertained, and

the

wages

if there

are

have
any

been

days

64

financial year,

close of the

the

and

date

that

between

AUDITING

OF

PRINCIPLES

THE

week's

wages

inspect

the

Salaries

the dates

up

correspondingproportion of the ensuing

should be calculated and provided for.

paid, and

been

salaries have

outstanding

any

note

Books

of the financial

periodbut unpaid at

for ; ascertain

the

whether

there

the

auditor

so

and

arrangements

FEE.

AUDIT

The

should

accounts

INTEREST

amounts

be

fee

SUNDRY
should

If there

to

as

; if

this head

under

in the accounts.

period

are

covered

the

by

All

the

is

all the

accounts

various

included

been

interest

provided for.

nominal

other

be

the

that

see

Sheet

date of the Balance

EXPENSES.

loans, mortgages,

any

to

inspectedto see that

charges for the period have

and

made

for.
provided.

PAYABLE.

to the

and

solicitors' bills of costs

the

for

provided

account.

be

included

debentures, etc., it is necessary

accrued

into

owing

are

end

to the

regardsexpenses,

should

call for the

should

various

date, are

brought

amounts

any

these

that

see

are

auditor

the

earned

that

as

Enquiries

CHARGES.

LEGAL

any

outstandings are

any

of

commissions

see

that

The

EXPENSES.

AND

Commission

inspect the

that

for

made

amounts.

travellers,and

see

to which

provisionis

that

see

COMMISSIONS

TRAVELLERS'
should

and

Salaries Book,

and

Account

should

auditor

The

SALARIES.

expenses
these will

"

consist,for example, of repairs,fuel,freight,

carriage,dock
dues, subscriptions,
advertising,and

amounts

by

of the

amounts

up

to which

such

dates

may

also

Cash

been

debited

and

run,

of the end

entries

invoice

received, the

and

discloses items
In

some

amounts

cases,

an

invoices
dates

where

no

accounts
to

be

period.

the

He

of the

examination

files for

for which

will have

of

making enquirieswhere

of the financial

books, and

made.

items

outstanding

trace

receiptsand

of the

inspect order

often

to

other

during the period,noting the

invoices

fall short

able

be

may

examination

an

such

Book

period

auditor

The

expense.

many

succeeding

provisionhas
have

estimated.

not

been

66

to

what

exactly a Balance

to

show

of

purpose

"

"

sheet

showing

but

merely

the

appearing in
balances^

nominal

Profit

Loss

and

balance

the

not

Loss

form, the

whole

items

For

other.
Profit

Loss

and

Sheet, but

asset."

Again,

discount

neither
is

over

must

appear

such

items

balance

an

forfeited,and
must

but
"

cannot

not

what

are

off to

Sheet.

funds,
left-hand

are

commonly

the

on

of

case

side

of

the
"

termed

be

an

preliminary

as

advertising,

Profit

Loss

and

carried forward
the

other

paid

amounts

Profit and

on

the

On

the

nor

balance

the balance

years,

credit balance

upon

one

issue of debentures,

Balance

reserve

appear

shares

on

Loss

side of the

Account,

Sheet,

Balance

understood

by

hand,

the

term

liabilities."
For

the

should

not

for if the
that
at

period of

as

the

debit

it includes

cases

expenditure,such

upon

in the

is the

as

in classified

right-hand

the

alterations,etc., is being written

Account

books,

in the

this balance, in the

on

this

when

Sheet,

Balance

The

the

to

including

Sheet

merely shows,

if there

appear

Balance

transfer

by

Balance

are

Account,

must

company,

expenses,

which

example

all the

jxxdcs,afty

of

business, but in many

sides

both

on

of all

after the nominal

open
It will include all the assets

closed.

liabilities of the

and

thought,

balances

of the

been

have

accounts

is not

Sheet

classified summary

account

Account, but

and

Balance

rinsed

the

"

actual

an

latter account.

the

on

therefore,is
Profit

Account

set

been

have

accounts

and

meaning

true

as is commonly
liabilities,

and

of assets

statement

importance that

the

SHEET.

BALANCE

OF

purports

Sheet.

Balance

it

what

utmost

understand

should

DEFINITION
a

is,and

Sheet

it is, therefore, of. the

auditor

every

AUDITING

OF

PRINCIPLES

THE

concern,

have

"

is headed

item underneath

foot represents the

whereas,

as

is

an

"

liabilities and
"

assets

"

asset, and

total value

explainedabove,

of the
often

Sheet

Balance

therefore, a

the sides headed

right-hand side

every

the

foregoingreasons,

"

assets,"

it must
that

mean

total

the

assets

of the

this is not

the

It is very

case.

result

the

it

The

in which

form
is

to them

this false

from

were

to

in the

accountancy
formed

Sheet

"

quite

is,looking upon

of assets

statement

fession,
pro-

Sheet in this way

Sheet

Balance

Balance

the

if

past, and

the

themselves

ask

adopted

even

67

ETC.

liabilities.

and
been

has

presented

for this,and, in fact,justifies

largelyresponsible
impression. These headings have been handed

down

and

them

those

they

strong

see

who

seriously why

exactly what

would

probably they

them

they

have

and

imply,
discontinuing

mean

for

reasons

use

practice.

the

Balance

Sheet

sides,and,
"

to what

as

simply and purelya

as

ACCOUNT,

general public have

the

that

ideas

erroneous

common,

LOSS

the sides of the Balance

to head

with

AND

PROFIT

THE

Cr."

it is not

as

should

"

and

"

By

should

not

have

headings

no

should

nor

appear,

used, for, as its name

be

signs

the

account,

an

the

the

two

Dr."

and

to
"

"

terms

it
implies,

is

"

To

merely a

of balances.

sheet

If

properly prepared, a Balance

and

true

concern,

and

all the

assets

items

described

the

will
particular

in

state

of the

show

exactlythe

that

the

auditor's

Sheet

is

and
principles,

to

whole

duty

positionmay

is to

show

affairs

it will often

but
liabilities,

and

so

An

Balance

of

should

of

nature

include

well, and, therefore, these latter should

as

clear.

view

correct

Sheet

the
of

other

be

clearly
perfectly

be

satisfy himself

that

the

the foregoing
properly drawn
up upon
report accordinglyto those employing

him.
MAIN
with

OBJECT

which

profitor

BALANCE

OF

Sheet

Balance

loss of the

concern

SHEET.

The

is drawn

during

up
a

main

object

is to ascertain

the

given period,though,

in

addition, it is of great value in showing the financial

the capitalis intact or not,
positionat date, and whether
and

how

the

excess

debit

such

capitalis invested.

of assets

balances

over

carried

preliminaryexpenses,

The

capitalrepresents

liabilities,
though for this purpose,
forward

upon

such

advertising suspense,

accounts

etc.,

as
are

68

included
assets

this must

that

mean

profithas

Sheet

last Balance

of the

surplus be less,a loss

comparing the opening
it must
into

be

during

to, the

added

the withdrawals

figure being compared with

A
the profitor loss.
increase, and
in

loss

the

amplifies
Sheet, the

have

any

the

the

valuation

ascertain

of the

decrease

or

will have

fix their

exact

which

to

is carried

estimate

business

and

that

be

claims

until

is, the
on,

the

is

over

surplus

the

which

total

the

case

estimated

such

such

tainment
ascer-

the

on

assets
as

the

by

land and

valuation

are

to

But

the

of which

the

Even

held

not

be

up.

of such

personal opinion.

cases

buildings,plant and

never

finallywound

use

other

easilybe

sold.

are

the

are

under
liability

but,

assets

re-sale,and, in fact, may

meantime,

of such

seen

as

machinery, mines, concessions, etc.,

the

assets

belongingto a business can

impossible in many
practically

value

assets, that

business

the

profit or

assets

ascertained, it is

until

such

absolutelydependenlupon
It is possible,
assets.
as
rule, to
a
of the liabilitiesexactly,
except in the

such
contingent liabilities,

hand, though the

to

Balance

loss is

profitor

the amount

this head

view

merely

the

by

surplus of

the

increase

subject of dispute,in

fixed

from, and

Account

showing exactly how

the

as

of the

of

the

at

capital invested

Loss

represents the profitor loss,it will be

case

drawals
with-

to arrive

deducted

disclosed

capital represents

and
liabilities,

the

been

paid

arisen.

loss has
As

been

in

and

information

former

this purpose,

the resulting
closingcapital,
the opening capital and
closing
disprofitmay be said to be an

Profit

business.

the

But, in

capitalhas

be

decrease

should

incurred.

If so, in order
must

date

since the

hand,

been

there

additions

loss, the

profitor

made

other

further

any

period.

the

for
closingcapital,

and

whether

or

been

have

must

during

the

on

whether

seen

business,

the

increased

liabilitieshas

over

surplus of
given period,

If, therefore, the

assets.

the

with

AUDITING

OF

PRINCIPLES

THE

with

sold unless

and

Consequently,

assets

if

is

matter

in
of

expert valuers

LOSS

AND

PROFIT

THE

employed, probably

were

the

result

same

instance, in the

for

"

valuers

two

no

69

ETC.

ACCOUNT,

arrive

would
of

case

at

factory

equipped with machinery being valued by two independent

total valuations might differ
expert valuers, the respective
by thousands
such

immediate

estimate

necessary

to

guarantee

that

VALUATION
in

Balance
based

the value

upon

for

purpose

Again,

there

therefore, if any
of

before

good

impossible to
the

working

total

For
to

such

at

exactly,and
results
the

life of

are

assets

values

the

realised and

ore

is, the

as

will

As

going

for

proprietor

be

the
seen

valuing

when

profitunless

additions

in which

such

part of such
or

must

arrived

at.

for

mine, and

in

be made

But

example,

machinery,

or

it is

will

be

is the

what

long it will take

how

capital

consumed

are

wastage

be

original

the

thereto, is intact

preciselywhat,
in

be

Sheet.

true

plant and

should

realise if sold,

adopted

are

assets

reasons,

it will be

profitsor

actual

losses of

to

absolute

it is

precision.

impossible

continuing

true

business, and

it is

that

seen

profitis seldom
absolutelydependent upon

of the

with

them.

for

ore.

the above

arrive

requires

profitcan

true

state

quantity of

extract

the

sidered
con-

assets

that

the business

to

wasting nature,

is

it

be

to

of

would

to

earning revenue,
the

question

assets

assets

any

of the
of

are

course

such

no

with

less

or

exact.

the valuation

Balance

be

can

capital,together
is invested

in

be

to

valuation

the

methods

these

more

though

exchangeable values,

he

for inclusion

assets

the

Another

of such

which

alter, both

will prove

is, their value

that

concern,

to

And,

is,whether

or

debts, and

value, it is impossible to

that it is estimated

amount
or

market

upon

same

their

with

Sheet purposes

view

the

cash.

ASSETS.

connection

degree,

into

valuations

such
OF

with

held

are

conversion

lesser

stock-in-trade,book

of

which

assets

In

pounds.

valuation

the

appliesto
other

of

appreciatedby accountants,

The

ascertained.
the

valuation

impossible to

These

business

facts
who

of

fix such
must

should

be

make

70

these

lead

not

into

belief that

the
be

certaintycan

clients,whom

to their

clear
principles

root

AUDITING

OF

PRINCIPLES

THE

absolute

they

must

exactitude

and

periodicalaccounts

achieved

in

purposes,

the assets

the

of

their businesses.
For commercial

and

estimates

leave

margin

"

of

means

servative
con-

concerns

in valuation, and

contingencies.

Balance

divided

arrived

accurate

well conducted

reserves,

provide against errors

to

for unforeseen
For

and

near
sufficiently
and, by
purposes,

ordinary business

for

according

profitor loss

the

is considered

in this way

at

rules,and

conventional

to certain

valued

are

Sheet

under

the

purposes,

of

assets

headings i.e., Fixed

two

business

"

are

"

Assets

and

FloatingAssets."
FIXED
of

assets

by

for the

the

with

the

and

same,

of re-sale.

purpose
a

same

such

For

for the

period of

whole

assets

example,

with

view

those

are

acquired by

are

factoryis held

plant.
Floatingassets

Assets

for
earning profits

to

of the

use

machinery of

view

Fixed
which

nature

permanent

undertakingwith
years

ASSETS.

FLOATING

AND

period of

not

held

plant

and

are

the

an

manufacturing

to

the

working

life of

such

acquired by
held

trading,and

with

view

as

are

as

possible. Examples

trade, work
seen

that

and

their

opposed

these

assets

of

book

those

stages of

fixed

assets, which

trades, and

which

are

into

debts

conversion

view

to

the

soon

stock-init will be

trades,

trader

with

or

assets
as

into

those

are

such

and

for

or

cash

are

in which

held with

not

and

floatingassets

various
to

of

course

conversion

and

are

the

produced

are

consist of cash
to

in progress,

which

assets

undertaking in

an

of its

purpose

those

are

cash,

as

which

he

conversion

into cash.
Fixed
such

assets

assets

in most

cases
over

are

valued

are

of

the

wasting nature,

is written
the

upon

off to revenue,

period

of the

basis

of cost, and

originalcost

the

by

estimated

means

of

if

price
ciation
depre-

working life

of

such

At

asset.

in the

date, therefore, the

Balance

written

depreciation(if any)

the

71

ETC.

ACCOUNT,

intermediate

any

will appear

fixed assets

LOSS

AND

PROFIT

THE

Sheet

off

cost, less

at

date, and

to

this

representsthe present value of such assets to the particular

words, the
or, in other
undertaking as a going concern,
value of such assets to the proprietorsof the particular
market

Current

business.

do

disregarded,as these
assets
the particular
that

amount

the

realised

be

would
case

where

are

not

valued
to

upon

their

values

is

there

that

be

fixed

If

asset.

errors

of

value

in market

asset

more

made,

On

the

they do

which

not

such

originalcost
results shown

add

assets

has

by

to

or

of the
which

will

earn

been

written

the

accounts

the

assets

their

upon

words,
their

upon

such

"

working life
loss will

profitor

tion
hand, the fluctuadoes

fixed asset

reduce

in

hypothetical,and
it is impossibleto

the

other

less than

or

Fixed

not

affect

not

the

asset's life,when

it

priceof the
of the original

the

case

the cost

But, apart from this, such fluctuations

one.

for

be

may

for

are

proprietor,
except at the end
have
to be replaced,in
may
new

less

or

the

hammer,

in other

"

that

therefore, that

seen,

of error,

immediately.

affected

the

and
profits,

more

in

amount

down.

business

be

are

if sold

is the

certainty,the period of

fix,with absolute
of

"

sale under

the

earn

likelihood

of

represents

saleable value, but

their

ability to

"

value

produce

is closed

business

upon

Sheet

Balance

forced

value._ It will

intrinsic

working lives

the

Market

would

proprietorof

the

value

"

break-up value

by

the

the

are

"*

asset

"

value

break-up

and

affect

not

all.

at

an

market, and

open

value

are

immaterial,

day the periodduring

profits,and provided the
off during this period,the
have
been, for practical
by

absolutelyaccurate.
the
basis of
Floating assets should be valued upon
is the
either cost or market
price,ac^or^ng_tp_jwhich

purposes,

lower

at

the

date

that, since these

the

market

of the
assets

Sheet

Balance
are

held

with

price has dropped, and

such

"

the
view

being"

reason

to

re-sale,if

fall is not

mere

72

fluctuation,but

represent

to

appears

in effect

fall,then

AUDITING

OF

PRINCIPLES

THE

loss has

more

less permanent

or

made

been

the

on

purchase, and should, therefore, be provided for. For if,

owing to the high pricesat which the goods were purchased,
and
to the subsequent fall in market
prices,it appears
that probably it will be impossibleto sell the goods in
ensuing year

the

for at

should

account

no

date

Balance

of the

provided

in which

year

the

for

"500,

valued

be

take

to

into account

profit. For

and

Sheet, when

remain

said that

if

certain

unsold

market

the

above

at

value

the

of the

profitof "100 has

maintained
been made, but merely that if these pricesare
it appears
likelythat, upon realisation,such a profitmay
valued at "600, apart
be made.
Again, if such goods were
from
other transactions,the accounts
would
show
a
profit
of "100 available for the proprietors
of the business, but,
in fact,there would
not be a penny
piecerepresentingsuch
"600,

is

same

purchased

are

be

unrealised

and

purely fictitious
goods

the

floatingassets
would

effect

the

price,as

cost

fall upon

be

purchased.

were

On

the loss should

then
profit,

should

and

once,

goods

at

be

it cannot

supposed profit,which, therefore, would

be

mere

paper

one.

The
the
in

foregoingreasoning might

necessityof
where

cases

J\

be

made

for

that

this

that

But,

the
on

be

values

prepared

estimated

an

estimate

upon

loss,and

it

in

profit,no

to

value

of

floatingassets
But

cost.

basis

the

against

argue

below

are

that

for if

losses

provision is

subsequently transpires

incorrect, and

was

resulted

that,

harm

in

will

fact, the
been

have

the

succeeding year will benefit to the extent

under-estimated.
previous year's profitswere

the other

hand, if a profitis anticipatedand

credit for before the

profitmay

the

used

anticipated,but profitsnever,

transaction

done, and

market

the

should

accounts

should

writing down

be

have

business, and

same

been

upon

it

paid

is

realised,then

away

being

found

to

the

such

taken

estimated

proprietorsof

the

subsequentlythat this'

74

most

has

considerably

for

assume

does

not

mis-stated

only

harm

and

OF

prepared

carefully

the

Great

PRINCIPLES

THE

cannot

can

an

be

and
the

done

audited

possibly

AUDITING

to

audited
real
the

Balance

possess.

Balance

position
profession
Sheet

virtues

Sheet
of
if

affairs.

tants
accoun-

that

it

CHAPTER

VALUATION

IN

values

be

of the

more

less

based

Balance

the

valuation

It

of

be

shown

But

it must

who

be

far

he

as

position
in any

can,

At

shown

the

of

the

Sheet, and

to

appear

be

sufficient, for, having

ought

be

to

in the

satisfyhimself
at
were

the

free

and

properly

are

that

date
from

of
all

the

to

practice,
thereto.

the

concern,

and

assets,

of the

Balance

duties

out

correctlyvalued.
from
of the

Balance

were

concern,

however,
Sheet.
the
of

assets

of account,

in

thus

Balance

the

this is not

But

what
he

actually in
those

the

all those

books

Sheet, and

charges except
75

the

that

The

that

see

as

regards

as

books

the

that

valuations

the

cannot,

clearly set

assets

results

valuations

he

from

possession
such

in

regard

discussed.

be

found

matter

of various

actual

testing

correct

duty

the

upon

satisfying himself

ascertained

auditor's

with

of such

way

also

all

certain

the

with

met

the

auditor's

will

assets

in

recognised

that

officials of

or

accuracy

time, the

will be

it is the

disclosed

that

to

be

to

be

valuation

the

mind

this

appears

same

business

and

in

not

to

for all practicalpurposes.

duties

is confined

guarantee

verification
a

and

are

upon

so

care,

with

proprietors

duty

way

utmost

practical knowledge

auditor's

an

in

bound

therefore, this

that,

auditor's

borne

are

but

it must

hand,

constantly

are

the

the

by

have

values,

and

deal

to

they

the

purposes

absolutely dependent

the

which

explain

made

that

accurate
sufficiently

assets
to

is

with

proposed

and

and

that

out

Sheet

valuations

such

other

assets,

into

be

now

common

are

the

Sheet

the

gone

may

is

On

pointed

for Balance

market

the

upon

ASSETS

OF

been

business

approximate,

accepted rules.

must

it has

estimated, that

or

cases

of

assets

be

to

that

VERIFICATION

preceding chapter

the

have

AND

that

assets

then

must

its possession
the

disclosed

same

in

the

76

is

This

books.

duties, for, although he

payment
that

asset

assets

evidence

actuallyin
method

securities of

produced

to

by

the

the

bonds

not

produced

in the

auditor

are

to

his examination.

keys

securities

are

of

he

has

of

of

noted

took

fifty,it

the

perpetrated for

at

that

whole

of the
that

control

during the whole

simple way of doing

the

strong
handed

these

he

completed

and

room

to

should

the

succession,

retain

his examination

all remain
time

safes, where

in

his

of the

bills,

securities

this is to

at

when

of freehold

of the

auditor

were

of fraud

certificates,bonds,
the

be
upon

Therefore,

time, and

one

in

title deeds

the

be

away,

bonds

same

years

defalcations.
as

one

would

form
fact,this particular

him

these

all the numbers

that

an

fiftyproduced

In

see

as

bonds

these

ensure

must

kept,
and

until

batch

property, share

his entire

all the

more

considerable

to

been

auditor

produced

under

or

verification will

batch

one

auditor

serious

leasehold

etc., the

that

holding
all

thereafter

another

twice.

up

unless

had

examining securities,such
and

and

bonds, having in all

who

the

produced,

past has

covering

If

company

time, the

manager,

impossible,unless

bonds
same

produced

then

of

debenture

the

at

for if the

"

care

of securities is not

investments.

case

bearer

"50

him

and

the

certain

produced

useless

are

exercised,this fraud is extremely simple. For

investment

are

such

assets

purpose,

batch

one

verify both

instance, suppose
hundred

this

for

securities

like nature,

to

is not

care

such

adopted to prevent substitution

when, for example, there are two

that

at

verifying the

be

must

say,

attend

inspectionof

that

his clients.

possessionof

the

examining

When

entails the

at

concern

of

purpose

satisfythe auditor

will

as

the

This

date.

at that

as

is to

period for

of the

close

the

the

at all that

auditor, therefore,should

The

date.

subsequent

original

the

evidence

no

possessionof

still in the

was

is

auditor's

an

vouched

have

may

purchase, that

the

upon

of

important part

most

AUDITING

OF

PRINCIPLES

THE

the

of

have
the
mencement,
com-

possession
securities.

VALUATION

VERIFICATION

AND

Further, he should

conduct

himself, assisted by his

The

in Hand.

Cash

of business

the

comparing

and

in

petty cash, cash

produced at

or

the

and

vouch

then

attend

cannot

bank

good plan
the

upon

drawn

upon

Unless
be

not

last

necessity for

balances

of

the

counting
date, and

to

the balances

with

same

Pass

Book

agreed by

direct from

the

their

at

balances

the cash

accounts.

automatically counted
saved

is thus

should

make

and

their

of the

Cash

The
as

largecash

balances

if cash

from

show

Book

should

tendency

enquiriesas

actual

existence, and

should

as

to

obtained

the

close of business
seen

that

balance
upon

to

the business.
be

reconciliation

be

to

careful

of
principals

of the

means

Sheet, it being

balances

checked

previouslydescribed, and

bankers,
the

all cash

that

are

Thereafter, a certificate should

Balance

the

auditor

the

facts to the notice

books

the

upon

of

purpose

to re-open

balances

them

Balances.

the

of

out

task.

allowed, and

Bank

prevent

period shall be paid into the

such
period,cheques being

absolutelynecessary,

bring the
with

day

for, and

increase, the auditor

the

the

arrange

financial

invidious

somewhat

is to

all cash

accounted

and

as

subsequently attends, check

he

followingday

the

this way

In

to

immediately

period for

comparing

close of each

the

the

to

books.

the

very

hand,

should

cash

up

petty cash, till books, etc., up

the cash,

by

shown

in

another.

financial

the

count

of the

being made

cash, he should, when

the

the

on

balances, such

time, in order

same

or

according

cash

more

close

the

at

Sheet,

balances

the

account

auditor

the

close of the

at

and

one

belonging to

If

possible

balances

till,etc., the whole

one

shortages upon

all cash

count

two

are

attend

Balance

of the

with

same

If there

books.

cash

little as

as

should

auditor
date

the

upon

followingmorning,

be

staff,and

own

examination

staff of his clients.

the

by

of the

whole

the

77

ASSETS

OF

the

two

statement.

by the auditor
according to

the

this balance

date
agrees

of the
with

78

"

balance
the

Deposit

upon

"

Account

should

is to

investments

actual

have

If shares

cost.

concern

services, should
account,
debentures

outlay,an

account

debentures,

and

the

profitor

will be

thus

and

written

date

of each

investment, the

each

Ledger, and
market

prices.

For

market

fluctuations

time

the

in

of

purpose

date

audit

markets

the

necessary
but

the

have

to value

price

should

be

should

to

should

be

such
on

the

to

current

upon

valuation,

this

porary
tem-

for

disregarded ;
Sheet

war

basis of such

included

the

realisation

all markets

the

subsided
not

abnormal

taken.
as

which,

scare,

being completed, has

righted themselves, it would
the

figure
to

according

Balance

exceptional circumstances

investment

at this

schedule

be

may

of

in

appears

is

upon

fair average

placed in

auditor, giving particulars

abnormally depressed owing

were

and

the

the

for such

off.

date, based

at

or

such

no

be

loss upon

thereof

cost

fair valuation

example, if upon
by

the

such

shares

opened

remains

Sheet,

Balance

prepared and presented to

of

be

investment

every

particularaccount,
the

with

realised will be credited

the amount

ascertained

to

are

should

bare cost, and

at the actual

until sold when

there

amount

no

issued

rendered, then

of the

cost

should

In this way

column.

the books

but

the

particularinvestment

If, however,

shares

being

been

in connection

received.
or

debited
have

the

to

in the

opened

services

incurred

debited

expenses

the cost

for

deal with

to

way

amount

debentures

or

been

be

best

representing the actual

as

or

the

consideration

as

outlay has

whatever

be

verified in

be

account

separate

investment,

for each

Ledger

the
possible,

When

Investments.

At

produced. Any

way.

same

the

Book

Pass

the

according to

balance

the

AUDITING

OF

PRINCIPLES

THE

the
list at

prices,

But,

except

above,
the

be

each

market

price.
In the
not

be

case

quoted,

of
the

holdingsin companies
Balance

inspected, and

Sheets

fair value

of such

whose

shares

are

companies should

placed upon

such

shares

the

information

that

The

should

added, and

be

exceeds

or

if the

of the

re-valuation

should-be-made..

Any

such

Profit and

Loss

Account,
from

this is

be

Balance

the

Sheet

for

in

some

years,

during

which

may

fluctuate

between

very

wide

is to deal with

make
In

to

reserve

at cost, with

value

at

In

all

"

as

Balance
to

"

market

item

investments

investments
Consols

and

prices,"or

investments

Sheet

their nature
"

the

of the
be

may

market

loss arises.
as

values

The

as

to

realisation.

in the

shown

best

whole, and

upon

Balance

to the

in such
"

that
"

way

"

at cost

be

that

is to say, there

in the

should

to whether

should

Balance

market

be

stated

the valuation

less

reserve,"

sub- divided

fair idea is

should

Sheet, which

given

be

not

in

one

includes

of

widely different classes, as, for example,

holdingsin small privatecompanies, but if a

detailed list of the investments

like nature

valuation

Sheet, that is,as

and, further, the

the

be

can

date

the

at

against the item

note

there

margins, but, until they

are

basis of the

the

cases

cost,"

at

but

date.

the Balance

upon

depreciationin

likelylosses

investments
a

adopt,though
must
invariably

investments

any

it is

company,

to

time

profitor

the

cover

the

cases

some

Sheet

is

actual

finallysold, no

investments.

investments

cases

Sheet

course

value

for many

method

of

the

to

Balance

the

investments

held

are

debited

be

of

case

market

the

to

if the total

price,a., reserve,
estimated
shrinkage

in the

wise

very

whole

cost

shown

that

thought

down

written

be

the

total cost

in

as

at cost, but

to

questionthat
not

Sheet

provide for such

considered in Chapter IX,

value, will be
it must

investments

the

and

the

question whether,

legallynecessary
no

equals

provide for this

provisionshould

to

deduction

and

cost

is less than

in value.

The

total of the re-valuation

in the Balance

appear

value,

total cost, then

the

should

as

the market

columns, that is,the

two

other

any

obtained.

be

can

79

ASSETS

OF

disclosed, and

positionthus

upon

based

VERIFICATION

AND

VALUATION

only

should

be

is not

given, holdings of

grouped together, and

a,

these

80

PRINCIPLES

THE

AUDITING

OF

adequatelydescribed, so that the Balance

what
show
proportionof capitalis invested in
may
securities, and
giltedged
are
commonly called
in connection
in speculativeinvestments,
amount
be

should

"

"

the risk of loss is very

which

So

far

list with

adequate

an

If

that

see

being

as

he

heavy,

estimated

but

estimated

an

at

As

of

case

and

follows

as

INSCRIBED

"

An

applicationbeing

must

be

signed by

given

the

to

as

the

in which

names

certified,and
who,

for this

must

also be
The
with

audit

cost, such

Profit

and

Loss

for what

is

supposed

penny

to

where

made

the

whom

the

certified form

accompanied by

the

the

or

records
as

the

his

correct, and

same

the

purchaser is given

When

year.
a

it is to be

is to

auditor.

be

by

the

for verification.
ticulars
par-

if found

to

inscribed stocks

certificate

form

the

it as

returns

sent,

The

compares

have

held,

amount

books, and

applicationwill

the

inscribed,

prescribedfee

then

agent
in

to

forms, which

stock, the

be

banker

sent

stock -holders ; details must

should

purpose,

each

is

stock

official

upon

of the

nature

be

it is held, the date at which

purposes,
way

above

applicationmust

of the

one

agree, certifiesthe form

For

investments

"

such

be

matter

piecewith whi
dividend
could be paid.
of investments, the procedure

agent's office

or

to

the

profit,such

paper

STOCKS.

banker

the

distinctly

credit will be taken

regards the verification

will be

the

upon

refer to

value

"

company,

the

should

he

are

should

credited

being

profitnot being representedby

in the

made,
appears

to

account

no

if this is done

as

value

it necessary

Sheet

Balance

increase

Account,

is

investments

the

On

report.

in the

appear

check

cost," and, if the fall in value be very

consider

may

in his audit

at

with

valuations, seeing that

reserve

market

the

that

or
"

what

greater.

the

such

no

to

as

Sheet,

Balance
stated

note

what

provided against possible losses

is

reserve

realisation.

upon

check

and

Ledger,

the

much

concerned, he should

is

auditor

the

as

Sheet

be
are

banker

to

directed.
made

in

bought,
or

agent

82

of the

tjiedate

auditor, and

Balance

Sheet

should

compare

he

Book, and

Receivable

the balance

with

upon

should

He

Ledger.

hand, noting that

completed

and

not

with

should
the

with

same

total of the

Bills Receivable

the

they

and

that

should

be

list agrees

overdue.

not

are

of the clients' bankers

requestedto supply the

bills. If the

certified list of such

Pass

and

Book,

and

will thus

renewed

should

for these

the cash

audit, the auditor

a

and
official,
responsible

the

(if any)

reserve

The

cases,

considerable, and,

total amount

satisfyhimself
adequate

-fIf any

bills

should

discount
shown
should
become

way

due

of

made

regard to

the

at

time

the

list of these

the

bills receivable

with

of
sufficiency
this
provided under

been

is

of the

the

to

as

provided

is, in many

auditor

the

good asset,

discount

for

and

must

that

an

possiblelosses

The

total amount
as

note

upon

as

to

whether

to

the

such

entries

the

of

bills,and

in the

the

Bills

bills under

contingent liability,
being

the Balance
any

of the

date of the Balance

anticipatedbad

Stock-in-Trade.

date of the Balance

require a list of
list with

appear

as

at the

this

since the

dishonoured, and
for any

been

should

Book.

be

With

therefore,

same

under

are

should

by

the

compare

Receivable

debts.

debts.

