Bus Admin.. Lit. 
 
 HF 
 5667 
 
 Bus. Admin 
 Lib. 
 
 RENN'S 
 PRACTICAL AUDITING
 
 THE LIBRARY 
 
 OF 
 
 THE UNIVERSITY 
 
 OF CALIFORNIA 
 
 LOS ANGELES
 
 This book is DUE on the last date stamped below 
 
 ' 
 
 JUL 2 1 1943 
 
 PRIVATE L^ 
 
 No. ............... 
 
 THOMAS KEPPEL, 
 
 ZEELAND, MICH. 
 
 yNlVERSHY OF CAUF9RNIA, 
 
 Library 
 
 Graduate ScV) iol of Business Administration, 
 University of California
 
 -t^VT^A^^
 
 Renn's Practical 
 Auditing 
 
 A Working Manual for Auditors 
 
 DESCRIBING IN COMPLETE DETAIL THE METHOD 
 
 OF CONDUCTING A COMMERCIAL AUDIT, 
 
 AND INDICATING IN PROPER ORDER 
 
 THE SUCCESSIVE STEPS OF 
 
 PROCEDURE, 
 
 WITH 
 A GENERAL TREATISE ON AUDITING 
 
 BY 
 GEORGE B. RENN 
 
 ACCOUNTANT AND AUDITOR 
 
 SECOND EDITION, REVISED AND ENLARGED 
 
 PRICE THREE DOLLARS 
 
 PUBLISHED BY 
 
 GEORGE B. RENN 
 
 1341 Dakin Street 
 CHICAGO, ILLINOIS 
 
 81831
 
 Entered according to act of Congress, in the year 1905, 
 
 By GEORGE; B. RENN, 
 
 in the office of the Librarian of Congress, at Washington. 
 
 Entered according to act of Congress, in the year 1907, 
 
 By GEORGE B. RENN, 
 
 in the office of the Librarian of Congress, at Washington. 
 All rights reserved. 
 
 PRINTED AND BOUND BY 
 GEORGE SETON THOMPSON, CHICAGO, ILLINOIS
 
 HF 
 
 \s 
 
 NL 
 
 PREFACE TO THE SECOND EDITION 
 
 ^ 
 
 \ The general commendation which the first edition of this 
 
 manual elicited from the accountancy profession, the press, and 
 discriminating students, proved that there is a demand for a 
 work which goes direct to the point on the subject of auditing. 
 This has encouraged the author to prepare a more extensive 
 treatise based upon the same plan. 
 
 In this edition, as in the first, one of the principal claims to 
 excellence lies in its distinctively practical treatment of the sub- 
 ject. This book aims to tell the student what to do and how to 
 do it, and it is written with the intention that its contents shall 
 be understood by the reader. 
 
 The Detailed Description of a Commercial Audit, presented in 
 the logical order of the procedure to be followed, which stamped 
 the first edition as unique in the literature on auditing, is re- 
 printed in its entirety in Part II of the present manual. That 
 <i 
 
 U> part has also been elaborated in order to clear up such points as 
 
 appeared from the inquiries of readers to be in the least doubtful ; 
 and an important feature has been added in the shape of an AUDI- 
 TOR'S REPORT in complete detail, made out according to standard 
 form. 
 
 }The whole work has been amplified by the addition of a 
 thorough exposition of the principles of auditing; with an elab- 
 orate treatise on EXAMINATIONS, INVESTIGATIONS, and PARTNER- 
 SHIP AUDITING; also the special considerations which govern 
 auditing in different lines of business; so that it is believed that 
 this new edition covers the subject adequately from every point of 
 view. 
 
 1341 DAKIN STREET, CHICAGO, JULY, 1907.
 
 PREFACE TO THE FIRST EDITION 
 
 All the literature on auditing published heretofore presup- 
 poses familiarity with the rules of practice on the part of the 
 student; hence the information thus far obtainable upon this 
 subject is of too indefinite a character to be understood easily 
 by that large class of accountants who are otherwise excellently 
 equipped for auditing, but who are lacking in experience. 
 
 The purpose of this manual is, therefore, to set forth minute- 
 ly the details to be pursued in making a commercial audit, and to 
 indicate in proper order the procedure to be followed. 
 
 With this brief explanation the book is respectfully submitted 
 to ambitious accountants.
 
 CONTENTS 
 
 
 
 INTRODUCTION Page 11 
 
 Definition of Auditing The benefit to the client from an in- 
 dependent audit To whom the work should be entrusted. 
 
 PART I 
 
 GENERAL CONSIDERATION OF PRINCIPLES AND 
 METHODS Page 13 
 
 Qualifications of an auditor The elemental aim in auditing 
 Rudimentary requirements of accountancy Special method for 
 checking the cash book The different kinds of errors in account- 
 ancy; characteristic examples of each kind; how brought to the 
 auditor's notice Some of the schemes employed for falsifying, 
 and methods for their detection Classification of various lines 
 of business according to their auditing features Different kinds 
 of audits The auditor's relation to his client His responsibil- 
 ity His attitude toward the office staff. 
 
 VOUCHERS. What constitutes a voucher; convenience of uni- 
 form vouchers ; what may be accepted as substitutes. 
 
 ANALYSIS OF ACCOUNTS. Purpose of analysis Proper ruling 
 of analysis paper Posting to analysis sheet Convenient time 
 for posting. 
 
 7
 
 8 RENN'S PRACTICAL AUDITING 
 
 CONTROLLING ACCOUNT. Its purpose Method of conducting 
 the controlling account How it is used to prove the individual 
 accuracy of the personal accounts Illustrations of controlling ac- 
 counts. 
 
 AUDITOR'S WORKING SHEET. Its uses Illustration of a work- 
 ing sheet. 
 
 TURNOVER. Defined and illustrated. 
 
 PART II 
 
 PRACTICAL AUDITING Page 29 
 
 Description in complete detail of the method of conducting a 
 commercial audit, arranged to indicate in proper order the suc- 
 cessive steps of procedure, and concluding with an auditor's 
 report made out in standard form. 
 
 This division of the manual deals with the actual work of 
 auditing ; it tells at the beginning what to do first and how to do 
 it ; then the next step in order is similarly taken up and explained, 
 and in this manner the student is guided step by step through an 
 entire audit. Important principles involved in different features 
 of the audit are called to the student's attention at the points 
 where they apply. In conclusion, an extensive report is reprinted 
 exactly as it was rendered in practice. 
 
 PART III 
 
 SPECIAL AUDITS Page 101 
 
 FIRST AUDIT OF BOOKS OF CORPORATIONS. Precise directions 
 for auditing the corporation books as distinguished from the 
 trade books of account.
 
 CONTENTS 9 
 
 PERIODICAL AUDIT. Definition Analogous to the audit 
 described in Part II. 
 
 CONTINUOUS AUDIT. Wherein it differs from the periodical 
 audit. 
 
 INVESTIGATION ON ACCOUNT OF SUSPECTED FRAUD. An elab- 
 orate article on this subject, treating the question from various 
 standpoints according to the department under suspicion. 
 Exactly what steps to take in case of a suspected cashier, conceal- 
 ment of sales, shipment of goods without entry, outright theft 
 of merchandise, fraud in the purchasing department, or merely a 
 suspicion that "something is wrong." 
 
 EXAMINATION ON BEHALF OF AN INTENDING PURCHASER. 
 The subject is treated in a very comprehensive manner. Some 
 features of this section are : Purpose of the examination Inspec- 
 tion of the statistical accounts Period to be covered Speculative 
 considerations The examination in detail Accounts receivable 
 and bills receivable Stock of merchandise Real estate, build- 
 ings and personal property Good will Patents Copyrights A 
 condensed outline of an examination Special directions in regard 
 to construction of the Trading account and the Profit & Loss 
 account How to ascertain the amount of working capital em- 
 ployed Estimating the inventory Liabilities not necessarily any 
 concern of the purchaser Their significance in relation to the 
 prosperity of the business. 
 
 EXAMINATION ON BEHALF OF A CREDITOR, ACTUAL OR PROS- 
 PECTIVE. This section covers the subject thoroughly, in reference 
 to either secured or unsecured loans. The points towards which 
 the examination should be directed are clearly indicated, and 
 detailed instructions follow. 
 
 FINAL AUDIT FOR ADJUSTMENT OF PARTNERSHIP IN CASE OF 
 DECEASED OR RETIRING PARTNER. Complete directions are given
 
 10 RENN'S PRACTICAL AUDITING 
 
 for conducting this kind of an audit with due regard to the rights 
 of each partner. 
 
 DIFFERING FEATURES IN AUDITS OF VARIOUS LINES OF BUSI- 
 NESS. This section directs attention to features of special impor- 
 tance in auditing particular lines of business. Under this head 
 are treated Trading, Manufacturing, Mining and Banking con- 
 cerns. 
 
 INDEX Page 128
 
 INTRODUCTION 
 
 By the term "Auditing" is meant the intelligent inspection of 
 books of account and subsidiary records and papers, for the pur- 
 pose of determining whether they are correct and complete. 
 
 The advantages of an independent audit may be summarized 
 as affording a client the means for detecting any dishonesty there 
 may be on the part of his employes, and, on the other hand, if 
 none is found, he will learn from a disinterested source that his 
 books are being kept correctly. Where inspection proves that 
 improvements in the methods of accounting would be desirable, 
 he will also be given expert suggestion along those lines. 
 
 In addition to the tangible benefits outlined above, it may be 
 mentioned that knowledge of an intention to have the books 
 audited at some time tends to discourage fraudulent practices an 
 effect which is not to be overlooked. Aside from any question of 
 dishonesty, the anticipation of an audit inspires also a desire that 
 the books shall be found technically correct, which prompts a 
 degree of care in their preparation that would often be lacking 
 were no inspection looked for. 
 
