Auditor should critically examine each item. The following may be properly charged to the Preliminary Expense Account, and any others in addition which have been properly expended for the formation and establishment of the Company, viz.: the expense for preparing the Articles of Association, the fee to secure the Charter, Printing, Prospectus, Plans, Account Books, and Brokerage paid to those for selling Stock, etc.

Writing Off Preliminary Expenses.

The expenses incurred in the formation of a Company are usually brought together under the Preliminary Expense Account as just stated, and as it would be unfair towards the business of the first year to charge the whole amount to Loss and Gain, it is customary to write off a proportion, say one-fourth each year for the first four years, at the end of which time the account would thus be extinguished.

Having satisfied himself that the Capital Stock and all the opening entries are correct, the Auditor may then give his attention to the

Cash Book.

The items on the credit side of the Cash Book should be checked with the vouchers or receipts; these vouchers should be critically examined. If cash is paid on account, or to balance an account, the account should be examined to ascertain if the balance is correct; this may prove to agree, yet the account may be a fictitious one. The credits of the account should be checked with the original invoices, which invoices should be marked O.K. by the Buyer and Receiving Clerk. If not satisfied with this, the Auditor should refer to the Order Book and Correspondence.

When money is paid to take up Notes, the signatures on the notes should be partially destroyed, then filed away as a receipt in addition to the check, if paid by check. Every well managed concern should pay all accounts by check and voucher. The statement or invoice should be pasted to the voucher, and when the checks are returned from the bank, they should be attached thereto also. The checks and vouchers should bear the same number, and when they are so kept, a great amount of labor can be saved the Auditor, and will also enable the officers to examine them with very little trouble.

The vouchers should consist of actual receipts, and the Auditor should require the receipts to be produced.

When satisfied that the expenditures have been properly made, and the cash accounted for, the Auditor must then ascertain if the charges have been made against the proper accounts. It is important

to know that all items have been charged to the proper accounts, because if posted to the wrong account the books may not necessarily be out of balance, but it would eventually affect the Assets in the Annual Statement.

The balance of cash in the Bank can easily be compared with the account on the stubs in the Check Book; these balances very seldom agree, as checks drawn may not have been presented for payment. From the Banker's balance deduct the amount of outstanding checks, and the amounts should then agree.

Vouchers, Documents, etc., Carefully Arranged.

The officers of the Company can render the Auditor a great deal of assistance by having all Vouchers and Documents previously arranged in numerical order. By so doing considerable time can be saved, and if any should be found missing, duplicates could be obtained before beginning the Audit. I have long made it a practice not to accept any vouchers, papers, etc., for examination, which are not properly arranged.

Purchase Book.

It is merely mechanical work to audit this book, yet there are points that should have the closest attention, as "Errors of Fraud " are frequently practiced by bookkeepers or others, increasing the credits of some accounts in order that they may pocket the money, and charge it to the account thus increased. Sometimes fictitious accounts are opened for the same purpose.

The amounts in this book can be verified by the original Invoices, Order Book, Letter Book, etc.

Sales Book.

In Mercantile and Manufacturing companies the principal source of profit is derived from Sales, which may be classed under two heads: 1, Cash Sales; 2, Credit Sales.

All Cash Sales should be entered at once in the Cash Book, from whence the entries are examined, which process is so simple that further comment is unnecessary.

Credit Sales should receive the Auditor's most careful attention, as it is from this source that bad and doubtful debts arise.

It is also a simple operation to examine the entries in this book, and it is expecting a great deal to ask an Auditor to examine every item, but if "Errors of Fraud" are sought, every amount must then

be examined. I have detected many false entries made in the Sales Book in this way. Say there would be a charge to a good paying customer of $550, this amount would be changed and posted $450; when the remittance of $550 is received, the customer would be credited $450 which would balance his account; the check or draft would be placed in the cash, and $100 in currency put in the bookkeeper's pocket, thus keeping the cash in balance.

If the Auditor is suspicious of any accounts in this book, after comparing it with the Ledger, the original order should be referred to, also the salesman's ticket. If there is a difference that leads to further suspicions, the Auditor should write the customer for a duplicate of the bill and receipt; these amounts can be verified with the credits; if there is a difference it can be learned from the Banker if such check was deposited on or about such date, thus making it an easy matter to detect. It would be difficult for operations of this kind to be practiced when there are a number of bookkeepers, cashiers, etc., yet the cunning knave is always alert. If the Auditor be capable he will detect and bring the guilty one to justice.