Sheet, the auditor

he

to

of the

has

reserve

bad

through

that

necessary

has

head.

careful

case

reserve

enquire

that

or

the

to

through

go

Book

dishonoured

which

stillcurrent

are

should

been
in

discovered,

bills that

of the

is

matured,

into the Cash

have

that

any

be

be traced

as
enquiry should be made
provide against possiblebad

balance

audit

time after the date of the Balance

some

Sheet, a proportion of the bills probably will have

and

in the

bills

they

in the hands

Bills

the

actuallyin
properly made out,

be

to

appear

the

to

Account

all the

examine

then

completed until

produced

the

stamped,

be

that

collection,the bank

auditor

AUDITING

see

If certain of the bills are

for

OF

PRINCIPLES

THE

reserve

Sheet.

Enquiry

bills that

Sheet

necessary

have
to

have
been

provide

debts.

Stock-in-trade

is

floatingasset

that

AND

VALUATION

with

is held

view

should
lower

date

at the

stock

and

materials
sold

and

the

either

they

cost

is

loss has

which

in the

subsequent

goods

fall in market

used

question

no

consists
state

same

valuation

the

and

is the

less

or

made

should

lower, for if
a

mere

fall,

permanent

purchase, and
if, owing to the

For

and

purchased,

prices,it

be

the

on

were

of

that

as

fall is not

such

more

been

the

be

the

basis

correct

business

whose

should, therefore, be provided for.

high priceat

will be

the

can

price,whichever
a

period under

actuallysold.

price has dropped,

in effect

there

purchased,

represents

profit is

succeeding period,

"

sellingthem

are

fluctuation, but
then

stock

account

the

to

it

likelythat

appears

will be
at

impossibleto sell the goods in the ensuing period

then the los^should be provided for at once,
profit,

fall upon

should

and

the

Stock-in-trade

purchased.

succeeding period at
fair chance

of

materials
raw

sellingat

and

of

which

should

be

profit.

manufacturer

goods partlymade

and

charges, such

goods

to

factory,and

the

the

invoice

prices,less

The

market

prices are,

dealingwith
in the

case

the

as

raw

of

hops in

the

cost

should

As
be

cases,

raw

cost

plus

of such
be

allowances.

disregarded when

for manufacture,

brewery.

regards

price figureshould
and

the

period

that

finished.

discounts

in certain

give

were

to

on

freight,carriage,etc.,

all trade

materials

goods

will include

materials, the basis of valuation

direct

the

charged

will

price that

stock-in-trade

The

in

year

be realised.*"*""

the

to

is the

no

unsold, which

or

under

or

on

never

may

period; therefore,

market

or

market

the

merchant,

and

and

which

to

if so,

as

is to credit
to

on

such

of

cost,

re-sale ;

of valuation

basis

the

Sheet, and

been

stock

is, cost

case

which

Balance

not

latter

in the

buying goods

the

is that

goods unused

profituntil

In

in

has

charge

for valuation
a

less immediate

or

valued above

be

object of taking

review,

of

rule

of the

anticipatedwhich
The

more

83

ASSETS

according
^be_cost_orjnai^et.j^icfi#-

should

or

to

general

therefore, the

OF

VERIFICATION

as, for

instance,

Here, the hops

are

not

84

with

purchased

previousyear
stock

into
had

cost

lower

year's brew,

next

materials

Raw

which

is

originalform,

but

and, therefore, in ordinary

a

fair basis

there

has

of valuation
been

materials

loss, owing
materials
that

the

cases

cost

be written
bad

the

enable

will result in

or

manufactured

the

charged

are

will

for

should
to

of

purpose

facture,
manu-

p:

for

resulted

has

prices obtainable
raw

re-sale in

to

But if
stocktakingpurposes.
price of raw
heavy fall in the market

materials, which

view

actual

the

loss thereon.

profitor

with

year'sBrewing

that

held for the

are

of

largerprofitout
matter
quite another

that

so

held

not

are

subsequent

actual gross

the

the

at

loss, but

charged with

be

must

consumed,

show

may

made

year

of the materials

Account

their

next

purchased

be taken

brewery
hops fell,it

made

have

have

would

prices,they

therefore,the
cost

and

waited

in the

after the

price of

brewery

the

of the

cost

purchased

were

market

the

hops

that

had

if they

same

to

year'sbrew,

next

actual

the

for, supposing that

"

its

not

mean,

that

the

at

the

Therefore, these hops should

not.

or

purchased

would

the

used, whether

materials

will not

but

year,

therefore, in order

charged with

be

must

account

that

one

loss upon

profitor

ascertain the true

the

position,therefore,is,that

The

following year

until the

used

be

for

but

hops,

as

purchased in

been

hops have

these

re-sale

to

beer.

brewing

of

purpose

view

AUDITING

OF

PRINCIPLES

THE

down,

buying,
to

the

year

to

on

that

is

fall in the

goods,

then

the

probable
anticipated,and the
so

the

that

ensuing

year

manufacture

at
at

price

fair

profit.
In

the

of unfinished

case

goods, the

basis of valuation

materials, and
them

to

is added

charges

"

yardmen,

the

direct

date

to

this

such

as

and

should

be the cost

manufacturing

of the
a

completely manufactured

and

Balance

Sheet.

percentage

the

mechanics

of

wages
;

labour

to

depreciationof plant,etc., and

to

raw
on

there

establishment

foremen,

consumed

Sometimes

cover

fuel, power,

of the

store-keepers,

heating, lighting,

reasonable

extent

this

VERIFICATION

AND

VALUATION

permissible.However,

is

its

merits, and

own

added

to

low

as

and

never

for

each

interest, staff

commission

and
that

added

for

may

be valued

at

account

found

the

course,

Sheet

considerable

Account

Loss

himself

and

Balance
which

in

be

not

stock

goods

can

be

it

of manufacture

cost

circumstances, of

such

not

similar

for Balance

adopted

regards

of such

freehold
auditor

to

"

in

any

of the

rely very
in

fraudu-.

the

is

other

the

by
in the

as

ments,
balances, invest-

this asset
assets

not

of the

means

properties,etc.

largelyupon
upon

certain

no

do

date

the

at

of this asset,

over

unless

of account

hand, bank

leasehold

connection, and

management

books

existence

less control

practicallyover

Profit

the

stock, and

the

in hand

be

cash

and

has

is bound

value

kept, the

should

as

Sheet, and

often

frequentlyeffected
it is impossible
for the auditor

Further, there

assets

both

one

is most

But

verifythe

can

is

involved

amounts

Balance

accounts

stock

stock-in-trade

materiallyaffect

the

been

Sheet.
he

in this

of

have

disclose what

the

should

newly-startedworks,

actual

take, inspect,or

to

books

case

of

the

and

of the stock.

means

stock

that

case

position as

lent falsification

by

the

for the
great difficulty,

very

and

into

taken

circumstances,

no

at which

price could

cost

auditor's

very

are

Under

salaries,

taxes, etc.

be

they

fees,

purposes.

The
of

but

that

sellingprice, and

the

and

as

only,

directors'

as

should

purposes,

figureabove

is sometimes
exceeds

kept

partly~or~
completely manufactured

purchased, for, in

be

he

latter expenses

these

be

salaries, travellers'

stocktaking purposes.

Eowever,

such

on

percentage

expenses

office rent, rates

expenses,

for cost

account

works

cover

expenses,

debenture

the

charges should

should

administration

It is true

be considered

stocktaking purposes

possible,and

85

ASSETS

must

case

establishment

cover

OF

of
the

he

fact,
has

business, and

internal checks

certificates

fact,the stock presents one

than

In

given by
of

an

the

auditor's

greatest difficulties.
The

errors
principal

that

have

to

be

guarded against,all

86

PRINCIPLES

THE

of which

follows"

as

are

committed,
purposelyor unintentionally

be

may

AUDITING

OF

calculations.

and

Incorrect

additions

Incorrect

pricesand valuations.

inclusion of

The
have

the

passed through
inclusion of goods in
been

not

The

entered

sold and

been

as

for which

stock, the invoices

in

goods

purchases.

stock

that

already

have

sales,priorto the date of the

Sheet.

Balance
The

in warehouse,

of agents, at docks,

in the hands

of stock

omission

etc.

plant,tools,furniture, etc., in stock,

which
have alreadybeen debited to an asset account.
in the case
of
The omission to providefor depreciation
damaged, out of fashion, or obsolete stock.
If proper
have
stock accounts
been kept, these will be
inclusion

The

of

great assistance
stock, and

the

any

of

largedifferences

by the stock books and

carefullyinvestigated.

shown
most

Before
should

carefullyenquire

entering, pricing
basis

exact

and

into

stock

it has

should

be

auditor

the

system of taking,

and

find

As

valued.

the

out

many

the stocktaking,
engaged upon
and
each
step should be independently checked.
Further, responsible officials should supervisethe work,

persons

possible should

been

quantities

sheets

checking,
whole

the

the

between

checking stock,

which

upon

the

actual

the

commencing

of ch"

for the purpose

to the auditor

as

juniors often

as

is

what

its valuation.

stocktakingshould

the

done, and

in all

that

the

the

or

fair and

case

of

represents
In

stock

at cost

cases

in

Each

stock, and
sheets

an

has

principles
part in

takes

for what

he

managing

been

correctlytaken,
that

valuation

has

director

over-riding certificate

under, and
proper

as

concerning

the

who

person

initial the

give

ideas

erroneous

such
responsibleofficial,

partner, should

effect

quite

rightly included

governing

or

have

be

to

the

is valued

the total of the stock

of this asset.

manufacturing business,

the

auditor

VALUATION

should

make

careful

most

partly-made and

the

through twenty
they

materials

finished

completed, and

are

ordinary

there

course,

that

the cost

cost

accounts

as

is the

comparison

of

and

at

will

be

Sheet, in the

Balance

goods

stage, and

every

Unless proper

should

be

to

management,

checks

except
possible,

of the

percentages shown
to the

with

exact

In

by

of each

the accounts

of other

comparison

conclusive, but
that

of

independent

the

conclusion

the

hands

the

records, and

not

are

cost

event,

any

no
practically

are

the

cost

considerably in

cost

latter

lead the auditor

the

show

very

there

as

these

valuations

of manufacture.

stage in the process

is bound

stock

the

records

records, which

even

pass

impossible
kept, it is practically
accuratelyto value partly manufactured
auditor
of checking that an
has
only means

goods,

and

may

been

have

the

plicated
com-

it

Therefore,

of the

will be

most

stage, wages

stage will be different.

in each

correctly and

date

the

whole"

the

to

as

in each

being expended.

are

at

the

and

of

stages of manufacture

distinct

more

or

appreciatedthat

auditor

goods,

valuation

the

to

this, in many
cases,
some
factories, goods

In

matter.

before

enquiriesas

87

ASSETS

OF

dealing with

for

system

VERIFICATION

AND

the stock

years

only

may

valuations

unsatisfactory.

are

Having enquired into

and

should
and

internal

the

check

and

the lines upon

should

be

Check

bearing
upon

as

with

which

mind

system of stocktaking,

regard thereto,

stock

the

sheets

he should

as

carry

far

his

the
as

auditor

possible,

investigations

"

castings,or
that

considerable

there

is

no

portion thereof,

double

entry check

totals.

these

Check

test

follows

the
in

checks

whole

the

proportionof

the

calculations,selectingthe

larger items.
Compare the stock sheets with those of the previous
/year,
especiallyas regards pricesand quantities,making
/

Icareful

enquiries if important fluctuations occur,

\also with a view to ascertainingwhether any part

and
of the

stock
be

In

the

case

"Examine
weeks

of

raw

Trace

large sales towards

last few

the

into Stock

largeitems

leave

not

Balance

Sheet,

included

in stock.

the

the

test

that

If there

reasonable.

particularsare
that

Test

these

are

items

far

as

as

Book

Cost

the
been

records, and

charges

Books,

Cost

no

certified

are

of

not

establishment

to how

given as

these

the

for

additions

any

and

with

have

sales

completely manufactured

partly and

same

date

the

goods

period

of these

if any

after

these

that

see

of

case

until

works

the

of the

end

the

Book, and

Outwards

into the Goods

see

all

for

Bought Day Book.

any

goods,

purchased goods,
and market
prices.

Book

Inwards
trace

thus

may

and

invoice

recent

period,and

of the

In

materials

Goods

the

into

did

obsolete.

priceswith

compare

and

or

of date

out

long periods,and

for

in hand

been

has

AUDITING

OF

PRINCIPLES

THE

by

arrived at,
offi"ial.

prominent

possiblewith

full

that

see

are
figures

the

are

available

any

evidence.
Books

If Stock

Sthe
1!

Stock

Book

kept, check the quantiti

balances, carefullyenquiring into
are

with

any

important differences.
In

businesses

some

checked

the

for

easily,as,

example,
and

Bought

Sales

merchant,

the

ruled

quantity columns, and

sold

with

during

stock

give the quantity in

There

will be

Enquiry

always small

should

/goodsin the hands

etc., that

When

that

no

When

may

in

be

made

examining

been
the

of

case

coal

should

Books

thus

the total tonnage

from

the

be

tonnage

in

plusthe tonnage purchased,

stock at the end of the period.
differences
as

to

omitted
stock

owing

whether

of agents, at the

have

the

be

can

Day

period, deducted

at the commencement,

should

the

stock

quantitiesin

there

docks,

from

sheets

to waste.

the

or

are

any

warehouse,

stock sheets.

it should

be

seen

plant,tools,furniture, etc., are included.

the Trading Account
is completed,the auditor

90

legalrequirements in

strict

the

be

to

appear

may

AUDITING

OF

PRINCIPLES

THE

this

direction.
Goods

it should

and
verified,
carefully

in each

that
and

due

with

from

sales received
that

the gross

profitor loss
latter comprising

Consignment Account
If at

stock

date

the

have

showing

sheets

and

have

The

to

see

Consignment

to the

agent's

the

that

debited

to the

agent'saccount.

Sheet

the

to

whole

the

in .hand at

goods

the

accounts

checked,

be

of

the

send certified

sold, the agent should

the

that

been

credited
Balance

compared

ensure

agent, and

the

to

be

price.

credited

been

of the
been

not

to

as

so

cost

at

commission

and

expenses

being

the

should

notes

agent should

sales have
debited

and

Account

goods

debit

the

the

Account

agent.

debited

been

have

is to say,

that

agent, the former

the

Consignment Account,

the

goods

the

by

or

duplicatesof

The

to

very

accounts

Consignment

showing
a
Trading Account
practically
the particular
consignment, and the
upon
amounts

be

that proper

seen

be

with

Account

Personal

should

asset

consignment,

should

there

case

be

to each

reference

with

kept

are

This

Consignment.

on

date, and

that

these stock sheets.

carefullyexamine
stock should
The
be valued at cost price,plus freightand
for depreciation
charges, full allowance, however, being made

should

auditor

the

if

goods

stock

valuation

upon

the

incurred
off to
be

will be

Profit and

stock

the

Loss

down

The

brought

in

down

to

as

and

the

figurein

the Balance

in hand

at

in
scrutiny,especially

been

but

not

order

anticipated in respect
yet sold

that

any

account

no

Consignment

should

represent

fair valuation.

have
Consignment Accounts
suggested above, these transactions

has

the

Sheet

If the

careful

on

been

written

be

must

must

upon

balance

loss has

date, it

balance

debit

if

Account, and

The

damaged.

been

or

Account,

goods sold

the

upon

Account.

deteriorated

Consignment

brought

only

have

of

to

will
see

goods

losses to date

kept

been

not

require
that

sent

upon

no

to

as

very

profit
agents,

goods

sold

written

been

have

due

commissions

from

agents

Sheet, and

Balance

the

fair value

are

not

are

is

all expenses

that

into

brought

and

provided for ; and

shown
separatelyupon
included among
Sundry

been

agents have

to

due

balances

that

at

91

ASSETS

unsold

stock

off ; that

Sheet

Balance

the

OF

VERIFICATION

AND

VALUATION

Debtors.

been

have

reserves

make

should

auditor

The

enquiriesto see
provided for possiblebad

agents, are
Work

and

is, for

businesses

by

under
work

the

Sheet

for

should

in progress

and

materials

valued

be

direct

at

percentage added

of the
and

to

business, such

taxes,

as

yardmen,
to

etc.

is, the wages,

oncost," that

various

indirect

such

as

and

such

expenses,

as

directors'

and

though

wiser
the

to

omit

work

to

period,and

no

If, however,
incurred

reduced,

upon
so

for Balance

these

latter.

date

is carried

forward
credit

purposes

the
to

for in

contract,

such

loss is

then

the

provided

cost

for.

rates

it is

actual cost
the

of

succeeding

respect thereof.

anticipatedthat eventuallya

any

that

Sheet

In this way,

profitis taken

it is

keepers,
store-

percentage is also sometimes

interest, staff salaries,office rent,

etc.,

rates

machinery,

of foremen,

those

is,

charges

fees, debenture
taxes,

date,

to

supervision,factory, rent,

administration

cover

work

depreciationof plant

power,

cartage, indirect wages,

added

the

of

case

is that

thereon
"

for

sum

cover

the

like businesses.

that

charges expended

and, in addition, a reasonable

in

general rule
"

have

present purposes

such

cost

care

Stock-in-Trade,

contracts,

the

purposes,

goods

of

head

in progress

example, uncompleted

Balance

default

to the

transactions.

these

and
builders,engineers,shipbuilders,
For

sellinggoods

times, owing

dealing with

when

above

is meant

what

carefully

most

Progress. Partly manufactured

in

dealt with

been

of

case

be

the

upon

considerable, and, therefore, great

very

be exercised

should

the

the losses at

in this way,

abroad
of

In

into.

enquired

should

Accounts

agent'sor Consignment

debts, and,

balances

debit

long-standing

therefore, any

ample

that

loss will be

figuremust

be

92

In
shown

as

separateitem, and

In

is sometimes
profit
practice,

this
theoretically,
in

which

circumstances

proper

well-known
auditor

an

adopted

individual

the

where

contractors,

and although,
anticipated,

correct, it is

is not

practiceis commonly

This

account

on

deducted.

be

thereof should

received

cash

any

be

should

in progress

Sheet, the work

Balance

the

AUDITING

OF

PRINCIPLES

THE

in

the

custom

pass.

may
of

case

extend

often

contracts

large

If,therefore, they only took

periodsof some
years.
the contracts
when
credit for the profits
were
completed,
the results shown
by the generalProfit and Loss Account
would
considerablyfrom year to year, for in
vary
very
contracts
of profitable
might run out,
one
year a number
over

with

result that

the

Profit and

the

Loss

would

Account

in another
but
large profit,
year, though there
contracts
running,
might be several large and profitable
show

and

in

received

been

been

have

bear

considerable

show

loss.

the

Therefore,

borne
and

in

in mind

this

that

for

having

contract

to

might

accounts

done, very

is

great

profit,and

contingencies,for it

care

ample

must

be

normally,
progressing
considerable profitwill

be

may

present figuresindicate that

unforeseen
earned, but some

be

Account

the results,profits
are

average

estimatingsuch

made

be

must

to

where

exercised

reserves

Loss

might

contracts

period, and,

standing charges, the

anticipated. But,
be

Profit and

have

the

actuallycompleted during
to

of cash

sums

few

yet very

account,

on

therefore,owing

must

considerable

respect of which

contingency

may

arise,

strike,collapseof part of the works, rise in the

of the building
price of raw
materials,floodingin the case
such

as

of

tunnel, failure

to

complete in

thereby incurring heavy

circumstances, which

showing
Profits
so

considerable
should

far advanced

estimated, and

be

may

the

fines, and

contract

many

result in the contract

time
other

and
such

eventually

loss.

is
anticipatedonly when the contract
that the cost to complete can
fairlybe
thus the probable eventual
profitarrived

VALUATION

Therefore, all

at.

should
the

be

taken

been

sufficient

in the

the

shareholders,

result of such
the
this

in

been,

and

in

small

capital,it
upon
that

is

contracts

to

very

careful

complete the

auditor

in progress

should

Cost

the

been

kept,

they

have

such

case

these

been

they

not

cash

all cases,

working

result
serious

sufficient

being

Large

contracts.

into the

whole

be

may

financial
funds

in

require

contracts

will afford

upon

of

Balance

Sheet

Cost

Books

efficient internal
very

If, however,
should
the

work

have

if
great assistance, especially

an
a

question of
the

If proper

Books.

subject to

auditor

being included

go

will be

in progress.
the

have

anticipateprofit

the

and

of

reason

small

to

carefully,comparing

most

figureswith

by

carefullyin

all,as

not

be that

financing,and, therefore, this point should

sight of.

be lost

Books,

at

created, there

partners, the

to

profit,must

policy

cipated,
anti-

paid

are

profitsthat

most

unsound

cash

no

Therefore, the

working capitalis reduced,

the

hand

work

very

uncompleted

The

of

cash.

considered

is

dividends

business, having only

position thus

never

in

the actual

profitis

is reduced

concern

withdrawal

fact, received
be

which

or

the

the contract

there

if

future, then
of

important

under

date, and

of dividend

payment

position should

pleted
com-

one-third,,

is less than

out

anticipationand

about

the

anticipationof profit,

profitspaid

working capitalof

work

the

to

reserve

example,

most

received

to

strength
or

heavy

for

Another

the

work

immediate

upon
to

for.

warrant

the

results of

the

reserved, the remaining two-thirds

the cash
to

93

early stage

When

cost.

if,for example, the cash received

payable

an

calculated, and

credit

upon

in

are

profit,according

be

to whether

expenditure

ASSETS

contingencies;

be

profitshould

point is,as
for

final

date, should

only being
has

for

the

at

OF

reasonably estimated,

deducted

proportion of
of such

be

can

be

to

that

contracts

invariablyvalued

contract

should

VERIFICATION

AND

work

valuable
there

insist

are

upon

in progress

check,

check
no

upon

as

in
the

reliable Cost

full

particulars

sheets, showing

94

PRINCIPLES

THE

exactly

check

should

he

far

as

The

of the

sheets,

initialled by all who

and

He

made.
added.

in progress

The

includes

point out

auditor

endeavour

he

should

partners, as the

of

fraud, but
sufficient

careful
lead

to

valuation
results

audit,

an

of

effect, the

may

thereupon

may

result

Plant

valued

of
;

is

institute

to

other

earning capacity,and

that

if

insist
work

the
do

they

not,

his audit report.

hands

of

this asset, but

he

figuresas

far

shareholders

work

in progress

as

or

has

managing director,

whole

the

ordinary

extent

of this

that

the

unsatisfactory,and

that

the

much

facts

the

the

if,therefore,he reports
fuller

case

of

to

company,

which
investigation,

being ascertained.

Plant

and

upon

value

is

machinery

value, but upon

particularbusiness

words, the
not

be

conclusion

to

basis of its realisable

its value
in

auditor

Machinery.
the

upon

the

should

intelligentinvestigationmay

asset

true

he

the

to

shareholders, in the

in the

and

and

investigatethe

impossible, in

reasonable, and

not

are

be

discover

to

the

this

will

"

oncost

absolutelysatisfied,

If the

be.

may

probabilityit

course

concern

case

is not

effect

that

to

"

in the

the

test

falsified deliberately
by, say, the

all

basis

if he

and

report

and

been

has

any

fact

with

by

Balance

in the

into

much

very

dealing

check

to

reasonablycan,

be

to

whole

carefullyenquire

anticipatedprofit;
this important fact in

when

he

been

as

valuation

such

disclose the

is bound

management

should

which

upon

should

accounts

he should

should

profitis anticipated,he should

thoroughly, and in this case

If

the

is certified

carefullyenquire

should

figuresmost
that

basis

the

been

part in their preparation,

auditor

The

the

test

latter have

the

system for valuing this item

into the whole

Sheet, and

that

see

in progress

official.
responsible

this

these

evidence

whatever

castings and

the

taken

have

work

the

that

check

should

auditor

calculations

in

possiblewith

as

at, and

is available.

there

the

arrived

been

results have

the

how

AUDITING

OF

is based

as

upon

its intrinsic value.

not

the

going
its

The

the

periodof

estimated

and

period,and

almost

entirelyin
market

The

working

is, of

for the

such

unaffected

by

portion

held

of the

with

plant and

small

very

has

been

hand," and

the

this

also

the
is

period

prices. The
disregarded,for

to re-sale.

j
.*"

considerable

as

rule, very

proportion of originalcost.
for

other

New

concern.

realisable value

is

Again,

patent process

machinery
"

just installed,immediately becomes

the

solely
for

same

market

regarded,
dis-

be

may

example, shafting,if pulled out,

value to any

no

with

are

machinery speciallymanufactured
be of

be

must

is held

machinery has,

; for

factor,

engineer.

the

view

The

engineer to

an

machinery

realisable values

is not

will realise

in

over

asset.

auditor

working life,and

fluctuations

or

of

manufacturer

"

scrap

unknown

respect the

manufacturing

little realisable value

that

"

revenue

life of the
the

of the

plant of
of

"

this asset

might

off to

course,

similar

of

asset's

of

up

this

hands

the

the

purpose

break

in

values

for

whole

life

working

fix this

"

estimated

the

written

be

requiresthe technical knowledge

it

95

ASSETS

priceof plantand machinery, less any

cost

residual value, should

or

OF

VERIFICATION

AND

VALUATION

second

considerablyless

than

cost.

All these

provided

circumstances, therefore,are

that

the

price is

cost

written

disregarded,and,
off to

of

the period of the asset's

over
depreciation
it is earning income, the
life, during which

means

in

appearing

the

absolutelycorrect
upon

which

ones,

Balance

to

of the

lost upon

the

year

some

are

withheld

plant,which

expirationof

cases,

for Balance

valuations

should

practiceis

very

plant and
be
uncommon.

to

the

and

retained

has

machinery
in which

produced

to

the

However,

in

sunk

been

life of the

Sheet purposes,

are

years

the

in the

would

capitalotherwise

the

balances

accepted rules
of
prepared. By means

replace the capitalthat

purchase
In

intermediate

according

Sheets

depreciation,
profits are
business

of

accounts

by
working

revenue

be

asset.

is re-valued

the certified

case,

auditor, but
it is

each

very

this

good

.1

96

plan indeed

of

amounts

the

that

have

to

plant re-valued occasionally,in ordeL.

thus be
off may
written
depreciation
be

it must

For

roughly checked.

AUDITING

OF

PRINCIPLES

THE

in mind

borne

it is

that

quite impossibleto fix,with absolute certainty,the period

of the working life of plant,machinery, and similar assets.
is a matter
The verification of this asset by the auditor
of

in fact, it is impossibleto verify this

difficulty;
with some
with any degree of certainty,as is the case

some

item

of the

other

periodof

the

also must

be
that

Plant

to

in the

ordinary

all additions

items

such

during

vouched, careful

be thus

that

see

fide additions

represent bond

the

payments

should

the accounts

enquiry being made

J.

the

etc., and
invoices,receipts,

with

individual

purchase of

the

will vouch

items, the auditor

way

the

Upon

assets.

do, in fact,

capital. Replacements

to

enquired into, with a view to

carefully
written
the old asset has been entirely
before

Account

the

is debited

asset

new

taining
ascer-

of

out

in its

place.

plant register,or a schedule of the

plant and machinery certified by the engineer,and, if so,
If possible,
called for by the auditor.
be
this should
should

There

should

the auditor
he

be

roughly

can

In

the

should

large items, such

the

count

the works, when

round

ask to be shown

of

case

the

machinery abroad,

plant and

require that

the

local

the

of

auditor

should

fully with
to

ascertain

estimates

the

and

upon

proper

value

or

the
basis

discuss

the

which

provisions,and
advice.

estimate

the

It is

to

whole

management,
upon

as

whether

Balance
a

proper
of

adequacy

ciation
question of depre-

and

they

the

auditor

furnish

engineer should

and also
working efficiency,
provisionsfor depreciation.

The

the

thus

the plant as
date of each
at the
report upon
is in
the same
Sheet, reporting as to whether
state

boilers,

as

verify then- existence, and that

machinery appears to be in working ord

lathes, etc., and

plant and

thus

endeavour

have

based

they

have

their

acted

impossible for an auditor

working life of plant ; all he can

to

do

98

PRINCIPLES

THE

working life of

average

for
is

when

five

about

in

working

horses

six

or

reduced

be

each

horse
age,

value

off

written

realised upon
the sale of the carcase
resultingdebit balance should be
any

death

loss.

sales.

or

making

up

Ledger,

and

by

as

the

The

balance

should

should

and

also

see,

and
same

extent
means

way

Account

compared
in the

in

the

therewith

lightof

actual

life appears

working
should

vans

details

the

to

be dealt with

depreciationof
initial cost

should

be

as

small.

be

may

is

But

the

engines

Harness

each

complete

fixed

value, such
new

and

should

of

set

fixed amount

very

into

by

with

in

being
valuation

simple and

effective

in

each
low

the

same

practicesometimes

is valued

fixed

the

the

auditor.

the

dealt

all valued

are

vans,

fairlyrapid, and as the

methods
applied to these

be

harness

of motor

case

re-valued, and

old sets

figure. Provided
latter is

is

considerable, the

loose tools,and

as

in the

enquired
carefully

Harness.

and

and

show

plant and machinery, and owing to the

be extended, by
the working life may
to which
of repairsand renewal of parts, the rate of depreciation

in the

way

Carts

Vans.

made

against losses upon

Horse

the

upon

whether
the estimated
experience,
be working out correctly.
Carts

being
profits

Registerwill

examined

be

of

event

credited

be

Horse

auditor, who

the

In the

should

sales, these

upon

the

amount

live animal,

or

of

by (say) one-sixth of the

the total depreciation
way

cost price,and in this

original
is arrived at.
Upon death or sale, after creditingin

registerany

years.

the

year

city

be

being given

cost

should

horse

be

estimated, which,

be

kept, in which each

purchased, full particularsas to

and
description
each

of cart

then

Register should

is entered

AUDITING

should

horse

example, in the case

generallyreckoned to

Horse

OF

at

average

the

same

is low
of

way

year

at

value,
average

enough, this
dealing with

this asset.

Freehold, Copyhold and

Land

should

appear

in

Leasehold

Balance

Land

Sheet

at

and
cost

Buildings.

price,and

AND

VALUATION

should

which

of land upon
with

view

re-sale,and

to

in value

is

to be

correct, if and

other

hand, should

when

earning capacity of

the

unless

will be occasioned

will

depend
of

state

of

case

upon

repair;

works

is not

the
burden

nature

but

although

Loss

the

will

the

place. Land,

off

fore,
there-

should

land,

written

loss

no

certain

"

building,its

the

rate

age,

and

length of life,in

the

long, yet

is inevitable

certain

from

time

be

the

amount

time,

to

year

have

renewals

will create

in which

they take place,when

be

to

borne

by

that

considerable

the

year's Profit

and

Account.

