seded by special articles of association, it will be seen that this clause has no bearing, except upon those companies which are either registered without special articles or include in their articles a clause similar to article 73 of Table "A." Leaving upon one side the most usual source of profit of this description -viz., the sale of a portion of the company's undertakingwhich has already been dealt with, the most ordinary classes of profits to come under this heading would be premiums received upon shares or debentures, and cash which has been paid up upon shares forfeited. The usual custom with both these sources of profits is to credit the amount to Reserve Fund, and it would be difficult to improve upon this. But, at the same time, it may be pointed out that in the absence of special articles, and in the absence of an article specially so providing -there is nothing to prevent a company transferring the whole, or a portion, of its Reserve Fund to Profit and Loss Account, and to declaring a dividend out of the increased balance so available. However, if this course be adopted, the attention of the shareholders is prominently drawn to the circumstances; and, if that be done, it seems quite clear that the Auditor would be in no way further responsible. As has already been indicated, however, in cases of doubt he would be well advised to draw attention to the exact position of affairs, with a view to escaping any risk of liability.

REVENUE EXPENSES.-Turning now to the expenses recorded upon the debit side of the Profit and Loss Account, these may be conveniently classified under the following headings:

(a) Expenses that are properly chargeable to the period under review.

(b) Expenses which may properly be spread over a term of years.

(c) Undisclosed and contingent liabilities.

(d) Depreciation.

(c) Losses arising by fluctuation of floating assets.

(f) Losses arising by fluctuation of fixed assets.

(g) Reserves for losses.

(h) Preliminary expenses.

With regard to (a), it is obvious that these amounts should all be charged up against the current year's revenue, and the steps which have been indicated in the preceding chapters should be taken to see that everything coming under this heading has been so charged.

(b) It should be remembered that the onus rests upon the directors and Auditor to justify this class of expenditure not being included as a charge against the current profits, and therefore that the Auditor must satisfy himself as to the sufficiency of the reasons advanced for its exclusion before passing the accounts. Examples of items which may be properly held in suspense are dead rents paid in excess of royalties by collieries and similar undertakings, where there is a reasonable ground for supposing that they can be redeemed out of future earnings; and also special expenditure in the way of advertising some new venture or undertaking, which, it is estimated, need not be maintained after it has been once established. With regard to the latter, however, especial care is necessary with a view to seeing that a sufficient sum is written off annually, as it not infrequently happens that the expectations of the managers are not realised, and that the permanent cost of advertising is far more than had been anticipated.

It is unnecessary to add anything upon either (c) or (d) to what has already been said in the preceding chapters, where both matters have already been very fully dealt with.

Passing on to (e), it may be pointed out that, inasmuch as the definition of " floating assets is that class of assets which it is the object of the undertaking to convert with all convenient speed into cash, it is obvious that, so far as possible, nothing in excess of the actual current market value should be attached thereto upon the face of any Balance Sheet. Special circumstances may occasionally modify this, where at the

moment of balancing there has been a wholly unexpected and temporary fall in value which has been recovered before the certifying of the accounts. It is probable, however, that it is only in connection with the treatment of foreign exchanges that this principle can generally be safely applied.

(f) Concerning this item, it is thought that, so long as the permanent earning capacity of the fixed asset has not diminished, it is quite unnecessary for any provision to be set aside, with a view to making good a loss which may have occurred by reason of the fluctuation of the value of such assets. Certainly the legal decisions which have been given under similar circumstances would appear to support this view. It is important to remember, however, that, if the views already expressed with regard to fluctuations upwards in fixed assets have been disregarded, and credit has been taken for such fluctuations as a profit, then a fortiori is it necessary that fluctuations downwards should be given effect to.

(g) With regard to reserves for losses, as has already been pointed out, it is very important that ample reserves should be made to meet all reasonable contingencies before allocating profit for purposes of payment of dividend. The only thing that appears to call for attention here is that in some cases— although, no doubt, improperly-what is really a reserve against loss is described upon the face of a Balance Sheet as a "Reserve Fund"; under no circumstances, however, must such co-called Reserve Fund be encroached upon for the purpose of equalising dividends, unless the Auditor is satisfied that a sufficient balance remains to meet any reasonable expectation of loss that may occur.

(h) Under almost all circumstances it will be found usual to write off a portion of the amount incurred by a company in preliminary expenses, say, one-third or one-fifth, in each year's accounts until the amount is wholly extinguished. There is no compulsion, however, that this course should be adopted, although it is certainly one to be recommended; and it may be added that, should the first year's accounts show a loss, it is distinctly preferable not to obscure the actual facts of the case

by increasing such loss by writing off any portion of the preliminary expenses. It is, of course, impossible to write them off except out of profits, and the attempt should, therefore, not be made upon paper. Per contra, where there is a Reserve Fund and the accounts for the current period show a loss, it is thought that a transfer of such loss should be made to the debit of Reserve Fund, so far as the latter is sufficient for the purpose, it being a contradiction in terms to state a loss upon one side of the Balance Sheet, and a Reserve Fund (i.e., undivided profits) upon the other side.

CHAPTER IX

THE ATTITUDE OF THE AUDITOR.

IN the foregoing chapters the object, extent, and manner of conducting an audit have been dealt with, and also-so far as the space at disposal permitted, and the general scope of this work appeared to justify—such modifications of, and departures from, the normal plan as are necessary to adapt it to the peculiar requirements of any individual audit with which the reader is likely to be concerned. The position of the Auditor himself will now be more particularly considered.

WHO MAY BE AN AUDITOR.-Auditors may, for general purposes, be divided into three classes:

(a) Amateur Auditors.

(b) Professional Auditors.

(c) Official Auditors.

It will be well to say a few words about each class before proceeding further.

He

AMATEUR AUDITORS are a class to whom the author has no great desire to express either affection or respect. has seen too much of their shortcomings, and of the inexpressible misery and distress that has been caused by their scandalous incompetency, to feel any desire to deal gently with their failings. Auditing is much too serious a matter to be trifled with; the evil that can be wrought by an incompetent Auditor is hardly less vital-and is infinitely more extensivethan that which may be exercised by an unqualified medical