 In order to derive the best results from an audit, it should be 
 entrusted to a professional auditor, for he will be independent of 
 local influences and may therefore be relied on to treat matters 
 in a disinterested manner. 
 
 n
 
 PART I 
 
 GENERAL CONSIDERATION OF PRINCIPLES AND 
 
 METHODS 
 
 The auditor should possess a thorough working knowledge of 
 accountancy, in order to qualify him for interpreting correctly the 
 work of others and for making intelligent criticism when neces- 
 sary. 
 
 The elemental aim in auditing is to safeguard the income and 
 to keep watch on the expenditures of the business. To that end 
 the auditor must ascertain whether the following rudimentary 
 requirements of accountancy have been complied with: 
 
 First. That charges have been made to the proper parties 
 upon the regular books of account for everything of value which 
 has passed to them. 
 
 Second. That all money received has been entered in the 
 cash book, and that it was entered at the time when it was 
 received. 
 
 Third. That no credit has been given to any one not entitled 
 to it. 
 
 Fourth. That no money has been paid out without proper 
 authority, and that no fabricated payments have been entered in 
 the cash book. 
 
 Fifth. That the proper amount of money called for by the 
 cash book balance is actually on hand either in bank, or in the 
 
 cash drawer. 
 is
 
 14 RENN'S PRACTICAL AUDITING 
 
 Sixth. That the open Accounts Receivable (debtors' ac- 
 counts) and Bills Receivable, represent correctly the difference 
 between the charges for sales, etc., on the one hand, less the 
 credits through the cash book and other authorized mediums, on 
 the other hand. 
 
 Seventh. That all other assets acquired through the business 
 are correctly recorded, and that they exist in fact. This includes 
 inventories. 
 
 Eighth. That Accounts Payable (creditors' accounts) and 
 Bills Payable are correctly and fully stated, and that they were 
 incurred in the interest of the business. In the case of bills 
 payable discounted, it must be ascertained whether the proceeds 
 were entered in the cash book. 
 
 It will be observed that the trend of the foregoing is con- 
 stantly to force the entry of cash receipts into the cash book, and 
 to provide for the proper recording of values parted with. 
 
 Usually there is not much attempt to defraud by direct theft 
 of merchandise, although the conscientious auditor will satisfy 
 himself that proper safeguards are in force to prevent it. The 
 principal efforts of an embezzler, however, are directed toward 
 the abstraction of cash, and for that reason a special method for 
 checking the cash book is suggested in this manual, viz. : that the 
 cash book shall be checked inversely from the ledgers. This 
 process will determine positively that the items entered in the 
 ledgers as "cash" are so in fact if they are found in the cash 
 book, because they will then have to be accounted for. Other- 
 wise, if the auditor should remain content with checking the 
 cash book into the ledgers, it might happen that all items tested 
 in this way would check correctly, while still others would remain 
 unchecked in the ledgers, falsely stated as "cash," but originating 
 elsewhere, probably in the journal. This leads to a detailed con- 
 sideration of the subject of correctness of the books, as indicated 
 by their freedom from errors.
 
 PRINCIPLES AND METHODS 15 
 
 ERRORS IN ACCOUNTANCY 
 
 There are three kinds of errors which may find their way into 
 books of account, and it is the duty of the auditor to detect them 
 when present, or to prove their absence. They are: 
 
 ERRORS OF PRINCIPLE. 
 TECHNICAL ERRORS. 
 FRAUD. 
 
 Errors of Principle. 
 
 This kind of errors divides into two minor classes those of 
 omission and those of commission. One of the most serious is 
 the omission to provide proper reserves for depreciation of assets 
 subject to wear and tear, or for shrinkage in values. Sometimes 
 this results in the payment of dividends out of capital, a pro- 
 ceeding which has been construed by courts as criminal; and in 
 one instance, at least, it has called forth an order from the court 
 compelling the directors who voted the dividend to make resti- 
 tution to the treasury of the corporation. 
 
 As an example of errors of principle through commission, we 
 may cite the incorrect distribution of purchase invoices or of 
 expense outlays, resulting in the loading of capital accounts with 
 charges which should be placed to expense, or vice versa. 
 
 The question of provision for reserves will come to the audi- 
 tor's notice through inspection of the balance sheet, and the point 
 in respect to proper distribution is disposed of through analysis 
 of the capital accounts and the various expense accounts. 
 
 Technical Errors. 
 
 These are the innocent mistakes committed in the mechanical 
 details of bookkeeping such as posting to wrong accounts, unin- 
 tentional errors in footings or in carrying them forward, in trans- 
 ferring accounts, etc. The auditor will detect such errors through
 
 16 RENN'S PRACTICAL AUDITING 
 
 the detail work of checking postings, verifying footings, and 
 general inspection of the books. 
 
 Fraud. 
 
 Under this head come the numerous schemes employed to 
 falsify the books of account for the purpose of stealing cash or 
 merchandise. 
 
 It would be impossible to describe all the expedients which 
 may be used to accomplish theft, but among them are the with- 
 holding outright of cash received from cash sales or through 
 remittances from customers; the "kiting" of such remittances; 
 the falsification of cash book footings ; the introduction of fictitious 
 bills receivable; the manipulation of purchase invoices; the 
 clandestine disposal of merchandise, and so forth indefinitely. 
 
 The withholding of cash from customers' remittances is usually 
 concealed on the books by crediting the customers fictitiously with 
 an equal amount through the journal, or the "merchandise 
 returned" book, thus balancing the account and withdrawing it 
 from observation. 
 
 "Kiting" begins with pocketing remittances when they are 
 received and withholding credit for them until a later date; then 
 other remittances will be held out and credit will be entered for 
 those first withheld. Industrious embezzlers have been known to 
 carry this process to great lengths, until an auditor appeared and 
 exposed the trick by means of verification statements sent out 
 privately to the book debtors. 
 
 As regards the other methods for defrauding referred to in 
 this article, an exact observance of the rules for auditing set forth 
 in this manual will circumvent them also. 
 
 CLASSIFICATION OF DIFFERENT LINES OF 
 BUSINESS 
 
 Although the general principles of auditing are the same for 
 all lines of business, the methods to be followed in different audits
 
 PRINCIPLES AND METHODS 17 
 
 vary somewhat according to the classification of the enterprise. 
 From their auditing features the various kinds of business may 
 be classified as follows: 
 
 TRADING. 
 
 MANUFACTURING. 
 
 MINING. 
 
 BANKING. 
 
 The auditor should always have a fair knowledge of the work- 
 ing details of the business which he undertakes to audit. Where 
 he is lacking in this respect he may acquire such knowledge by 
 studying a text-book on accounting in that particular line. 
 
 DIFFERENT KINDS OF AUDITS 
 
 Audits differ according to the immediate objects for which 
 they are undertaken; the following are regarded as the principal 
 kinds : 
 
 The Periodical Audit, to determine the general accuracy of 
 the books. 
 
 Investigation, on account of suspected fraud. 
 
 Examination, on behalf of an intending purchaser, to deter- 
 mine the earning capacity of a business ; or for a creditor, actual 
 or prospective, to establish the correctness of the balance sheet. 
 
 The Final Audit, for the purpose of partnership adjustment 
 in the case of a retiring or deceased partner. 
 
 There are other conditions that call for audits, but those above 
 mentioned are the more usual cases. 
 
 A complete description of all the various kinds of audits, 
 together with their possible ramifications, would prove entirely 
 too complex and confusing to the student. For that reason, and 
 because the greater number of audits are made merely for the 
 purpose of ascertaining the general correctness of books of ac- 
 count, it is believed by the author that a detailed description of
 
 18 RENN'S PRACTICAL AUDITING 
 
 THE PERIODICAL, AUDIT will serve best to familiarize the 
 student with the principles and methods of auditing. In accord- 
 ance with this idea the detailed instructions in this manual are 
 limited in the first instance to a specimen audit of that kind. 
 However, to make the manual complete, there have been added 
 supplementary instructions in regard to other kinds of audits, 
 which, considered in connection with the detailed directions pre- 
 ceding them, will qualify the student to carry out any one of the 
 audits mentioned. 
 
 In concluding this chapter a few words in regard to the 
 auditor himself will be in order. 
 
 THE AUDITOR'S RELATION TO HIS CLIENT 
 
 The auditor's relation to his client is of an extremely confi- 
 dential nature, and all information obtained by him through that 
 relation must be held inviolate. Nothing can be more out of place 
 than a garrulous auditor. 
 
 Sometimes there is a disposition on the part of young auditors 
 to make impetuous criticisms and suggestions. They should 
 defer all comments until the audit is completed, for something 
 may develop meanwhile to modify their hastily formed opinions. 
 
 THE AUDITOR'S RESPONSIBILITY 
 
 There is no record of any legal decision in this country fixing 
 liability upon auditors for certifying to inaccurate or untruthful 
 statements. Where deliberate mendacity could be proven there 
 would probably be ground for action, but manifestly it would be a 
 hard matter to establish the "intent" in such a case. 
 
 Virtually this makes the public dependent upon the personal 
 integrity of the auditor for the truthfulness of statements con- 
 tained in his report, which imposes a moral responsibility that 
 he should not attempt to evade in any particular. His reports 
 should be complete, definite and absolutely correct. Only a high
 
 PRINCIPLES AND METHODS 19 
 
 professional standard will bring him business of the desirable 
 kind, as no auditor can hope to be permanently successful unless 
 he commands a reputation for perfect reliability in his profes- 
 sional capacity. 
 
 THE AUDITOR'S ATTITUDE TOWARD THE OFFICE 
 
 STAFF 
 
 The auditor should conduct himself courteously toward the 
 office force, so far and so long as they enable him to do so con- 
 sistently. While it is true that his position is sometimes made 
 unpleasant through the boorish attitude of some of the staff, it 
 does not help matters to be openly resentful; and, in passing, it 
 may be remarked that sometimes auditors are the authors of their 
 own misfortunes in this respect, through an assumption of superi- 
 ority which engenders antagonism. 
 