The

of leasehold

cost

Profit and
end

at the

the

for

of such

cost

upon

whole

Loss

Account

over

of

case

the

that

auditor

gives

must
to

appear

property.
the

the

be

period

written

be

may

off to

lease, for

of the

lessor.

to the

also

made

be

made

upon

the

lease.

in
regards verification,

same

must

period the property reverts

buildings,provisions should

dilapidationclaims

As

property

of this

expirationof
the

figure,for

wise
should, therefore, be provided for in advance, other-

and

In

the

affected, and

freehold

of the

the

renewals

it is not

Sheet.

be

prove
the

Balance

"'

increase

On

this

buildings upon

held

not

price, and

of the

not

unless

any

may

Sheet

sale takes
cost

case

be sold.

may

Balance

first-class building,is

structural

of

or

the

made

been

going down,

depreciation should

of

amount

of

case

stand, it is

may

land

be

neighbourhood

meantime,

the

generallyappears at
stated clearlyon
the face
In the

In the

values

the

profithas

such

to reduce

general custom

works

estimate, which

mere

99

ASSETS

increasing,for, in

no

land is sold.

until such

and

values

factory or

OF

though

even

up,

improving and

be

may

written

be

not

VERIFICATION

the

of freehold

case

inspect the title deeds

be

He

should

dates

and

seeing that

such

conveyance

is in to

order, and

in

inspect the
parties to

conveyances
the

name

refer

to

abstract

the

are

and

property,
that

see

the

the

particular

of title which

various

there, and

of his clients.

conveyances,
that
An

the

last

auditor

100

to

that

see

in order

deeds

the

all he

do

can

is
be

to

appear

refer to

points,he should

any

upon

good

possession and

in

are

if in doubt

title is

the

guarantee that

cannot

AUDITING

OF

PRINCIPLES

THE

client's solicitors.

the
In

the

deeds, and

of the

Lord

of the

Roll

counterpart of the lease,the

noted, and
and

rent

receiptsfor

the

policiesshould
these
If

possessionof

of

payment

and

date

the

that

the

mortgagees
should

or

apply

interest

which

to

has

will be

title deeds

solicitors,
and,

their

direct to them

they hold the deeds of the

securityfor the advance, the amount

as

ground

ascertain

to

certificate that

property

be

fire insurance

the current

mortgaged, the

the auditor

in this case,

should

arrear.

property has been

in the

of

inspectionof

an

of which

called for, in order

be
in

not

are

last

premiums paid under

the

title

no

Manor.

terms

the

be

certified copy

property will be verified by

Leasehold
the

will

there

call for the

should

auditor

the

Court

the

copyhold land,

of

case

been

for

part
of whi"

should

be

mortgage,

the

paid

specified.
In

Loans.

that

seen

valuation

of advances

case

of the

advance, such

inspected,and it should
been
paid to date. If a

interest has

the

property

valuation

upon

will be

title deeds

and

mortgage
be

the

made

were

should

time

the

at

of the

inspectedto see that

the loan appears
secured.
to be sufficiently
With
other loans, the auditor should inspectthe written
acknowledgment of the debt and any security that may
have

been

lodged ;

regularlypaid,

and

bad

debts.

In the

the

articles

give

the

directors'

have
the

advances

auditor

should

also

see

sufficient

of

case

to

power

made

should

that

minute

separatelyupon

should

he

be

company,
make

individual

he

should

in his audit

loans

see

and

is
for

that

inspect

If directors

same.

if

interest

is made

reserve

members

insist upon
such
the Balance
Sheet ;

refer to the matter

the

advances,

authorising the
to

that

board,

of the

being

they

report.

are

shown

not, he

life of

The

Patents.

and, therefore, the

off

written

should

the

receiptfor

has

been

paid

to

Copyrights.

Account.

patents,

each

he

last renewal

the

be
fees

all renewal

all the

list of

should

same

Loss

and

years,

patent, the registerednumber,

should inspect the patent itself,and

of
giving particulars

dates, etc., and

Profit

to

call for

should

auditor

The

of

direct

debited

be

acquiringthe
period. The cost of

this

over

patent is only fourteen

cost

101

ASSETS

OF

VERIFICATION

AND

VALUATION

fee, to

that

see

the

same

date.

copyright lasts

lifetime

for the

of

the

plus seven
years, or for a period of 42 years from
the date of publication,
according to which period is the
cannot, however, be written
longer. The cost of publication
of this period,as in the majority of
the whole
off over
author,

value

the

cases

before

expires long

only practicalmethod, therefore,is

The
to be

re-valued

each

is

document

There

no

for the

has

the

fixed

been

not

from

at cost

appear

difference
at

between

Sheet
"

total

are

often

written

wise

considered

be, either from

asset

such

"

of

as

course
a

assets

inseparablefrom
as

plant

and

the

assets
over

in the Balance

appear

to

described

be

as

to

legalor
the

depreciation

whether

view, compulsory. Goodwill

it is

it*

when

liabilities taken

asset, and

this

undoubtedly
to

case.

raised

off

very

purchase,

should

separate item, and

cost," if that is the

at

in

asset

an

purchase price and

should

be

point

of

case

Goodwill

as

appear

less any

Questions
should

not

agreed valuations,

as

to

appears

price. If the pricepaid for goodwill

will be the
the amount
specifically,

the

the vendors.

being

should

Goodwill

Sheet, except in the

should

should

auditor

this asset

that

see

first

fair value.

Goodwill.
Balance

proof of

of title in this case,

inspect the valuations, and

at

copyrights

year.

publicationconstitutinga copyright. The

be taken

time.

of the

end

the

although

adopt,
from
is

it cannot

very

business, and

machinery, etc.,

is
be

accountancy

an
a

this

peculiar

it is unlike

in that

it does

102

to be renewed

have

not

words, the

other

its

Sheet

Balance

present value, but merely the

or, in
expended in its acquisition,
of capitalthat has been invested

been

has

that

amount

in

goodwillappears

show

depreciated

earning income.

of

course

to

purport

not

it is not

and
replaced,

or

figureat which

The
does

in the

out

worn

or

AUDITING

OF

PRINCIPLES

THE

amount

asset.
particular

in this

goodwill of a business must

at date, and the
the financial position
depend entirely
upon
present earning capacity and prospects of the concern,
and
a
purchaser would not be influenced in the least by
the value
placed upon this asset in the Balance Sheet.
of the

present value

The

If the

increasing,and

large and

profitsare

part thereof

goodwill,its value
will in realitybe increasing,whereas, if the profitsarc
small, or losses are being incurred, it will be impossible
the goodwill,the value of which, in this
to write down
be decreasing. Again, a business that is doing
case, would
goodwillmay not be worth
very badly to-day,and whose
cost pricewhich
anything like the original
appears in the
is used

write

to

Sheet, in the future

Balance

management,

new

valuable

very

Goodwill
a

is

sound

very

available, and

capitalof
but

the value

down

business

to

matter

decide

with

down

that

ensure

it

and

is,therefore,
if

profitsare

whole

the

of

the

representedby tangibleassets ;
entirelyfor the proprietorsof the

for

is

themselves, and

interfere,though he may
do

through

flourishingconcern,

goodwill.
a
asset,
very intangible
policyto write the cost
business

be converted,

may

most

in this way

the

this is

into

of the

give advice

auditor

an

if

cannot

asked
specially

to

so.

The

auditor should

Goodwill

Account

the actual

cost

thereto.

He

Balance

Sheet

from

this he

exactly how

see

is made

up,

only,no improper
should
and

is not

see

that

described

and

it does

that

items

it is
as

the balance

having

upon

represent
debited

been

separatelystated

being

"

at

concerned, the Balance

cost."

Sheet

the

in the

Apart

showing

this

upon
in

the

this

effect,

The

but,

in

of

be

latter

more

is

the

clearly

goodwill

down

created,
clear

capital.

and,
that

unless,

provide
should

arrived

Sheet.

better

out

moreover,

additions

In

to

course

in

shown
of

the

profits,
the

are

this

to

no

on

adopt,

Balance

being

the

effect

made

for

position
writing

by

secret

is

reserve

does

to

this

many,

exact

Sheet

same

disclosed

of

Sheet,

Balance

be

the

reserves,

as

to

working

the

way,

of

is

otherwise

opinion

the

in

profits

Exactly

creation

the

by

would

increased.

is

at

in

of

out

that

and,

concern

Balance

the

upon

it

can

the

goodwill

profits

distribution,

for

capital

down

writing
business

the

profits,

goodwill

hand,

other

the

of

up.

of

effect

available

result

written

be

retain

on

cannot

specially

articles

the

company,

out

insist

He

affairs.

down

103

ASSETS

OF

of

written

being

of

case

position

the

asset

account

is

is

what

clearly

VERIFICATION

AND

VALUATION

not

the

make

working

VI

CHAPTER

AND

RESERVES

DEPRECIATION,

FUNDS

SINKING

Depreciation
THE

subject

and

at

the

auditor

depreciation is

of

has

deal

to

points

that

in

impossible

it is

paid

this

to

should

auditor
In
in

also the

FLUCTUATIONS

IN

Fluctuations

in
for

for

fluctuations

affecting

way

of land
in
this

merely
to

which

upon

erect

business.

value

the
asset

for

the

the
The

of

is not

the

factory

in

the
of

this

providing

asset
104

of

the

for

are,

buin

factors

in the

market

no

actual

the

or

example,

for

of

generally

case

tions
fluctua-

properly disregarded,

are

market

results

out

ASSETS.

not

are

capacity

necessary

trading

used

values,

FIXED

OF

is built, the

land

such

every

wearing

the

by

For

assets.

future,

market

in

by outside

earning

In-

vali:

the

accounts

the

buildings

of

in

assets

caused

purpose

earning capacity

of fixed

of such

in the

commonly

is

VALUES

are

will

business.

in the

preparing

either

earnings

revenue

for

when

"

caused

MARKET

value

are

governing priii-

fluctuations

use

THE

the

provided
these

in all the

in value

its

to

students

therefore,

"

covering decreases

shrinkage

with

world

past

it is

completely

attention

commercial
the

But

in all its bea

more

depreciation

outside

owing

asset

an

"

term

by

deal

this

important

the

all accountant

in

case

sense,

caused

to

an

discuss

to

auditor

an

exhaustively

well versed

be

wide

very

and

the

practice, the

assets

of

been

has

than

the

question by

of

by

considerably

that

thought

it

study

to

which

with

some

available

subject, and

strongly advised
for

out

important,

most

matters,

in mind

borne

space

of this

whole

the

the

point

to

be

must

the

therefore, it is proposed

and

question here,

difficult

time

same

of

one

the

the

sale, but
space

is held
which

upon

of

purposes

and

concern,

therefore,

in

no

the
the
way

106

that

used

are

seeking to

of

course

machinery, furniture and fixtures,horses, carts,

leases, patents,

harness,

OBJECT

MAIN

THE

and

vans,

copyrights,etc.
PROVIDING

OF

DEPRECIATION.

FOR

of wasting
objectof providingfor the depreciation
As part of the capital
is to keep the capitalintact.

main

The

assets

of the

have

working life of only

working life

this

therefore, when

earning capacity of

the

valueless

become

for

these

the

Hence, in order

lost.

been

to

comes

assets

end, and

an

business, and

acquisition will

the

keep the capitalof

to

is invested
be

wasting assets, profitsmust

will

they

ceases,

in

their

these

period,

of

part thereof

intact, if any

limited

purposes

originalcapitalsunk

the

purchase of

in the

invested

been

has

concern

assets, which

of

and

being, buildings, plant

examples

income,

earn

in the

exhausted

or

up

AUDITING

OF

PRINCIPLES

THE

in

the

held back

by

have

business

purchase
of

means

charges to Profit and Loss Account, in order

depreciation
of the
to replacethe capitalthat is being lost by reason
fact that it is represented
by assets that are being consumed
of trading or seeking to earn
exhausted
in the course
or
of a factory,in order
For example, in the case
income.
to

produce

to

use

of

the

the finished

goods

machinery

manufacture

is

just

are

the

as

certain

and

that

goods

machine

the

cost

of

The

had
cost

been
of the

producing

the

for in order

to

used

wages,
up

machine

to

wages.

alone
the

of the business, but

year

production, which

used, the

If

purchased at

one

and

in the
is

goods

convert

the

raw

as

be
cost

much
the

the

tured,
manufac-

charged

be

of

cost

of

the

machine

part of the
into

the

manufacture.

materials

materials

working

in this case,

to

of the

course

sary,
neces-

ment
commence-

goods

have

the

just as

finished

the

was

the

only,then,

would

cost

the

machine

one

the

charge against
and

calculatingthe profitor loss upon

against the sales there would

materials
which

was

materials

was

of the financial year

life of this machine

much

as

sold, it is necessary

are

machinery,and

and

materials, labour

raw

profits earned

when

that

and
the

cost

of

wages,

saleable

RESERVES

DEPRECIATION,

In

necessary.

are

machine, and

.he

this

sale of the

the

upon

loss of

would

not

goods, there

is held

if this

been

would

be

back

the

of

cost

is

purchase

by

manufacture,

the

and

available

the

reduced

permanently

thereby, the result being exactlythe

the labour
had not been
charged.

simplecase,

realised

amount

done, the effect would

not

were

materials

and

in its

provided for,

business

the

capitalsunk

the

capital,directlycaused

have

capital of

of the

way,

107

FUNDS

labour

the

out

thus

replaced; whereas,
be that

and

machine

the

articles,both

SINKING

AND

same

if the

as

The

of

cost

foregoing is, of

exactlythe same
principles
apply where the machinery lasts for a period of years ;
and so, as the plant will continue to be used for a number
of years, its cost has to be spread over
this period. In
this way,
during the life of the machinery, out of the
very

course,

income

earned
of the

cost

wasting
for

will be

replacement of
In all cases,

is

wasting nature,

be

for

provided

assets

the

as

the

most

year,

charges,such
have

the

case

in

machines
old

spread over

EFFLUXION

effect
and

of

OF

exhausting

that

and

new

"

"

of

should

but

of

such

it is

one

periodof

years,

all exhausted
of

factors

Other
value

and

in

revenue

of

assets

improved machinery
better, cheaper,

therefore, if these

in the

scrapped

assets

Obsolescence, in

will manufacture

widely adopted
be

the

of time.

greater quantities,and,
must

TIME.

of

cost

majority

the

effluxion

invented, which

plant

not

are

with

case

plant,means

are

the

rent, rates, taxes, salaries,etc.

AND

the

causes

assets

charge,

revenue

has to be

such

as

the

or

direct

fixed

For

revenue.

direct

is the

obsolescence

has been

of the

one

as

are

of

of

out

for

or

asset.

arisingtherefrom

OBSOLESCENCE
which

business,

the

gradually to consume
of
the depreciation

cases,

benefits

one

of

worn-out

is, in fact, a

that, in

original

the

therefore,where

earning revenue
a

thus

purposes

the

the

capitalinvested in this
replaced,such capitalbeing available

and

general

the

will be held back

thereby, there

same,

asset

but

particulartrade,
the

new

new

the

machines

108

installed,as

otherwise

AUDITING

OF

PRINCIPLES

THE

will not

particularbusiness

the

be

with its rivals,and thus keep

compete successfully
Therefore, in fixingthe working
its placein the markets.

able

to

life,this eventualityshould
fixed should

will

particularbusiness, and will

requiredstandard of articles
at

cost

and

to

fixed

in such

factor

The

ceases.

capitalisedvalue

of

leasehold

place,

its

of

Effluxion

of

end

at the

all value, therefore,

is, in effect, the

lease
in

paid

rent

and

advance,

must,

period of the
the cost of any buildingserected upon
also must
land, and any improvements effected by the
off to

therefore,be written
lease,as

for

paid

amount

hold

to

leases,where

as

the

and
quantities,

markets.

the

lease terminates, and

periodthe

manufacture

to

business

that

of .the

purposes

in sufficient

the

cases

the

able

be

successfullyin

compete

is

time

will enable

that

for

suitable

be

period

the

it is estimated

periodduring which

be the

machinery

the

considered, and

be

the

over

revenue

lessor.
ESTIMATION

of
depreciation
the

such

assets

working lifehas

to be

as

plant and

PLANT

OF

in dealing with
difficulty

The

MACHINERY.

LIFE

WORKING

THE

OF

AND

questionof

the

is that

machinery

estimated, and

is

there

no

certain

period; therefore,past expcrinn

and
requin d \vhrn
expert and technical knowledge are
it is generallyfound
dealing with this point. In practice,
in
that the cost of all the plant and machinery is included
in which
the
it is impossibleto estimate
account,
one
case
depreciation accurately,for the lives of all the various
classes of machinery, etc., included
head
under
the one

way

of

arrivingat

will

be

different

accessories
In the

of the
accuracy

light of

after

have

may

above

can

years.

of

number
a

belting will

as

and

such

like

years,

but

fast-

example, boilers

last for

depreciationis
of which

for

heavy plant may

running machines
such

this

very

short

have

to

life

be

and

only,

renewed

stantly.
con-

circumstances, therefore, the fixing

a

matter

mere

only

be

If, then,

proved
as

is

of

guess-work,

the

disprovedin the
probable,it is
very
or

RESERVES

DEPRECIATION,

evil

the
will

been

have

been

many

cases

been

found
lost

been

for

of

kept

the
"

Plant

should

machinery

the
in

have

bankruptcy,

it has

as

capital that

Register,"in

machine.

each

capitalof

has
,

only reallysatisfactorymethod
depreciationof plant and machinery

special

such

The

REGISTER.

keep

profits

circumstances

of

cause

that

inadequate provisionfor depreciation.

to the

dealing with

is to

Such

impossibleto replace the

owing

PLANT

chief

the

estimated,
under-

if, furthermore,

part of the

lost.

been

been

in

done,

and

withdrawn,

will have

concern

been

overstated,

been

profitshave

will have

109

FUNDS

depreciationhas

the

subsequentlythat

found

SINKING

AND

into

splitup

be

of

whole

The

which

plant

the

classes, so

is

record

and

only

that

approximately equal working lives would be

in
should be entered
grouped together. Full particulars
column
should
connection with each machine, and a special
items

with

in

provided

be
"

"

value

scrap
estimated
columns
written

should

be

is written

life of

each

for

provided

In

the cost

that

light

the
be

of

actual

of

from
of

in

off, and

Machinery
adjusted
of
the

to

agree

machine, the

register,and

upon
The

in the

Accounts

with

any

At
be

total

the

debit

prepared
class

Plant

balance

be

written

and

should

Upon

should

end

the

depreciation

The

summaries.

far

as

totals,as regards each

realised

amount

that

Impersonal Ledger

such

"

assets'

the

so

should

closing balance.

the

value

experience,these

attained.

machinery, the opening balance,

written

of

equal

an

scrap

constantly revised,

registersshowing

the

of

amounts

be

period

be

number

"

less the

is
possibleabsolute accuracy
financial period,summaries
each

as

should

should

The

cost.

annual

the

estimated

the

over

should

estimates

the

register,and

in the

so

year,

life.

entered

depreciation,which

for

off

be

working

the

entered

each

working

and

and

off

amount*

should

which

sale

the

credited

off

as

be

in
loss

sale.

foregoing method
but

once

the

may

appear

registerhas

been

to

be

unduly

written

up,

plicated,
com-

it will

110

be

PRINCIPLES

THE

only

necessary

entail

this will not

date, and

to

of labour.

amount

great

it up

keep

to

AUDITING

OF

On

the

hand,

other

it

possibleto deal with the question of depreciation,

which
so
materiallyaffects the accounts, with a degree of
is quite impossible;
which
otherwise
and,
accuracy
information
as
further, most valuable practical
regards the
will be

machines

various

be

can

great assistance

very

of

Cost
of

cost

should

to

Maintenance

be

plan

to

create

and

Maintenance

annual

period of

charge

to

to

charge under

should

be arrived

available,expert advice

Loss

should

amount

average

Account, and

Account.
should

As
be

credited

repairs take

the

charged direct

Account, and

if the

balance

this account

upon

these

separate item
a

debit

credit

Account

should

the

Balance

upon

debit balance, this

provisions have
balance

been

not

should

Account, and

has

this

to

accumulate,

the

that

account

Maintenance

Reserve

be

credit

Sheet.

tenance
Main-

forward

If this
that

mean

provide

the

upon

carried

off

as

account

annual

the

Profit and

to

It

before the

actual

charges

and

the

Loss

annual

be, however,

may

has

reserve

had

time

outweigh

may

the

circumstances, if it is reasonably

into

credit,a debit balance

this

Reserve

sufficient to

credits

in

thereof

cost

correct, the

the

forward, but,

this

Profit and

year

balance

written

years,

the

material

sufficient,and, therefore, such

be

credits, and, in such

certain

sought, and

question reconsidered,

in the first few

long

to

be

would

effect

over

Maintenance

provision accordinglyincreased.
that

To

be

been

should

charges. The
Reserve

shows

estimate

that

so

if such

place, the
the

to

good

very

equal.

each

the

to

charges

or,

should

be debited

this head

at,

renewals,

Account,

be

may

The

if these

it is

year,

Reserve

revenue

small

of

be

Reserves.

and

revenue,

year

annual

years

to

will

which

repairs and

as

Maintenance

this,the average

for

management.

charged direct

considerablyfrom

is not

the

maintenance, such

vary

the

accumulated,

in the

case,

next

this item

few

will

years

might
would

be

have

bring

carried
to

be

RESERVES

DEPRECIATION,

separately stated

and

However,

Sheet.

AND

as

allowed

upon
for

Methods

follows

as

in

SYSTEM.

INSTALMENT

percentage, calculated

estimated

be

to

would

year

10

Plant

Register

easilybe adopted, and,

the

effective

most

method

This

the

REDUCING
fixed
the
That

is

life is known

percentage is written
is

the

exactly.

off each

system

calculated

year,

the asset

upon

written

being

this

Under

off

asset

an

account.

costing

in the

third

it will be

10

year

It will be
each

year,

10
seen

and

"1,000, that
cent,

per

per
that
it is

cent,

the

on

on

"900="90

"810

amount

"81,

written

suggested that,

and
and

case

will

second
in

the

so

on.

off becomes

in the

upon

is, "100

year

of

cost

be

on

can

calculation.

of

first year

cent,

author, it is

off in the

per

if

it

"1,000, the depreciationwritten

10

question of additions,

no

brought down

cent,

make

to

writing off

SYSTEM.

INSTALMENT

is,if 10 per

method
for

used
there

case

reducing balance

each

in connection

of the

opinion

accurate

commonly

periodof

used

suggested above,

as

is

is, "100 per

it is necessary

in the

and

leases,in which

short
and

is

depreciation charge

commonly

kept,

of which

respect of all additions, but

in
is

system

originalcost priceof
example, in the case

"1,000, that

machinery, as
"

this

working life

on

is not

for

the

cent,

per

separate calculation
"

year

years,

method

plant and

with

the

upon

off each

ten

be

This

annum.

never

Account.

Under

costing "1,000, the

asset

an

should

Depreciation. The various

are
writing off depreciation

practicefor

the asset, is written

of

balance

"

FIXED
fixed

Balance

the

except in very

Reserve

Off

Writing

used

methods

debit

Maintenance

in

general rule, and

111

FUNDS

clearlydescribed

exceptionalcircumstances,
be

SINKING

less

of such

plant and machinery, this decreasing charge for

of repairs will be
the cost
depreciation is justified,
as
increasingeach year as the plant grows older, but, in the

assets

as

author's
of

opinion,it is
repairs apart from

far better

to

deal with

depreciation,
by

the

the

question

creation

of

'112

maintenance

commonly

most

one

as

it is

be

made

plant and machinery,

do

have

not

the

The

great weakness
to

write

very

high

time

long

unless

burden

if an, asset

be

system,
of

balance

"1,000 off

"14

over

the

periodof

Account,

this increased

figure.

it takes

is, that

as

very

approximately nil,

to

latter
For

the

case

example,

depreciatedat 10 per cent,

of fortyyears there will still

is

end

upon

the Plant

is excessive.

years

at the

of additions,

used, in which

costing "1,000

this

is

rate

tions
separate calcula-

case

upon

down

asset

an

opening

the

upon

under

in the

of this system

with

in connection

used

percentage is calculated upon

and

writing off depreciation

of

simple,and

the balance

increase

additions

such

to

AUDITING

method

This

reserves.

is the

OF

PRINCIPLES

THE

asset

ten

and

account,
the

years,

write

to

will have

rate

to

exceed 25 per cent., but taking 25 per cent., the

slightly
at the end of the first year will be
charge for depreciation
"250 ; for the fourth year it will be "105 ; for the sixth
year,

"60

what

an

and

charge

enormous

two, and

ninth year

the

is

"25

it will be

that

so

"

first year

the

placed uppn

seen
or

rapidlythe charge in succeeding years rr"

These
facts are
seldom
this system is
appreciatedwhen
adopted in practice,and the rate fixed is generallyquite
inadequate to write the asset down in a reasonable period;
this system is adopted, an
auditor
should
therefore,when
how

that

see

the

down

asset

is

rate

per

cent,

during

the

period of

sufficient

to

write

its estimated

the

working

life.
DEPRECIATION

during
equal

the

period
Loss

Account

be invested
and

an

by

the

and

the

Account

in

giltedged

Investment

Account

investments, as

credited

to

the

at

from
"

for

year

being debited,
;

this

life of the

off each

is withdrawn
"

Under

estimated

being credited

of cash

amount

of

SYSTEM.

is written

amount

Profit and
Fund

FUND

the
the

and

an

Depreciation
a

similar

business, and

should

time

same

The

received, will be

DepreciationFund

asset,

depreciation,

cash
securities,

debited.

system,

credited

being
interest

debited
Account

yielded
to

at

cash
the

114

cases

where

to

be

retained

in

tables

From

charge for

Loss

Account,

to Profit and

The

the

but

year,

and, therefore,the annual

less

for this

is,that the

amounts

adding to

are

business, and

as

the

earning income

be

taken
a

the

first year,

For

will be

each

same

less each

The

year.

reason

for

year

using

these

and

sums

question of interest is

example,

years

Account.

depreciation
working capitalof the

available

business

period of twenty

each

aside each

set

therewith, the

into account.

for

the

the

to

charge (that is,depreciation

net

heavier

interest)grows

Loss

credit for becomes

taken

interest

year,

account

debited

be

depreciationis

off for

written

amount

annual

The

whilst the interest,

credited to Profit and

and

account

nil at

to

credited to the asset

reducing balance, will

the

upon

down

life.

taking

reducing

the

asset

ciation
depre-

after

upon

estimated

calculated
the asset

the

account.

off for

sum,

rate

the

upon

into

written

period of its
will be
depreciation

debited

and

agreed

an

of the

end

the

taken

ascertained, which

at

depreciationarc

interest

be

be

to

asset, will write

of the

balance

is

year

interest

for

credit

is to

asset

fixed amount

each

business, and

the

in the

capitalinvested

for

charged

amounts

the

in

AUDITING

OF

PRINCIPLES

THE

in the

of

case

lease

costing (say)" 10,000,

and

in

"10,000 is locked
is provided each
up in this lease, but as the depreciation
and, for instance, during the
year, this capitalis replaced,
last year

the

nearly"10,000 has

this amount
the

capitalto

amount

been

of

providedout

of

revenue"

of
forming additional working capital,

business

has

the

increasingcharges

use

in the

meantime.

which

Therefore, the

for

inishing
caused
depreciation,
by the diminterest taken
into account, are
compensated for
of depreciation
by the earnings of the accumulations
which
are
increasingthe working capital. This system
is seldom

sometimes
of

used

in

practice,and the only items

applied are leases, in which
case

life is known

exactly, and

there

is

no

to which

the

it is

period

question

of

additions.
RE-VALUATION.

Under

this

system

the

assets

are

RESERVES

DEPRECIATION,

re-

valued

to

adopt

year, and

each
with

such

work

this is the

assets

copyrights,and other
almost
impossible to

115

FUNDS

method
only satisfactory

loose tools,harness, live stock,

as

of this nature,

assets

fix rates

accurately, since

out

SINKING

AND

of

because

it is
will

depreciation that

these

assets

constantly

are

changing.
AUDITOR'S

THE
has
to

DUTIES

DEPRECIATION.

REGARDS

As

already been pointed out, it is impossiblefor an auditor

estimate
the working lives of the assets of a business

consequently,he
this

that

whose

have

been

advice

If he

think

no

be

of those

this

question

not

has

considered, the
either

in

profits,then
he

reppcLjthat
sufficient.
discuss

stated

to

write

to

assets

should

it

of

been

he

properly

though he
larger amounts,

has

expert

no

satisfied

having
with

But,

view

that

the

on

sufficient
finds

that

honestly

been

fixed,

inflating

to

definitelyin his

taking

or

and

opinions

knowledge.

such

state

such

plant and machinery,

as

or

to

even

off

amounts

manner,

before

honestly

be

should

is not

ascertain

end

accept the

have

that*""

audit

provisions

this course,

he

are

should

whole

hearing their
refuse

he

However,

the

he

wise

and

haphazard

and

sufficient

are

palpable that
being provided for, or he
been
not
adequately and

rates

see

been

question has
concern,

who

should

depreciation

the

by

further

should

hand,

depreciation is

this

of such

that, therefore, he

other

nil

to

off

appreciate that

must

knowledge

conclusions
the

has

it would

auditor

technical
and

he

off for

written

rates

finds that

considered, he

an

written

particular assets

the

periods.

for

been

the

are

properly considered,
applied. He should

the amounts

that

that

amounts

fixed,that the working lives have

estimated, and
reduce

the

depreciation,but

been

subject has

upon

may

for

have
principles

correct

estimate

cannot

provide

to

necessary

the

AS

question fully with the management,

after,
views, and layinghis before them ; if,there-

is still not

alter the

above.

and
satisfied,

accounts,

he

the

directors

should

then

or

partners
report

as

116

OF

PRINCIPLES

THE

AUDITING

Reserves.
"

"

word

The

with

in connection

generalpublic.
is

there

subject. The
has
very

the

widely different

in

result that
in the

mind

of

with

this

"

the term

"

reserve

and

senses,

ceptions
miscon-

profession,

connection

opinion in

of

loosely

somewhat

accountancy

for this is that

to

describe

of affairs.

diverse states

Reserves

with

in the

Even

reason

used

been

used

regard thereto

with

difference

some

been

accounts,

arisen

have
the

has

reserve

under

sub-divided

be

may

following

the

headings
"

Funds

SpecificReserves

Reserve

General

Sinking Funds

Reserves
Secret

and

it is

proposed

Reserves
of these

brieflyeach

consider

to

now

sub-divisions.
SPECIFIC

reserve
specific
represents a
contint
to provide for a known
chargedagainst profits

the exact
and
bad

RESERVES.

of

amount

which, however,

has, therefore, to be

assets

exact

for

debts, discounts

of

means

should

reserve

deducted
Sheet.
and

of such

In the

repairs and

it
depreciation,

case

renewals, and

to Profit and

is known

that

and

these
Loss

the

provided
cases,

Account,

the
and

corresponding asset in the Balance

of specific
for accruing repairs
reserves
for disputedclaims, it is known
that a

will arise,but
liability

the

exact

thereof cannot

amount

again, therefore, the

estimated

and

debited

this latter

case

the

amount

debit side of the

Balance

that
liability

had

has

reserves

heads, but

these

In

of

case

loss has to be estimated

charged

the

ascertained, and

the

specificreserves.

be

from

In

loss under

subjectto

are

amount

by

and

etc.

for

reserves

as

debts, discounts, depreciation,future

for bad
the

be ascertained,

cannot

estimated, such

renewals, disputed claims,

sum

to

to

Profit

and

provided
Sheet, and
be estimated.

has

amount

Loss

Account.

to

be
be
In
the

will appear

upon

is in effect

merely

RESERVES

DEPRECIATION,

SINKING

AND

117

FUNDS

and must
reserves
are
a charge against revenue,
Specific
the Profit and Loss Account
shows
be providedfor whether
a
important
profitor a loss. In fact, if a loss,it is more
under
that
than
ever
ample provisionshould be made
be seen
these heads, in order that it may
exactlyto what
has been lost.
extent
the capitalof the concern
In the

"

"

has

reserve

other

some

use

circumstances, it is thought that the

above

"

"

is

reserve

be

"

term, such

as

"

such

as

disputedclaims," so that
clearlyappreciated.
GENERAL

RESERVES.

it would

and

"

provision;

used, it should

explanatory words,
of

badly used,

been

always
for bad

the

be

term

be better

if the word

but

followed

debts,"

"

in

with

respect

circumstances

exact

generalreserve

to

may

represents sums

future
to provide against unknown
of profits,
contingencies,to increase the working capital,to equalise
set

aside

out

dividends,
of the
and

merely

or

concern.

is

strengthen
general reserve
to

the

financial

pre-supposes

appropriationof profits.In
retained
general reserve
represents profits
which
in

ear-marked

fact, these
Sheet

Balance
be

must

for any

"

as

business,
and,

purposes,

described

in

the

undistributed

represented by

is created

be

words,

in the

of the above

might well

reserves

capitaland

over

other

an

are

position
a
profit

profits."A true profit

correspondingsurplusof assets

liabilities,
and, therefore, as

general

it must,
profits,
in its turn, be representedby a correspondingsurplusof
In fact, it is of the essence
of a generalreserve
assets.
that it should
consist of such a surplus of assets.
The

reserve

credit balance
appears

upon

merely the
surplusof
the

upon

General

the

such

gauge
assets

is

which
that
the

Sheet, represents

the

measures

are. withheld

business.