Accounts and Bills Receivable.

The Auditor should go carefully through the list of the Bills Receivable to ascertain whether they have been discounted or are on hand, and if on hand and overdue, whether or not they have been paid, and no credit given. If any have been discounted, they should be carefully listed, for the Company is liable should they not be paid when due.

Regarding the Accounts Receivable, he should notice what time. they were to run; if overdue, why they have not been collected. It is very important that due provision be made periodically for bad and doubtful accounts, otherwise there will appear among the assets accounts that can never be collected. Too many concerns carry their customers accounts as good, and make no provision for bad and doubtful ones, thereby continue to pay good dividends, whereas, if a sufficient amount should be written off for expected loss, no dividends could be paid at

It is practically impossible for any business to be carried on without bad debts being occasionally incurred. An Auditor cannot be expected to be acquainted with, or even to ascertain the financial condition, of those indebted to the Company, but it is a part of his duty to prevent the Company taking credit for full amount of all accounts.

The Auditor should require a list of all those who are indebted to the Company at the date the books were closed. This list should be

classified under three heads, namely: good, doubtful and bad. The amount due from the good ones may be considered worth full value, while the doubtful ones should be regarded as worth 50 to 80 per cent. of face value; the balance 50 or 20 per cent. which is considered doubtful, together with the total of those considered bad, should be treated as shown in Lesson 16, Page 108.

Should there be accrued interest on any of the Bills Receivable or Personal Accounts, Loss and Gain should have credit therefor as shown in Lesson 21, Pages 145 and 146.

Accounts and Bills Payable.

The Auditor should be very critical in examining the Accounts and Bills Payable, to see if there are any outstanding Accounts or Notes that have not been credited, and whether or not the Company owes the Accounts and Bills Payable as shown by the books. If there is accrued interest on the Accounts and Bills Payable, the Auditor should adjust the same as shown in Lesson 21, Pages 145 and 146. Entries of this character, however, pertain to the duties of the bookkeeper, but it is the duty of the Auditor to adjust such matters in his audit if they have been omitted by the bookkeeper.

General Expenses.

Items of General Expense which are not of sufficient importance to require separate Ledger Accounts, are usually included in one General Expense Account. The Auditor should, however, for his own information, examine the principle items, as it may contain some unauthorized payments.

Salary Account.

Under this account is kept the remuneration of the officers, bookkeepers and others on the regular office force. Very often an attempt is made, especially with new companies, to omit certain charges to this account until after the dividend has been declared, thus making a better showing. This is done upon the ground that they have not been paid, that the exact amounts are not known, or have not been agreed upon. This the Auditor should positively refuse to allow, and should defer the audit until the amounts have been ascertained, or a satisfactory estimate has been made and charged.

Wages.

The wages paid to workmen, mechanics, aud others whose remuneration depends upon the quantity of work done, should be kept

separately. In all well regulated establishments, the wages are charged to the particular department to which they belong. Wages, and other costs to manufacture, should be included in the cost price of the article manufactured. The Auditor should see that all wages paid are charged to the proper accounts, else the expense to operate or cost to manufacture will not be accurate.

Commission.

Frequently Traveling Salesmen and other Agents are paid entirely by a commission, or are allowed a commission in addition to their regular salaries, on the amount of business done for the Company. When commission is paid, the amount so allowed should be stated separately and the Auditor should be satisfied that there are no commissions paid or unpaid which are not charged. Neither should he allow commission to be deducted from the sales. Money is often advanced to traveling men or agents to be deducted from commissions expected to be earned. The Auditor will find it a tedious task to ascertain how much of the amounts advanced should be charged. The sales, etc., will have to be carefully examined to determine the amount earned, which amount should then be charged. The balance should be carried as an Asset for the unearned portion of the commission, which should stand in the agent's name.

Rent, Taxes, etc.

Under this heading should be included the rent of offices, grounds, and buildings in which the business of the Company is transacted. When a portion of the premises of which the Company is the lessee is sub-let, the Auditor should see that there are no credits for rents which might have been paid in advance. Only such portion of these payments as are earned should be credited.

Agents' Accounts.

The Auditor should be particular that commission and all other charges which will be allowed to Agents are deducted from their balances and charged, so that the difference only, which is the amount the Company should ultimately receive, is taken credit for among the Assets. Accounts which are considered bad or doubtful should be treated as previously stated.