 A great deal may be accomplished in this direction by the 
 auditor himself setting an example of gentlemanly deportment. 
 This does not mean, however, that he should yield one iota of 
 his freedom to investigate to any extent any "lead" which he may 
 desire to follow; on the contrary, he must regard himself as an 
 independent agent, and proceed without fear or favor.
 
 20 RENN'S PRACTICAL AUDITING 
 
 VOUCHERS 
 
 A great many business concerns use their own form of voucher 
 for disbursing cash, the same being approved and certified as cor- 
 rect by certain officials or authorized employes. While this is 
 convenient and desirable, it should be understood that an invoice 
 itself, if properly made out to your client and duly approved, 
 is equally competent as a voucher. Therefore, wherever this 
 manual calls for vouchers either in support of cash payments 
 or for journal entries, any memorandum which will establish 
 the validity of the transaction should be accepted as satisfactory. 
 Your report, however, should suggest the introduction of regula- 
 tion vouchers, if considered desirable. 
 
 ANALYSIS OF ACCOUNTS 
 
 For the purpose of analyzing the various expense accounts 
 and capital accounts, use paper ruled in a series of parallel debit 
 and credit columns. At the top of the sheet write the caption of 
 the account under analysis, and sub-head the classification col- 
 umns; then from the books of original entry post the items into 
 the proper columns of this analysis sheet; when completed, the 
 net balance of all the columns combined should equal the amount 
 of the account as shown in the ledger. This analysis may be 
 made at the time of checking the invoices against the particular 
 items in the books, or it may be made a detail by itself ; the former 
 is the preferred method when you have an assistant. Some audi- 
 tors advocate the above method of checking all the general ledger 
 accounts, but that is not necessary, inasmuch as the items in the 
 general ledger accounts, including expense and capital accounts, 
 should all be checked against the books of original entry, and this 
 would consequently be mere duplication of work. This analysis, 
 it should be understood, is chiefly for purposes of comparison; 
 the audit proper is accomplished on these accounts, as well as 
 on the others, by first verifying the correctness of the items in the 
 books of original entry and then checking them into the ledger.
 
 PRINCIPLES AND METHODS 21 
 
 THE CONTROLLING ACCOUNT 
 
 The Controlling Account is used in auditing to prove up the 
 personal accounts by totals instead of checking them by indi- 
 vidual items. (Where it is practicable, there should be a separ- 
 ate controlling account for the personal accounts receivable, 
 and another for the personal accounts payable; but where the 
 books are not so arranged as to make this expedient, it will be 
 satisfactory to make one account answer for both.) Begin with 
 the total sum in the personal accounts as shown by the trial balance 
 of the initial date, then post to the respective sides of the account 
 the monthly footings, during the period under audit, of such books 
 and columns as are posted exclusively to personal accounts. 
 Should there be any book in use, however, that is not columnized 
 in such a manner as to keep the personal account items separate 
 from those relating to general ledger accounts, the personal 
 account items from that particular book must be posted indi- 
 vidually to the controlling account. After all postings have been 
 made in this manner, the net balance of the controlling account 
 should be in exact agreement with the total of this class of 
 accounts as shown by the trial balance of the terminating date. 
 If found so, it establishes the aggregate accuracy of the personal 
 accounts. 
 
 Now, to prove their individual accuracy, take off statements 
 of every open account embraced within this general sum- 
 mary, and mail them yourself to the various debtors, with the 
 request that they check them over and return them to you, either 
 endorsed "Correct," or with notation of any differences. To make 
 these statements effective they should be an exact transcript of 
 the face of the ledger, particularly so far as relates to credits to 
 customers; and the various classes of credits should be desig- 
 nated exactly as they are entered upon the ledger, i. e., cash 
 should be designated "Cash" and other credits by the name cred- 
 ited upon the ledger. This form of making up the statements will
 
 22 RENN'S PRACTICAL AUDITING 
 
 not only serve to prove the correctness of the amount of the ac- 
 count, but will establish quite effectively the truth of the compo- 
 nent parts. In fact, this is the proper method for determining 
 whether all cash receipts from customers have been entered upon 
 the cash book, provided the customary precautions are also taken 
 against allowing improper credits in this class of accounts. 
 
 You may also attain this result in effect, but with considerable 
 less labor, by carefully checking the bookkeeper's monthly state- 
 ments to customers with the ledger accounts, and mailing them 
 yourself, with a printed slip, requesting each customer to check 
 them over and return to you, endorsed either "Correct" or with 
 notation of any differences. 
 
 When the statements sent out to customers for comparison 
 are returned to you, there will probably be exceptions noted on 
 some of them, but your judgment will guide you as to whether 
 they are of a character to require further investigation or not. 
 Among a large number of accounts an occasional difference may 
 exist without impropriety, though it should, of course, be sus- 
 ceptible of explanation. 
 
 On books of account where the sales accounts and purchase 
 accounts are not kept separately, it is sufficient for practical 
 purposes to treat the total personal account debits as accounts 
 receivable, and the total credits of the same class as accounts 
 payable. The technical distinction need not be drawn except in 
 case of liquidation, when it may become necessary to make pre- 
 cise separation. 
 
 The outline of an audit as presented in this manual is based 
 upon a set of books containing separately a general and a personal 
 ledger, the contents of the personal ledger being represented in 
 the general ledger by a controlling account. If the ledgers are 
 not so separated, you must use your discretion whether it will 
 economize time and labor to construct a controlling account inde- 
 pendently, or to check all items in detail.
 
 PRINCIPLES AND METHODS 
 
 23 
 
 ILLUSTRATIONS OF CONTROLLING ACCOUNTS 
 
 ACCOUNTS RECEIVABLE CONTROLLING ACCOUNT 
 
 1907 
 Jan'y 
 
 Feb'y 
 
 Balance, Total Accounts Receivable 
 per Trial Balance 
 
 Sales Book Debits January S.B. 
 
 Journal " J. 
 
 Cash Book " " C.B. 
 
 Sales Book Credits " (Returns) S.B. 
 Journal " " J. 
 
 Cash Book " " C.B. 
 
 Balance., 
 
 Proof : Agreement with Personal 
 Accounts debit balances 
 on Trial Balance. 
 
 $139 650 60 
 72 450 62 
 
 $ 67 199 98 
 
 $ 85 376 45 
 
 26072 
 14053 
 
 84594 
 
 548623 
 
 66 118 45 
 
 $ 7245062
 
 24 
 
 RENN'S PRACTICAL AUDITING 
 
 ILLUSTRATIONS OF CONTROLLING ACCOUNTS 
 ACCOUNTS PAYABLE CONTROLLING ACCOUNT 
 
 1907 
 Jan'y 
 
 Feb'y 
 
 Balance, Total Accounts Payable per 
 Trial Balance.... 
 
 Purchase Book Credits January P.B. 
 Journal J. 
 
 Cash Book " " C.B. 
 
 Purchase Book Debits "(Retns.)P.B. 
 Journal " " J. 
 
 Cash Book " " C.B. 
 
 Balance.. 
 
 Proof : Agreement with Personal 
 Accounts credit balances 
 on Trial Balance. 
 
 $ 46 679 54 
 
 14291 
 15 410 20 
 30 126 43 
 
 $ 59 162 76 
 39 043 60 
 1 536 23 
 14011 
 
 99 882 70 
 46 679 54 
 
 $ 53 203 16
 
 PRINCIPLES AND METHODS 
 
 25 
 
 ILLUSTRATIONS OF CONTROLLING ACCOUNTS 
 COMBINED ACC'TS REC. AND ACC'TS PAY. CONTROLLING ACC'T 
 
 (Used where book* of original entry are not columnized for keeping them separately.) 
 
 1907 
 
 
 
 
 
 
 
 
 
 
 Jan'y 
 
 1 
 31 
 
 Balance, Net amount of Personal 
 Accounts per Trial Balance 
 
 15 
 
 $ 26 
 
 52 
 
 213 
 
 872 
 
 69 
 90 
 
 
 
 
 Sales Book Debits January S.B. 
 
 
 31 
 
 Purchase Book " " (Retns.) P.B. 
 
 12 
 
 1 
 
 142 
 
 91 
 
 
 
 
 
 31 
 
 Journal " J. 
 
 8 
 
 16 
 
 670 
 
 92 
 
 
 
 
 
 31 
 
 Cash Book " " C.B. 
 
 10 
 
 30 
 
 266 
 
 96 
 
 
 
 
 
 31 
 
 Sales Book Credits " (Retns.) S.B. 
 
 15 
 
 
 
 
 
 845 
 
 94 
 
 
 31 
 
 Purchase Book" " P.B. 
 
 12 
 
 
 
 
 39 
 
 043 
 
 60 
 
 
 31 
 
 Journal " J. 
 
 8 
 
 
 
 
 7 
 
 022 
 
 46 
 
 
 31 
 
 Cash Book " " C.B. 
 
 10 
 
 
 
 
 66 
 
 258 
 
 56 
 
 $127 
 
 167 
 
 38 
 
 $113 
 
 170 
 
 56 
 
 Feb'y 
 
 1 
 
 B al ance 
 
 
 113 
 
 170 
 996 
 
 56 
 82 
 
 
 
 
 
 
 $13 
 
 
 Proof: Total Personal Accounts 
 
 
 
 debit balances on Trial 
 
 
 
 
 
 
 
 
 
 
 Balance. 
 
 
 $ 67 
 
 199 
 
 98 
 
 
 
 
 
 
 Total Personal Accounts 
 
 
 
 
 
 
 
 
 
 
 credit balances on Trial 
 Balance. 
 