Account, which

Reserve

the debit side of the Balance

proprietorsof

of the

by retainingpart of

The

from

the

distribution

continued

absolutelydependent upon
existence of the correspondingsurplusof
if,for example, in the succeedingyear the
reserve

of

amount

the

to

existence

continued

assets,
business

so

that

makes

118

trading,equal to

loss in

then

such

In

these

upon

the

loss.

credit balance

the

therefore, the

circumstances,

should

Account

Reserve

General

sequent
sub-

Profit

the

upon

Account.

Loss

and

of the

amount

previous year'sprofits,

of the

against the debit balance

off

written

be

has

assets

the

automaticallydisappeared,as
of the
disappearedby reason

has

reserve

surplusof

exceeding

or

set aside out

generalreserve

AUDITING

OF

PRINCIPLES

THE

represents a surplusof assets over

generalreserve
it will be appreciatedthat it^
capitaland liabilities,
tence
depends upon the valuation of the assets, for if the
assets have been over-valued, as for example, by insufficient
then
to the
provisionsfor bad debts and depreciation,
the surplus is
of assets
over-valuation
of such
extent
As

In

non-existent.
other

has

assets

and

to

the

Balance

the

the

of the

extent

Sheet

the

excess

will

of

the generalreserves,
inflating

effect of

the

over-valuation

the

way,

same

shown

reserve

upon

absolutely fictitious, and

be

non-existent.
A

FUNDS.

RESERVE

the

should

investments

definition is not

it is

suggested that

the

to

whenever
A

on

Those

"

seen

fund

"

conveys

distinct fund

senting
repre-

into

cash

by debiting Profit and

Loss

converted

be

can

is created

fund

creditinga Reserve

time

same

invested.

held

senting
repre-

required.

reserve

in the

is

there

"

word

authorities,but

all the

of the

use

that

reserve,

Account, and
the

the

as

assets

giltedged

or

accepted by

general publicthat
the

"

be firstclass

This

same

outside the business.

is invested

reserve

is the

surplus of

the

except that

general reserve,

fund

reserve

These

Balance
account

INVESTMENT

investments

Sheet, and
of the
OF

GENERAL

RESERVE.

place from

time

reserve

SURPLUS

to time

should

be

separatelystated

described

as

being

fund.
OF

ASSETS

Considerable
as

at

and

is withdrawn

be

should

and

Account,

of cash

equal amount

an

Fund

to whether

REPRESENTING

discussion
the

has

surplusof

taken
assets

AND

RESERVES

DEPRECIATION,

should

a generalreserve
representing

the business, but

outside
which

is

objectwith

If the

good

use

surplusof

this is

cases

which

successful

business.

adopt,

to

which

interest

no

is

small

and
beginningsby withholding profits,
additional

an

capitalwhich,
increasingand expanding

be

seen

no

concern,

and

that

most

from

up

providing

thus

Therefore, it will

business.

which

has

dictate the

shall make

business

auditor

an

cannot

accountants
a

fact,

necessity,is requiredby

of

question with

of
proprietors

the

that

this is

business,

the

built

been

have

concerns

many

additional

In

payable.

and

that

cern.
con-

created

In

as

to extend

large
the

the

has been

reserve

course

available with

becomes
capital
upon

wise

very

the

left in the

be

must

assets

of
proprietors

policy

working capital,for which very

the business, then
obviously the

in

be found

can

of business

matter

119

FUNDS

invariablyinvested

be

of the

which

provide additional

is to

and

this is

the hands

entirelyin

SINKING

use

funds

of the

of their business.
On

the

providing

to

hand, if

other

the

contingencies and
the

future, then

the

business, so

realisable into
used

be

funds

with

it is wise

locked

in such

machinery, which

into

cash

are
theoretically

point

of view

surplus

"

reserve

The

general

fund

readily
will

funds

these

debts,

reserve

is invested

should

investment

reserve
"

of

be
a

are

should

outside

are

plant

or

business.

positions
practical

these two

which

but

the same,

the

from

different,it is suggested that where

are

"

is

that

immediately converted

be

cannot

surplusassets representinga
the

that

distinction between

which

term

form

seriouslydisturbing the

to draw

the

in

stock, book

as

in

surplus outside

the

found

be

assets

and

"

suddenly arise

may

unknown

meet

invest
be

view

surplus assets
working capital,and when

arises,it may

In order

to

with

Otherwise, the

cash.

without

to

it may

that

emergency
up

which

liabilities that

additional

as

is created

reserve

the

the

left in the business,

be

used, but

where

business, the

adopted.
surplus representing

term

reserve

120

OF

PRINCIPLES

THE

outside the business

does

AUDITING

and

not

fix the

cannot

existence

absolutelydependent upon the

existence of a surplusof the whole of the assets
continued
the capital
investments) over
(includingthe ear-marked
liabilities; if, subsequently,losses are
and
incurred, the
surplus is thereby automaticallyreduced, and, therefore,
of such

the

may

the

of the

off

written

fund

reserve

and
disappears entirely,
be

reduced,

still in existence.

be

investments
amount

is also

this extent

to

reserve

is

which

reserve,

is

loss

reserve

should

thereon

and

the

equal to

investments

of the concern,

part of the general assets

incurred, the

loss ; the

againstthe

If

credit balance

the

though

even

are

then

required

are

provide for the liabilitiesand capital. It is absolutely

of a surplus,
impossiblepermanently to fix the amount
of necessityincrease or
which
decrease from
time
must
to

time, according to the fortunes of the business.

to

SINKING

FUNDS.

sinkingfund

fund, except that

reserve

is very

it is created

similar

for

the

to

definite

of

Profits are appropriated

redeeming a liability.
and credited to a Sinking Fund
Account, and at the same
time
invested
outside
the
are
corresponding amounts
business.
The interest earned by the investments
should
be credited to the Sinking Fund
Account
and re-invested.
The
term
is also used where
sinkingfund
provisionis
made
for the replacementof a wasting asset, but, in these
is a better term.
circumstances,
fund
A
depreciation
depreciationfund, as has already been described in the
earlier part of tliischapter, is created in an exactlysimilar
purpose

"

"

"

"

manner.

In the
the

case

of

sinkingfund' created

periodicaldebits

to

Profit and

to redeem

Loss

Account

liability,
represent

appropriationsof profits,
has been
and, after the liability
paid off, a credit balance is left upon the Sinking Fund
Account, which
out
case

of

repayable

then

represents a general reserve

of divisible

company
at

the

profits. For

having
end

of ten

example,

debenture
years,

and

debt

lated
accumu-

suppose
of

the

"10,000,

it is decided

to

122

AUDITING

OF

PRINCIPLES

THE

representingdivisible profitsthat
which

business, and

used

been

have

left in

been

have
to

off

pay

the

capital

liability.
sinking

or

fund
depreciation

created

is built

up in the
completion,the debit balance upon

wasting

asset

same

the

replacea

to

but, upon

way,

old

of the

account

expired asset is written off against the credit

balance
the Sinking or DepreciationFund
Account,
upon
and the investments
thus disappears,
which latter account
asset.
provide the cash with which to purchase the new
and

now

the

In this case,

Loss

debits to Profit and

annual

as
they represent
chargeagainst profits,
of the wasting asset.
the depreciation

are

for

SECRET

RESERVES.

disclosed

not

secret

position is,in fact,better

Sheet.

Secret

reserves

can

shareholders

the

be
and

or

that

reserve

is

fin

the

that

so

provision

from the Balance

appears
for the purpose
created
of

than
are

equalisingdividends,
heavy losses

Sheet,

Balance

in the

is

reserve

the

Account

provide a

to

without

met,

fund

of which

out

disclosingthe

general public; also, in

some

fact to
cases,

avoid

information
to trade rivals.
disclosing
Secret reserves
created by writing down
are
assets, such
as
stock, book debts, plant and machinery, and premises,
below their true value, by making excessive provisions
for
and by charging capitalitems, such
outstanding liabilities,
additions
to plant and
as
machinery, to Profit and Loss

to

Account.
The
of

case

these
the

Auditor's

Position

specificreserves,

most

with
carefully,

provisionsmade

these

reserves,

are

such

as

outstanding claims, have

The

auditor

is not

been
that

the

reserves

are

the

auditor

the

must

enquire

into

satisfyinghimself that
sufficient. His duties as regards
view

been

must

do

to

debts, depreciation and

bad

concerned

except that he
properlytaken, and

reserves,

In

regards Reserves.

as

discussed
with
see

show

clearlyand

already.

the creation
that
a

the

bond

of

accounts

general
have

fidesurplus,and

properly stated

in the

If the

Sheet.

Balance

of

provisionfor depreciationand

bad

deal

must

with

If the accounts

is

of

case

for

provide

his

of

creation

practice,auditors
these

auditor

an
profits,

reserves

asked

in

the

specially
in

however,

advise

to

that

as

province, except

auditor

an

report.

general reserves,

such

often

are

Again,

matters.

of

audit

his

the Articles of Association

when

the

in

auditor

the

debts, then

disclose

the creation

company

and

entirelyoutside

matter

stock, or the insufficient

question

in order

are

insist upon

cannot

whole

the

123

FUNDS

fictitious,
owing, for

are

reserves

over-valuation

the

example, to

SINKING

AND

RESERVES

DEPRECIATION,

regards

as

insist upon

cannot

the

being invested
surplus assets representinga general reserve
to seeing
outside
the business, his duty being confined
In

the

same

the

he

way,
to redeem

be created
in

positionof

the true

that

of

case

affairs is disclosed

be

no

said

be

view

correct

of

But, in the
of

in

that

the
of

case

of

state

invariablyrefer
the

of

practicalvalue
in their

such

of

partnerships, secret

reserves

the

concern.

these
that

audit
reserves

and

true

reserves

they
do

practice, auditors

in

not

be

In the

the number

of shareholders

in the

of the

hands
In

necessary.
are

entitled

therefore, if
been

shows

affairs

the

to

of the fact.

aware

where

not

case

Sheet

are

not

reports.
not

are

and, if in existence, all the partners should

common,

are

in the

auditor

the

large public companies,

considerable

such

circumstances

such

adopted extensively, and

made

provided

so

of issue.

terms

Balance

the

report that

cannot

In

debentures, except

positionwith reference to secret reserves

there can
of some
little difficulty.
Theoretically,
and
be justified,
cannot
question that secret reserves

it may

are

sinking fund

auditor's

The
one

the

as

it is

when

company,

that

such
liability,

Articles of Association, or

is

demand

cannot

in the accounts.

created

secret

by

to

such
see

reserves,

the

of

case

privatecompanies,

is small, and

public, secret

the accounts

reserves

circumstances, all the

the

full
to

be

should
holders
share-

positionof affairs,and,

any

directors, the

material
auditor

extent, have
should

make

124

PRINCIPLES

THE

this

clear in his audit

fact

accounts

general public, the

of the
it is
effect

the

upon

therefore, often

disclosing to
such

create

these

whole

body,

the

in

the

the

secret

is in the

accounts

interests

may

that

they

losses without

have

they

the

companies,
so

reserves,

that

of the

public credit

the

consider

Such

concern.

world

in this way

as

for

competitors

to

emergencies and heavy

This

reverses.

of

the

shareholders, and, therefore,

disclosed

credit

the

and

great importance

very

able to meet

be

may

available

creditors

the

as

information

that

have

of

matter

well

circumstances

the

thus

are

customers,

as

company,

But

entirelydifferent, for

are

published, and

are

AUDITING

report.

large public companies

with

as

OF

with

met

shareholders

of the

concern

is maintained.
On

the

unscrupulous
example,

to

cover

the

of

the

company,

be

influenced

fluctuate
created
an

the

that

are

the

secret

are

without

reference

some

auditors

make
value

the

auditor
these
matter

but

not

is not

showing

fullyin

his

report

he

that

its amount.

should
to

secret

reserves

as

without
the

that

whole

the

ascertaining

the

company,

fidepurposes

of the

fact

absolutelysatisfied

transactions, he

accounts

only.
safelypass

may

in these

though

general

may

the

to

of

in his report,

thereby disclosingthe
reserve,

case,

shares

important

view

for bond

this is the

report that

by

interests

the

fur

of its shares

is most

with

used

the

carefullyinto

most

in

being

is satisfied that

circumstances

value

results shown

reserves,

by

purposes,

manipulation of

enquire

necessary

they

audit

market
the

used

i"zojuircs transactions,

Therefore, it

past.

of the

matter

their

for the

should

improper

most

be

private speculation in

by making

in the

they

If he

of

might

reserves

losses upon

improperly by

question
and

for

up

purpose

auditor

that

secret

directors

for

or

hand,

other

statement

is understated,

assets

is

there

secret

If, however,
to

the

bond

fail deal

shareholders.

in

the

fides of
with

the

VII

CHAPTER

1908,

ACT,

that

to

possible to

deal

The

and

for in Section

Act, 1908,
"

Every

will

auditor's

observed

private companies
The

appointment

and

the

the

accounts

of

be

is made

in

though,
into

appointed
on

proprietors of

to

behalf
the

act

as

of

them

true

upon

for the
and
125

the

audit

merely
whose

fact

mind

by
is

he

work

directors, who
for

the

them

accounts.

at

all.

directors, and
who

directors

benefit of the

correct

to

for

in

shareholders,

the

business, that

undertaking honestly
to

check

body,

This

his

the

acting

are

borne
of

with

is not

thought.

as

and

to

that

so

is often

business.

course

contact

business, yet he

the

render

the

refers

Act,

behalf

and

the

(1).)

their agent

the

on

carry

until

office

112

as

as

whose

on

general meeting

themselves

thoroughly appreciated

ensure

are

(Consolidation)

shareholders

the

by

directors, who

the

constantly brought
is

auditors

this

exempted,

not

are

shareholders,

auditor, for

conduct

of

Sub-section

registered under

directors

the

(Sec.

is,therefore, acting

auditor

agents of the

must

Auditors.

hold

to

above

the

that

company

benefit

of

annual

auditors

or

"

and

1908

the

an

Companies

general meeting."

"

every

of the

shall at each

auditor

an

be

remuneration

112

company

annual

next

the

only

follows"

as

appoint

to

of

from

Remuneration

and

appointment

provided

He

it is

sections

few

the

Companies

the

available

space

particular importance

Appointment

an

the

briefly with

of

are

of

of view.

point

It

in

with

familiar

be

provisions

the

1917, but

Acts, 1908

that

of

AUDITORS

should

auditor

an

whole

practicallythe

Act

AFFECTING

PARTICULARLY

is necessary

IT

(CONSOLIDATION)

COMPANIES

THE

OF

SECTIONS

are

the

carry

on

shareholders,

"

126

PRINCIPLES

THE

AUDITING

OF

at an
appointment of auditors is not made
annual
general meeting, the Board of Trade may, on
of any member
of the company,
the application
appoint

"If

an

of the

auditor

an

remuneration

fix the

for his services."

auditor

behalf of the

acts

"

member

director

this way

it is

In

had

he does

and

be

of the

auditor

the

of

in

Trade,

shall not

company

the

be

not

ment,
appoint-

appointed at the
act specially
on

not

auditor

provided that

secretary,he would

As

the

appliedto the Board

body of shareholders.

secretary of the company

the

been

officer of the

would

independent,as

company

agent of the shareholders

capable of being appointed

(3).)

the

by

and

year,

makes

of Trade

if he

who

or

(Sec. 112

current

him

paid to

the

as

behalf of the whole

on

the

(Sec. 112 (2).)

as
exactlythe same
way
annual
generalmeeting,

but

be

to

although the Board

In this case,
the

for

company

be

company."

shall be

quite

if, for example,

case

also

were

of

servant

appointed auditor.
the directors,subject

authority; but it is essential that an auditor

should be absolutely
independentof the board of directors,
and, therefore, such an appointment is prohibitedby the
In practice,
it is not uncommon
Act.
to find one
partner
their

to

in

firm

of

of accountants

and

company,

although

acting as

another

yet it is undoubtedly contrary

and
If

serious

the

such

director

partner acting as

strict letter of the

the

Act

does

the

to

would

between

arose

arise

one

of very

auditor, therefore, would

independence,as
"

person,

it

be

not

always should

other

than

of

an

and

directors

the

partners of the

The

would

position of
of

one

the

disinterested

be.

retiringauditor,

capableof being appointed auditor

meeting unless notice

advisable.

there
as
great difficulty,

directlyconflictinginterests.

this,

this Subsection,

spiritof

appointments are certainlynot

questions
be

forbid

not

auditor, the positionof the individual

firm

secretary
auditor, and
or

at

intention

an

to

shall not

annual
nominate

be

general
that

(CONSOLIDATION)

COMPANIES,

THE

office of auditor
to the
person
not
shareholder to the company
before

shall send

copy

advertisement

by

general meeting
"

thereof

auditor

an

is called for

given within

by

thereof, and

the

at the

given

or

time

the

past it

the

carried

was

their

out

nominating

person,

unless due
and
of

to

than

other

notice

the

case

to nominate

expedient

an

before

of

meeting, and
the

fixingthe

by

The
the

the

given

sent

or

given
sent

auditors

in

who

consequence,

directors, were

the

to

by

appointment,

the

of 1907,

Act

given
the

both

to

thus

has

cannot

date
the

less than

so

that

no

appointed

shareholders

the

opportunity

an

The

second

notice of intention

be frustrated
the

by

the

annual

fourteen

simple
general

days

from

notice.

of the company

directors before the

be

shareholders.
a

without

Therefore, these

anyone.

provides,that

receiptof

first auditors

or

general meeting,the directors

immediately summoning

date of the
"

auditor

or

sent

provision,be

retiringauditor, can

been

part of this Sub-section

days

notice of the annual

with

conflict

retiringauditor, who
his

laying

has

being

conscientious

else for

the

the

be

properly, and,

duties

introduced

provisionswere

annual

an

fourteen

to

this

as

that

notice beforehand

giving any

date

to

(Sec. 112 (4).)

found

someone

intention

given,

so

of

instead

re-elected at the annual

not

annual

the

of the

notice

time

same

into

occasionallycame

the

given, the notice, though

required by

general meeting."
In

by

requiredby this provision,

been properlygiven for the

the

may,

company

within

have

to

been

time

the

deemed

purposes

been

has

less after the notice has

shall be

allowed

before

days

if,after notice

that

general meeting
not

company

"

Provided

nominate

days

auditor,
retiring

mode

other

seven

the

shareholders, either

the

to

in any

or

less than

Articles, not

fourteen

less than

notice to the

such

give notice

shall

and

of any

127

given by

been

has

general meeting, and

annual

the

1908

ACT,

may

be

appointed

statutory meeting, and

if

so

128

by
meeting, unless previouslyremoved
the shareholders in general meeting, in
shareholders

in this

should
first

they

and

auditor

such

remove

not

directors

office of

this case,

such

again, the directors

shareholders.

This

as

the

for

the

appointed

were

in

the

continues,

vacancy

auditors, if any,
shareholders,

for the

not

but

that

mean

of

auditors

the

the company

not

the

during

thought by students,
must

when

agent of the

the

auditors

as

auditor, who

an

by

does

act

may

officer of the company.

"The
remuneration
shall be fixed

in all cases,

is,as

is sometimes

appoint

may

and

vacancy

or

act

Sub-section

themselves

vacancy,

the

auditor to fillthe casual vacancy,

auditor

be

of

but

that

director

company

generalmeeting, except
auditors appointed before
in

that

the remuneration

the

statutory meeting, or to fill any casual vacancy,

be fixed by the directors."
(Sec 112 (7).)

may

The

remuneration

appointment,
where,
for the
to

casual

fill any

may

appointan
appointed,the
directors

agents for

(Sec.112(6).)

and

or

if he

as

way

auditor, but while any

act."

may

the

body,

place,

making

directors,acts

surviving or continuing auditor

the

they

same

as

to

power

his

in

another

met

yet

may

shareholders.

the

"The

In

exactlythe

in

the

directors, when

auditor, though appointed by the

shareholders

have

merely acting as

have

shareholders, who

by

auditors."

statutory meeting,

the

appoint

The

it.

desire

appointment, are

direct

the

case

directors

the

shareholders

the

case

that

seen

prior to

first auditor

appoint the
even

it will be

clause

this

but

which

appoint

may

of

resolution

(5).)

(Sec. 112
From

meeting

that

at

general

office until the first annual

hold

appointed shall

AUDITING

OF

PRINCIPLES

THE

the

as

of the

rests

mere

auditors, in the

entirelywith

matter

shareholders

of any

of

in the

statutory meeting,

the

same

way

as

their

shareholders, except

convenience, the directors

case

of the

and

where

act

appointment prior
a

casual

vacancy

130

PRINCIPLES

THE

of

their tenure

in

the company

laid before

Sheet

AUDITING

OF

generalmeeting during

office,and the report shall

fa) Whether

the

required;

have

explanationsthey

and

information

all

obtained

have

they

not

or

state-

and
in

(b) Whether,

in the

referred to
exhibit

to

company's

affairs

information

and

noted

It will be

view

according

to

auditors

the

that

Sheet

report is addressed

such

If the

directors.

the

there

points,or

of the

submitted

his

and

accounts,
way

any

that, in his

dealing with

to

the

true

the

facts before

matter

the

any

to

In

shareholders.

opinion,
qualify
clear
the

prepare

in

accounts

report, and

is confined

thus

the

to

any

matters

point,his duty

in his

that

not

must

alter such

cannot

; if dissatisfied upon

shareholders

satisfied upon

is not

information

auditor

the

report

of office,and

duty of the directors

It is the

shareholders, and

the

auditor

the

be

therein.

of

make

to
to

their tenure

to

is any

have

placed before the shareholders, he

such
and make
report accordingly,
any

should

as

of the

state

best

the

so

explanationsgiven to them, and

books of the company." (Sec.1 13 (2).)

generalmeeting during

in

Sheet

the

the

Balance

every

upon

by

shown

as

correct

and

true

opinion,the Balance
report is properly drawn
up
their

laying

same

way,

if the

system of book-keeping is bad, the auditor cannot

insist upon
alterations,but if it is so bad that reliable
accounts

be

cannot

prepared,then,

in such

circumstances,

he should
as

report to this effect to the shareholders. However,

rule, directors appreciate and value the advice of the

auditor
"

The

board
there

is

there

matters.

Balance

by

auditor's
or

such

on

two

only

Sheet
of

one

the

shall be
directors

signed on
of

the

to

the

Balance

to

the

before the company

report, and
in

the

if

or

company,

shall be inserted at the foot of the Balance

reference

of the

director, and

director, by that

report shall be attached

behalf

the

Sheet,
Sheet

report shall be read

general meeting

and

shall be open

COMPANIES

THE

inspection by

to

shall be

entitled

Balance

Sheet

(CONSOLIDATION)

ACT,

1908

shareholder.

Any

shareholder

any

furnished

be

to

and

auditor's

exceeding sixpence for

Sheet

Balance

is not

to the

be

The
the

report

form

from

course

read

at

any
is

there

the

being held
the auditor

is

from

hesitation

in

given

on

it

Balance

other

but

Sheet,
.

as

the

the auditor's

Sheet
to

appears

as

be

confidential

Balance

meeting,

Sheet
Sheet

Balance

the

is open

which

freer hand,
the

often is.

has

in the

There

is

no

he may

report
doubt

Sheet,

the Balance
as

have

shareholders
be

be

that

so

copy,

to

inspection,

to

contained

publishedwith

much

inspection.

to

upon

the shareholders.

made

no

any

clear to

hand, if the report is published with

Sheet, and

general public, the

insert

separate document,

information

not

19

Section

the

reporting fully to

the

to

whether

which, in his opinion, should

On

duty

Balance

is entitled to demand

risk of the

that, if the report is

matters

to

shareholders'

back

appear

shareholders, and, therefore,

the

to

shareholder
no

must

published Balance

looked

be

this

in

Messrs

open

decide

of

publishedbroadcast,
report referred

but

is necessary,

above

is

the

to

is to make

The

of

the

on

rightto

intention

auditor

the

foot

the

"

meeting,and

report should

the

is not

the

The

day of

the

it

Balance

at

there

specialwording

the

have

but

the better

the

(Sec.

the

to

It is the directors'

report shall be attached

not,

Sheet

the shareholders

at the

directors

them.

not

this is done.

that

see

separate document,

no

good

to

is dated

will be read

and

to

Company's auditors,

which

one

charge

directors,but

the

generallyappears

report.

followingis

that

the

words."

either attached

it

this note, for which

or

hundred

signed by

foot of the Balance

at the

reference

be

case

it may

thereof, or
event

duty

must

report

Sheet, in which

The

of

copy

at

report

every

be

must

auditor's

the

auditor's

the

(3).)

112
The

with

131

thus

reaches

creditors,customers

the

and

hands

of

the

competitors

132

; should

of the business

credit

shareholders

to

AUDITING

of

to

the

report adversely

only,so

made

be

the auditor

that

be

might

concern

Therefore, the report should

seriouslyaffected.

'LL^ accessible

OF

the auditor have

the

matters,

any

upon
-

PRINCIPLES

THE

be

may

hampered by these other considerations.

It is most
important that the report should identify
Sheet
which
it
to
clearlythe particularBalance
very
be no
for after-dispute
room
or
refers, so that there may
in

no

way

confusion, and

Sheet

Balance

the

bearing

the

referred

to

document,

in

report.

they

the

report is

If the

actually

one

separate

initial the

particular

to, and should state

referring
in all cases
they should keep a
sent, and place a memorandum

are

report, and
Sheet

Balance

be

not

should

auditors

otherwise

or

shareholders, though

the

to

should

date

the

fact in the
of the

submitted

the

by mistake

that

proper

Sheet

Balance

danger

no

this
copy

of

identitythereon, so that if the question arises,they may

with certaintyas to the matter.
The bx
able to testify
however,

is to

foot of the audited

Balance

Sheet,

documents

made

and

two

safer course,

are

copiesof
merely

reference

REPORT

the

by
in

Accountants

have

Limited,

dated

"

or

us,"
We
we

have

have
In

our

Council

"

report, but with

of the
Wales

and

copy

set

is annexed

obtained

all the

has

of

of

Institute

of

"

THE

the
and

of

forth," or

of which

form

the

TO

Sheet

day

above

shareholders

LIMITED.

Balance

the

"

or,

the

of which

copy

the

does

course

to the

OF

audited

it as
identify

the

AUDITORS

SHAREHOLDERS
We

that, in this way,

report

following is

England

THE

OF

the

sending
The

""

at

without

thereto.

report recommended
Chartered

Sheet

Balance

such

so

the

inseparable.This

prevent the directors from

not

write

be

"

within

hereto
been

and

contained,"
initialled

initialled

information and

(here

by

us

by
").

explanations

required.

opinion such

Balance

Sheet

is

properlydrawn

THE

(CONSOLIDATION)

COMPANIES

to exhibit

and

up

so

the

company's affairsaccording to

as

and
the books
"

of

If any

true

the

company.

of

mation
infor-

our

shown

as

which

133

the state

of

and

us

Sheet

Balance

of

the best

explanationsgiven
of

view

correct

the

copy

1908

ACT,

has

by
been

not

signed as required by this Section is issued, circulated or

published, or if any copy of a Balance Sheet is issued,
circulated, or
of the

published without

auditor's

Section, the

fine not

penalty if
"

In

the

be

of

copy

containing

or

this

director, manager,

every

ingly
is know-

who

company

be liable

conviction

on

(Sec.113 (4).)

that

seen

of this Section

case

fifteenth

the

it will

required by

exceeding fiftypounds."
terms

the

and

is

as

default, shall

to the

this Sub-section

From

report

having

thereto

officer of the

other

party

that

to

company,

secretary, or
to

report attached

reference

such

either

heavy

carried out.

not

are

is

there

registeredafter
banking company
and
of August, eighteen hundred

day

seventy-nine
"

(a) If
limits
as

the

of

allowed
books

the
been

in the

and

United

it shall be

to

three

directors

those

directors, and

three

"

Holders

company

inspect
the

as

have

company

be

signedby

where

there

by

company
when

there

are

secretary

not

than

more

least

at

are

the

of

three

than

more

(Sec.113 (5).)
by all the directors."
refers only to banking companies.

of

shall
the

preferenceshares
have

the

Balance

holders

(Sec.114(1).)

of

and

of
other

ordinary

and

debentures

right

same

Sheets

reports of the auditors

by

branch

from

directors

Sub-section

This

and

of the

auditor

extracts

office of the

the

; and

Sheet must

(ifany)

beyond
if the

and

such

any

head

the

Kingdom

Balance

manager

of

accounts

sufficient

copies of

such

to

access

transmitted

(b) the
or

Europe,

banks

branch

has

company

the

to

and

company

reports

shares

receive

in

as

the

is

of

and
the

possessed

company."

134

THE

"This

July
This

and

holders

Sheets

of

the

and

1907

before
registered
List

Section

provides

every

containing various
capitalof the company,
each

contained

be

must

and

members,

in

copy,

be forwarded

must

Sub-section
"

is

The

to

date

form

of

as

be

Balance

auditors, and

assets, and
arrived
statement

In

many

company

provided
be

annual

how

also

at, but
of

the

is filed to
it

sufficient,and

paid

unpaid,

and

summary

registerof

values

follows

the

made

by

the

giving

such

of those

Sheet

in the

company's

need

capital,

as
particulars

liabilities and

of the fixed assets

Balance

to

up

statement,

of its share

summary

"

the company

statement,

in
specified

profitand

cases

that

include

gene'ralnature
the

share

and

list and

(except where

Sheet, audited

the

calls

providesas

its assets,

will disclose the

of

su"

regards the
called up

amount

containing a

and
liabilities,

of the company,

or
signedby the manager
secretary,
the Registrarof Companies.

must

may

least in every

at

once

amount

3 of this Section

summary

such

into force.

came

separate part of the

privatecompany)

its

the

This
particulars.

other

privatecompanies

Act

particularsas

total

share, the

various

the

Act, 1908,
Companies (Consolidation)

list

on

the

and

company,
of

shall
company
list of all the members

that

the

Summary.

of the

26

make

year

and

by

receive and

given the rightto

case

Annual

introduced

preference shareholders

auditors' reports, except in the

those

privatecompany,
the first day of

eight." (Sec. 114 (2).)

which

were

Balance

inspect the

to

innovation

an

debenture

apply

and

hundred

important
Companies Act, 1907, by
was

AUDITING

registeredbefore

company

nineteen

OF

shall not

section

to

nor

PRINCIPLES

not

been

have

include

loss."

last audited

Balance

Sheet

of

the

comply with this Sub-section, and

gives the requiredinformation, this will
the auditors will not have
to
specially

(CONSOLIDATION)

COMPANIES

THE

certifythe

audit

or

Sheet

is

condensed,
auditors

then

the

they

have

done

providedfor

or

will have

in the

Act, and

the

statement

that

to the

in

with

accordance

of certificate

they

Sheet,

it has

the

audited

have

Balance

of their information

best

in

prepared

of

filing,

will be sufficient

effect that

form

for

certifythat

specialform

no

memorandum

to the

the

it and

135

Balance

audited

prepared

audit

to

is

There

so.

is

specialone

the auditors

signed by

But, if the

same.

