a special statutory provision to the contrary obtains, should be regulated at all events to some extent-by the value of such

assets.

It may, however, be added that there are certain classes of undertakings to which the application of the Double Account system is not inappropriate, e.g., tramway companies and the

like.

In practice, assets may generally be divided into two classes: (1) Those with which business is carried on, and (2) those in which business is carried on; the former may be named FIXED ASSETS, the latter FLOATING ASSETS.

VALUATION OF FIXED ASSETS.-The points to be borne in mind here are that wasting may reduce their value, and that fluctuation may increase or reduce their value. So far as wasting is concerned, inasmuch as it has directly contributed to the profit earned, it is clearly an expense with which profit may be fairly charged. The only question is "How?" which will be considered in full under the head of DEPRECIATION. On the other hand, fluctuation is something altogether apart from trading profit and loss, being merely the accidental variation (owing to external causes) in the value of certain property owned, but not traded in: to carry the amount of such variation to Profit and Loss Account would be to disturb and obscure the results of actual trading, and so render statistical comparison difficult, if not impossible. On no account, therefore, should the results of fluctuations affect the Profit and Loss Account. Whether or not it is desirable that such fluctuations should be revealed by the accounts at all will be fully considered under the head of SECRET RESERVES. The actual cost of acquiring fixed assets (e.g., stamps, conveyances, registration fees, &c.) is usually capitalised. This is not unreasonable, as such expenses are clearly an integral part of the cost price of such assets.

VALUATION OF FLOATING ASSETS.-It being the essential feature of these assets that the whole aim of the undertaking is to convert or be able to convert

them into cash at the earliest possible opportunity, the element of immediate realisation is an essential factor in their value. The only point to remember is that, while a manufacturing profit is earned only when the manufacture is completed, a trading profit is only made when the sale is completed. Neither profit must be anticipated, but it does not appear to be invariably essential that manufacturing profit should be held over until a sale has been effected. It may be added that, where a manufacture consists of several distinct processes, and separate accounts are kept of the manufacturing profit earned under each process, there seems to be no great objection to each process being considered as a separate manufacture.

With regard to what is a trading profit, a most ingenious argument was once advanced by Sir RICHARD WEBSTER before the late Mr. Justice FIELD (in re Horden v. Faulkner and others), in which it was contended that the most scientifically correct method of valuing a stock-in-trade was to take it at selling prices, less the average trade profit; it being suggested that any profit realised in excess of the average was in reality a profit on buying, not on selling; and any profit realised less than the average a corresponding loss on buying. The argument passed muster at the time, appears to be plausible, and indicates a system that would doubtless prove very convenient in practice; but, unless the profit on different articles was very uniform, it would hardly be a safe one to adopt.

RESPONSIBILITY FOR VALUES.-A much-debated point is the extent of responsibility incurred by the Auditor in relation to the values set upon the assets of a company in the published accounts of the directors. The opinion arrived at in the Court of Appeal in The London and General Bank case upon this most important point appears to be that the Auditor incurs no responsibility whatever so long as, after exercising reasonable care and diligence, he has honestly arrived at the opinion that the accounts are correct. It will be seen, however, that this decision in no way commits itself to the expression of any particular opinion as to the mode of valuation to be adopted. In this latter respect it is interesting to note that the

draft Bill, recommended by the Departmental Committee appointed to consider the question of Company Law Amendment by the Board of Trade in November 1894, requires that the Balance Sheet of every company shall show (inter alia) "whether the assets are taken at cost price, or by valuation, or on what other basis they are stated, and whether any, and if so what, amount or percentage has been written off, and what other provision, if any, has been made for depreciation." At the time of writing, this recommendation has not yet become law, but it is a very excellent practice to follow notwithstanding, and has for many years past been adopted by some leading accountants.

VERIFYING

EXISTENCE OF ASSETS. - Having settled a basis of valuation, the next thing would appear to be to obtain evidence of the existence of the assets enumerated in the Balance Sheet.

The evidence necessary in each class of assets would be as follows:

LAND AND BUILDINGS: The title deeds of the property. Should the property be mortgaged the title deeds will, of course, be in the possession of the mortgagee, and an acknowledgment of this fact should be obtained from him or his solicitor, together with a statement of the amount due. Conversely, the verification of an asset represented by a mortgage is the production of the title deeds and the mortgage deed. In the case of a second mortgage the title deeds will, however, be in the custody of the first mortgagee, and here the Auditor will require to satisfy himself that such first mortgagee has received proper notice of the existence of a second charge.

STOCK-IN-TRADE: The original Stock Sheets, signed by the stock-taker, calculator, checker, and manager. Most accountants would, in addition, consider it essential that the extensions and additions be re-checked by one of their own staff, and, further, require to be satisfied as to the soundness of the principle of valuation adopted.

The Auditor's liability in connection with the valuation placed in the accounts upon the amount of stock-in-trade was considered in The Kingston Cotton Mills case and The Irish Woollen Co. case, which will be more fully dealt with in a subsequent chapter. It may be pointed out at this stage, however, that the general effect of these decisions seems to be that, where the circumstances of the case are not such as to arouse the suspicions of an ordinarily capable and diligent auditor, he is justified in relying upon the valuation of stock in-trade which has been submitted to him and certified to him by the Managing Director. In the first-named case, however, the Auditors had taken the precaution to state in their certificate that they accepted no responsibility for the valuation of the stock "which had been certified to them by the Managing Director," and as a matter of prudence it would no doubt be well for Auditors to always add this qualification. It may be added, however, that such a qualification as this would certainly not appear to save the Auditor, where he had reasonable grounds for doubting the valuation itself; whenever his suspicions have been aroused, it is absolutely necessary that the Auditor should thresh the matter out to the bottom.

INVESTMENTS IN STOCKS AND SHARES: The Auditor will require to have produced to him the scrip, certificate, bond, or other document, proving that the ownership of the investment in question is vested in his clients; and he should also require production of the broker's note, with a view to verifying the cost price thereof. In the case of Consols and other inscribed stocks, no such certificate of ownership is furnished, and in these cases it becomes necessary to obtain-from the Bank of England in the case of Consols, or the bank authorised to register the stock in other cases-a certificate that, upon the date of the accounts, such stock stood registered (or inscribed) in the names of the Auditor's clients. It is important to notice the date of such certificate, as it is not in itself a proof of ownership, but merely a record dealing with that particular date. alone, and it differs from an ordinary certificate, or scrip, in that, in the event of a subsequent sale, it does not have to be given up.

Funds deposited as security might be taken on the certificate of responsible persons.

It may be added that if, when examined, the securities are securely sealed up in packages, it is not necessary at subsequent audits to re-examine them in detail, if the seals remain unbroken.

BOOK DEBTS: Sold Ledger balances, perhaps verified by circular to debtors (see also Bad and Doubtful Debts and Discounts).

PLANT, MACHINERY, FIXTURES, &c.: Certified inventory, which should be compared with the previous inventory, and changes noted. Additional items should be compared with invoices, and care taken to see that items sold are credited in account.

BANK BALANCE: Banker's Pass Book verified either by personal visit to Bank or by Banker's certificate of balance.

In practice it will rarely happen that the balance recorded in the Pass Book exactly agrees with the balance in the Cash Book, and a Reconciliation Account has therefore to be prepared upon the following lines:

Where practicable it is desirable that the Auditor should see that the various adjustments which constitute the difference between the Pass Book Balance and the Cash Book Balance