 
 53 
 
 203 
 
 16 
 
 
 
 
 $ 13 
 
 996 
 
 82 
 
 
 
 If one or more of the personal 
 accounts contain both sales and 
 purchase items, the respective 
 sides of the Trial Balance will 
 produce totals differing from 
 the above, but the net differ- 
 ence between the two sides 
 will remain the same. 
 
 
 
 
 
 

 
 26 RBNN'S PRACTICAL AUDITING 
 
 AUDITOR'S WORKING SHEET 
 
 The form of Working Sheet illustrated opposite is used by 
 auditors for classifying the trial balance into the various schedules 
 which are made a part of the report; such as the Trading Ac- 
 count, Profit & Loss Account, etc. It serves also as a convenient 
 medium for rating Accounts Receivable as "good," "doubtful," 
 or "bad." 
 
 This form can, of course, be extended to any desired length 
 by using wider paper and adding more vertical columns. 
 
 When taking off trial balances it is best to write them on the 
 working sheet form in the first instance, and thus save the labor 
 of transcribing them afterwards.
 
 
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 28 RENN'S PRACTICAL AUDITING 
 
 TURNOVER 
 
 By the term "turnover" is meant the cost of goods sold during 
 a certain period. 
 
 The turnover for a period is ascertained in the following 
 manner : 
 
 Inventory, January 1, 1905 $15,763.87 
 
 Purchases during year 1905 46,143.22 
 
 $61,907.09 
 Deduct Inventory, December 31, 1905 13,376.04 
 
 Turnover $48,531.05
 
 PART II 
 
 PRACTICAL AUDITING 
 
 Description in complete detail of the method of conducting a 
 commercial audit, arranged to indicate in proper order the suc- 
 cessive steps of procedure, and concluding with an auditor's report 
 made out in standard form. 
 
 SPECIAL INSTRUCTIONS 
 
 For the sake of brevity the two dates limiting the period under 
 audit will be referred to respectively as the "initial date" and the 
 "terminating date." 
 
 Select a well lighted location to work in, and reserve to your- 
 self ample space for handling the books and papers. 
 
 In a suitable note-book make memoranda, as you proceed 
 with the audit, of such particulars as you will require when mak- 
 ing up your report after the audit is completed. One of the first 
 points to set down is a complete list of the books in use, giving 
 their titles, and where the titles do not clearly indicate it, their 
 purposes as well, together with the names of the clerks who 
 are responsible for the work contained in the individual books. 
 
 With a rubber stamp, bearing the word "Audited" above 
 your name, stamp conspicuously all loose papers of a fulfilled 
 character when you inspect them ; such as returned bank cheques, 
 receipts, invoices, paid notes, pay-rolls, and other vouchers. This 
 
 will forestall any possibility of the same vouchers being foisted 
 20
 
 30 RENN'S PRACTICAL AUDITING 
 
 upon you a second time in support of disbursements. However, 
 it is not permissible to stamp securities in this manner, and it is 
 therefore necessary to observe caution when inspecting bills 
 receivable, stocks, bonds, mortgages, and securities of all kinds, 
 to the end that you do not list them more than once. 
 
 Adopt a personal check-mark, and check all items and foot- 
 ings (preferably with red ink) when you take them into account 
 during the audit. 
 
 If you meet with an erased or doubtful item in any of the 
 money columns, ascertain what it should be, and then write the 
 correct amount above it in red ink. This will detect any erasures 
 or alterations which may be made after you have audited the 
 items, as such changed items will not bear your red ink iden- 
 tification marks when you review the books. 
 
 Be on the alert, when following footings from page to page, 
 to see that they are properly carried forward, both as to the 
 amounts and as to their location in columns. 
 
 Verify all footings in all books of original entry. 
 
 All books of original entry except the cash book should be 
 checked into the general ledger or the Controlling Account, but 
 the cash items should be checked from the general ledger or the 
 Controlling Account into the cash book. 
 
 Re-foot all personal ledger accounts from the point where 
 last ruled up. 
 
 Prove all footings of all general ledger accounts, balanced 
 or unbalanced, during the entire period under audit. 
 
 Inspect the general ledger to see that every item therein has 
 received your check-mark. 
 
 In case you find errors on the books of account, make mem- 
 oranda of the same upon your note-book, but do not make cor- 
 recting entries upon the books unless you are authorized to 
 do so.
 
 PRACTICAL AUDITING 31 
 
 A general principle to be observed in auditing is to guard 
 against improper or fictitious credits in any account to which 
 cash is posted on either side. 
 
 ORDER OF PROCEDURE 
 
 The following order of procedure for making an ordinary 
 commercial audit will economize time and accomplish the best 
 results; but, when conditions make it impracticable to follow 
 these directions exactly, you must accommodate yourself to cir- 
 cumstances. 
 
 It will be observed that this outline of an audit is classified 
 to accord with the basic books which make up a typical set of 
 books of account. There are establishments, however, where 
 some of these principal books radiate into special or auxiliary 
 books; in such cases the same methods of auditing will apply 
 to the auxiliary books as would be employed on the particular 
 class of items contained in them, were those items entered upon 
 the main books of account. 
 
 THE CASH BALANCE 
 
 Where the engagement to make the audit is entered into 
 some time in advance of the terminating date, it is altogether 
 the best plan to deposit in bank all funds on hand at the close 
 of the last day, in order that the bank account shall constitute 
 the entire cash balance of that date. The bank pass-book should 
 then be written up, and reconciled immediately with your client's 
 books. 
 
 If the above method is not deemed feasible, however, the next 
 best plan is for the auditor himself to balance the cash on the 
 night of the terminating date, and at that time to assure him- 
 self that the proper amount in some form or other is at hand to 
 substantiate the book balance. As a part of this method, he 
 should get the bank pass-book written up not later than the day
 
 32 RENN'S PRACTICAL AUDITING 
 
 following, and should make reconciliation with the bank imme- 
 diately on the return of the pass-book. 
 
 If you begin the audit some time after the terminating date, 
 without having previously balanced the cash, as directed here- 
 tofore, the proper course is to balance when entering upon your 
 work. 
 
 First, count the actual currency on hand and list same, then 
 add any memoranda that may be carried as currency. Inquire 
 into the authority for all advances represented by these mem- 
 oranda. (By thus listing the currency in advance of balancing 
 the bank account, you will avoid the risk of currency having been 
 replenished through a cheque not recorded.) 
 
 Second, list cheques on hand, after having assured yourself 
 that they are entered upon the cash book prior to the point where 
 balanced. 
 
 Add to the above items the balance in bank, as shown by 
 cheque book or wherever recorded. 
 
 The sum of the foregoing three items should equal the cash 
 balance, of which a summary should be incorporated in your 
 report. 
 
 To arrive at the cash book balance, you should verify care- 
 fully the footings of that book from the terminating date to the 
 present, confirming the final footings in red ink, and with your 
 check-mark. Compare the result with your summary of actual 
 cash, previously made. 
 
 The disbursement side of this intervening period should be 
 audited later in precisely the same manner as you test the space 
 under direct review, namely, with returned bank cheques; and 
 where the distribution is made direct upon the face of the cash 
 book, with vouchers or other competent memoranda. 
 
 As the receipts side for this additional period is not held 
 in check by the Controlling Account, it is necessary that you 
 apply special methods to its test when making the audit.
 
 PRACTICAL AUDITING 33 
 
 After seeing to it that all cash sales have been entered up to 
 date for this extra period, it is best to prove the face of the 
 book by the inverse process of checking into the cash book by 
 individual items the deposits made in bank during this time; 
 and in similar manner follow into the book from their place of 
 record such other items as should appear upon the receipts side 
 of the cash book; namely, cheques on hand and currency dis- 
 bursed or remaining on hand. 
 
 Sometimes you may meet with the condition that the cash 
 balance of a certain date is not recorded. To determine what 
 it was at that time, add to the present balance the total disburse- 
 ments made since the date in question, and deduct the total 
 receipts during the interval the net difference is the balance 
 sought 
 
 THE BANK BALANCE 
 
 As soon as possible after balancing the cash you should get 
 the bank pass-book written up, and when returned to you recon- 
 cile it with your client's account by deducting the outstanding 
 cheques from the balance shown by bank statement. The best 
 way to accomplish this is to arrange the returned bank cheques in 
 numerical order, and then from the missing numbers construct 
 the schedule of uncleared cheques. Also see whether the re- 
 turned cheques are properly endorsed by the payee, and stamped 
 by the bank as having been paid. 
 
 The bank balance should be stated on the balance sheet at the 
 net amount shown by your client's books, provided reconcilement 
 has proven it to be correct. The suggestion at one time made 
 that it should be stated "gross" with an offsetting liability to 
 cover the outstanding cheques, does not merit any consideration. 
 
 TRIAL BALANCES 
 
 After you have verified the cash and bank balances as directed, 
 the next step in point of importance is to secure trial balances of
 
 34 RENN'S PRACTICAL AUDITING 
 
 the ledgers. This will serve the double purpose of familiarizing 
 you with the system of accounting in use as indicated by the 
 lay-out of the accounts, and will also provide you with an indis- 
 putable abstract of the ledgers as they stood at the date of the 
 trial balances. Should any alterations be made subsequently in 
 the ledgers the abstract in your possession will direct attention 
 to the change. 
 
 If trial balances of the initial date and of the terminating date 
 are at hand, you can make use of them for present purposes as 
 you find them; but, where they are not at hand, it will now be 
 necessary to take off balances of both dates limiting the period 
 under audit. These should be set down (preferably) on the 
 working sheet form of trial balance paper, illustrated in Part I. 
 
 For the purpose of verifying the personal accounts receiv- 
 able, as described in the article on the Controlling Account, mail 
 statements of their accounts to all debtors shown upon the trial 
 balance of the terminating date. 
 
 Dispatching these statements at this time will give oppor- 
 tunity for their return during the progress of the audit. 
 