1908

ACT,

been

and

properly
of

requirements

the

Section.
As

regards

how
to

these

say,
"

being

of the

values

the

"

have

same

should

assets

cost,"

at

fixed assets, the

the

by the directors," etc. In

Galloway v. S chill,Seebohm
In

the

Trade

Goodwill,

Fixtures

Marks
taken

were

with

different parts of

that

valued

in different ways

values

of

those

Section

include

not

provides that

to include the balance

to

the

Section, and

submit

set out

of

"

the
it to

only the

the

less

Sheet

assets

on

and

the

held

was

loss

"

did

total the

directors

to

prepare

auditors

for the

not

Loss

been

separate
that

this

statement

purposes

the

of the

need

not

Account,

requiredby

sides.

two

it

therefore, it is

liabilitiesas

to

the

Sheet

Profit and

then

ciation."
depre-

had

assets

Balance

profitand

of

statement

but

duty

Machinery,

cost

state

not

Further, it

they

Section, because

fixed

the

which

at

ought to state the separate values

intangiblefixed assets.

tangibleand

usual

and

Sheet

Balance

The

the Goodwill

at

the

did

and

parts.

and

that the
"

Furniture

sum

and

total, thus

this Balance

that

of

case

Sheet, this

one

"

the

requirementsof

the

in

valued

were

held

was

Balance

assets

Company,"

the

Fixtures

It

comply

by

over

of

Machinery,
at

valued

as

connection, the

5d.," statingthat

valued

were

and

Furniture

stated

16s.

as

Co., Ltd., is of importance.

form

the

Marks,

"100,007

Trade

6-

all its fixed

included

company
"

in

statement

"

or
depreciation,"

this

is

at, that

described

be

case

show

must

arrived

been

in each

less

at cost

statement

It is the
and

of audit.

to

136

THE

The

Statutory

providesthat
"

from

shall

month

nor

at

which

the

business, hold

commence

of

members

the

Report.

Companies (Consolidation)Act, 1908,

one

date

the

AUDITING

and

company

every

less than

not

OF

Meeting

of the

65

Section

PRINCIPLES

than

more

months

is entitled

company

which

shall be

to

of

the

called

the

general meeting

company,

three

statutory meeting."
directors shall,at least

The
the

meeting, forward

to every

member

certified

by

days

seven

the

of

day

report, called the statutory report,

and

of the company,

directors,and

the

before

this

report has

thereof

copy

to be

has

be

to

Registrarof Companies. But the provisions

to forwarding and
as
filingthe statutory report do not
apply in the case of privatecompanies.
The
provisionsof Sub-section 3 of Section 65 are as

filed with

follows
"

the

"

statutory report shall be certified by

The

than

directors of the company,

two

less than
and

(a) The

otherwise

total number

they

have

"

in either

been

in

company

the

(c) an

account

of its
and

date

within

seven

exhibiting under
the

company

of

cash

all

the

amount

from

of

case

they

so

are

for which

of the

from
made

of

distinctive
shares

by

the

allotted,

shares

receiptsof

payments

days

received

capital,whether

of the

which

up

respect of

abstract

to

the

the consideration

distinguishedas aforesaid
"

partly paid

stating in

extent

case

allotted

total

(b) the

manager,

guishing
allotted, distin-

fullyor

as

in cash, and

partlypaid up

up, and

of shares

allotted

than

paid

are

"

shares

shares

there

directors,by the sole director and

two

shall state
"

where

or,

less

not

the

the

shares

or

date

of
the

debentures

the

on

tures,
deben-

thereout, up

headings

and

company

to

report,

receiptsof
and

other

138

PRINCIPLES

THE

Commissions

Companies (Consolidation)Act, 1908,

power to pay underwritingcommissions,
for
on
placingor procuringsubscriptions
is
payment of such commission
Articles, and the commission
paid,or

provided that

authorised

agreed to

the

by

in lieu of

the

paid,is disclosed

be

prospectus,

or

for shares,
subscriptions

exceed

not

persons

in

whole

the

of

the

"1

shares

to the

the

shares,

not.

if the

"

the
that

them

must

case

mark

the
the

auditors

cent,

underwriters

to

persons

person

would

and

thus

have

always been

check

have

between
is for

them

public,

company,
the
scribe
sub-

take

who

up

to

any

by

the

they

written
shares under-

the

the

the

up

The

rata.

pro

examine

the

the

commission

shares

or

Articles, and
also

must

has

inspect
see

if the

shares

placingshares

subscribers, in which

the

marked

up

it is

mission
underwriting com-

for

commission
of

take

remaining

introduce

entitled to pay

take

to

60,000

say,

underwriter, and

each

Commissions

claimingthe

writing
under-

an

taking this risk, and

that

with

application letter
should

upon

to

public applied for,

see

underwritingcontract

paid

to the

the

entitled

were

prospectus

issue is under-subscribed.
are

Underwriting

underwriters, will

properly authorised

disclosed in the

the

does

subscribing for

they actuallyhave

auditors

is
been

shares

paid to

The

who

underwriters

payable whether

with

public not

of 5 per

remaining 40,000
commission

"

For example,
remainingshares.
of a company
making an issue of 100,000
public,the whole issue being underwritten

commission
each

paid

amount

issue of shares
contracts

inviting

the

individuals

by

the

statement

notice

or

authorised.

an

of the

take up
case

by various

that

issue, they, the

the

for and
suppose

and

into

prospectus, or

circular

rate

or

enter

event

in the

any

that, upon

means

certain
that

the amount

"

shares

Shares.

of the

89

commissions

shares,

and

Placing

on

gives a company
and

AUDITING

Commissions

Underwriting
Section

OF

should

initial

subscriber, and

or

the

applicationletters
payable. Companies

brokerage upon

shares.

is,an

that

(CONSOLIDATION)

COMPANIES

THE

payable

amount

agents whose

clients subscribe

should

be

only

stamp, and

brokers'

brokerage
"

Where

in

commission
allowed

respect of any

thereof

Section

of shares
is not

The
the

spread over
shown

as

appliesif

same

total

must

be
the

that

see

at

discounts

upon

debentures

must

in the

terms

of this

not

Interest

of

these

Shareholders

to

missions
com-

be included

but

heading of preliminaryexpenses,
Sheet.
in the Balance
separately

Payment

treated

the

shown

Sheet.

discount

complied with, and, therefore,

or

once,

forward

Balance

issued
must

respect

at

carried

in the

are

discount

auditors

The

way.
Section
are

debentures

in

Account

amount

separate item

whole

total amount

the

Loss

period,the

of the

amount

same

under

or

(Sec.90.)

commissions

and

of

way

until the

paid, and

Profit

off to

89.

off,shall be stated

off."

if any

are

of

respect of any
allowed, or so

or

company

written

that

debentures

or

be

must

of the

been

provides

written

is

Sheet

in

written

been

not

thereof has

amount

but

has

as

the

debentures,

or

paid

so

by

sums

of discount

way

bear

payments

any

shares

total amount

Balance

in every

This

by

sums

any

debentures, the
much

These

paid

has

company

brokerages

provisionsof Section

the

subject to

not

are

and

therefore, examine

must,

application forms.

stamped

the

Such

applicationletters

auditor

the

139

stockbrokers

to

for shares.

if the

paid

share

per

1908

ACT,

must

be

During

Construction.
Section

91

of the

Companies (Consolidation)Act, 1908,

gives power,

in certain

shareholders

during construction,

circumstances,

first part of the Section

"

Where

purpose

of

construction
of

any

reads

shares

of

raisingmoney
of any

works

as

to
or

plant which cannot

lengthened period,the company
any

follows

pay

of

out

company

to

may

capital. The
issued for the

are

expenses

of the

provision
for a
profitable

buildingsor
made

to

"

defray the
be

interest

pay

the

interest

on

so

140

PRINCIPLES

THE

of that

much

AUDITING

is for the

capitalas

share

period and

for the

up

OF

subject

restrictions in this section

time

conditions

the

to

being paid

mentioned, and

and

charge

may

of
capitalas part of the cost of construction
the work
or
building,or the provisionsof plant."
formed
to
Suppose, for example, the case of a company
carry on a manufacturing business, the factory having to
be
the
erected
first. Until
factory is completed, the
trade
and
cannot
can
no
earn
profits,and,
company
be no
of paying dividends
therefore, there can
possibility
stances,
their capital. In such circumto the shareholders
upon
it is considered
only fair that, upon the capital
advanced
by the shareholders speciallyfor this purpose,
struction,
they should receive interest during the period of conand this can
be paid provided that the term
this Section are complied with.
The interest thus paid is
paid out of capitaland is debited to the BuildingAccount,
The provisionsthat
as
part of the cost of construction.
follows"
have
to be complied with are
as
the

to

same

(1)

"

No

such

is authorised

(2)

"

No

Articles
the

authorised
payment, whether
by specialresolution,shall be made

or

"

Before

of Trade

the

at

of the case,

require
(4)

"

period
and

The
as

of

which

the

completed or
(5)

determined

The

in

the
rate

or

be

by

no

appoint

the

ment,
appoint-

give security for

enquiry

shall

made
the

only

the

buildings

have

for

such

of Trade

Board

extend

case

the

after

half-yearnext
works

to

making

without

stances
the circum-

to

as

the

the Board

company,

to them

before

may,

of the

period shall

the

"

costs

be

report

by

payment

of the

company

payment

may

such

close

the

of the

payment

and

of Trade

such

expense

enquire and

to

Board

sanctioningany

may,

person

of the

same

resolution
by special

or

such

previoussanction

(3)

the Articles

by

unless the

shall be made

payment

beyond

the

half-year during
been

actually

plantprovided;
of interest

shall in

no

case

exceed

four

cent,

per
time

"

as

annum

per

The

of the

respect of which
"

(7)

The

it is

paid

for the

may

shall

not

operate
in

shares

the

on

up

paid;
shall show

of the company

accounts

as

141

in Council;

interest

amount

1908

ACT,

rate

Order

of the

payment

reduction

lower

such

or

prescribedby

be

being

(6)

(CONSOLIDATION)

COMPANIES

THE

capitalon which, and the rate

been paid out of capitalduring

which,

at

period

the

the share

interest

has

which

the

to

relate."

accounts

It will be

from

seen

the above

there

that

are

stringent

very

governing this matter, and that such payments

regulations
of interest out of capitalare
of
controlled by the Board
Trade.
In
must

registeredunder

company

1917,

to

keep

must

(1) Register of

the

Members

addresses, and

the

the

company,

"

numbers, and

paid

as

person
any
a

such

on

was

person

the

held

shares

ceased

be

The
any

and

has

Register of Members
member

person

on

gratis,and
payment

of

inspection. (Sec. 30,

be

to

date

the

the

each

which

at

in

Section

26

the

annual

entered.

inspectionof
inspectionof any other

is open
to

to be

of

considered
which

at

Register of Members,

summary

the

members

Under

member.

entered

distinguishing

the

dates

the

and
register,

separate part of the

list of members

also

in the
to

of all the

by each,

Companies

be

must

paid or agreed

amount

entered

which

occupations

shares

Companies Acts,

the

followingbooks
(Sec. 25 of the

(Consolidation)Act, 1908), in
names,

been

have

Books.

Statutory
1908

auditor

an

with.

complied

Every

paid in this way,

provisionsof Section 91

all the

that

see

is

interest

where

cases

fee not

to

the

exceeding

Companies

Is. for

each

(Consolidation) Act,

1908.)
(2) Minute

Book

Act, 1908), in

which

(Sec. 71, Companies (Consolidation)

must

be

entered

minutes

of

all

142

proceedings

at

directors

(3)

or

name

(if

and

and

names

occupations.
the

Registrar
(4)

of

the
is
fee

the

in

the

mortgagees
open
not

and

Mortgages

to

Act,

exceeding

usual

has

origin

residence;
be

to

of

case

sent

Is.

for

each

any

this

to

or

in

charge,
the

each

on

or

and
of

names

The

thereto.

inspection.

affecting

mortgaged

bearer)

person

100,

register

giving,

mortgage

entitled
of

entered,

to

(Sec.

specifically

property

securities

persons

inspection

the

the

In

1908).

be

of

of

amount

or

the

of

Charges

charge

or

must

company

description

the

name

nationality

register

mortgage

every

short

charged,
(except

such

Christian

Christian

nationality);

(Consolidation)

property

ing
follow-

the

present

former

any

nationality

of

of

of

entered

to

as

Companies.

Register

particulars

be

director

dation)
(Consoli-

(Particulars

must

present

copy

of

Companies

case,

which

surname

the

Companies

75,

Companies

and

company.

each

surname

than

other

in

shareholders

the

(Sec.

respecting

names

or

the

and

1917),

particulars

of

Directors

1908

Act,

Directors)

of

of

Register

AUDITING

OF

meeting

every

managers

Act,

or

PRINCIPLES

THE

payment

register
of

CHAPTER

POINTS

SPECIAL

IN

CONNECTION
THE

COMPANIES_^UNDER

WITH

COMPANIES

with

connection
1908

1917,

to

dealt

be
such

with

there

here,

are

preponderantly

audit

the

some

of these

concerns.

Memorandum

of

Every

of

(1) The

forms

companies

audit

the

would

auditing

on

less detailed

or

must

reference

shares

by

have

must

Association, stating
"

of
in its

the

with

company,

"limited"

as

name.

situation

(2) The

more

limited

name

last word

book

no

Acts,

which

of

in

but

Association.

company

Memorandum

the

that

without

complete

of these

large proportion

practices of accountants,
be

audit

J9j7_

TO

Companies

the

specialpoints

some

the

as

1908

OF

all audits,

to

under

companies

AUDIT

THE

ACTS,

principles of auditing apply

THE

to

VIII

of

the

registered

offices

of

the

company.

(3) The
(4)

That

the

is No.

for

of the

that

does

This

clause

not

provisions
The

terms

come

is

must

no

within

the

and

enter

enter

as

which
the

auditor's

an

set

must

is

the

division

to

into

terms

wide

company

point

out

carry

any

of its

on,

does

the
and

transaction

objects clause.

possible,but

as

of

exactly
and

formed,

it is intended
to

the

of the

from

power

that

with

amount.

company

that

made

thereof

fixed

the

always
see

capital

objects clause

which

business
has

company

is limited.

members

registered, and

be

of these

3, for the

purposes

auditor

of

shares

important

most

nature
a

into

the

share

to

proposes

thereof

view

of

amount

company

company.

of
liability

the

(5) The

The

of the

objects

not

break

an

the

into ultra vires transactions.

Memorandum

cannot
143

be altered, except

144

PRINCIPLES

THE

OF

provisionsin
placed in the

certain

by complying with
considerable

restrictions

are

alterations.

Important

ones,

and

holders

interest

and

business

relations with

Articles

of

the company,

of

require

by

the

tions,
altera-

before

the

Court.

be said to govern

may
and

clause

every

all persons

to

such

reduction

views

company,

importance

of

way

affected

be

may

place their

affairs of

external

as

Act, and

the

shareholders, debenture

of Association

Memorandum

The

and

creditors,who
entitled to

are

the

Court

of the

sanction

the

such

objectsof

alteration of the

or
capital,

AUDITING

is of

entering

into

company.

Association.

the

specialset of Articles,and
Act, 1908, contains a model
Companies (Consolidation)

set

of Articles known

need

company

for which

But, upon

must

own

regulationsthat
of the

are

at

time

any

by

Table

A,

and

complied
by

followingare
the

The
Calls
The

with.

rightsof shareholders
on

govern

auditor

Articles

panies
com-

up.

whole

the

substitute
auditor

An

with

the

been
exact

particular
company.

The

must

the
see

internal
that

Articles

of matters

examples

of the

terms

exclude

familiar

special resolution

drawn

been

parts thereof, have

be

the

an

all

govern

not

may

or

must

govern

company,

thereof

have

company

Articles of Association

The

The

excluded, for he

thus

A, which

provisionsof Table A, and

Articles.
speciallydrawn

whether

see

Table

as

formation,
its

therefor

specialArticles

parts of the

or

have

not

of

be

can

the
that

the

affairs
terms

altered

shareholders.
are

governed

"

inter

se.

shares.

forfeiture of shares

on

of the

account

of calls.

Alterations

of

The

capital.
appointment of a managing

The

appointment

The

powers

and

director.

of directors.

duties of directors.

non-payment

146

is any

there

return

Articles

The

ordinaryshares.

the

on

AUDITING

OF

PRINCIPLES

THE

expresslyprovide that the preference shares are to

otherwise
to capital,
as
be preferential
they rank equally
in this respect
The preference
with the ordinary shares
must

rights to dividend

shareholders'

non-cumulative

or

of there

event

cumulative, it

being

not

cumulative

such

in

that

means

profitsin

sufficient

preferencedividend,

the

pay

if

either

be

may

any

year

to

to

be

have

arrears

the

sufficient,
are
profits
the
dividend
be
and
there
no
thus
can
paid upon
the preferenceshares
ordinary until all such arrears
upon
holders
been paid. If non-cumulative, the preferencesharehave
of the profits
out
entitled to a fixed dividend
are
made

future

in any

up

of each

and

year,

right to make

if such

unless

then
insufficient,

are

of

shortages out

up

All
years.
Articles
the

future

the

when

years

no

surplusprofitsof

the

preference shares
speciallyprovide

is

there

cumulative,

are

they shall be

that

non-cumulative.
Issue

Shares.

of

In

ordinary

the

capitalis

share

for

with

by

direct

deposit,the

These

receipt therefor.
entered

in

course

shares

prospectus

considered

are

for than

are

directors

make

applicants.
being

notice

selection

of this

of what
same

issued

time

fact

is known
the

raising of

being advertised

in
and

stockbrokers

through

in

interested

or

have

the
be

to

company.
in

sent

on

panied
company's bankers, accombanker
sending the applicant a
and
applicationsare numbered

the

Application

an

to the

means

to

step in the

tions
prospectus invitingapplica-

for shares
rule, applications

special forms

the

of

circulated

and

connected

others

due

such

shares,

newspapers,

As

issue

the

first

the

course,

and

by
If

the

Allotment

directors, who

according
and

"

as

to

the

sent

to

Letter, of

deposit paid

then

in
allot

applied

been

prospectus, the

certain of the

refuse

being

have

shares

more

and

Book,

the

tions,
applica-

applicant by

Regret,"

is returned.

In

and

at

other

COMPANIES

OF

AUDIT

where

cases,

UNDER

is

there

COMPANIES

THE

the
over-subscription,

an

applied for by individual

and
allotments
proportionately,
over-paid upon

amount

in reduction

minute
"

allotment

The

shares.

Allotment

the

the

upon

in
specified

when

the

and

directors

minute

notices

when

the

is

of
The

paid
in

"

been

balance
certain

which

making
made

and

as

up

In

an

shares

on

up

is called

or

board

have

issued

banker's

the

be

all shareholders.

to

are

number

money

the

passing a

applicant

each

to

to

prospectus,

certificates

share

has

passed by

respect of the

allotment.

on

require the

sent

are

shareholder, these
letter and

the

in

directors

the

sending

either

shares

dates

case

by

due

amount

is reduced

rule,being applied

Letter," notifying the

allotted and
due

is made

of

accordingly, the

due

amounts

effect,and

this

to

made

application,as

further

of the

number

subscribers

shares

147

ACTS

latter

call,

the

due

course,

for each

out

exchange for the allotment

in

receiptsfor

the instalments

paid

to

date.

Audit

of

the

Share

an

Issue

upon
The
should

audit
be

and

conducted

as

the Share

(3) Check

amounts

Book

(4) Check
Allotment

(5) Check

Books

follows

of shares

"

to the

Cash

Book

with

received

with

from

Applicationand

the

Application

minutes

Pass

Book.

subscribers

of allotment

with

from

the

Book.

Allotment

Applicationand

Book.
"

letters of

regret

"

or

with

Application and Allotment

amounts
are
paid on application
(6) Check

issue

an

upon

Book.

(2) Check
Cash

Shares.

letters
application

the

Allotment

of

Share

of the

(1) Check

Books

the

distinctive

the

Application and

press

Book,

copies thereof
and

that

see

returned.

number

given

to

each

block

of shares.

(7) Check
Share

Ledger, seeingthat

Allotment

all details

are

Book

entered

to

the

correctly.

148

AUDITING

OF

PRINCIPLES

THE

do

issued

(8) See that the total shares

exceed

not

the

capitalaccording to the Memorandum.

subscriptionupon which
(9) See that the minimum
the company
proceed to allotment has been applied
may
total authorised

for.
in the financial

opening Journal entries

the

(10) Vouch
books.

(11) Check the balances

schedule, seeing that the
(12) If
than

cash,

them,

(13) If

ascertain

such

that

issue

underwritten,

been

has

adopting
been

the

see

the underwriters, and, if the issue is not

rule, have

for
sign applications

to

if

"

Underwriters,

underwriters.

the

to

the

inspect

so,

tracts
con-

fully

allottingthe balance

directors' minutes

underwrite

number

these.

as

of shares
Vouch

the

entries.

and

brokeragesare paid,
applistamped or marked cation

(14) If placingcommissions
check

other

have

contracts

the

shares

Journal

total

the

minutes

the

Registrar of Companies.

subscribed, the

they

and

the

with

of the

with

to the

issued for consideration

the contracts

see

and

filed with

been

have

shares

total agrees

Ledger

issued.

of shares

number

Share

the

on

paid with
forms.
Inspectthe receiptsfrom persons receiving
and
such commissions
brokerages.
(15) As a rule,the auditors are requestedto check and
initial the share certificates before they are
signed and
sealed

the

amounts

by

(16) Upon
due

will be

in the

directors.

the

becoming payable,the detail amounts

entered in a Call Book, or in specialcolumns
calls

Applicationand

will be checked
with

the

Book, and

(17) If
returned
be checked

in the

directors'
to the

the

allotment
with

same

the

way

minute,

Share

share

Book, and

Allotment
as

the

these

entries

the allotment, that

Cash

Book

and

is,

Pass

Ledger.

certificates have
letters and
Share

bankers'

Ledger.

been

issued, the

receiptsshould

AUDIT

COMPANIES

OF

auditor

shares, and

must

audit

when

calls

satisfyhimself
accounted

that

being

necessary

Auditors

which
at

the

is

transfer

be

check

duplicatecopiesof
enquire as
transfers

transfers

with

have

and

capital.
audits,

fraudulent
is in

system

notices

such

to whether

the

with

any

force,

to the Transfer

objectionshave

the

Transfer

Register,seeing

properly signed,witnessed

been

check

into the

shares

distinctive

the

Register. Thereafter, cancel

auditor's

audit

transfers

the

the transfer

stamp.

old certificates with

entries

transferor's
the

transferee's

(7) Check
balance

in Transfer

sold

entries
account

and
the

in

account

shares, and

(6) Check

not

previous

transfers,and

thereafter

certificates.

(5) Check
he has

the

applicationletters.

or

(4) Check
cancel

and

of

numbers

(3) Verify the signaturesof transferors with

has

seen

received.

stamped,

the

Ledger

"

in this way

If this

detected.

be

(2) Check
that

Share

transfer

out

follows

that

may

been

audit, all that is

received, the transferor should

are

immediately,so

Register,and

been

it is not

total issued

the

carry

as

transfers
the

has

of

transfers

notified

to

may

balances, it being

with

instructed

due

the

upon

list of

he

however,

transfer

issue of

an

that

money

years,

balances
a

upon

in order

of the

out

audit should

(1) When
be

149

ACTS

specialarrangement, and one for

is entitled to a special
fee. The procedure

the auditor

made,

agrees

matter

are

to

on

often

are

this

but

that

total thereof

the

that

carry

checked

be

share

subsequent

to

books

the

whole

the

In

for.

part of his duty

should

COMPANIES

THE

Audit.

Transfer
An

UNDER

Share

checking
in

whole

the

Transfer

in Share

initial

Register to

distinctive

Register

to

of

that

numbers.

to

debit

of

Ledger.

of his shares, check

certificates issued

credit

Ledger, seeing

and
certificates,

new

the

him.

if transferor
and

initial

150

subsequent audits,

(8) At

passing

minute

Fees.

Transfer
Count

transfers,and

of

number

the

transfer fees has

of the

directors'

the

see

previouslychecked.

transfers

the

AUDITING

OF

PRINCIPLES

THE

accounted

been

that

see

the

whole

for.

Debentures.

Upon
.checked

in

exactly the

auditor

The

must

same

debenture
the

exact

further

trust

or

be

deed

that

seen

Articles

the

should

be

give

and

exercisingthat

of the

terms

allotment

an

in this way,

money

directors' minute

the

as

way

that

see

to borrow

power

debentures, the allotment, etc., will be

issue of

an

directors

the

he should

examine

The

power.

that

It must
debentures

the

charge given by

actual

in order

examined,

be ascertained.

issue may
the

of shares.

is entered in the Register

of the company
of Mortgages and Charges, in accordance
with Section 100
the

upon

assets

of the

Companies (Consolidation)Act, 1908, and that the

particularshave been filed with the Registrar
necessary
of Companies.
The
and

entries

in

if debentures

amount

that

is the

actual

be

repaid,and

to

separate

Profit and
forward

Sheet,

issued

comply
should

shown

as

with

be

if
the

particularcompany,
the

discount

debentures.

were

Shares

will have

to

written
the
an

The

1908.
off to

auditor

never

could
off

carried

be issued

Balance

in the

of

90

discount
as

the

raise

over

off to

amount

revenue

provisions of

written
can

is written

Section

of

terms

be debited

must

separate item

the

but, subject to
possible,
the

that
liability

period,the

Companies (Consolidation)Act,
debentures

as

of the discount

over

checked,

Account,

If this discount

Account

be

Debenture

the

to

should

discount, the full nominal

of the

amount

account.

be

at

credited

the amount

Loss

must

to

are

be

must

financial books

the

upon

soon

Articles

as

of

objection,

no

the
at

the

period
a

of

discount,

COMPANIES

OF

AUDIT

debentures

but

debentures

be credited to

at

and

shares

the

in

of the

Debentures

on

in which

exactly the

premium

fixed

assets

the

premium

case

but,

the

on

be utilised

Acts

Companies
Profit

and

unsound

Loss

Account.

adopt,

to

course

as

available

for

amount

to

return

premiums
for dividend

this fact

end

of

period at

the books
with
a

of

and

that

premium.

The

deferred

revenue

the whole
to

debentures
created

to

and
are

the

case

then

of the

should

Account

for the

include
of

If

the

that

see

repayable

they

should

will have

If

of the
a

company

premium.
with

for

out

be

fund

of

charged
is

the

being

debentures,

illustrate

debentures

at

otherwise

in which

of the
To

date

payment

as

year

sinking

redemption

the

of

to

in

amount,

certain

debentures,

the

at

appear

provided

be

premium

redeemed.

provide

it should

suppose

Loss

of

available

made

and

par

should

period
of the

amount

Profit

the

then

the

it would

subscribed.

they are repayable at a

premium is in the nature

interest,and

over

made

Sheet at the nominal

the Balance

on

note

at

premium,

thus

quite clear.

issued

are

were

dividend

as

were

auditor

an

an

sums

paid

had

an

not

are

and

shareholders

debentures

or

in the

is, however,

were

themselves

they

If debentures

dividend

in this way,

made

accounts

premiums

Account,

the

to

shares

on

such

are

credited

being

latter

any

there

nothing

This

Loss

dividend, if

which

amounts

and

Profit

to

or

reserve,

in effect, if such

ordinary trading profit,and,

credited

is

premiums

prevent such

to

to

unless

hand,

other

additional

as

goodwill,or

Articles,there

the

Premiums

way.

preliminary expenses,

provisions in

express

to

down

write

to

must

Shares

working capital,and, therefore, transferred

used

the

to

Account.

same

should

debentures

credited

be

must

amount

premium,

be dealt with

should

the

nominal

the

premium,

again

Premium

issued

be

at

debentures

Account, and

Debenture

upon

issued

are

of the

amount

may

provisionsof

the

to

151

ACTS

of Association.

Articles
If

subject

can,

COMPANIES

THE

UNDER

of

this,

"10,000

152

Sheet

Balance

cent., the

period being

of ten

end

the

repayable at

follows

as

at

years
the

at

of 5 per

premium

of

commencement

the

"

SHEET

BALANCE

15,000

Capital

AUDITING

OF

PRINCIPLES

THE

Assets

Sundry

25,000

(repayable

Debentures
at

the end

at

105)

of ten

years

10,000

....

"25,000

is created

sinkingfund

required,and
would

be

follows

as

Sheet

Balance

the

provide"10,500.the

to

SHEET

"
15.000

Capital
.

Debenture

"500,

the

investments

to

debentures

follows

the

of

at

should

now

premium

Sinking
the

(now
of the

Fund

exact

the

be

credited

required to

sum

be

would

Fund

It will be

Fund

pay

would

be

SHEET

Sundry

.25

Assets

fooo

Account

general reserve
company)

the

the

produced,

Sheet

Balance

with

amount

If

Account.

10,000
/25.0;""

"25,000

over

10,500

"

15,000
a

account

Fund

payable, this

premium,

repayment,

on

Sinking

25.000

"35,500

BALANCE

Capital
Sinking

merits

realised cost, the

and, after such

as

of the

amount

being debited
off the

Account

Assets

Sundry

10,500

"35,500

The

10,0"'

....

Fund

Sinking

period

"

BALANCE

Debentures

of the

end

the

at

amount

seen

that, although "10,500 has been

period, only "10,000

Account

after the

remains

repayment

upon
of

the

the

provided

Sinking

debentures.

154

correctlyin
that
of

PRINCIPLES

THE

Sheet.

Balance

the

debentures

these

been

have

formation

the

obtaining of

the

with

to

bear

the

so,

he

must

that

see

that

they

formation

the

auditor

An
to

part of these

any
the

the

liminary
Pre-

refer

and, if
bear

not

to

have

they

expenses,

does

company

to

should

whether

see

and

debited

are

payable by the vendors.

should
carefullyexamine
this account,

to

are

Account.

with

various

are

any

are

debited

items

the

Registrar

the

there

company

vendors

the
or

auditor

The

Account.

whole

that

expenses

Register

whether

to

as

filed with

capital,that

share

Expenses
contract

of

in connection

initial expenses

the

enquire

in the

Expenses.

Preliminary
Upon

also ascertain

should

entered

been

particularshave
Companies.

necessary
of

He

Charges, and

and

Mortgages

AUDITING

OF

charge

proper

Under

and

this

to

vouch

the

satisfy himself

thus

PreliminaryExpenses
will

heading

and

included

be

the

following
"

LEGAL

CHARGES

Memorandum

the

and

and

the

vouched

be

in connection

of

Articles
with

contracts

by

with

the

preparation of

Association, the

vendors, and

of the

production

the

the

pectus
pros-

will

these

solicitors' receipted

bill of costs.
COSTS

PRINTING

OF

Association, and

by

the

vouched
done

with

through

STAMP

appear

by

an

which

the
an

DUTIES
will

be

examination

REPORTS

duties
FROM

will

the

agent, with

payable

prospectus,

the

the

his

costs.

will

which

newspapers,

be

or,

registration,which

solicitors,and
The

amount

of the certificate of
are

vouched

be

if

receiptedaccount.

upon

bill of costs.

paid

Articles of

printers'receiptedbill of

receipts from

paid by

in their

the

the

ADVERTISING

OF

and

prospectus, which

the

production of

COSTS

Memorandum

the

bably
pro-

will, therefore,
can

be

verified

incorporation,
upon

stated.

