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PRO FORMA BALANCE SHEET OF A MANUFACTURING COMPANY.

(SINGLE ACCOUNT SYSTEM.)

BALANCE SHEET, 31ST DECEMBER 1892.

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CONCLUSION.-In considering these matters, however, it must be borne in mind that it is very exceptional for the form in which accounts are stated to be actually under the control of the Auditor. As a rule, articles of association provide that the accounts shall be rendered in such form as the directors shall think fit, and in such cases it is, of course, impossible for the Auditor to dictate as to the precise form to be adopted. This, however, does not release him from the responsibility of judging as to the fitness of the form in which the accounts are rendered by the directors. In this respect he is placed in a position and furnished with information which is withheld from the general body of the shareholders, for the express purpose of satisfying himself that the accounts submitted by the directors to the shareholders are such as will reasonably disclose the position of the company. Considerations with regard to the form which the accounts should take are frequently of a nature which the Auditor must of necessity weigh for himself; for, inasmuch as the shareholders have no knowledge of the transactions or position of the company other than that which they gain from a perusal of the directors' accounts and the Auditor's report, it stands to reason that if the accounts do not sufficiently disclose these things it may frequently happen that the shareholders themselves would have no reason to suspect that the accounts were not all that they should be. It therefore follows that, although the Auditor does not have the drafting of a company's accounts, it is necessary for him in all cases to consider the form in which they are submitted for his approval, and not merely to content himself with an examination of their technical correctness. It has been stated that the accounts submitted to the shareholders, being the accounts of the directors, they, and they only, are responsible to the shareholders for the form. This is true to the extent that the Auditor has no power to compel the directors to modify the form of their accounts, but it is not true in the sense that if the accounts submitted are, so far as they go, correct, the Auditor is under no responsibility to specially report in such cases as they are insufficient to enable anyone examining them to obtain a correct idea of the com

pany's position. Were this the case it would indeed be difficult to see in what respect the shareholders gained by an audit of their accounts, for it is obvious that it would be possible to conceal almost anything in the shape of fraud or unjustifiable extravagance. The shareholders have, however, a clear right to such accounts as will enable them from time to time to judge of the value of their investment; and it is for the purpose of making the accounts reliable for this purpose that an Auditor is appointed; and while there rests with him the serious responsibility of concealing such matters of internal detail as would, if divulged, tend to damage the position of the business, yet, on the other hand, he must not fail to remember that it is the shareholders, and not the directors, who are the masters of the fortune of the company, and that (except in matters of internal detail) they have an indisputable right to the fullest and clearest information.

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CHAPTER VIII.

WHAT ARE PROFITS?

IN the preceding chapters most of the points arising in the course of an audit, with a view to ascertaining that all due precautions have been taken to test the accuracy of accounts before certifying them, have been considered in some detail; but it is advisable to review some of these various questions from the point of view of considering whether or not the amount of profit stated upon the face of the accounts is actually available for dividend. It is most important to remember in this connection, however, that until an undertaking has been actually wound up, any statement as to the profits earned is merely an estimate, or a statement of opinion and not a question of fact.

ADVANTAGES OF DOUBLE ENTRY.-The reader will hardly require to be reminded that, in the case of an ordinary undertaking, the amount of profit available for distribution will be represented on the Balance Sheet by the excess of the assets there disclosed over the liabilities and capital of the undertaking. But it is desirable for the Auditor, in order to make sure of his position, to look at the matter not merely from a Balance Sheet point of view, but, in the first place, to carefully scrutinise the Profit and Loss Account in order to see that no sources of income have been taken credit for unduly, and that all reasonable expenses have been properly debited, and then to compare the profit shown by such Profit and Loss Account with the surplus before mentioned, stated to be available on the face of the Balance Sheet, after scrutinising all the

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