 As rapidly as these statements are returned they should be 
 checked against the trial balance; delinquents should be urged 
 to return them until the last one possible is received. 
 
 To verify accounts payable, the proper course is to procure 
 statements from all parties with whom your client is known to do 
 business, and compare them with the accounts upon the books. 
 
 From the trial balance of the initial date determine the aggre- 
 gate amount of personal accounts of that time, and with that 
 amount as a basis open the Controlling Account, which is to be 
 conducted as described under that heading in Part I. 
 
 BILLS RECEIVABLE AND SECURITIES 
 
 The examination of Bills Receivable should now be taken up, 
 and it may be stated that this detail demands a great deal more 
 thoroughness than it usually receives.
 
 PRACTICAL AUDITING 35 
 
 The substitution of fictitious bills receivable to offset money 
 embezzled is a favorite method of concealing a shortage tem- 
 porarily; for notes are not subjected to the frequent scrutiny 
 which open accounts receive. 
 
 In several recent instances the officers of certain financial in- 
 stitutions made use of this expedient to cover up the shortage, 
 while they were industriously looting the banks under their 
 charge, so that when the defalcations were finally exposed, they 
 had attained astounding proportions. This scheme may be pur- 
 sued with equal facility in a commercial house, although neces- 
 sarily to a smaller extent. 
 
 A simple method, and the only safe one, to follow in auditing 
 bills receivable is to communicate with the reputed drawers of 
 the notes, in the same manner as has been indicated for the 
 verification of open accounts receivable, and so secure direct 
 acknowledgment that the notes are genuine. A note once verified 
 as above may be passed on future audits until due, as reference to 
 your records will show that it has been proved genuine. 
 
 Attention is to be given to the maturing dates of the notes, 
 and whether they are secured. If any unsecured notes are found 
 to be past due they should be charged back to the open accounts 
 of the debtors. 
 
 Notes at banks for collection or under re-discount should be 
 verified by the auditor. A certified list of notes in their pos- 
 session will be furnished by banks on proper request. 
 
 Draw up a schedule of the notes, showing their essential 
 points in detail. 
 
 Securities in the shape of stocks or bonds are also to be 
 examined rigidly, as there are instances on record where the 
 number of shares represented by stock certificates had been 
 raised. A separate schedule should be drawn up for this class of 
 securities. 
 
 From now on you should audit the individual books in the 
 following order, and make it a point to complete at one time
 
 36 RENN'S PRACTICAL AUDITING 
 
 every feature of the audit relating to each particular book, in- 
 cluding verification of footings. If possible, do not allow any 
 book to pass out of your possession while it is under inspection. 
 
 THE CASH BOOK 
 
 RECEIPTS SIDE 
 
 The importance of auditing the cash book thoroughly cannot 
 be overestimated. As stated before, the chief object in falsifying 
 books of account is to abstract cash, and the attempt to manipulate 
 the records for that purpose is frequently made in the cash book, 
 either by omitting to enter receipts, or by direct falsification 
 such as overfooting the disbursement side or underfooting the 
 receipts side, or by the entry of fabricated disbursements. 
 
 The cash book is really a personal account between the pro- 
 prietor of a business and his cashier, the cashier charging him- 
 self with the amount of cash on hand at a certain date, to which 
 he adds from day to day the cash received into the business 
 from all sources. In turn the cashier takes credit for all moneys 
 paid out on behalf of the business, and holds himself accountable 
 to the proprietor for the difference as shown by the cash book. 
 
 It will be seen readily that it is not sufficient for a customer's 
 remittance to appear merely in his account in the ledger, but it is 
 equally important that the cashier as custodian should have 
 charged himself with the amount. For that reason the author 
 suggests that all items which appear in the ledger as "cash" should 
 be checked from there into the cash book, since that will prove 
 that they have been treated as "cash" and must be accounted for. 
 By thus making this detail different from routine checking, 
 there is less likelihood of falling into error through inattention. 
 
 In an extensive business, however, it would be practically im- 
 possible to check all cash items individually, so this difficulty has 
 been met by introducing the Controlling Account, through which 
 the total credited to personal accounts during the month is
 
 PRACTICAL AUDITING 37 
 
 checked in one item. A study of the controlling account, as 
 described in Part I of this manual, will make clear that it is quite 
 as reliable as individual checking. 
 
 The cash items in the general ledger, however, should be 
 checked individually into the cash book, because they are not held 
 in check by the controlling account. Falsification in footings 
 and the entry of fabricated disbursements are fully provided for 
 in the directions which follow: 
 
 Verify footings for the entire period under audit. 
 
 Check the cash book balance of the initial date against cash 
 balance in ledger. 
 
 Check cash sales from their place of record into the cash 
 book. 
 
 Several satisfactory methods for recording cash sales may be 
 mentioned, such as modern cash registers (the inside record of 
 which should be under the auditor's exclusive control), or dupli- 
 cate cash sales tickets, numbered consecutively, any missing num- 
 bers of which are to be accounted for to the auditor. When 
 other methods are used, you should test their efficiency and, if 
 deemed unsatisfactory, recommend improvements. 
 
 If there are any other cash receipts of an impersonal charac- 
 ter, similar to cash sales but still differing in some respect so that 
 they cannot logically be included with them, such as sale of old 
 material, etc., they should be tested with such records of the 
 transactions as may be obtainable. 
 
 Cash discounts, if entered upon the cash book, are not easily 
 verifiable, but they should be scrutinized to see that they are not 
 excessive. Occasional items at different periods of the time 
 under audit should be compared with remittance letters to test 
 their individual correctness, and if they are found satisfactory 
 they may be accepted as implying the general correctness of this 
 class of items. 
 
 Where miscellaneous credits are made through the cash book 
 to customers, for such items as allowances, freights, etc., if 
 
 81831
 
 38 RENN'S PRACTICAL AUDITING 
 
 made separately they should be subjected to the same scrutiny 
 as they would receive were they entered in the journals, where 
 they properly belong. Should they be included, however, in the 
 same item with the cash, they should be put to the most rigid 
 test. You should procure copies from the bank of the deposits 
 made for your client during the period under audit, and from 
 them determine the actual cash portion of these sundry credits. 
 In cases where currency payments are entered in this way the 
 amount of actual cash would have to be determined by deducting 
 the offsetting charge from the total credit. Fortunately this is a 
 condition not frequently met with, and when encountered should 
 be condemned. 
 
 Compare the deposits made during the last ten days preced- 
 ing the terminating date with the entries in the cash book. 
 
 From the general ledger check all cash credits into the cash 
 book, including columnar footings ; and then make sure by inspec- 
 tion that all of this class of items have now been checked on the 
 receipts side of the cash book. 
 
 Post monthly footings of the personal accounts column to 
 Controlling Account. 
 
 THE CASH BOOK 
 
 DISBURSEMENT SIDE 
 
 Verify footings for the entire period under audit. 
 
 Check the returned bank cheques against the items on this side 
 of cash book, noting at the same time whether they are entered as 
 drawn in respect to name of payee and amount. Stamp the 
 cheques "Audited." 
 
 Check the list of outstanding cheques from bank reconcile- 
 ment against the items on cash book representing them, and 
 prove them with the vouchers, where such have been returned, 
 otherwise with the invoices. If any of these items represent pur- 
 chases of securities, the same should be inspected; if charged to 
 personal accounts as loans or advances, investigate.
 
 PRACTICAL AUDITING 39 
 
 There should be vouchers ready at hand in support of all cur- 
 rency disbursements, since no cash should have been paid out 
 in this form without taking a receipt at first hand. With these 
 vouchers verify all items of this character. 
 
 The foregoing should clear this side of the cash book, except- 
 ing possibly the petty expenditure voucher, pay-rolls, and notes 
 taken up at banks, or interest on the same. These items are 
 frequently paid without drawing individual cheques for them; in 
 such cases the original papers must be taken as evidence. 
 
 It should be recommended, however, that specific cheques 
 be drawn in future for all classes of disbursements. The proper 
 way to do this in regard to petty expenditures, is to draw a cheque 
 in favor of the disbursing official for a round sum as a begin- 
 ning, and thereafter reimburse him by cheque periodically for the 
 amount of his expenditure voucher. This will leave the original 
 amount in his possession, while at the same time covering his 
 expenditures by cheque. 
 
 This brings you to the cash balance, which has been proven 
 up before. 
 
 You have now established the fact of the disbursements re- 
 corded upon the cash book, but it remains to determine the pur- 
 poses for which they were made. 
 
 Where the charges for moneys paid out are made upon the 
 cash book direct to the various accounts, you should require 
 vouchers with invoices attached, in order to check all items 
 entered against impersonal accounts, and these vouchers should be 
 certified "Correct" by some one of competent authority. Other- 
 wise you should examine the invoices to see that they are of a 
 date harmonizing with the time of payment, that they are properly 
 made out to your client and that the amounts are correct; or at 
 least that they have been so attested by some authorized person. 
 Charges to personal accounts should likewise be checked with 
 vouchers which satisfactorily explain the purpose of the pay- 
 ments.
 
 40 RENN'S PRACTICAL AUDITING 
 
 V 
 
 Pay-rolls charged up should bear the O. K. of some one in 
 authority, as well as the signatures of the employes to whom 
 paid. If not so attested, satisfy yourself as to their general cor- 
 rectness, and recommend this safeguard. If footings are not 
 certified, they should be verified by the auditor. 
 
 Charges to Bills Payable account for notes taken up at the 
 bank or elsewhere should be substantiated by the canceled note 
 itself in each instance, which should be examined as to date and 
 genuineness ; instances are known where the same note has been 
 charged up more than once. 
 
 Petty Cash disbursements should be combined in one monthly 
 voucher, properly attested O. K. by some responsible official. If 
 you are asked to accept the face of a petty cash book as a voucher 
 for this class of disbursements, you should require an authorized 
 O. K. to be placed upon the book. 
 