ENGINEERS,

ACCOUNTANTS,

ETC., for

AUDIT

COMPANIES

OF

prospectus

balance

debit

written

generallythree
provisionsto
Profits

the

is to

at

certain

actual

from

basis

of

the

formation

time, and
received

the
until

of the

certificate

December
available
these
the
as

the

to

whether
of

purchasing
to

belong

increased

the
the

vendors

31st

company
the

if, as

the

terms'

example,

business

upon

December,

the

from
take

the
new

date,

that

little

some

be

not

of March.

In

such

profits,from

the

31st

The

dividend.

taken
the

is that
In

belong

to

fixing

the fact

into account
31st

not

are

reason

purchase price.

to

the

shall take

incorporationmight

will have

over

figures

of the

For

might

profitsbetween

the

of the

one

profitsas

in the

incorporationare

to

over

company

as

be

may

March, represent capitaland

included

profitsare

date

1st

in the

being priorto

date.

intermediate

for distribution

price,the
to

the

nothing

company

new

(say) the following 1st

circumstances, the

years,

there

company,

of

of

basis

date

such

to take

to

should

Incorporation.

the

the

at

The

purchase and take

often provides that

to

agreed

the

being entitled

company
but

that

Sheet

Balance

of

new

be formed

might

company

the

or

Articles.

contract

agreed date,

profits as

the

is

there

completed upon

incorporationof
contract
being

of the

but

is formed

be

with

comply

period

short

Date

existingbusiness, the

purchase
as

over

this effect in the

to

separate

Account

compel this, though

to

company

the

debentures.

upon

five years,

to

Prior

When

with

underwriting

Preliminary Expenses
revenue

Acts

to

for

paid

discounts

upon

off to

Companies

155

(Consolidation)Act, 1908,

Companies

or

as

appear

in order

commissions

placing shares,

an

should

Sheet, and

the

include

not

must

of

90

vouched

be

ACTS

of costs.

Balance

in the

Section

be

will

preliminaryexpenses

The

COMPANIES

THE

which

purposes,

receiptedbills
item

UNDER

and

December
them

or

the

to

in this illustration,they

are

latter, the purchase price will have

been

profitshave

been

accordingly. Therefore,

these

156

purchased and paid for

and

company,

capitalof

share

received, such

it would

amount

the

profit were

to

return

new

paid
to

the

themselves

part of the capitalthey have

of

shareholders

of the

out

if, when

dividend,

as

away

AUDITING

OF

PRINCIPLES

THE

contributed.
is

If, as
of

customary,

incorporation

it

accounts

no

is

taken

are

difficult to

always

at

the

arrive

at

date
the

that have
to be treated as capital.
profits
were
If, for example, in the case above, the next accounts
31st December, the better method
preparedat the following
would
be to apportionthe full year'sprofitsbetween
the
two
periods,before and after the 1st March, on the basis
for these two
of the turnover
method
periods. Another
amount

of the

is to

apportion on
that

case,

basis of time, that

the

months

two

out

twelve

of the

therefore, one-sixth

incorporation;

is to say, in this

of

are

the

prior to
full year's

profitis capital;but, as the profitsearned in different

thi^
periodsof a year may vary considerably,
to adopt. The
cases, is not a good one
proportion
many
of the full year'sprofit
that is fixed as being prior to the
from
be transferred
date of incorporationshould
Profit
and
Loss
the credit of a Capital Reserve
Account
to
Account, or used to write down
preliminaryexpenses or
goodwill. If any interest is paid to the vendors upon the
the interest for the period prior to the
purchase money,
date of incorporation
should be debited against the profits
i

prior to
the

date

Loss

of

any

interest

should
incorporation

be

for the

debited

period
Profit

to

after
and

Account.

In
the

date, and

that

the

whole

prior

to

facts
the

accurately
dividend

Galls

or

appear

as

an

auditor

mos^t carefully,and

date

see

of

incorporationare
possible,and are not made

used

for

revenue

should
that

examine

the

profits

ascertained

as

available

for

balance

will

purposes.

Arrear.

in

If any

circumstances,

above

calls have

upon

the

not

been

Call Account

paid,
in the

debit

Impersonal Ledger,

and

details

the

reference

by

be

should

brought
should

from

deduction

notice
that

see

These

Ledger.

the

to

total

issued

the

calls

unpaid

directors

of the

the

157

ACTS

will be ascertained

this balance

up

Share

the

to

auditor, who
as

making

COMPANIES

THE

UNDER

COMPANIES

OF

AUDIT

thereof

capitalin

the

by

is shown
Balance

the

Sheet.

Any
a

Advance.

Paid

in

calls

paid

Galls

specialaccount,

and

auditor

the

total

paid in

calls

shares

where

carried

out

proper

notices.

shares

record
been
the

give

in

have

transaction, and
forfeited

and

and

debit

the

represent the
be

Account

credited
balances
calls

written

; the

equalling and
which

can

If these

done

these

will then

already paid

shareholder, any

such

Shares

the

upon

discount

does

shares
be

which

Shares

upon

up

re-issued at

discount

credit balance

paid

amount

should

has

unpaid,

Forfeited

show

the

to

Account

but

shares

debit of the

provided

Ledger

Call Accounts,

upon

are

books

the

called up upon
Share
to
Capital

amount

the

shares

been

that

seen

Share

the

upon

off to the

power,

forfeiting

financial

debited

representingthe

forfeited.

amount

due

be

Forfeited

latter account

shares

be

to

it must

that

be

must

this

directors

the

The

auditor

an

the Articles have

in the

made

been

adjusted accordingly.
shares

in the Articles.

defaulting shareholder

the
of

minute

calls, if

of

directors

the

and
inspected,

be

Account

the

separate item

non-payment

provisionsof

the

The

must

this

should

the

up

total of the

forfeited in this way,

are

regards giving

as

entries

correct

is contained

effect

the Articles

that

see

this

to

power

and, further, that

the

as

appear

forfeited for

be

may

cases

must

should

making
The

Ledger.

Accounts,

Shares.

Shares

In

Share

the

to

details

verify the

Call

upon

Sheet.

Forfeited

express

should

credit of

to the

appear

credit balances

as

advance

Balance

the

or

reference

by

should

in advance

the

discount,

not

by

debited

exceed
the
to

old
the

158

THE

Shares

Forfeited
shows

fixed

used

or

if, thereafter,this

profitshould

the forfeiture,which
reserve,

and

Account,

But

assets.

down

write

to

is

there

be transferred

preliminary

nothing

in the

prevent this profitbeing credited

to

subject, of

Account,
in the

Articles

of the

Balance

auditor

the

Forfeited

be

On

paid by

the

attendances

of each
the

who

then

and

been

re-issued,
the

upon

separate item

in

paid

amounts

as

up

be

shareholders

hand,

case

counted.

Register of Directors
the

that

directors
director

each

to him.

of

Receipts should

should

Managers,
and

to

to

he

the amount

be obtained,

cheques only are produced

signaturesare known, these may

of

number

only

endorsed
if the

Directors'

company,

receives

times
some-

auditor

and

the

should

are

the

The

the

vote

minute

the

the

by

to

directors

inspected,and

director

Ai

the

fixed

be

may

the shareholders'

other

must

are

see

properly due
often

provided

balance

"

attendance, in which

Book

ascertain

left to the

the

Attendance

also examine

fees

the

latter case

in which

examined.

should

and

provisionsthereof carefully

the

of

amount

Articles,or it may
be

Loss

vouching of directors' fees,

the

inspectedand

The

amount,

Profit

Fees.

be

noted.

Acts

not

as

or

forfeited."

regards

should

is shown

Account

expenses

If, at the date

credit

the

that

see

have

general

Companies

particular
company.

Sheet, being described

Directors'
As

to

to

restrictions

any

Sheet, the shares

Shares

shares

upon

to

course,

of the

should

Balance

the

account

balance, this represents the final profitupon

credit

AUDITING

OF

PRINCIPLES

auditor,

the

be

though

considered

sufficient.
If the

paid by
the

Income
the

fees when

directors

are

Tax

upon
such

company,

paying

the

the

directors'

tax

must

generally assessed
The

Income

has

deducted

been
from

directors,though nowadays, the

respect of their fees, in which

fees in full.

be

fees

Tax

for Income
case

upon

the

Tax

company

directors'

direct in
pa\
fees must

AUDIT

COMPANIES

OF

borne

be

never

voted

have

by

is within

accrued

Sheet,
waive

in the

accounts

or

voted

have

their

fees

of the

fee,

(ifany) provided

for the
under

to

upon

and

therefore,see

to

seal with

report, unless all the

accounts

director

claim

requirements

auditor
been

have

to
an

signed

has not

who

which

otherwise,

The

necessary.

these

that

included

either

formally all

renounce

to

the

signed a minute, by

each

be

agreed

have

being

in his

of the

period

would

minute

fees

years,

circumstances

these

such

Balance

the
in bad

directors

in

referred

of

date

Sometimes,

the

even

mutually agree

agreement
the

that

insist upon

must

all

fee

the

at

provided for.

fees, but

auditor

they

unpaid

is informed

their

directors

but

be

must

auditor

an

total

the

maximum

the

shareholders

the

Articles.

the

Fees

unless

company,

fees free of tax, and

the

plus the tax,

for

the

by

159

ACTS

COMPANIES

THE

UNDER

must,

complied

with.
If

directors

the

profits,the

should

auditor

also

Directors'

board

are

provisions of

the

percentage is paid, and

entitled to their

not

meetings,

Articles,but they are

business

upon

the

they

should
should

them

the

Expenses.

Directors
attend

such

of

percentage

calculated.
percentage is correctly

that the

see

to

inspect the

of which

Articles,by virtue
he should

entitled

are

unless

and

produce vouchers,
passed

the
board

inspect

the

minutes, seeing that

the

to

the

by

if travelling

in this latter

the

at

allowed

expenses

and

company,

auditor, therefore, should

directors'

expressly

entitled to proper

of the

be

travelling
expenses

case

paid

amounts

The

meetings.
receipts and
appear

expenses

to

the
to

be

reasonable.

Managing
The

Articles must

director,and
who

Director's

such

Remuneration.

give

power

to

appoint

is generallyvested

also fix the remuneration

therefore, inspect the

power

payable.

Articles, and

managing

in the directors,

The

the

auditor
minute

must,
of

the

160

PRINCIPLES

THE

AUDITING

OF

paid is in

directors,seeingthat the remuneration

If

therewith.

is

there

director, this should

directors' and

minutes

auditor

an

that

shareholders'

the

and, apart from

often

such

accounts,

as

minute

inspectboth
books, for the

of the transactions

many

this,by reading the minutes,

of

matters

that

provided for
in connection
pending litigation

in the

becomes

aware

important

should

taking place,and which

are

should

auditor

an

only authority for

the

are

company,

managing

inspected.

be

important

It is most

of

the

Books.

Minute

the

with

contract

accordance

be

with

disputed claims.
The

examples of matters
the authority
are

following are

shareholders'

Passing

minutes

Transfers

the

accounts.

of dividends.

Appointment

and

remuneration

of directors.

Appointment

and

remuneration

of auditors.

The
which

alteration of the

following

Articles.

examples

are

directors' minutes

The

the

general reserve.

to

Declaration

The

which

"

adoption of

and

for

issue of share

Allotment

are

of

matters,

necessary

to

authorise

"

capital.

of shares.

Calls.
The

forfeiture of shares.
of contracts.

Adoption

Appointment
Declaration
the

and

of officials.

remuneration

of interim

dividends

and, if authorised

by

Articles,final preference dividends.

Appointment

and

remuneration

of

managing director.

Dividends.
The

declaration

of

except in the
some

cases

the

dividends
case

dividends

is vested

of interim
upon

in

the

holders,
share-

dividends, and

preference shares, in

in

both

162

precautionto

every

use

If

dividends.

OF

PRINCIPLES

THE

the accounts

that

see

is

there

AUDITING

such

no

justifysuch
in

power

express

Articles, preference dividends, like dividends

ordinary shares,

the gross

case,

and

Profit

credited
will have

The

company.

dividend

the

credited

to

Balance

Sheet.

declared

date

The

and

until

time

any

the

various

and

be

holders
share-

receipted

are

Sheet

insist upon

dividend

the
are

is

of such

No

arise

there

have

be express

must

do

Loss

of

prevent

future, and,
declared either

terms

cumulative

should

company

note, but

until

If

preference

be stated
an

the directors

upon

auditor
at

the
or

by

of the Articles.

the

cannot

date, and

sufficient

further, until

by

dividends

DIVIDENDS.

exists
liability
and

claim

can

Account.

upon

from

years

although,subject

PREFERENCE

arrears

become

not

shareholder

to

be

been

not

period. Forfeited

and

actual

the

should

them

separatelyon the
fix a period after

dividends

nothing

unless

according to

but

general reserve,

in the form

this.

will
liability
in

"

of dividend

arrears

shares, the amount

Balance

to

CUMULATIVE

OF

to

dividends

the

this

Profit

to

due

be

cannot

expiration of twenty

within

Articles, there

ARREARS

made

upon

made

shown

if such

the

be transferred

creditingthem
there

that

Articles sometimes

declaration, and

of

at

the

to

tax

shareholders

and

specialaccount,

barred

statute

to

be debited

against the

returned

the

claimed, they may be forfeited

to this effect,otherwise
power

should

unless

must

the

to

If certain

expirationof which,

them

paid

deducted

tax

assessment

with

DIVIDENDS.

traced, the dividends

the

the

warrants.

UNPAID

the

the

paid

vouched

total

the

must

Account,

amounts

be

can

Tax

paid under

been

inspect

deducted

be

dividend

and

Account,
Income

the

to

that

must

shareholders.

the
must

see

the

upon

free of tax," but, in the former

of the

amount

Loss

Tax

"

is declared

dividend

the

Income

therewith.

agrees

and

dividend

declaringthe

minute

by

auditor

The

DIVIDENDS.

VOUCHING

declared

be

only

can

the

no

profitsare
arrears

of

the shareholders,
It will be

AUDIT

therefore,

seen,

and

the

ordinary

the

auditor

of

the

Balance

whole,
to

for

be

cannot

and

see

Sheet

distribution

diiferent

classes

that

the

of

arrears

how

this

view

correct

of

reveals

only

in

of

the

be

will

then

the

of

state

profits
future

shareholders.

of

served

which
will

may
be

the

show

not

stated,

become

divided

note

for

the

as

company

by

of

meantime,

unless

the

to

duty

the

does

is

position
purpose

in

affairs

dividend

will

dividend

be

Sheet

If

arrears

any

But,

done.

Balance

the

first

the

is

preference

the

it

future.

the

these

can

there
and

that

said

whereas,

show

before

shareholders,
to

made,

are

163

ACTS

of

question

profits
up

COMPANIES

THE

is

this

that

made

be

to

true

UNDER

sufficient

when

have

it

COMPANIES

OF

such

is

note

available
between

the

IX

CHAPTER

AVAILABLE

PROFITS

IN

the

of

case

directors, in whom

the

dividends

before

and,

auditor

the

upon

that

is

It

follows

In

Chapter

of

profits

in

surplus
most

absolute

be

it is necessary
in

profit is

such

capital
in

wasting

has

value

nature,

or

unless
;

of
in

of

rules.

in

assets

fact

process

of

that
that

being

true

in

impossible

all the
be

assets,

estimated

Further,

if

therefore,

the

increase

it is

should

the

164

true

original capital,plus

the

intact

reason

value

accepted

sible
impos-

dependent

concern.

as

to

have

ascertaining

corresponding

thereof

invested

are

exact

value

at

been

by

the

certain

is

thereto,

by

the

for

question.

it is

cases

be

has

should

he

profits are
of

assets

at

the

arrived

not

additions

with

most

liabilities,but

over

arrive

that

accordance

the

constantly

in

such

represented

to

cases

because

I'lit-

available

are

that

exactitude

of

of assets

in

that

as

entirely

complicated

most

affairs,

therefore, it will

auditor

this

shown,

business,

profit should
the

it is

valuation

the

upon

of

laid

of

almost

profits

an

the

earned.

fact, been

what

for

profits,shown

any

it is essential

that

IV

obtain

to

of

knowledge

thorough

in

general

accounts

position

respect, and,

which

with

one

not

have,

this

in

the

correct

or

in

auditor

necessity depend

question

the

dividend

deal.

of

whether

and

true

whether

must

their

by

recommend

to

shareholders

the

by

prepared

are

power

appoint

distribution,

shareholders

the

show

for

the

ascertaining

consequently,

available

seen

declared

of

accounts

rests

shareholders

The

them

also

be

to

purpose

express

the

company,

the

meeting.

Dividend.

for

Available

Profits

DIVIDEND

FOR

any

of

part

ciated
depre-

have

they

any

are

consumed

of

in

PROFITS

the

of

course

AVAILABLE

earning revenue,

part of the capitalhas

any

made

be

must

good

ascertained.

can

be

and

1913, neither

if,for any
lost,then

or

been

of

out

before

revenue

However,

provide as

165

DIVIDEND

FOR

other

reason,

such

the

wastage

profits

true

1908

Companies Acts,

the

to the

exact

in which

manner

of a company
to be ascertained, nor
enact
are
profits
be distributed as dividend.
that only
true profits may
The
of the profitsof a business
periodicalascertainment
is an
operation of such practicalimportance as to be
the

"

"

essential to the
follow
of

profitin making

be

very

"

of the

"

is

firms

and

itself,but

above

would

strict

the

rarely observed

in

to

conception

accounts

practice. Hence

profit

of

business

annual

the

out

difficult in

word

the

of the

strict consequences

the

out

safe conduct

often

meaning

drawing

up

of
the

domestic
are
companies. These
documents
designed for the practicalguidance of those
which
interested,and so long as the principle
on
they are
accounts

drawn

is

up

certain

by

lessen

departures

Sheets

almost

induce
It

and

said

be

Profit

will

found

for

dividend, although the

company

that

is not

of

considering
if,when

Articles that

in

some

intact.

the

company

losses of

In

the

company

definition,which
out.

in

Hence

drawing

Accounts, that

cases

it
to

be
profitsmay
originalcapitalof

every

individual
and

Memorandum

are

question
is

all,

them.

be

of Association

For

Loss

at

require specialcircumstances

to

practice,the provisionsof
when

and

partiesto depart from

available
the

strict

the

if
little,

of making them
difficulty
so
assumptionshave become
customary

Balance

may

from

greatly the

certain
up

clear,their value is diminished

case

in

Articles

of the utmost
of

the

formed, it

importance
divisible profits.
is provided in its

capitalshall be made good out of

and the method
of ascertaining
available
the profits
profits,
for distribution is precisely
defined, these provisionswill
be compulsory in this particular
case.
If, on the other
hand, the Articles providethat the original
capitalneed not
be kept intact out of current
then in such a case
revenue,

166

of

out

actual

or

do not
nor

was

From
in

time

to

practice in

connection

of

decision.

circumstances

particularcase.
that

have

are

But

of that
be

may

Courts

only

several

in this

decided

cases

subject,

whole

of

the

be

borne

when

of what

circumstances.

are

all

not

mind

that

""and

that

surplus

a
or

distribute
such

capitalmay

before

comes

cases

Again,

entirely in

dividend

profit.
the

dividend

not

only

can

be

as

the

proceeds
would

used

would

rulingsin

accord

be

to

pay

out

example,

if

company

of sale of

one

be

paid

out

of

of

the

accepted

probably

paid

can

For

be

the

stances
the circum-

with

another, it is extremely difficult to generaliseupon

subject. However,
two
root
that
principlesare
shareholders'

cases

previous decisions

Courts

the

the

the circumstances
in

case

of

rules thus

the

entirely
upon

similar

decides

important

and

and, further, that

case,

in similar

this

the

in which

cases

it must

indication

an

parties.
to

the

way,

have

submitted

very

again. Therefore, the decided

as

decide

be

cases,

case
particular

reversed

and

interested

to

of the

question

definite upon

had

of what

have
difficulty

the

between

not

are

decided

decide any

neither shareholders

particular
cases,

such

in
applicable

are

identical.

Courts

In

There

been

laid down

Companies

investigated,and the Court

equitablein the circumstances

are

is fair and

what

of dividends

company.

of

with

in

dispute

Companies Acts are

points in dispute have
for

of the

circumstances

for dividend

matters

Courts

proceeding,and

intentions

express

the

the

traded

subsequentlycomplain

can

holders
share-

have

creditors

profitsavailable
become

creditors

that

time

arisen

the Articles that

prohibitsuch

of the

one

knowledge,

althoughthe payment
financially
imprudent, the

deemed

be

it is with

; and

the company

might

and

subscribed

have

Acts

AUDITING

capital. For, in such cases,

presumed, of the terms of

losses of

with

OF

could pay dividends

quite well be that a company
bond fidetrading profits,
without replacingprevious

it may

As

PRINCIPLES

THE

a
a

one

this
the

dividend,
bond
were

fide
to

of its fixed

assets,

capital,and

would

AVAILABLE

PROFITS

in

be

realitya

return

that they
capital

spiteof

in

capital,for

dividend

out

of which

it could

been

have
extent

When

income

in

incurred

and

will

these

Capital
The

be

now

supposed

such

dividend

capital,to

overstated.

in connection
assets

but

that

been

has

points

of

siderable
con-

with

the

and

capital losses,

treatment

considered.

Profits.

profit available

surplus, or

dividend, is
certain

the

accounts,

shareholders'

income,

depreciation of wasting

of the

of

expenditure

such

arise
difficulty

paid out

been

profits available for dividend,

period, there must, of course,

current

producing

showed

dividend, the

as

of the

of any

all the

charged

Account

the

whole

the

the

at

dividend

surplusor profitavailable

profitsare

the

arriving

against the
be

which

to

out

part of the

paid a

have

paid. If, in

and

paid

Loss

would

no

distributed

been

profitshave

be

be

overstated

profitsare

the

would

there

of

company

the fact that the Profit and

of

must

If

subscribed.

167

DIVIDEND

shareholders

the

to

loss,then, again,such

FOR

confined

not

cases,

to

include

may

for

distribution

as

profitsonly, but
capital profits. Suppose,
revenue

in
for

example, a fixed asset costing "1,500 is sold for "2,000, a

clear surplusor profitof "500 has been made, and assuming
intact, this
that, apart from this, the share capitalremains
violating
"500 could be distributed as dividend without
the

principles.

above

Assets.

Wasting
In

the

decided

of

case

that

such

that

it

Companies
In

the

not, in

Acts

case

as

not

was

of such

mine, and

necessary

of

compel

formed

was

company

wasting asset,
to

Asphalte Co.,

Neuchatel

v.

where

wasting asset,
stated

Lee

to

provide for

there

it to do

was

specially

the

nothing

ciation
deprein the

so.

mines, depreciationof the mine

practice,usually provided

was

work

to

its Articles

it

for out

of the

itself is
current

168

AUDITING

OF

PRINCIPLES

THE

ordinarilythe object of
mine
only, and
particular

because
profits,
is to work

work

life of its

will wind

it will be

of such

depreciationin
sale of

such

and

all the

and

now,

any

and

of the
of

the expenses

Account

of the

mine

the

there

and

may

whole
then

proceeds of
raisingthe
the

the

same,

company

sufficient to

sum

to

providing for

charge against

to

is

object

main

"

charges of

is worked

by the time the mine

in
original capital sunk

ore

effect of

Out

for
pany's
com-

asset, sell the

is,the

actual
?

case

of

value

scrap

that

"

losses and

Loss

out

whole

the

the
Ordinarily,

further, it is proposed

year'sProfit

the

to

part of the

value

the

acquirethis

paid all

expenses,

when

that

land.

is the

what

will be

ore

and

part thereof

Now,

up.

is sold is

from

is to

company

of the valuable
wind

and

works

exhausted.

peculiarone,

somewhat

sold

entirelyexhausted, apart
be in surface

is

that

and

raised

been

has

is

the latter is worked

when

ore

capitalasset,

main
ore

the

that

seen

acquire and

to

up.

therefore,
position,

The

company

is,therefore,roughly equal

asset, and
principal

company

not

originalone

the

life of the company

The

the

after

mines

other

mining

each

late,
accumu-

out, the whole

of the

acquiring and equipping the

property ; therefore, if these provisionsfor depre"
is finally
the company
are
estimated, then, when
correctly
wound
to
capitalwill be returned
up, the shareholders'
them

in full.

which
the
with
these

is

of

purposes
sufficient

and

the

will be

that

winding

this
up.

sale of ore,

If

business.

of

whole

accumulated

so

funds
remain

that

there

until

whole

after payment

the

paid
is

no

question only
The

be

must

realised and

seen

the

the

asset

outside

the

up,

of
the

when

shareholders.

requiringreplacement,

affects the

of the

whole

the

winding

to

over

capital
started

company

invested

final

this

required for

is not

working capital,therefore,

accumulated

It will be

mine

graduallybeing

business, and

they

life of the

the

During

positionupon

amounts

of all expenses,

realised
are

upon

final
the

payable to

170

of

positionwith that
regards the capitalsunk
above

it will be

plant, but

Therefore, in order

originalmachinery

replaced,or

be

Therefore,

to

is

the

plant and

carry
out

of the

the

company

indefinitely.
the
object,when

this

and

useless,the

earnings of

original

less

out

must

same

continue

cannot

company

In this

of the lifeof the

or

as

company

machinery.

more

the

contrast

object of

the

trade

worn

to

manufacturing

the term

to

well

be

that

seen

continue

to

in

only for

is not to continue

Machinery.

it may

going further,

latter case,

AUDITING

and

Plant

of

Depreciation
Before

OF

PRINCIPLES

THE

to

trade.

originalmachinery,
be provided a sum
there must
for the depreciation
thereof,
so
that, during the period of its working life,the capital
sunk
is replaced,and, when
the machinery is worn
out,
is available to purchase the necessary new
this sum
plant.
be replacedin order that a
assets
must
Therefore, when
its objects,the depreciation
out
of
company
may
carry
such assets must
be provided for.

Capital

out

Losses.

Another

Investment

various

Profit and

The

question raised by this

which
pay
had

been

might
law

sometimes

There

is
its

it

held

was

be

very

prevented

circumstances.

sinking

the

company

whether

was

and

the

value

of

company

capitalcould lawfullydeclare or
first making good the capital
which

without

lost ;

which

"

this case,

lost part of its

dividend

case

and

General

v.

producing income,
Account
showed
but the
a profit,
had seriously
depreciated.,.

Loss

had

In

Trust.

Verner

investments

investments

the

is

important case

very

Commercial
owned

the

it

Part of the
no

law

which

that, although this

imprudent, yet
in

all

and

cases

judgment

reads

prevents

there

as

course
was

no

all

under
follows

company

"

from

capital in the purchase or production of a

money-making property or undertaking, and in dividing
the money
annually yielded by it without preserving the
capitalsunk so as to be able to reproduce it intact either

before

formed

be

may

company

dividends shall
that no
principle
capitalis kept undiminished, or a
with
its creditors
to
keep its

the

contract

may

A company

up of the company.

the

upon

unless

declared

be

winding

after the

or

171

DIVIDEND

FOR

AVAILABLE

PROFITS

But, in
capitalor assets up to a given value.
of some
specialArticle or contract, there is no

absence

the

law to this

It
effect, and, in my
opinion, for very good reasons.
would, in my judgment, be most
inexpedientto lay down
a

and

hard

either

company

rule

fast

in debt

not

paying dividends

from

would

which

well able

or

its

long as

so

prevent
to

flourishing

its debts,

pay

capitalsunk

in

creating

representedby assets which would,

if sold, reproduce in money
Even
the capitalsunk.
a
sinking fund to replace lost capitalby degrees, is not
requiredby law."
business

the

not

was

It will be

dividend, is

that

seen

the

paying

not

the

but
capital,

is paying it out

without

providing for

but
is

different

quitea

losses of fixed

that

appear

If the

kept

be

capitalto

so

be

profitsare
if the

From

it must

But

be

floatingassets

that

arrivingat

the amount

must

be

of the

part of the judgment reads

Perhaps

which

am

capitalmay
current

the

shortest

way

its

that

shareholders
out

sunk

receiptsover

and

that

capitalmust

do

not

there

are

require

then

this

bond

fide

for dividend.

this

clearly holds

case

properly depreciatedbefore
profitsavailable
follows

as

of

for

to

yet that

payments

dividend,

"

distinction

expressingthe

lost,and

current

the shareholders.

of revenue,

endeavouring to explain is
be

it

case,

available,then the company

maintained

observed

before

this
with

again, rests

provides

but

surplus,

revenue

of revenue,

out

and, provided
illegal,
surpluses,these are available

revenue

"

matter,

is not

course

for

do

to

good

dividend

company

intact before

is bound
their

the

fide

which
previousloss of capital,
the point,therefore,is : Must

made

for

"

bond

of a"

capitalbe

available

profitsare
would

matter

out

same

by declaring this
of the shareholders'

company,

may

that

say
the

be

excess

fixed
of

divided,

172

in which

divide

to

case

such

part of such
without

excess

up,

excess,

deducting

part of it, will be

forms

capitalwhich

the

form

into and

it will enter

otherwise

as

kept

be

circulatingcapital must

floatingor

that

but

AUDITING

OF

PRINCIPLES

THE

to

contrary

law."
In the situation raised

Co.

it

case,

that

shown

was

wasting

of the

Lee

the

by

AsphalU

non-provisionfor depreciation

the

asset

NeuchaUl

v.

such

not

was

bad

business

policyas at first sight it might appear, but with reference

be
cannot
to capital
losses,as in the Verner case, the same
formed
not
said
Here, the company
presumably was
with a view
to trading only for a definite limited period,
and, consequently,the non-provisionfor capital losses
was
unquestionablya bad financial policy; but this case
would

to

appear

compel

to

company

lines,so

that
run

it need

not

shareholder

every

is

there

keep

i;d

provides in

its

capitalout

up

subscribes

to

finan

sound

company

law

in the

nothing

its business upon

if,for instance,

that

Articles that
then

show

of

revenue,

this basis, and,

upon

consequently,there is nothing illegalin

carrying out this policy.

the

company

Conclusions.
Some

doubt

and

ones,

has

thrown

hard

practice as

is

what

to

and

capitaland

conclusions,therefore,would
of

floatingassets

assets, it

provision in
the
need
the

case.

not

Court

In

its

be

must

depends

upon

fact, the

alone

for the

can

many
is

is not

the

objects of
the

whole

position is

that

appl

is

profit;

cases

to

and

decide

floatingcapital,
difficult.

so

to be that

appear

by later
is not, and

be

can

what

what

cases

there

provided for,but

Articles,and

provide

in

distinction

the

that

fast rule that

again, it is extremely difficult

exactly as to what is fixed and
though in theory

these

upon

it would, therefore,appear

be, any

cannot

been

depreciation
regards fixed

as

the

The

company,

circumstances
some

the
of

companies

depreciationof fixed assets,

decide the question in
definitely

but

any

PROFITS

AVAILABLE

particularcase

all

after

173

DIVIDEND

FOR

circumstances

the

been

have

considered.
dividend

this

way

pre-supposes

means

also

represent

capitalof

share

paid

were

left intact

is such

capitalasset

value

of the
be

profitmust

realised

treated

the

is

out

this

of the

represented by
paid, and

estimated

used, possibly with

with

piece with

serious

trading profitsit

large unrealised

is

effects

profitsare

what
in

paid
the

for

are

cash, with
has

company
and

not

which

dividend

that

value

drawn

upon.

for

is not

dividend
is

and

can

being
Even

concern.
see

that

treated

declared

the

so

company

to the

be

were

company

unrealised

result

be

the

in

increase

paid thereout

in

credited

not

moment

the

must

company

may,

the

capital

extremely important to

available for dividend, for any

of

the

increase

working capitalof

the

regard

sold, cannot

not

working capital of

penny

without

dividend

the

of the

particular

one

mere

be

to ascertain

dividend, for if it

for

be that

and

unrealised

that

however,

are,

effect must

in order

Further, such

so

one,

the whole

available

as

original

the

profiton

assets.

profitavailable

as

paid

taken

other

of assets, which

treated

be

be

cannot

value

the

to

surplus,as

clearly

so

capitalsurplus

that

valued

re-

cases

some

capitalwould

share

therefore,it is necessary
shall be

above

if such

dividend, the

as

away
;

there

and

that

company,

of the company

assets

that

the

in

ordinary

available,but only if they

capital surplus over

in the

trading profit,but

proper

capitalprofitsare

profit,and

in

as

respect

must
profits,

be

working capitalof
If, therefore, the

this
large surplusof working capital,

probably will, seriouslystrain

its

financial

position.
The

Interests

One

of

the

of
main

payment

of

dividends

available

to

pay

payment

to

Creditors.

objects
out

creditors

shareholders

of

of

of
must

the

rule

prohibitingthe

capital,is that the funds

be depleted by the
not

improper dividends.

