: (9) A draft Balance Sheet and Profit and Loss Account should be prepared. As has already been pointed out, some of the duties comprised in the foregoing may devolve upon the Auditor in the case of a private firm or trader; but in the case of a company audit it is particularly desirable that these matters should be completed before the Auditor commences his investigation, as it cannot be too strongly impressed upon all concerned that the accounts submitted to the shareholders are not the Auditor's accounts, but the accounts of the directors. CHAPTER III. SPECIAL CONSIDERATIONS IN DIFFERENT In the previous chapters the rules laid down have been of as general a character as possible; but it must not, therefore, be supposed that the audit of every concern is to be carried out on precisely the same lines. The opportunities for fraud will vary widely in concerns of a different character, while the chances of unintentional errors in principle and in detail will likewise vary extensively in different classes of concerns. As has been already intimated, the Auditor who wishes to be of the greatest possible service to his client should avail himself of every opportunity to become practically acquainted with the working of the business, as it will only be when he has some real acquaintance with the matter he is discussing that his opinion upon the accounts of any given business will possess any great weight; for if he has no knowledge of the business carried on it is impossible for him to intelligently criticise the system of accounts that records the transactions effected, and if he has no knowledge of the nature of such transactions it is hardly to be expected that he should be in a position to form any reliable opinion as to the risk that exists. of the transactions not being correctly recorded in the accounts. These remarks will, perhaps, appear trite to many, but so much has been said about Accountants "confining themselves to their own province" that it has become necessary to point out the utter inefficiency of any audit which confines its investigations to an enquiry as to the academical correctness of the bookkeeping. The object of the present chapter is not to supply the reader with such special knowledge concerning each class of undertaking as it may be desirable for him to possess before presuming to certify as to the correctness of its accounts-such a knowledge cannot be altogether imparted by any book, and is beyond the scope (as it is beyond the compass) of the present volume-but in the following paragraphs the reader will find his attention directed to those points most worthy of his consideration in each of the leading classes of accounts he is likely to be called upon to verify. The special opportunities of fraud, and the points upon which an innocent misstatement of facts is most likely to occur, will, so far as possible, claim attention; while in Appendix "E" will be found references to books and papers supplying information that is likely to prove useful to the reader-whether practitioner or student. With these preliminary remarks, the categorical consideration of the subject will be proceeded with. I. COMMERCIAL ACCOUNTS.-(a) MERCHANTS AND WAREHOUSEMEN.-The chief openings for fraud in these accounts are: theft of stock; misstatement of cash sales; fraudulent payment of bogus purchases; misappropriation of moneys received in payment of accounts-such accounts being either left open or written off as bad"; petty theft by the raising of fictitious items of discount allowed on receipts, or interest incurred on payments; and similar matters. Of what may be styled " innocent" errors, the most common are errors of principle in the valuation of stock-in-trade; insufficient depreciation on leases and furniture; omission to allow for outstanding discounts and interest; errors of principle in the valuation of foreign currencies; omission of liability on outstanding expenses, and on bills discounted; insufficient provision for bad debts, &c. There are not many trade details that the Auditor will require to be acquainted with in these accounts, but he will do well to ascertain the terms of payment and discount accorded to, and by, his clients, and to make use of his knowledge continuously. Where the terms vary-and they generally do vary-they should be written in red ink at the head of each account in the Ledger. The Auditor should make himself acquainted with the percentage of profit expected by his clients, and should compare it, both with the actual results, and the rate generally realised by others in the same trade. Stock Accounts can, almost invariably, be kept by merchants and warehousemen; but this is, in practice, only occasionally done-verb. sat. The question of patents or trade marks sometimes arises in these accounts, but the consideration thereof is more appropriately dealt with in a later chapter. (b) MANUFACTURING TRADERS.-Under this heading are intended to be included those manufacturers who ordinarily keep a stock of ready-made articles, and who do not manufacture exclusively (or principally)" to order." Such manufacturers are, clearly, also warehousemen, and consequently the preceding paragraph (a) will apply to the consideration of their accounts; but a few additional precautions are required in connection with their manufacturing departments. The item of wages, in particular, is one requiring the utmost care; and the question of depreciation of plant and machinery will also require a full share of attention. A proper system of "costing" becomes all but essential. It is probable that the Auditor will find some such system in operation; but it is at least equally probable that the actual system employed will be found both unscientific and unreliable. (c) RETAILERS.-RETAILERS WHO GIVE CREDIT in many respects follow upon the same lines as the wholesale houses in the same trade; but the increased number of transactions renders a detailed audit more difficult. It is generally quite impossible to call back all the postings of the Sold Ledger; but the balancing thereof can be checked without difficulty, and must always be done. Where practicable the posting of the cash received may be checked with advantage, and the list of balances should always be compared with the Ledger, and the additions checked. Where the business is very voluminous, the audit of the Sold Ledgers is frequently deputed to some of the counting-house staff; but, in any case, the Auditor should not lose his grip of this department, and should occasionally check the balances himself. To check, say, one or two Ledgers at random each year will have all the moral effect of checking the whole set. Many retail houses supply goods to their own assistants, &c., at reduced rates, and allow credit until the following pay-day. A separate "Assistants' Ledger" should always be kept in these cases, and the Auditor is usually expected to see that the payment of these accounts is not unduly delayed. At every stocktaking he should be careful to ascertain that no amount stands to the debit of an employee who has left. The Bought Ledger is generally of comparatively manageable proportions; consequently it is rarely impossible to check it in toto. In any case the Bought Ledger payments should be checked, both as to postings and vouchers. In a continuous audit it is frequently arranged that the Auditor shall pass all the Bought Ledger statements for payment, and the system has much to recommend it. In addition to seeing that each item on the statements is also in the Ledger, the Auditor should make the Bought Ledger-keeper initial-and SO guarantee the correctness of every statement that is submitted to him. He should also compare the discount deducted with the terms of payment stated at the head of each account in the Ledger. It need hardly be added that this passing of the Bought Ledger statements for payment is not a necessary part of any audit, and-where performed-it should command a special fee. The vouching of cash received-whether for cash sales or Sold Ledger Accounts-may, under a good system of internal check, safely be left to the care of the staff; but it is the Auditor's duty to see that the receipts are duly banked, and to verify the bank balance. A large Retailers' audit will, almost invariably, be continuous; and it is desirable that the bank |