 Stamp all of the foregoing vouchers "Audited" when taken 
 into account. 
 
 Review the cash book to assure yourself that you have had 
 vouchers for all disbursements. 
 
 Having thus satisfied yourself that the money was paid out 
 as recorded, and also that it was disbursed for proper purposes, it 
 remains only to make comparisons with the ledgers. 
 
 From the general ledger check all items posted from this side 
 of the cash book, including cash balance and monthly footings 
 of columnar postings; then make sure that this has checked all 
 charges excepting the debits to personal accounts, which are 
 covered by the controlling account. 
 
 Post monthly footings of the personal accounts columns to 
 Controlling Account. 
 
 Analyze the items which are entered in the columns that are 
 charged in total to the respective accounts. This is particularly 
 important in connection with the cash book, as it will betray im- 
 proper distribution, if such have been made accidentally or other- 
 wise.
 
 PRACTICAL AUDITING 41 
 
 % 
 
 In establishments where the Voucher System is a part of the 
 scheme of accounting, the distribution of disbursements is made 
 in advance upon the Voucher Register at the time when the 
 vouchers are issued, instead of being made upon the cash book 
 when they are paid, as heretofore described. Under this arrange- 
 ment all disbursements are charged to Accounts Payable upon 
 the cash book, as an offset to the corresponding credits previously 
 made to the same account upon the Voucher Register. 
 
 In such a case the audit of the disbursement side of the cash 
 book has been completed practically at the point where it is indi- 
 cated that the fact of the disbursements has been established. The 
 following details, however, should be added: 
 
 Check the items from the Accounts Payable column in the 
 cash book into the corresponding column in the Voucher Reg- 
 ister, in order to determine by the amounts remaining unchecked 
 and, therefore, unpaid, the correctness of the balance of Accounts 
 Payable account. 
 
 Check monthly footings of the Accounts Payable column, as 
 well as the final cash balance, into the general ledger. 
 
 If, in conjunction with the use of the voucher system, there 
 are any charges made in the cash book to other than Accounts 
 Payable account, check them in the manner described heretofore 
 for vouching items direct into the cash book. 
 
 THE VOUCHER REGISTER 
 
 CREDITING SIDE 
 
 These directions for auditing the Voucher Register are based 
 upon the system, so generally in use, by which the vouchers, with 
 papers attached, are sent out with the remittances, to be receipted 
 and then returned. Where the more up-to-date method of issuing 
 both an office voucher and a voucher-cheque is in force, most 
 of the complications provided for in this article are obviated;
 
 42 RENN'S PRACTICAL AUDITING 
 
 especially the matter of paid vouchers not having been returned 
 is eliminated entirely. 
 
 Verify footings for the entire period under audit. 
 
 In following these directions you have already checked the 
 paid items from the cash book into the Accounts Payable column 
 in the Voucher Register. Now make a schedule of the unpaid 
 vouchers as shown by the unchecked items, and compare the total 
 with the balance of Accounts Payable account in the ledger. 
 
 Check the returned vouchers against the items which are 
 shown "paid" on this side of the Voucher Register, to determine 
 what vouchers (if any) are missing. To avoid unnecessary 
 handling of vouchers, the examination of them and comparison 
 with the distribution side of the Voucher Register, stipulated for 
 below, may all be made at this time. 
 
 Check the total of Accounts Payable column to its proper 
 account in the ledger. 
 
 Check other general ledger items (if any) into the ledger. 
 
 Post footings of the personal ledger column (if any) to Con- 
 trolling Account. 
 
 THE VOUCHER REGISTER 
 
 DEBITING SIDE 
 
 Under the voucher system for paying accounts the Voucher 
 Register supplants the right-hand side of the cash book, so far as 
 relates to the distribution of charges and the entry of details. 
 
 The examination of vouchers and the mode of checking them 
 into the debiting side of the Voucher Register is therefore iden- 
 tical with the method already indicated for handling them when 
 they have been entered in the cash book. 
 
 Verify footings for the entire period under audit. 
 
 It is stated above that the examination of returned vouchers 
 and their comparison with this side of the Voucher Register 
 might as well be made at the time when they are being checked
 
 PRACTICAL AUDITING 43 
 
 against the crediting side of this book. This examination involves 
 inspection to determine whether they are properly O. K.'d, and 
 whether they have invoices attached or on file to substantiate the 
 charges made from them upon this side of the Voucher Register, 
 and it should be noted particularly whether the charges are prop- 
 erly distributed. Vouchers that have been issued, but rem?in 
 unpaid, should be compared in the same manner with the entries 
 in the Voucher Register. 
 
 This should clear the debiting side of this book, except such 
 items as are covered by vouchers paid but not returned ; for such 
 items the returned bank cheque is usually deemed a satisfactory 
 voucher, unless the nature of the distribution should seem to 
 require corroboration. 
 
 Make a list of these missing vouchers for your report. 
 
 Stamp the vouchers and attached invoices "Audited" at the 
 time when they are compared with the entries upon the Voucher 
 Register. 
 
 Check the general ledger items and columnar footings into 
 the general ledger. 
 
 Post footings of the personal ledger column to Controlling 
 Account. 
 
 Analyze columns which are posted in total to any expense or 
 capital account. 
 
 THE PURCHASE BOOK 
 
 The distinctive Purchase Book is often dispensed with en- 
 tirely where a Voucher Register is used, as all purchases are 
 vouchered at first hand by that system. In other establishments, 
 however, while the Purchase Book is used, it is limited to the 
 entry of purchases of the commodities dealt in, and there may be 
 still other conditions found that will further modify this arrange- 
 ment ; but the principle of auditing the purchases of the stock-in- 
 trade, wherever recorded, remains the same. 
 
 Verify footings for the entire period under audit.
 
 44 RENN'S PRACTICAL AUDITING 
 
 Check all entries of purchases with the original invoices, which 
 should be examined in regard to details of date, both month and 
 year; see that they are properly made out to your client ; and that 
 they are certified by the manager or an authorized employe in 
 respect to receipt of goods, and correctness of price and exten- 
 sions. 
 
 Stamp the invoices "Audited" at the time when they are com- 
 pared with the entries. 
 
 Purchases made for officials or employes should be traced to 
 their respective accounts. 
 
 If the charges for goods returned to shippers are entered 
 upon this book, check the shipping clerk's record of same against 
 the entries. 
 
 Check footings into the proper ledger account. 
 
 Post footings to the Controlling Account. 
 
 THE SALES BOOK 
 
 Verify footings for the entire period under audit. 
 
 For an audit of the character described here you may accept 
 the total-extension of individual invoices as the basis from which 
 to take sales into account, the assumption being that they were 
 properly checked before they were entered in the books. 
 
 Where there are numerous sales books in use, it may be found 
 that the sales are transferred to a sales journal from which the 
 postings are made to the ledger. In such a case it is optional 
 whether you check the sales into the journal, or post the totals 
 direct from the book of original entry into the Controlling 
 Account; the last named is the more desirable method, where 
 practicable, as thereby you will be taking original figures. 
 
 Should credits for merchandise returned be entered in this 
 book, call for authorized credit slips, or similar vouchers, with 
 which to check the entries.
 
 PRACTICAL AUDITING 45 
 
 Stamp the credit slips "Audited" when compared with the 
 entries. 
 
 Check footings into the general ledger. 
 Post footings to the Controlling Account. 
 
 THE JOURNAL 
 
 Verify footings for the entire period under audit. 
 
 In auditing the journal a cardinal rule, previously stated, is 
 to see that no fictitious credits are allowed to stand in any ac- 
 count to which cash is posted on either side. As has already been 
 stated elsewhere, nearly all falsifications are made with the ulti- 
 mate object of diverting cash, therefore this single rule, if fol- 
 lowed, will in itself accomplish a large part of the object of the 
 audit. 
 
 This applies equally to all books of account; but it is here 
 emphasized for the reason that the journal, with its various auxil- 
 iaries, affords the best opportunity to falsify, and in consequence 
 this book is usually favored with those entries, if any such are 
 made. 
 
 The larger establishments use journal vouchers from which 
 entries are made upon the journal. By this system an individual 
 voucher for each entry is drawn, which recites the details of the 
 transaction and is then certified with an authorized O. K. ; after 
 which it is journalized. This facilitates greatly the auditing of the 
 journal, as it is then necessary only to check these vouchers against 
 the entries in order to establish their correctness ; except in cases 
 of extraordinary entries, when independent investigation should 
 be made. 
 
 Where the journal entries are made haphazard, however, 
 .without regard to any particular system as is often the case 
 the inspection of the journal becomes a much more complicated 
 matter. To verify the entries item by item would involve an 
 amount of labor which would make auditing entirely too expen- 
 sive. For an audit such as is here described the necessity for
 
 46 RENN'S PRACTICAL AUDITING 
 
 detailed inspection may be overcome by having some authorized 
 official initial the individual pages of the journal as evidence that 
 he assumes responsibility for the entries. 
 
 While accepting such a general O. K. in the main, you should 
 still verify entries so far as possible with such data or mem- 
 oranda as may be at hand, noting particularly whether entries for 
 purchases of every kind are supported by invoices, and whether 
 the purchases were really made for your client. 
 
 All such invoices and memoranda should be stamped "Audit- 
 ed" at the time when they are checked against the entries. 
 
 By thus checking a portion of the entries, those remaining 
 unchecked will be brought more conspicuously to your notice 
 when reviewing the book, and any unusual or exceptional items 
 thus discovered should then be investigated. 
 
 It should be noted in this connection that, where credits to 
 customers have been made without a definite O. K., the receipt 
 side of the cash book should be vouched by checking the deposit 
 slips of the period under audit, against this side of the cash 
 book. 
 
 Analyze columnar charges made to expense or capital accounts. 
 
 Check general ledger items, and the footings of columns that 
 are posted in totals, into the general ledger. 
 