Part

of

174

reads

Ireland

of

in the

judgment

the

"

capitalof

the
.

it follows

from

be diverted

the

liable to be spent
but

company,

have

from

away

as

also

cannot

follows

business

the

be returned
fund

that

member

that

capital,cannot
society. It is,of course,

the

can

the

that

as

carrying on

part of it

right to look,

paid by
opinion,it

Memorandum

lost in

From

up.

been

objectsof

or

no

take

to

as

so

being wound

my

in the

is described

what

In

him.

to

the creditors

is to pay

which

in the

mentioned

as

company

has

whatever

that

returned

be

the

of the company

event

Corporation

Land

v.

"

is to be the fund

Memorandum
in the

Guinness

case

follows

as

AUDITING

OF

PRINCIPLES

THE

to

which

of which

out

to

member

the

they

of the

creditors
are

be

to

paid."
It will be

therefore, that, in the

seen,

interests of the

be used exclu
must
capitalof a company
for the purposes of carryingout the objectsof the company.
in the Memorandum.
Further,
Such objectsare
set out
be paid only out of a bond fide surplusor
dividend may
a
profit,as otherwise the capitalavailable for the payment

creditors,the

is reduced.

of creditors

Position

of

the

Auditor

this

Regards

as

Question.
As

regards

these

of considerable

question and
the

auditor's

an

He
responsibility.
all the

ascertain

He

case.

matters,

must,

must

go

positionis
into the

circumstances

of course,

and

thoroughly

be

one

whole
of

facts

conversant

arisingout of the
principles
and see that these are properlyapplied,and, in any
same,
lutely
that the whole
event, he must
see
positionis made absoclear to the shareholders.
If depreciationis not
being provided for in respect of wasting assets, capital
losses are
not
being provided for, and capitalprofitsare
with

all these

being

used

for dividend

shareholders
the

facts

rulings,and

are

the

purposes

entitled to

of the case,

and

be

look

in all these

the

cases

placed in possessionof
to

the

auditor

to

see

all

that

AVAILABLE

PROFITS

this

is

consulted

in

whole

the
he

that

matter,
find

may

and

board,

it

what

to

and,
have

requires

in

act

and

is

what

may

often
not

is

therefore,

it

complete

grasp

opposition

of

the

to

thorough

upon

of

Again,

great.

are

based

subject,

the

direct

courage

auditor
and

responsibilities

the

essential

of

an

may

shall

he

as

this

knowledge

practice,

to

as

175

DIVIDEND

circumstances,

these

importance

great

in

course,

directors

by

done

be

Of

done.

FOR

of

appreciation

the

responsibilities.

Summary.
To

available

profits

must

assets
current

of

be

it

fixed

assets,

depends

upon

all

these,

profits
that

are

the

actually
re-valuation

of

the

need

available,

realised

subject

of

the

whole

of

Articles

and
of

that
the

assets.

provided
the

te-.ms

and

after

even

the

considering

decide.

Capital

requirements

allow,
such

ciation
depre-

Association,

following

the

be

all

to

regards

company,

finally

can

to

and

profits,

the

and,

case,

alone

Memorandum

of

Articles

whole

As

floating

course,

necessarily

not

objects

the

Courts

the

losses.

the

at

of
of

addition,

and

and

circumstances

in

for,

this

arriving

depreciation

dividend,

charges

in

that,

appear

provided

Memorandum

the

would

for

expenses,
of

for

it

summarise,

profits

that

remain

they

are

after

CHAPTER

THE

Legal

THE

subject

of

the

Parliament

indefinite

very

liabilities.

There

subject which

that

finality

therefore, that
careful

consideration,

extent,

fix
of

sense

his

standard,

own

member

as

It

exhaustively
important

most

is

thereafter, the

but

in the

this

will

cases

conclusions

to

the

each
space

but

subject,

be

to

end

essential,

matter

up

most

to

drawn

large

to

high

to

individual

available,
of

some

briefly considered,

be

the

is rendered

service

in

impossible

with

acting

by

greatest

whole, and

thereof.

this

give

in

is

it

with

thought

Even

practitioner must,

each

as

it is

but

differ

should

responsibility,the

profession

deal

auditor

every

arc

dealing

reached.

been

yet

of

Acts

auditors

cases

legal view,

profession, opinions

accountancy

of

one

responsibilitiesand

important

the

is

various

The

auditors'

several

not

auditors

of

appointment

the

indicate

has

Auditors.

the

to
are

AUDITORS

difficulty.

with

as

the

to

and

dealing

OF

legal position

exact

complexity

some

the

of

Position

The

of

POSITION

LEGAL

the

and,
will

therefrom

be

summarised.
The

Position

of

Auditor

an

to

Private

Firm.
In

the

under

case

suffer

Auditor's
Under

281,
or

if

other

loss

any

document,

in

any

makes

is not

auditor

an

responsible

through

under

Companies

auditor

is

but

Position
the

an

private firms,

statute,

any

employers

of

his

the

in

appointed

damages

neglecf

or

default.

Companies

(Consolidation) Act,

1908,

report, certificate, Balance

a

statement
176

false

in any

if his

Acts.
Section

Sheet,
material

178

is entitled to

auditor

An

of

vouchers

and

the

AUDITING

OF

PRINCIPLES

THE

to all the

access

whose

concern

to

accounts

has

he

accounts

is entitled

audit, and, in addition, he

books,

to

additional

such

explanationsas he may require. In the

of registered
companies,these rightsare given to him
case
113, Companies (Consolidation)
by Section
specifically
and

information

1908, and

Act,

be limited

cannot

audit

the

directors

privatefirms

of

of his audit

scope

either

by

way

case

limited

be

can

in any

in the

but

and

his powers

in

by agreement,

the

holders,
share-

or

scope

which

case

of

an

the

limited accordingly; but

are
responsibilities
circumstances, as is pointed out in Chapter I, it is

auditor's

in

such

of

importance

the utmost

should

recorded

be

Auditor's

in

of the arrangement

terms

difficulties

writing,otherwise

future.

arise in the

may

the exact

that

for

Liability

Neglect.

of an auditor arises where it is proved that,

liability
through his neglector default, his clients have suffered
actual
arise, for example, where
damage. This may
defalcations have
taken place on
the part of officers or
such as
employees of the concern,
misappropriationof
In the case
cash
stock.
of companies, the auditor's
or
also may
arise where
the results shown
liability
by the
The

by

or

been

have

accounts

of dividends

payment

assets,

such

if it is

or

by
the

cases,

the

value

have

must

Auditor's

It must
misled

had

he

may

of

be effected

may

assets, such

as

debtors

as

provide for liabilities.

held personallyliable,

to

be

reasonable

exercised

discovered

Liability

Third

omission

auditor

proved that,

skill,he

be

capital. This

stock, by insufficient provisionsfor depreciationof

other
In

of

out

by over-estimating the
and

through an error
falsification,
resulting in the

deliberate

of

reason

overstated, either

the

care

and

discrepancy.

Regards

Parties.
also be remembered
and

thus

suffer

that

damage

third

by

partiesmay

reason

also

of accounts

LEGAL

THE

certified by

POSITION

auditor

an

intending partners

or

audited

of

accounts

proposing
from

the

case

business

into

of Le

Lievre

and

them

by

had

he

though

even

should

third

parties who

However,

is not

employed
But

moral

recognise

otherwise

may

would

damage,

suffered

duty.

no

are

scientious
con-

obligation

suffer

through

neglect.

his

Decisions.

Legal
There

several

are

subject,all
here

space

Leeds

this

case

merely

it

held

was

thus

In

been

carried

that

the

this

the

case

out, and

auditor

it

had

that

As

result

and

held that

where
that

knowing
In this

case

customers,

wholly

General

be

Bank

of
but

accuracy,

of

company's

the

"

of the

is

Articles had
it

was

no

Articles when

not

excuse

he knew

auditor's

bonuses

neglect,
improperly

were

the

insufficient.

Sheet

case,

he

had

the company

but

does

Balance
the

In

Case.

auditor

an

the

it to

books

the

therefore, held liable for damages.

was,

London

auditor

an

Sheet

that

the

seen

In

Balance

of the

held

dividends, directors' fees and

he

the

terms

was

not

existence."

paid, and

with

representation

accurate

only

Shephard.

v.

its arithmetical

satisfyhimself

must

of their

verify

is

there

sufficient for

Sheet

Balance

the

compare

affairs."

it is not

that

this

upon

leadingcases.

Building, Etc., Society

and

true

of the

few

studied, but

be

Estate

and

he

that

should

consider

decisions

important

very

of which
to

to

account,

to

they

auditor

an

had

the

Gould, it would

v.

fraud,

them

owe

them

to

which

negligent. He

to

appears

Dennes

of

business,

relations.

partieswho

been

auditor

towards

and

absence

be held liable to third

not

with

business

enter

to

produced

have

may

the

that, in the

appear

example,prospectivecreditors,

holders, investors, purchasers of the

debenture

"

; for

179

AUDITORS

OF

is

not

report

is

advanced

company

case

to

the

it

was

holders
share-

incorrectlydrawn,

guilty of

securities held

The

this

misfeasance.

considerable
sums
by

the

bank

had, however,

were

taken

180

due

credit for the interest accrued

interest

the

failure

of the bank's

causes

bad

debts,

of affairs, and

real state

refused

however,

lack

the

of

value

of

the

dependent
guiltyof

assets

to

contained

words

result of which

as

these

dividends

reads
"

to

follows

as

It is

directors

An

an

auditor's

auditor has
of

nothing

dividends
the

on

ground

them

to

had

company
of

being

failed in

had

he

failure the

shareholders

or

found

was

the

his

p.iid

judgment

"

part of

no

is

holders,
facts to the share-

capital. Part

of

out

The

Sheet

two

report

quite meaningless, and, therefore,

duty,

"

jointlyand sevenilly

true

in his

his

of
ro-

no

auditor

held

reportedthe

to have

ought

some

In

Balance

the

respect of
"14,400 odd,

in

directors

the

the

made

the

directors,

the

accounts.

The

was

of

aware

merely stated,

by

realisation."

misfeasance, and

the

but

shown

as

declared, amounting
he

alter

to

security,etc.,

upon

liable with

that

apparently was
reportedfullyto

for

available

shown

shareholders, the auditor

the

to

report

auditor

The

respect

made

been

been

have

chief

the

loss in

heavy

reserves

proper

profitswould

no

for dividend.

who,

had

loans, and,

of these

of

One

paid.
the

was

loans, whereas

such

upon

in fact,

never,

was

AUDITING

OF

PRINCIPLES

THE

nothing
making loans

to him

to

as

do

to

duty
what

with

with

the

give advice

either

they ought

to

of

do.

dence
prudence or impru-

without

or

the business

whether

to

It

security.

is

company

is

being

conducted

prudently or imprudently,profitably
or
unprofitit is nothing to him whether
dividends
are
properly

ably ;
or
improperly declared, provided
duty
state

to the

the

shareholders.
financial

true

time

of the

then

comes

position? The
But

company.
this
see

without
that

the

his

duty

is

he

does

enquiry
books

the

is he

and

to

the

at

company

By examining

not

own

is to ascertain

is confined

How

question :
answer

business

position of

audit, and
the

His

discharges his

he

that.

But

ascertain

such

to

the

books

of the

discharge his duty by doing

and

without

of the

company

taking

any

themselves

trouble
show

to

the

company's

THE

LEGAL

POSITION

OF

true

position. He

must

ascertain

to

will be

that
than

worse

bound

not

skill in

correctlyshow
does

he

would

part,

if he

even

of

concealment

fraudulent

the

did, he

reasonable

of

want

any

is accurate

If he

his

on

obligationis

His

Sheet

company.

do

affairs ;

company's

the

error

by

say,

"

him.

from

book

the

deceived, without

his part

on

is not

books

the

that

his Balance

an

and

care

investigations.He

guarantee

of

responsiblefor

himself

care

exercise reasonable

positionof

true

books

the

to

be

were

the

not

guarantee that

not

according

does

auditor, however, is

An

enquiries and

he

care

this, his duty

does

he

...

than

more

making

insurer

an

do

to

farce.

reasonable

take

Unless

do.

they

181

AUDITORS

not

as

onerous

so

this.
"

be

I take

Such
honest

skill before

is

right, and

and

suspicion;

opinion of

the

required.
.

"

The

that
to

the
to

he
an

must

Where

there

practice, I believe,

like them
care

more

is not
skill

is

obviously

to

in

they

correct

are

bound
even

that

see

exercise

case

perfectlyjustifiedin acting
special knowledge
expert where
is

directors

Sheet

directors

certificate of

and

1891,

year

of the

and
certificate,
the

and

care

of
on

is

Balance

is, for the

the

others

and

care

case.

haphazard,

auditor

an

reasonable

than

more

still

but

necessary,

that

assume

not

little enquiry will be

and, in

cases

does

he

reasonable

of that

suspicionis aroused,

Where

also.

few

must

particularcase

suspicion,
very

select

men

he

certifies is true.

he

in any

care

sufficient ;

and

reasonable
business

excite

to

what

circumstances

the

upon

take

must

believes that

he

nothing

are

he

auditor

certifywhat

not

must

true, and

of the

duty

the

is reasonable

What

depend

be

is,he

that

"

believe to be

"

to

was

bank

accompanied by a report
Taking the Balance Sheet,

report together, Mr.

the

true

and

if this

report had

Mr.

Theobald

would

financial

been

have

February, 1892,

laid

Theobald

position of

before

the

the

stated

bank,

shareholders,

completelydischarged his duty

182

this

Unfortunately,however,

them.

to

AUDITING

OF

PRINCIPLES

THE

it becomes

legalconsequences

the

consider

shareholders, and

the

laid before

report

to

necessary

Theobald

Mr.

to

not

was

of this

circumstance.
"

others, does
them

information

information

of

auditor

An

risk of

and

means

equivalent terms.

means

respect of

financial

company's

of information

means

the

his

at

so

them,

serious

very

failed to

discharge

duty.

"

In this

I have

case

without

February, 1892,
before

is

than
shown

It is

...

loans

and

the

mere

suspicion. But,
is to

that

similar

expresses

without

value

the

of the assets

dependent

upon

that

the

to

say

effect is

that

is

words

so

to

enough

We

might infer from

an

that

excite

to

auditor

an

enquiry,

arouse

unusual

of

value

unusual

of

as

tion.'
realisa-

their realisation.

upon

not

warning

and

statement

no

was

statement,
than

more

Co.

held liable for

falsified
had

in

if, as

this

case,

ordinary person

any

language

its

would

infer

it."

Irish Woollen

that

of

follows
it by no means
seriously
wrong,
ordinarypeople would have their suspicionsaroused

was

Sheet

other

no

alreadystated, the duty

auditor

something

that

by

as

information,

convey

althoughan

truism

to

with

is

of those

presence

'

words,

depends

statement

shareholders

to the

reference to the report which

Sheet

mere

securities

told that

are

the

Balance

the

any

Mr.

saying that

the Balance

them

directors,and

the

conveyed by
on

in

hesitation

layingbefore

certifyingand
laid

no

discharge his duty

did fail to

Theobald

he

in

induce

to

Information

peril,and runs
to have
being held, judicially,

position,does

in

is calculated

more.

no

to

duty by simply giving

gives shareholders

who

of information

instead

his

by

are

information

convey

that

as

to ask for

of them,

some

or

discharge

not

much

so

it is to

duty

whose

person

by

the

he used

v.

In

Tyson.

damages

where

suppression
reasonable

of

care

this
the

case

accounts

the

auditor

had

invoices, it being
and

he should
skill,

been

held,
have

discovered
follows
"

LEGAL

the

fraud.

these

that

audit

London

not

only are

grounds

for

petty cash in hand, which

"760, whereas,

to

in

v.

has

liabilities in

the

January, 1892.

and

his assistants

also for the

Hasluck

Seear

"

liable for

failed to

had

they

the

mechanical

out."

held

were

and

over

company

4th

Kevans

this, but

Storage Co.

that

Mr.

the
of

since

cause

carried

auditors

the

this

to

was

Oil

damage

care

discovered, and

been

have

any

due

blame

free from
the

would

carrying

under-statement

the

Sheet

I consider

case

as

if due

opinion that

exercised, the

invoices

from

Balance

way

reads

judgment

the

of

am

is liable for

auditor

sustained

been

suppression of

not

of

183

AUDITORS

OF

Part

reasons

skill had

the

POSITION

"

For

and

THE

damages,

the books

of the

amounted

difference

only "30, the

was

the

on

verifythe existence

according to

fact,there

In this

Co.

representing the secretary'smisappropriations.

The

had

accounts

the

by

Cotton

Kingston

falsified to

been

stock.

managing director,and

the

auditor

stock.
"

of

out

as
capital,

Parts

For

make

of the

several

and

was

no

cotton

auditbrs

extensive

both

the

years

certified

been

appeal that

on

that

had

that

been

manipulationof
follows

as

the

by

quantities and

ately
deliber-

values

He

company's mills.

1890, 1891, 1892

and

the
and

company

the reverse,

was

the

"

committed

bolster up

by
the

certificates,and

were

it

valuations
over-

of the

did

this at
There

1893.

of account

or

took

of the

to

extent

(except the stock journal,to which

presently)showing the quantity or value of

book

I will refer
the

held

read

frauds

in the

yarn

of the

judgment

order

exaggerated
the end

had

result of the

when
flourishing

it appear

cotton

of

means

was

the

case

considerable

very

accept such

years
in

who,

manager,

it

this

liable in respect of the dividends

not

was

paid

entitled to

was

stock

The

In

Case.

director, by

managing
of the

he

Mills

yarn
the
year,

in the

mill at any

one

entry of the stock-in-trade

from

the

last

The

time.

preceding

at the

Balance

ning
beginSheet,

184

of the
a

trade

it

by

shown

as

inserted

in

asset

an

as

the accounts

that

this

into

the

this item.

from

see

breach

of their

duty

He

rely on

him

In

for the materials

Sheet.
He

manager.

In
was

this

of

man

He

competence.
knew

who

him.

directors

are

auditors
to

had

give
"It

work
a

suspicionthat

no

information

accurate

hand, and

they trusted

is the
he has

duty
to

blamed

be

to

of

him

that

reasonably competent,

would
must

use.

depend

What
on

the

to

not

careful

questioned
un-

the

that

The

and

be

to

trusted

stock-in-trade

bring

skill,care,

is reasonable
the

was

to

of

everyone

held

has

the

on

and

by

accordinglyin

auditor

an

perform

as

in the

trusting him.

for
he

to enable

relied

character

Judge

irly

value

trusted

was

learned

The

not

high

that
to

and

particularcircumstances

on

the

which

caution

and

in

matter.

bear

cautious

skill,care,

an

stock-inmust

necessary

auditors

the

case

mill, he

its proper

at

it is.

that

details of the

cotton

stock-in-trade

the

enter

of

case

was

part of

no

contends

one

people for

the

It is

confess

his returns

company.
No

so.

check

to

stock.

other

skilled person

Balance

The

entry in the

the

they did

that

take

to

in hand.

to

further

summarised.

and

manager,

to the

duty

auditor's

some

per

ascertained

examine

not

accounts

their omission

that

cannot

must

the

showed

Sheet

Balance

on

as

not

item

the

trade

they did

the

was

'

of
professto guarantee the correctness
for it. They
no
responsibility
They assumed

did

auditors

took

of

accuracy

and

always corresponded

and the auditors

But

case.

value

the

Sheet, but

summary

summarised,

the

was

stock-in-trade.

of such

Balance

the

The

manager's certificate.'
with

of all the

summary

and
signed by the manager,
was
adopted by the auditors

was

summary

and

year,

total value

the

showing

accounts

The

of each

end

the

at

purporting to
company's stock-in-

of the

values

and
quantities

the

show

contained

heads,

various

under

series of accounts

end

the

at

book

The

journal.

stock

the

from

year

stock-in-trade

of the

they took the values

and

AUDITING

OF

PRINCIPLES

THE

auditor
caution

of each

case.

186

in

every

certificate

for
responsible

stock, and

the

would

be

safeguard for
the audit

that

tested

be

check

the stock

there

are

regards this
that

he

that

he

an

auditor

show,

can

used

in the

For

the

should

not

order, therefore,
must

stock

it is

in

it is almost

satisfyhimself completely as

to

in the

the

possibleto
where
others, especially
cases,

he

and

can,

enquiriesand

use

of his

event

various

tests,

no

so

being challenged,

of this most

correctness

i^

there

precaution,in

reasonable

to the

be

company,

in which

ways

some

However,

every
as

In

of manufacture,

course

asset.

satisfyhimself
item

in

should, make

he

many

are

fact, in

in

of

case

were

reasonablypossible. In Chapter

completely,but

goods

impossiblefor
doubt

is

as

accounts

real value, the auditor

some

there

that

V,it is shown
may

be of

far

as

circumstances,

the

shareholders.

the

may

stock

test the

all that

at

would, therefore, in the

correct, and
no

by manipulating
pleases,

results he

guarantee

mak'

can

audit, therefore, in such

the

no

stock

official

the

that

means

of the

valuation

the

whatever

show

accounts

it

regards the stock,

as

relies upon

merely

auditor

yet if the

way,

AUDITING

OF

PRINCIPLES

THE

order

to

important

accounts.

foregoing

reasons,

literal construction

too

the ruling in the

Kingston
placed upon
Cotton Mill case, but, in duty to his clients and to himself,
auditor in every case
the stock most
should investigate
an
Such
carefully,and apply thereto every reasonable test.
of far greater importance than
the
are
investigations
mechanical
such

be

checking

which

upon

large proportion of

so

many

auditors

devoted

time

the

expend
to

an

audit.

Republic of Bolivia
it

was

held

that

auditors

ultra vires payments

Sheets, but whether

for not

made

are

made
and

discoveringand

of payments
the

Exploration Syndicate, Ltd.

on

specialcircumstances

prima facie responsiblefor

the

to what

faith

extent

the

of each

audit,
case.

of their

they

callingattention

prior to

Here

are

to

must

Balance

responsible

the

illegality

depend

upon

THE

In

this

certain

case

audit, for

POSITION

LEGAL

which

payments

there

being regulated by
payments

satisfied

been

have

damage

in his

far from

been

carried

was

of

terms

the

Dumbell's

Others

with

defalcations

point

as

of the

where

in
the

From

for
"

and

auditors,
sentenced
in

the

they knew

to

concurring

which

intent to deceive
and

Dalgleish.

and

did

they

and
of

creditors

Book, and

was,

as

to

carry

to whether

various

it is that

definite

an

other
auditor

of

duty,
plaintiffs'

the

"1,700 odd.

to
or

the

not

full audit.

agreeing

accountants

this and

breach

the

case

failed to discover

thus

case

out

In this

check

not

cashier, amounting

clear and

The

case

judgment

to

it will be

cases,

should

understanding

tants
accoun-

have,

with

his

for
seen

in all

clients

what

exactly he is to do, and what ground he is to

especiallywhen
only a partial audit is required,or
is instructed

accountant

an

work

have
audit

the

the

case

prosecuted

the

the

by

important

cover,

was

to

appears

negligence and

for

Cash

instructed

settled

to

auditors

the

this

shareholders

that

the

of

were

cases,

In

Sheets

Cape

v.

sued

were

Book

how

pointing out

in which

manner

with
particulars,

grounds being

"850.

the

actual

stances
special circum-

Court

the

imprisonment,

members,

and

accountants

was

in not

to

appear

suffered

against

as

these

Banking Company."

Wilde

The

costs,

Balance

three

false in material

Pass

action

company

not

Therefore, in the

directors,were

the

publishingof

the

default

Banking Co., Ltd.

various

defraud

does

the

to

out.

together with

be

company

the

satisfied with

Dumbell's

to

(1906). Although

that

without

dismissed, but

this

Court

the

case,

prior

authority,

vires, the

report.

of the

made,

were

no

auditor's

the

through

this fact

Table

ultra

were

was

187

AUDITORS

OF

Several

only.
where

cases

the

have

had

question has

been

accountants

whole

to carry

originalinstructions, and, therefore,

contracted

to

do.

out

accountancy

to pay
as

what

damages

to what

work

were

they

188

AUDITING

OF

PRINCIPLES

THE

Conclusions.
conclusions

The

subject,would

this

upon

auditor

(1) An

cases

follows"

as

honestly satisfyhimself

must

and

true

positionof

financial

various

the

be

to

appear

show

accounts

the

from

drawn

be

to

the

whose

concern

of

view

correct

that
the
is

he

accounts

auditing.
(2) He
he

books

the

that

examine

must

must

make

records, and

but
official,
skill in

he

testingthe

an

original

and

vouchers

enquiries.
auditor's duty

take stock,

to

the certificate of

relyupon

he is entitled to

and

therefore, for this purpose

with

proper

part of

is not

books

the

test

(3) It

correct

are

satisfyhimself

books, and

the

exercise reasonable

must

sible
respon-

care

and

of the stock

correctness

relyupon the opinionof

experts where specialknowledge is required.
auditor need
not
(5) An
necessarilybe suspicious,
exercise
aroused
he must
but where
his suspicions
are
all reasonable
that

is entitled to

auditor

(4) An

care

and

skill before

he

auditor's

duty

satisfies himself

all is in order.

(6) It

is

part of

no

an

give advice.

to

(7) If the auditor is not satisfied upon any material

points, he must
report clearlyto the shareholde:
the
a

of

case

far

as

auditor
is

the

(10) If

an

are

and

if it is

proved

company,

the

of

of assets,

auditor

an

Memorandum

is

negligentor

skill,he may

what

be

his client has

that

would
to

case

and

must

see

Articles of

carried out.

auditor

care

(11) As

of

case

proper

otherwise

verify the existence

must

provisionsof

Association

partners in the

the

reasonablypossible.

(9) In the
that

to

or

company,
firm.
private

(8) The
so

have

been

does

not

held liable in
suffered

exercise

damages

losses which

prevented.

is reasonable

care

and

skill

depends

LEGAL

THE

standard

general
In

(12)

the

recorded

there

is

these

frauds

of

the

them

If

an

to

be

that

it

point,

event

of

if

he

is

thought

honest
believe
skill

the

his

tracking

fraud,

when

and

when
servants

be

be
he

true,

the

the

the
must

and

believes

of

that

must

what

himself

this
of

auditor;

certify
take
he

what

point,
It

auditor's

an

is

he
he

case

must

does
care

is

of

part

Bank

reasonable
certifies

the

effect.

which

General

the

upon
in

and,

to

and

taking

cases,

material

any

following,

not

he

all

definition

and

duty

provided
skill,

accounts,

report

London

the
be

audit

unlikely

very

liable

in

upon

short

than

is, he

that

before

given

to

his

better

no

in

take

to

in

is

satisfy

to

certifies

liable.

professional
skill

dissatisfied

clearly

it

personally

such

knowing

accounts,

criminally

requisite

he

being

judgment

"

duties

tried

by

that

precaution

that

can

said

exercises

before

reports

Such

utmost

not

suspicion,

held

held

be

of

reasonable

every

the

the

of

schemes

certifies

be

be

may

honestly

he

duties

for

perpetrated

may

will

possessed

every

of

auditor's

the

liable

their

wilfully

false, he

auditor

an

is

he

"

auditor

conclusion,

that

is

concern.

(14)

In

it

of

laid

arouse

been

have

firms,

held

be

not

to

the

upon

profession.

the

scope

carefully

nothing

also

and

case,

writing.

in

and

ingenious

out

exact

will

Auditors

by

private

the

that

be

(13)

of

case

importance
should

adopted

the

189

AUDITORS

OF

of

circumstances

the

upon

POSITION

true."

be
not

and

APPENDIX
EXAMINATION

(1) WHAT

audit
a

of

limited

(3)
and

audit
principal objects of an
in
briefly the difference
principle
of a private partnership,
accounts

the

company.
do
What

what

audit

the

are

State

(2)
'

QUESTIONS

the

are

between
and

Continuous
by a
disadvantages

and

advantages

the
of

those

*'

understand

you

Audit,"
of

such

an

(4) Upon

of (a) a company,
having been appointed auditor
do
in
would
each
case
partnership, what
prior to
you
of
the
actual
work
the audit
?
commencing
Audit
the objects of keeping an
?
(5) What
are
Programme
do
and
understand
Internal
Checks,"
(6) What
by
you
is an
what
?
auditor's
position in regard thereto
should
make
auditor
notes
an
(7) What
during the course

(b)

"

of

audit

an

(8)
the

What

Balance

had

company
find

would

steps

Trial

of

failed

you

take

of

books,

set

which

an

were

you

in

error

of

the

asked

to

staff

the

which

and

detect,

to

discover

to

(9)
(10)

What

do

State

in

efficient

audit

of

(11) To what
when
checking
State

how

Cash

in

(12)
check

understand
you
work
detail
the
Cash

the

Banker's

would

should

you

Pass

verify

'

"

Vouching
and
in a
involved
complete
of a manufacturing
business.

Book

special points
the

the

by

term

auditor

an

Book

with

Balance

the

attention
pay
the
Book
Cash

and

Bank

at

the

Hand.

Describe
the

the

following

Cash

that

steps

would

you

take

as

auditor

to

"

Sales.

Rents

Receivable.

Interest

Receivable

Loans.

on

Proceeds

of

(13) Why
insufficient
what

vouchers

(14)

for
In

payments.
the

What

Travellers'
Staff

consider
the

proof
in

each

Commissions

would

you
and

191

accounts

endorsed

you

find

require

Salaries.

cheques

of

accept
Book

Cash

case

endorsed

payment
you
?

payments

vouching

Consols.

^500

would

any

payment

of

you
for

circumstances

vouchers

of

sale

would

Expenses.

of

to

Under

cheques
the
the

be

as

following
correctness

192

Purchase

of

Plant

Purchase

of

some

Payment

of

(15)

You

whom

of

Debentures

and

you,

(16)

In

(17)

what

ton,

15th

of six months

15th

October,

1914

liabilityin respect

the
31st

would
of

record

the

examining

1914

December,

tons

follows

as

1914

of the firm

books

for whom

2,000
2,000
1,000

1914

15th

Petty

of it be

in

Cash

Account

auditor,

act

as

at

"2

10s. per
of invoice.

date

from

would

"

tons
tons
tons

requisite for you

it be

transactions

these

of

extent

you
of iron

acceptances

delivered

been

April,
June,

What

you

purchase 5,000

to

had

iron

The

?
audit

what

to

some

mode

checked.
payment
both
heads, and,

under

wages

merchants,

of iron

firm

terms

on

would

way

contracted

has

the

check

auditor,

as

the

to

as

the

adopted,

were

manufacturing

workmen,

of

piece workers,

some

suggest

you

of

large number

should
be recorded
the wages
recommend
would
State what
you

system

Railway Company.

auditor

as

which

if the

the

Accounts.