 Post footings of the personal ledger columns into Controlling 
 Account. 
 
 REVIEW AND CONCLUSION OF THE AUDIT 
 
 After you have inspected all the books of original entry pro- 
 ceed to examine the ledgers. 
 
 Inspect the personal ledger trial balance to determine whether 
 all the debtors' accounts have been pronounced "Correct," through 
 the statements previously sent out, or that differences (if any) 
 have been reconciled. 
 
 That all liabilities, as determined by the statements requested 
 from trade creditors, appear upon the books.
 
 PRACTICAL AUDITING 47 
 
 That the total of the personal ledger trial balance agrees with 
 the independent Controlling Account which you have kept 
 throughout the audit; and that the Controlling Account (if one is 
 kept) upon the general ledger, in turn, agrees with yours. 
 
 If some detail of the instructions heretofore given has been 
 disregarded, as is sometimes done, it may result that there is now 
 no positive proof of the correctness of the personal ledger trial 
 balance. In such a case it is necessary to foot all open personal 
 accounts upon the ledger from the point where they were last 
 ruled off, and in that manner confirm the balances shown upon 
 the trial balance. 
 
 It will be found, however, that where the foregoing instruc- 
 tions have been followed exactly throughout, and where no errors 
 have been found in the books of original entry, nor developed 
 through the medium of the statements sent out or received, that 
 the personal ledger trial balance as originally taken will stand 
 confirmed without re-footing the accounts. 
 
 For the purpose of assisting you in rating accounts receivable 
 as "good," "doubtful," or "bad," you should review the trial 
 balance in company with the credit man of the establishment, and 
 be governed by his suggestions if they seem reasonable to you. 
 
 The general ledger is now to be re-footed for the entire period 
 under audit, whether accounts are ruled up or remain open, and 
 note is to be taken at the same time whether all items within that 
 period bear your check mark. Following the inspection of each 
 account, the net balance of the same is to be checked against the 
 trial balance. 
 
 Compare your analysis sheets of the various expense and 
 capital accounts with the totals of each of these accounts upon 
 the ledger, and make sure at the same time that no error has 
 been made in the distribution of charges. 
 
 From the trial balance, verified as above, draw up the Profit 
 and Loss Statement and the Balance Sheet.
 
 48 RENN'S PRACTICAL AUDITING 
 
 THE PROFIT AND LOSS ACCOUNT 
 
 Properly the Profit and Loss account should be used merely 
 to receive the transfer of the yearly balances of the various reve- 
 nue accounts, to show compactly the result of the year's business. 
 If the account is restricted to the use stated above, it follows that 
 the items brought over have been audited in their original loca- 
 tion in the revenue accounts, and the only precaution then neces- 
 sary in respect to them is to see that they have been transferred 
 correctly. Frequently, however, both charges and credits are 
 made direct to the Profit and Loss account during the year, and 
 sometimes even direct upon the ledger without journalizing. Such 
 entries should receive especial scrutiny from the auditor, and 
 particularly if customers' accounts have been closed into Profit 
 and Loss for the stated reason that they are considered uncollect- 
 ible. It is very important to see that any transfer of a per- 
 sonal account which withdraws it from the "live" section of the 
 ledger, is properly authorized, whether it is carried into Profit and 
 Loss, Bad Debt, Suspense, or any equivalent account. Inquiry 
 should also be made to ascertain whether such delinquent ac- 
 counts are being properly followed up by the collection depart- 
 ment. 
 
 THE BALANCE SHEET 
 
 The balance sheet is a condensation of the final trial balance, 
 and should be in such form as to show in the most compact man- 
 ner, and with due regard to proper relationship, the totals of 
 each of the several classes of Assets and Liabilities of the busi- 
 ness. 
 
 Where necessary, the balance sheet may be utilized for cor- 
 recting any vital omission from the books of account; as, for in- 
 stance, if it is found that no reserve has been provided for bad 
 debts, depreciation, etc. This should be rectified upon the bal- 
 ance sheet by deducting a proper percentage from each class of
 
 49 
 
 the assets liable to depreciation, such reductions to be offset by a 
 corresponding charge to Profit and Loss. 
 
 In a similar manner, when such items as unearned premiums 
 prepaid on insurance, interest accrued on loans, rent paid in ad- 
 vance, etc., are of a sufficient amount to warrant it, credit may 
 be given on the balance sheet by inserting a Special Inventory 
 account, and making a corresponding credit to Profit and Loss. 
 
 In order to be perfectly exact, the stationery, fuel, etc., pur- 
 chased but unused at the terminating date may likewise be taken 
 into account in the same manner, though the position is usually 
 taken that, if they are not of sufficient value to be regularly in- 
 ventoried, they need not be considered. 
 
 Wages accrued, and interest on notes given, should appear 
 upon the books of account ; but if not entered, they must be pro- 
 vided for upon the balance sheet as "Accrued Accounts." 
 
 A great deal has been written in respect to the relative posi- 
 tions which the assets and liabilities should occupy upon the bal- 
 ance sheet, but the preferred arrangement when the double-page 
 form is used, is to locate the assets upon the left-hand side, with 
 the liabilities opposite. In harmony with this, when the single- 
 page form is employed, the assets should be placed before the 
 liabilities. 
 
 The various items of assets should be arranged in the order 
 of their availability in the event of liquidation, and the liabilities 
 should be arranged on a similar basis, in the sequence of their 
 respective preference in law. 
 
 Review the balance sheet to determine how far your investi- 
 gation has established the existence of the assets scheduled, and 
 if any items still lack verification, they should now be investi- 
 gated and confirmed. 
 
 Satisfy yourself that values have not been inflated, and that 
 proper deductions have been made from the various items to 
 meet discounts, probable losses from bad debts, depreciation, etc. 
 
 The inventory, particularly, should bear the O. K. of some
 
 SO RENN'S PRACTICAL AUDITING 
 
 one in authority, as certification that the goods scheduled had 
 actually been purchased but remained unsold at the date of the 
 inventory, and that they were listed at prices not exceeding the 
 original cost, or present market value, whichever is the lowest. 
 In addition to this you should satisfy yourself of the correctness 
 of the extensions and footings. 
 
 Bills Receivable, as well as other securities, when not other- 
 wise verified, must be examined carefully to establish their genu- 
 ineness, and they should be checked against the item which they 
 represent upon the balance sheet. 
 
 It is urged, however, that the directions given heretofore for 
 verifying bills receivable, should be followed. 
 
 If customers' notes have been discounted, but have not ma- 
 tured, there is a contingent liability involved for which it is 
 necessary that a reserve be provided. 
 
 These instructions have advised the procuring of statements 
 from trade creditors for comparison with the books of your 
 client. Of course you should assure yourself that they agree, 
 and also make a careful survey to determine that all miscel- 
 laneous liabilities, such as wages, rent, etc., are provided for upon 
 the balance sheet. 
 
 THE AUDITOR'S REPORT 
 
 From the information gathered and noted throughout the 
 audit make up your report, reciting conditions as you found 
 them. Call especial attention to any irregularities that you may 
 have discovered, and recommend such changes or improvements 
 in the method of accounting as you may deem advisable. Ordi- 
 narily the report should contain the following schedules and sta- 
 tistical statements ; and, under special conditions, still others may 
 be required to meet the particular object for which the audit was 
 undertaken.
 
 PRACTICAL AUDITING 51 
 
 Balance Sheet. 
 
 Trading Statement, or Profit and Loss Account, and compari- 
 sons with previous years. 
 
 Summaries of the analyses of the various Capital Accounts 
 and Expense Accounts, and comparison with previous years. 
 
 List of Bills Receivable. 
 
 List of other securities (if any). 
 
 List of Bills Payable. 
 
 List of Delinquent Accounts. 
 
 Recapitulation of the cash balance. 
 
 List of outstanding cheques at time of reconcilement with 
 bank pass-book. 
 
 List of unpaid vouchers. 
 
 List of missing "paid" vouchers (if any). 
 
 List of missing returned bank cheques (if any). 
 
 Trial balance of the initial date. 
 
 Preliminary trial balance of the terminating date. 
 
 Final trial balance of the terminating date. 
 
 THE AUDITOR'S CERTIFICATE 
 
 The Balance Sheet, when rendered separately, should bear 
 your certificate at the foot as follows : 
 
 I hereby certify that I have carefully examined the books of 
 account of the Smith-Brown Co., of Chicago, 111., and that the 
 above balance sheet is a true, correct, and full statement of the 
 condition of their business as on November 30, 1905, as disclosed 
 by said books of account. 
 
 (Signed)- 
 
 Accountant and Auditor. 
 
 Dated at Chicago, 111., December 31, 1905.
 
 52 RENN'S PRACTICAL AUDITING 
 
 A SPECIMEN REPORT 
 
 The following report was rendered upon completion of an 
 audit where the books were found in chaotic condition. It has 
 been selected as a specimen because it abounds in criticism and 
 suggestions for improvement, necessitated by the condition of 
 the accounts. 
 
 The student can readily determine what features to omit when 
 reporting upon books which have been correctly kept. 
 
 (In practice the report is usually typewritten.)
 
 November 23, 1906, 
 
 THE COAL MINING AND SHIPPING 
 COMPANY 
 
 ACCOUNTANT'S AUDIT REPORT 
 
 on the Books of Account for the eighteen months ended 
 September 30, 1906. 
 
 GEORGE B. RENN, 
 
 Public Accountant and Auditor, 
 Chicago.
 
 1341 Dakin Street, 
 Chicago, 111. 
 
 November 23, 1906. 
 
 James Smith, Esq., 
 President, 
 
 The Coal Mining '& Shipping Co., 
 Chicago. 
 
 Dear Sir: 
 
 In compliance with your instructions we have made a thorough 
 examination of the Books of Account and records pertaining to same, 
 of The Coal Mining & Shipping Co., for the eighteen months from 
 April 1st, 1905, to September 30th, 1906, and herewith submit our 
 report thereon. 
 