Ledger

consulted

employing
day and

are

for

contract

Machinery.

and

Bought

are

company,

of

account

on

buildings.

of

erection

builders

to

Payments

AUDITING

OF

PRINCIPLES

THE

in the

shown

to

in

see

would

How

of

Sheet

Balance

of a trading company,
if the amounts
take
to ascertain
auditor,
you,
?
correct
charged in respect of purchases were
that the
would
as
auditor,
How
satisfyyourself,
(19)
you

(18)

In

auditing

steps would

Bad

for

Reserve

the

accounts

as

Doubtful

and

Debts

was

sufficient

one

the
(20)
you
Journal ?
(21) To what points should an auditor pay specialattention
when
examining invoices ?
the
would
to check
take
the steps that you
(22) Describe
Bought Day Book.
of a manufacturing
business,
(23) In auditing the accounts
asked
all
ascertain
that
to
are
outstanding
particularly
you
have
been
How
would
accounts
satisfy
brought in.
you
yourself on this point ? Give illustrations
reference
the duties of auditors
with
to the
are
(24) What
evils have
Sheet
What
?
grouping of the items in a Balance
acted
be
be
avoided
?
should
to
What
general principles
upon

What

accounts

(26)

items
"

Account,"
Account,"

cases

the

entries

contained

in

(25)

of

vouch

would

How

Profit

and

"

would
and

what

you

"

Loss
are

Trading
expect to find in the
and
Account,"
Appropriation

the

objects

of

these

preparing

Define

it is not

Balance
a

Sheet,

Statement

and

explain why

of Assets

and

in the

majority

Liabilities

194

take
Sheet

(37)

each

increased

made

was

for

Account

Trading

previous year

(38)How

stock

30th

An

June.

know

to

each

in

of

the

at

the

three
taking
stock-

accurate

without

How,

verify the

would

you
Balance

appearing in a
(39) Are there,
would
justify the

requires

saws,

turing
manufac-

you

30th

the

Balance

again
this information
give him
mately
approxithat
a
September, assuming
proper
each
department had been kept during

on

taking stock, could

on

and

company,

diminished.

or

the

limited

the

whether

quarter
has

departments

the

of

managing director
edged tools, skates and
The

of

Account

Trading

correct

were

end

the

satisfyyourselfthat

to

AUDITING

OF

PRINCIPLES

THE

Sheet

"

item

Work

in

"

Progress

in your
addition

opinion, any circumstances

of any
anticipated profitto actual
of partially manufactured
in the
cost
case
goods, or of an
in
similar
?
or
contract,
cases
uncompleted engineering
should
Plant and Machinery be valued
for Balance
(40) How
in the

Sheet

purposes
(41) In the

provision
he adopt
(42) On
presented
years,

for

depreciation

insufficient,what

was

annual

Balance

find
of

later

that

the

on

years
the tenth

you

an

auditor

being appointed

you

advise

?
manufacturing company
auditor
being of opinion that
a

the

find

and

Balance

some

directors

Sheet

adopt

with

are

the

at

respectively.
to

buildings acquired at
buildings acquired

thirty years' lease,

leasehold

note

Liability

on

does

mean

this

If so, how

(45)
the

course

which
has
company
its shareholders
for ten

to

freehold

some

company,

annual
and

Sheets

of

What

on

the

Bills
?

would
do

Balance

Sheet

Receivable

taken

to

it be

shipping

discounted,

Is it necessary

verify

understand

for

in

the
you

based

company,

"

Contingent
"5,000." What
:

this

statement

satisfy yourself on this point

by Depreciation,
for
the
?
same
providing

you
you

five

thereto, before

should

follows

the

for

would

course

reference

as

credit

prices paid

What

Balance
Sheet
?
certifythe eleventh
is Goodwill, and
what
(43) What
upon
Sheet
(44) In auditing a Balance
of a

you

the

should

formation

freehold

of

case

of

event

v.

?
and

what

objects of
(46) Explain what is meant
by
(a) A Specific Reserve.
Reserve.
(b) A General
Fund.
(c) A Reserve
A
(d)
Depreciation Fund.
(e) A Sinking Fund.
(47) The directors of a manufacturing company,
owning a
considerable
of
valuable
and
quantity
plant
machinery,
decide to keep a Plant
Register. They request you to advise
them
to how
as
this Register should
be kept, what
information

are

"

195

APPENDIX

should

be entered

should

be

therein, and

dealt

directors

with.

advice

the

Set

how

out

in

the

question

the

form

of

depreciation

of
a

report

to

the

that

give.
you would
the
suggested
necessity of

a
(48) Having
provision for
of each
of three
Depreciation of Machinery in the accounts
of
raise
the
boards
directors
objection
companies,
respective
the
on
following grounds respectively
of similar
cost
machinery having risen, nothing
(a) The
valuable.
should
be written
off, as it is actually more
done
have
maintained
the
(b) Repairs
fully
machinery,
is as good as new.
which
extent
in a
as
(c) To
charge depreciation to the same
of a
would
dividend,
good year
prevent the declaration
"

with

the

and

of

result

dissatisfaction

possible fall in the

Criticise

these

shareholders

arguments.

the
manufacturing business, where
expenditure
order
and
in
the
works
to
keep
efficiency
necessary
proper
varied
could
this expengreatly from year to year, how
diture
very
be dealt with
in the yearly accounts
that
the profits
so
for dividend
fluctuate
available
should
not
greatly by reason
of such
variable
?
so
being
expenditure
find
that, during the
(50) As auditor of a company
you
have
been
sums
on
large
expended
repairs, renewals,
year,
and
and
How
additions
to
alterations,
plant
machinery.
would
these
and
what
verify
by
principles
payments,
you
would
be guided in deciding whether
they were
properly
you
?
to
or
revenue
chargeable
capital
the
in practice for
various
methods
used
are
(51) What
writing off depreciation ? Shortly describe each.
do
and
understand
Reserves,
(52) What
by Secret
you
what
is an
auditor's
in
thereto
?
regard
position
the provisions of the Companies
are
(53) What
tion)
(Consolidareference
and
the
to
Act, 1908, with
appointment

(49)

In

price

the

amongst

of shares.

of

remuneration

(54)

Set

Section
the

113

auditors
the

out
of

the

directions

?
and

powers

Companies

contained

in

of

duties

auditors

under
and

(Consolidation) Act, 1908,

clause
with
regard to

the

that

Auditor's

Report.
(55) Having completed the audit
Sheet, and having found
everything

your

report

to

the

of
in

shareholders

in

Companies (Consolidation) Act, 1908.

the requirements of
are
(56) What
Act,
form

of

Summary
(57) A
1908

to

1908,

Balance

with

Sheet

reference

required

company's
order, give

to

accordance

the

to
be

Balance

of
copy
the
with

Companies

the

dation)
(Consoliin

statement

filed with

the

the

Annual

company
1917, has

registered

under

shares

for

issued

the
the

Companies
purpose

of

Acts,

raising

196

PRINCIPLES

THE

to

money

the

will

not

which

works,
The

defray

directors

interest
but

take

directors

the

certify the

to

agree

interest

such

treat

must

against the Profit and Loss Account,

as
capital expenditure. What
steps
to satisfy you,
as
auditor, before you

shares

such

on

of some
of the construction
expenses
income
for three years.
be able to earn
is
desirable
to
it
not
charge
opinion

of

are

AUDITING

OF

without

accounts

comment

in a Register of
particulars have to be entered
(58) What
under
the
Companies (Consolidation) Act, 1908 ^
Mortgages
of a limited
(59) You are appointed auditor on the formation
and

company,

Report

certificate

(60)

take
you
the
Give

When

special power
(61) Is an

how

(64)

shares.

(65)
(66)

do

of

security

be

in

What

be

with

the

for

duties

the

are

of

you
documents

be

"

(68)

1st

dealt

limited

with

in the

and

an

how

auditor

November,

of

accounts

was

company

in

the

issued

should

this

as

position

?
of

formed

and

under

company

"

be

company's

Debentures

Companies (Consolidation) Act, 1908,

Preliminary and Formation
Expenses,"
same

and

treated

in

item

auditor,

are.

shares

by

Sheet

duties

company

the

the

to

are

of

accounts

refer

the

transfer
"

of

Loan,"

Balance

the

of

fortnight

Books

discount, and.

in the

of which

company

once

auditor

of Association

at

with

an

a
company
understand

you

collateral
shown

be issued
dealt

should

Minute

any

reasons

your
forfeited

"

accounts

What

necessary

the

examine

to

fully what

out

should

How

published

the

of

directors

Set

the

1908, confer
respect ?

this

in

discount

to audit
you
in connection

entries

the

entitled

purposes
Articles

and

The

instruct

(67)

the

good system of
special duty to perform ?

any

auditor

an

the

what

Memorandum

the

for

(Consolidation) Act,

upon
auditor

should

For

(63)

adopted

not

auditor

and, if so, for what

Shares and
Debentures

company,
(62) Can

if so,

to
you
of certificate.

has

Companies

the

give

enable

to

form

company
keeping, has an

account

books

under

steps would

Does

the

examine

to

certifyingthe particularsrequired for the Statutory

What
the Companies (Consolidation) Act, 1908.

of

purpose

instructed

are

respect
and

of

the

should

how

company

incorporated

on

as
1914,
acquire two
private concerns
June, 1914, adopting their trading from that date.
The
1914.
purchases were
completed on the 30th November,
It was
decided
to keep the
of the
businesses
accounts
two
until
the
30th
The
1915.
net
separate
June,
profitsat that
date were
found
to be "2,100 and
"3,600 respectively for the

on

the

to

30th

You
year.
dividend

of

in

ordinary

are

asked

they are
paying on
shares.

to

advise

the

directors

as

to

the

amount

tions,
justified,apart from financial consideraof
total
company's
capital
"50,000 in

the

197

APPENDIX

What

(69)

In

points for
auditing

debited

find
Fees

(70)
consult

their

and

which

Loss

you
The

directors

of

to the

The

For

annum.

per

business

considerable

paid

dividends
had

June, 1914, it
profits. During the

30th
fund

year

made

up

directors

dividend

the

at

of

connection

shareholders

Preference

duty

regard
"

"

shares

10,000
35,000

called

to

shares, upon

up,

been

resolve

to

declared

(76)

strength

pay
that

therefore,
In

been
the

of

Statement

Point

surplus.

the

when

How

should
with

dealt

be

the

by

be

capital
vendors

the

10s. per

2s. 6d. per

400 shares
share

company

as

as

public
share.

only
have

it should

in

with

dealt

has

of

the

"50,000

fully paid.
and

have

Of

these,

paid
unpaid

been

calls

appear

in

the

Sheet.

directors

the

to

of

extent

which

Balance

shareholders
on

in

is meant
?
"

dividend

subscribed

the

what

forfeited, and

5s. per share.

the
capital of

published
(75) The

allotted

were

up

have

and,

this

of

company

were

shares

400

State

usual

auditor

the

on

dividends

Preference

of the

accounts

to

as

Cumulative

Shares,

should
dividends
unclaimed
(73) How
Sheets
of a company
?
yearly Balance
has a nominal
(74) A limited company
in "1 Ordinary Shares.

of

their

otherwise,

(ifany) devolving

Preference

to

Cumulative

"

of

been

accounts

July, 1915,

1st

therewith.

(72) With
they are
the

On

6 per cent,
per annum.
the
to
correctness, or

as

the

the

until

ascertained

of

rate

views

and

the

to

profits
leaving

no

absorbed,

was

At

undivided

of

June, 1915,

following September.

paid

your

arrears

the

fund

accumulative

an

made, and the accumulated

small
not
deficit,but this was

action,

an

shareholders.

Ordinary

to

were

Give

Dividend.

forming

carried on
years the company
its Preference
dividends
and

ended

the

auditor

are

you
Interim

an

in

several

successfully and

30th

ID

of

payment

How

opinion,
guide you
before
would
advising.
require
you
of
is a limited
Bulgarian Oil Company
company,
is
divided
and
Preference
into
capital
Ordinary
of 6 per
latter
dividend
cumulative
a
carrying

the

were

6d."

is correct

this charge
for which
company

company,
you
"
Directors'

17s.

"653

information

Shares, the

Account,

travelling expenses,

regard
you
would
the points which

(71)

also

Profit

involve

this
limited

satisfyyourself that

what

cent,

of

accounts

with

State
and

would

the

the

to

and

would

consideration

of

dividend

out
such

paid
case

the

trading company
present to their
and
of Receipts
only,
Payments
shown
this
on
statement,
a
surplus
of the
absorbing nearly the whole
risk they run
of its being eventually

dividend

not

been

earned

and

has,

of

out
of

has

capital.
newly formed

company,

set

out

in

198

the

detail

which

to

extent

AUDITING

OF

PRINCIPLES

THE

would

you

check

issue

the

of

shares.

(77)

company
being redeemable
create

to

debentures
be

end

the

(78)

and

premium.

the
in the

what

commission

pay

to

(79)

Is

stated

It is often

(80)
Capital."

dividends

What

(82)

(83)
with

the

the
Is

(84)
revenue

dividend

bad

of

paid

out

how

can

what
of

is the

and

plant

pay

of

position

premium,
and

is it

dividends

the

dealt

be

arrears

lost

replace
dividends

State

that,
you
their fees,

draw

to

of

out

fully the

informed

intend

not

capital

?
of

the

in

affairs

trust

company

earned

has

company
How
dividend.

usual

of a
directors
(87) The
capitalat a premium.

enough

should

auditing

bound

company,

wasting

dividends
the

assets

out

Board

out

of

the

have

to

revenue,
profitsof

to

show

the

of

the

aid

of

annually

in

to

are,

for

and
the

advised

received
premiums
decided
therefore,
liabilities side

They
provide

of

been

limited

company,

issued

it

deal

you

annual

the

accounts

of

and

such

of the Investments

considerably,while

this

that

been

pay

the

company

adopt

you
value

the

profitsto
should

declare

trade, they did

market

to

of the

of

a
company
bound
to

can

would

fallen

with

of

answer.
your
the
directors

The

income

have

depreciation

how

Shares,

accounts

course

(86)

the

purposes
sufficient

not

are

company
before
it

(85) If
owing to

of such

his duties

are

issuing shares at a
company
in the accounts,
be treated

for

reason

what

Dividends

by this statement,
capital ?
manufacturing company,

premium

Preference

in

what

of

event

If there

the

bound

for

available

should

how

and

to
scribing
sub-

of

out

In the

should

how

repaid ?

company
of his

is meant

be

machinery

of

position at

been
a

consideration

in

"

that

so
paid
of a
(81) In the case
legal position as regards

has

have

to work

in this connection,

company

on

debentures

for

the

transactions

wasting property
the depreciation
to meet
Sinking Fund
auditor
is the legal position of an
what

set

of

these

will be the

is it lawful

formed

company

apart a
property, and
a

should
what

person

any

of

repayment

or
procuring subscriptions for shares, and
?
in the accounts
be dealt with
payments

such

to

the

when

circumstances

It is decided

105.

the

for

How
and

accounts,

period

of the
In

to

at

years

provide

Sinking

Fund

with

dealt

of ten

end

at the

debentures

such

"40,000 debentures,

issues

Revenue
the
Balance

under

the constitution

depreciation
only entitled

You
company.
that they cannot
and

Account,
amount

as

Sheet, and

depreciation

of

have

by shares,
in

respect

to

declare

carry

they

separate

apply

leaseholds.

told

are

the

have,

item

on

one-tenth
What

is

199

APPENDIX

duty

your

auditor

as

in

these

circumstances

Give

your

reasons.

Are

(88)

capital

for

available

profits

distribution

as

dividend?
auditor
(89) Is an
personally liable if it is subsequently
he has certified are
false or fraudulent?
proved that the accounts
An
has
built
new
(90)
a
engineering company
workshop
and
lathes.
A
new
equipped it with
portion of the work
has
been
done
and
a
by the company's own
portion by
men,

outside

increased

has

engine

been

sold

State
that

The

addition

steam

power,

contractors.

provide

to

the

needful

it

old

and,

would

you

require,

Buildings

to

and

correct,

were

been

charged

rendered

consequently, an
replaced by a larger one

evidence

amounts

Account

and

what

has

how

the

Account
of

cost

should
be dealt with.
power
A
limited
has removed
(91)
company

chased.
pur-

auditor,

as

and

Plant

additional

the

steam

works

which
of

have
the

portion
"14,000, has
The
value

of

has

above-named

previous
State

from

of

been

plant

balance

an

of

at

loss

on

"3,200.

brought

value

cost

the
The

new

"30,000.

estimated

works

new

sold, showing
and

at

Land,

to

of

of

"1,800.
book

total

profitsfor

forward

the

from

provision for depreciation on the

plant are "4,500, without
taking into account
the
normal
about
are
loss, and
profits in

after

years.
views
your

making

to

as

and

removal

financial

plant,

to the

machinery
including the

previous year,
machinery and

cost

removed

the

year,

the

machinery

been

remainder

the

cost, including Freehold

and

business

its

the

the
loss

of
mode
proper
and
the
on
sale,

considerations,

the

directors

dealing

with

whether,

would

be

the

apart

justified

in

declaring a dividend.
(92) As regards the legal liabilities of auditors, is there any
difference
between
auditor
the position of an
to a partnership,
and
auditor
Acts ?
an
the Companies
appointed under
To
is
auditor
what
extent
an
(93)
responsible for the
valuation

of

the

Stock-in-Trade

for a
manufacturing concern
of past years
the sales have
equalled the average
year in which
You
reduction
show
considerable
are
on
a
preceding years.
for
the
the
asked
reasons
to
to investigate and
partners
report
in
this reduction
profits.
the
what
State
are
give attention,
points to which
"'"."-.'.;
you would
would
them.
how
and
proceed to investigate
you
the
of a charitable
In
institution,
accounts
auditing
(95)
who
is
authorised
is
to
where
a
employed,
paid secretary
and
and
collect
subscriptions,
give receipts for donations

(94)

what

The

trading

and

information

certifyingthe
the

profitsof

Annual

subscriptions

and

evidence

Accounts,
donations

would
to
had

you

require

before

satisfy yourself that all

properly accounted

been

200

PRINCIPLES

THE

for, and

what

safeguards

company

desirous

OF

AUDITING

would

to

suggest

you

ensure

this?
A

(96)

company

Sheet

Net

of

cost

Discount

of

the

up

materials

as

of

the

work

follows

which

the

circumstances,

out

obtains

premises,

lowest

by
premises figure in

to

made

thereon

builders, the

carry
additional

the

"4,000,

at

its

extending

from

decide

staff, and

own

work

consideration

On

"4,000.
of the

the

for

estimates

of

directors
of their

means

their

Balance

"

purchased

transferred

is

1,300
Interest

to

and

Discount

Account
Labour

30

erection

on

2,240

Managing director's supervision (part of

Proportion of office expenses
Interest
on
outlay to date of completion
Profit, transferred

Profit

to

Loss

and

his annual

salary)

100
50
40

Account

240

"4,000
What

view

of the

various

(97)
find

should
items

involved

In

examining
following item

the

auditor

an

the

take

of this

transaction

and

Cash

Book
the

among

of Smith

payments

Brown,

you

"

1913.
20

Aug.
The

receipt

reads

For

the

on

follows

as

"

Jones

Co., for coal

file

corresponding

in

"42

order

10

this

to

item

"

MR.

A.

coal

supplied

WILLIAMS.

Dr.

to

Received

31st

July.

31st

JONES

to

1913
.

"42

August,

1913,

With

thanks,

(Stamp)

ft Co.
10

J. ROBINS.
In

what

voucher

(98)
Ledger

In

examining

Accounts

features
the

particulars does

this

appear

to

be

insufficient

an

mere

examples

of each

account

arithmetical
of

list of

Debtors

and

Creditors

with

the

for the

error

or

of a Balance
Sheet, to what
purposes
should
you pay attention, apart from
correctness
of the extractions
?
Give
fraud
which
be
detected
in
this
may

process.
" Co. keep all Bills Receivable
(99) Blank
maturity, and then pay them into the Bank

until
On

30th

31st

July, when

June,

it appears

you

are

that

examining
the

actual

the

in

their

Balance

bills in

hands

for collection.

the

Sheet
cash

of
box

INDEX
and

ACCOUNTANCY

Automatic

Auditing,

BAD

Work,

Additions,

Checking

Adjustment

of

Tills, 35

between,

Difference

Doubtful

and

15

of,

Figures,
counts,
Ac-

Nominal

Balance

14,

Sheet,
Audit

63

55

Debts,
26

58

of,

Definition

20

Advice,
Allotment

of

Analysis

Cash

Annuity

Banker's

134

Allotment

Arrears

of

Book

Preference

of

144

Association,
of, 69,

Verification

75,

37,

24,

135

52

81
51

81

Debts,

46

Books,
23,
Bought
Day
Ledgers, 24, 53
71
Value,
Break-up
138
Brokerage,

162

Valuation

Assets,

62

60,

Accounts,

32

Book,

Receivable,
Book,

125

Dividends,
Articles

of

Auditors

Cumulative

of

Balance,

of

133
Banking
Company,
Bills
24,
Book,
Payable

146

Shares,

for

Certificate

Pass

Book,

146

Applications
Appointment
Company,
Appropriation

of,

33

113

and

Balance,

66

Verification

77

Summary,

System,

Application

Bank

28

27

and

List

Annual

object of, 67
of, 65
Preparation
of
Books,
22,
Balancing

Book,

Ledgers,

of

Main

14

Alterations,

66

of,

36

from,
Receipts
147
Letter,

Agents,

75

of,

Audit,
,

167

Wasting,

CALLING
Calls

Banking
Commencement

of,

133

Company,

Company,

15

Continuous,

in

Advance,
of

and

Carts

29

140

170
167

Profits,
10

Internal,

157

Vouchers,

Expenditure,

Losses,

64

Fee,

156

Paid

Capital

176

125,

Arrear,

Cancellation

11

14

Back,
in

98

Vans,

Main

objects

of
,

Share

Balance,

147

Books,

Partial, 18
Periodical,

Cash

of,

Primary
Object
12
Programme,

148
Transfer,
Auditor,
Company,

of,

Received

Sales,

Position
Legal
Qualifications

Auditor's

176

of,

176

Certificate,

Liability

as

19

of,

Commencement

Third

Commission,

for

Report,

neglect,

178

129

Form

of,

35

35

of

22
15

Postings,

22

Audit,

new

Errors

of,

36
Received,
138
etc.,
Underwriting,
Annual
of,
Summary
Company,
Commissions

178

Parties,

37

11

137

regards

Credits,
Debits, 33
from
Debtors,

Castings, Checking,
Additions,
Checking
Castings and

125,

77

30

Vouching

15

22,

Book,

44,

Checking,

134

132

203

204

INDEX

Company, Application

for

Shares

125

of,

Statutory

of,

Report

Summary
(Annual) of, 134
Underwriting Commissions

Auditors

of

Appointment

Company,
136

in, 146

Association

of

Articles

of,

of. 138

Audit

"

of, 125,
of, 6, 17,

Auditor
,

125

of,

176

Continuous
and

Powers
,

Duties

Contra

of

129

Banking,
Capital Losses
Profits

Cost

Creditors'

Preference

of, 146. 162

Debentures
of, 81,

Shares
,

101

Directors'

110

Maintenance,
47
Notes,

Credit

of, 170
167
of,

Cumulative

of

90

15
Audits,
39
Accounts,

Copyrights,
133

167

of,

Assets

Wasting
Consignments,
.

Position

Legal

of,

162

176

Dividends

Vouching

144

Statements,

Cumulative

Preference

54

48,

Shares,

146
150

of

Arrears
.

Minute

Book,

Dividends.

162

160
158

Fees,

DEBENTURES

Expenses,
Register of,

Dividends
,

Duties

of

161

of, 129
of, 157

Forfeited

Shares

Interest

paid

Construction,

by,

during

Dividends

of,

161

of

of, 143
Book,
Objects of, 143

Minute

Preference

ations
Associ-

1 1 '2

for

Share

of,

160

of
Desk

Cash

Preliminary

Expenses

of,

Profits

available

for

Differences

Profits

poration,
Incor-

to

155

Book.

Directors,
Discount

Prospectus of, 146

Register of Directors

of,
Debentures,
Ticks, 13
36, 160

on

Dividends,

142

160

Register

Distinctive

of,

25

Balancing,
Expenses. 159

Minute

of, prior

3, 25

in

Fees, 158

164

Assets.

of

Directors'

Dividend,

170

Machinery,

35
Book,
Errors,

Detection

154

of,

and

Wasting

167
dends
Divi-

161

off.

Writing

Ill
of Plant

141,

System,

Methods
,

Memorandum
,

120

Fund,
-

115

139

Interim

51
35,
Statements,
and
55
Doubtful,
Depreciation, 95, 104. 170
Auditor's
Duties
regards.
as
Bad

Debts,

Auditors

153

Security,

Debtors'

160

of,
Interim,

Collateral

as

142

150

81.

159

Arrears

142
150

Cumulative

of

of

Members

of,

"

of

"

Mortgages

141

Preference,

by.

162

Interim,

161

142,

150

Remuneration
,

of

Auditors

Profits
.

Share

Shares,
for,

available

of, 128
,

Preference

on

Books

of, 147
Capital of, 145
Certificates
of, 81
of, 120, 151
Sinking funds
Statutory Books
of, 141

Unpaid,
Vouching,

Dockets,

Drawings,
Duties

of

161

164

162
162

44

40
Auditors

Acts,

129

under

panies
Com-

205

INDEX

ENDORSED

Cheques,

Errors

41

in
of

Calculations,
4
Commission,

of

Omission,

of

JOURNAL,

23, 52

LAND

Buildings, 40,
Property, 99

14

Erasures,

Principle,
Questions, 191
of Investigations, 9

Decisions

Examination

Fictitious
Final

of Accounts,
7
Payments,

Position

Fixed

Statement

of,

System,

Floating Assets,
Fluctuations

100,

135

MAINTENANCE

111

Managing
Market

Assets,

157

Shares,

Freehold

Register of, 141

of Association,

Property, 99
and
Fittings,

Misappropriation, 7
Miscellaneous'
Receipts, 36
41
Missing Vouchers,
and
Mortgages
Charges, Regis-

117
Reserves,
46
Book,

Goods

Inwards

90

Consignment,

on

Outwards
101

Grouping

Items

NEGLECT,
in

Accounts,

59

Liability

Horses,

98

Auditor

of

178

for,
Nominal

HARNESS,

150

of, 142,

ter

50

Book,

Goodwill,

of

Minute
97

143

13
Work,
Book, 141, 160

Method

GENERAL

110

ation,
Remuner-

71

Value,

Memorandum

Furniture

37

Reserves,

Members,

Forfeited

153

159
of

Value

104

Frauds,

176

146

Director's

70

in

Auditors,

of

Regret,

Interest,
Tools, 97

Loose

Instalment

of

Loans,

58

Accounts,
Assets, 70

Auditors'

to

as

Liabilities, 179
Letter

FALSIFICATION

98

64

Legal Charges,

Extent

and

Leasehold

63

Accounts,

Notes

13

during Audit,

97

OBJECTS
IMPERSONAL

Ledger,
Postings,

Imprest

System,

Income

and

23

Balances,
46
Books,
Outstandings, 32,

80

Policy,
under,

37

PARTNER'S

113

Pass

Drawings,

during Construction,
on
Deposit, 36

139

101

Paying-in Book,
Slips,

37

Payable, 64
161
Interim
Dividends,
Internal
Checks, 9, 30
of surplus
Investment
General

of

Payment

Invoices, 46

Checking,
of, 37

34

Interest

to

holders
Share-

Construction,

139

32,

Payments,
of

Assets

Reserve,

in
Pencil

41,

78

Figures,

Periodical

Petty

39

65

Advance,
14

Statements,

Percentage
Sale

34

during

118

Investments,

40

32

Book,

Patents,

Loans,

63

Amounts

36

representing

27

Opening

Order

System,

on

Memorandum,

107
Obsolescence,
Errors
of, 4
Omission,

43

Stocks,

received

of

Clause

143

Expenditure

Insurance

Interest,

58

61

Account,
Inscribed

24,

Audit,

Cash,

15

43

Book,

23

62,

89

206

INDEX

40,
Machinery,
Depreciation

and

Plant

and

Returns

42

Cards,

Piece-work

23

Books,
of Assets,

94

of,

Re-valuation
Routine

170

114

Checking.

108

life of,

Working
Register, 96,

49, 51

Allowances,

SALARIES

44

Sales

23,

Book,

Postage

Postings, Checking,

22

and

of

Powers

Book, 43. 64
Day Books, 23, 49
Inflation
of, 50

109

Duties

Ledgers. 24.

Auditors,

Omission

129

of, 50

Share

Preference

Expenses,

Preliminary
Premium

available

Profits

Regards.
Self -balancing Ledgers.
Books.

Audit

Capital.

145

Share

164

prior

to

Prospectus,

146

Position

as

Account,
58, 62
for
Dividend,

Loss

and

Profit

Book,

122

Auditor's

24

Ledger,

Cash

of

Reserves,

Secret

38

Accounts,

Audit

of

51

Allowances.
Books,

31

151

of, 5

Principle, Errors
Private

Scheme

154

Debentures,

on

and
Desk

Salesmen's

145

Shares,

Returns

161

Dividends,

54

Incorporation,

10,

22,

of. 147

Certificates. 81

155

Shareholders'

for

Provision

Outstanding

Liabilities,63
Purchase
of Business,

QUALIFICATIONS
Questions, 191
RECEIPT

Issue

19

Auditor,

of

Reconciliation

Instalment

Meetings .and Report,

System,

and

Mortgages

111

Checking. 87
Subscriptions. 37
134
Annual,
Summary,
Receivable,
Sundry Amounts
Expenses, 64
.

Charges,

142, 150
Remuneration

of

TABLE

36

by

Reserves,

Trading
Transfer

Accounts,
60, 61
149
Audit,

Journal,

118

Travellers'

23

Books,

35. 43

Commissions
Position

regards,

as

and

Expenses.

43, 64

122

for

Debts, 56
Secret,
,

132

136

116

Auditor's
Reserves

Institute

Accountants,

Funds,

144

97

Tools,

Statutory,

Reserve

A,

Ticks, Distinctive, 13. 29

Time
41
Recording,

Report, 18, 129

recommended

65

of

Auditor

128

Rent-Roll, 36
Rents
Receivable,

136

Stock-in-Trade. 82
Stock
Sheets. 24, 87

Directors, 142
of Members,
141

of Chartered

29

32,

of

Company,

120. 151
Sinking Funds.
for
Vouchers.
Special Tick
116
Specific Reserves.
34
Splitting Cheques.

39

Statement,

33

of

of, 157
146

Receipts, 32, 37
on
Cheques,

Reducing
Register

of,

160

Book,

Statements, Creditors', 48, 54

Debtors'. Si
141
Statutory Books,

34

Books,

Shares,
,

19

Minute

Forfeiture

Bad

and

Doubtful

UNDERWRITING
Undiscovered

122

Unpaid

Commissions,
Differences,

Dividends,

162

25

13

207

INDEX

of Assets,

VALUATION

69, 75, 135

Position,

Auditor's
,

41

WAGES,
and

Salaries

73, 75,
Verification

of Assets,

side

Debit

side

Outstanding, 63
System, 41
Wasting Assets, 167

of

Cash

Book,

Working

of

Cash

Book,

Work

37

Printed,

life

of

162

by Sir

Isaac

Pitman
v"

""

Sons, Ltd., Bath, England

(1524)

and

Plant

Machinery, 108
in Progress, 91
Writing off Depreciation,

33

Dividends,

42,

44

29

Credit

24

43

40

Missing,
Cash,
Petty

Vouchers,

Vouching,

75

Book,

Checking,

111

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