 The Accounts presented are divided into two parts, covering the 
 business of twelve months and six months respectively, as follows: 
 
 PART 1. April 1st, 1905, to March 31st, 1906. 
 
 PART 2. April 1st, 1906, to September 30th, 1906. 
 
 INDEX PART ONE. 
 
 We have prepared the following Accounts covering the trans- 
 actions of the year ended March 31st, 1906. 
 
 Account No. 1. Balance Sheet as on March 31st, 1906. 
 
 Account No. 2. General Profit & Loss Account for the year. 
 
 Account No. 3. Dock General Profit & Loss Account for the year. 
 
 Account No. 4. Dock No. 1 Profit & Loss Account for the year. 
 
 Account No. 5. Dock No. 2 Profit & Loss Account for the year. 
 
 Account No. 6. Mine Profit & Loss Account for the year. 
 
 66
 
 56 
 
 RENN'S PRACTICAL AUDITING 
 
 INDEX PART TWO. 
 
 The following Accounts have been prepared for the six months 
 ended September 30th, 1906: 
 
 Account No. 7. Summarized Trial Balance as on Sept. 30th, 1906. 
 Account No. 8. List of Accounts Receivable as on Sept. 30th, 1906. 
 Account No. 9. List of Accounts Payable as on Sept. 30th, 1906. 
 
 ANALYSES PART ONE. 
 ACCOUNT NO. 1. BALANCE SHEET. 
 
 In the following paragraphs we give analyses of various accounts 
 shown on Balance Sheet: 
 TREASURY STOCK $49,100.00. 
 
 BALANCE, April 1st, 1905 $134500.00 
 
 LESS: STOCK transferred as below: 
 
 Name, 426 shares $42600.00 
 
 Name, 232 shares 23200.00 
 
 Name, 116 shares 11600.00 
 
 Name, 80 shares 8000.00 
 
 85400.00 
 
 BALANCE, March 31st, 1906 $ 49100.00 
 
 REAL ESTATE, PLANT, IMPROVEMENTS, ETC., 
 totalling $95,534.46. 
 
 MINE NO. 1 REAL ESTATE AND PLANT. $67,597.01. 
 
 BALANCE, April 1st, 1905 $ 44860.90 
 
 REAL ESTATE: 
 
 123 Acres from $12000.00 
 
 78 3/10 Acres from 5872.50 
 
 1 Acre from 50.00 
 
 17922.50 
 
 COAL RIGHTS: 
 
 2024 Acres from $ 1556.25 
 
 40 Acres from 3000.00 
 
 4556.25 
 
 MACHINERY, ETC.: 
 
 1 13x12 Ideal Engine, 2nd hand....$ 550.00 
 
 1 Austin Steam Separator 50.00 
 
 1 8-ton Head Pan Scale 80.00 
 
 1 Steam Engine, 2nd hand 55.00 
 
 Carried forward $ 735.00 $67339.65
 
 A SPECIMEN REPORT 57 
 
 Brought forward $ 735.00 $67339.65 
 
 MACHINERY, ETC. (continued): 
 
 Leather Belting 26.35 
 
 Material New Cars 22.31 
 
 Bar Iron (use not specified) 99.75 
 
 883.41 
 
 LABOR (Distribution of Mine Pay-Roll) 5173.59 
 
 MULES purchased (3) 300.00 
 
 SUNDRIES: 
 
 Machinery Repairs and Supplies. ...$ 356.12 
 
 Services Mining Engineer 54.50 
 
 Freight (adjusting undercharge on 
 
 Machinery and Supplies) 1.35 
 
 411.97 
 
 TOTAL DEBITS $ 74108.62 
 
 CREDITS. 
 SALES: 
 
 Old Hoisting Engine $550.00 
 
 Old Scale 60.00 
 
 Old Elevator 50.00 
 
 Revolving Screen 20.00 
 
 Scrap Iron, etc 296.42 
 
 3 Mules sold 235.00 
 
 $ 1211.42 
 
 ROYALTY, charged to Coal Account.. 3772.19 
 
 REFUND on Purchase from 1500.00 
 
 MINE ASSETS COLLECTED 28.00 
 
 6511.61 
 
 BALANCE, March 31st, 1906 $ 67597.01 
 
 You will note that Machinery, Tools, Machinery Repairs and 
 Supplies are included in the charges to this account and also in the 
 Improvement Account (details of which are given below) showing a 
 lack of uniformity in the distribution of charges. An examination of 
 the other accounts would seem to indicate that the distribution of 
 accounts was left to the opinion of whoever approved the charges, 
 without reference to any definite plan. This practice minimizes the 
 value of the distribution, and the remedy therefor is made the subject 
 of another part of this report, "Distribution of Accounts." 
 
 The credit for Royalty, which is made each month, we presume 
 is considered as the Depreciation of the Mine, but no Depreciation 
 has been written off Improvement and other asset accounts. The 
 subject of Depreciation is considered in a later paragraph.
 
 58 RENN'S PRACTICAL AUDITING 
 
 MINE NO. 1 IMPROVEMENTS. $25,733.14. 
 
 MACHINERY, EQUIPMENT, ETC.: 
 
 Goodman Electrical Machinery. $ 3000.00 
 1 Pr. 18x36 Hoisting Engines (with 
 
 packing) 1930.00 
 
 51 Coal Cars 1375.00 
 
 1 Weigh Pan and 1 Shaker Screen 1075.00 
 
 1 Electric Generator 900.00 
 
 1 20' Fan and 12x24 Engine 685.00 
 
 1 Pr. Self-dumping Cages 425.00 
 
 59 Sets 13" S. O. Wheels with axles 481.00 
 
 283 Cast Iron Bumpers 141.50 
 
 25 13" Wheels for Cars 37.50 
 
 Bar Iron for Cars 103.46 
 
 Double Dynamo Belt 49.82 
 
 Pulleys, Belting, Shafting and 
 
 Hangers 87.52 
 
 Pipe and Boiler Covers and As- 
 bestos Cement 65.77 
 
 2 Lubricator Pumps at $42,00 84.00 
 
 1 Power Post Drill with C. S. 
 
 Pulley and Hangers 39.00 
 
 1 Loco. Arc Headlight with Car- 
 
 bons 37.00 
 
 , 3 Mandrils for Saw, Emery Wheel 
 
 and Grinders 23.00 
 
 2 Radiators 25.00 
 
 1 Reel for Copper Wire 10.00 
 
 1 % ton Chair Hoist 9.10 
 
 1 Buffalo Blower 9.10 
 
 1 Circular Saw $6.00, 1 Emery 
 
 Wheel $2.03 8.03 
 
 1 Steel Barrow 5.70 
 
 3 No. 1 Trolley Supports $3.60, 1 
 
 Switch $4.05 7.65 
 
 1 Arbor for No. 2 Morse Socket.. 1.00 
 
 $ 10615.15 
 
 Labor and Material used in Construction of 
 New Buildings and in sundry Improvements 
 
 and Maintenance 9571.35 
 
 Machinery Supplies and Repairs 2333.23 
 
 Steel Rails, Joints and Spikes 2444.56 
 
 R. R. Ties 504.02 
 
 Freight and Express 264.83 
 
 BALANCE, March 31st, 1906 $ 25733.14
 
 A SPECIMEN REPORT 59 
 
 Included in the foregoing item for Labor and Material are several 
 charges for Maintenance of Plant, which should have been charged 
 against cost of operation. 
 
 In the foregoing account there is a charge for two Lubricator 
 Pumps at $42.00 each. Only one pump was purchased, but two bills 
 were rendered for same and both bills were passed and paid. One bill 
 was rendered by the maker of the pump in Chicago, and some weeks 
 later another bill was passed in favor of the Sales Agent in St. Louis, 
 who had also rendered a bill. An effort is now being made to recover 
 the amount paid to the St. Louis Agent. 
 
 Included in the item of Machinery, Supplies and Repairs, is a 
 
 duplicate charge for 1 Breeching purchased from , Invoice No. 
 
 396, amount $55.00. This same breeching was again charged on 
 
 Invoice No. 459 and paid for. We are informed that Mr. has 
 
 acknowledged the error and remitted the amount. 
 
 Both of the above, errors are the result of carelessness on the part 
 of your Mine Clerk, or lack of a proper Receiving Book being kept 
 there. A description of a good Receiving Book is given in the latter 
 part of this Report. 
 
 There are also included in the item "Labor and Material" several 
 
 bills for timbers or lumber purchased from , and during the 
 
 examination of this account we found that Invoice No. 284, amounting 
 to $126.68 had been paid for twice. Steps are now being taken to 
 recover this amount. This error was made in your Chicago Office, 
 and caused by charging the amount of the first cheque to Improvement 
 Account through the Cash Book direct, and later charging the invoice 
 to Improvement Account and crediting the account of the shipper 
 through the Journal. A correct Voucher System (such as is referred 
 to later) would render such errors impossible. 
 
 SAW MILL $1745.10. 
 
 Jan. 15, 1906. Purchase price of Mill $1600.00 
 
 3 Wagons purchased 145.10 
 
 BALANCE, March 31st, 1906.. ..$1745.10
 
 60 RENN'S PRACTICAL AUDITING 
 
 DOCK NO. 1 PERSONAL PROPERTY $322.18. 
 
 BALANCE, April 1st, 1905 $ 113.50 
 
 Purchases : 6 Wheelbarrows $60.00 
 
 4 doz. Scoops 49.98 
 
 \ l /2 doz. Scoops 23.25 
 
 Coal Chutes $22.52, Baskets $14.00 36.52 
 
 Window Shades, office 10.45 
 
 Gasoline Lamps 12.50 
 
 Misc. Tools and Supplies 15.98 208.68 
 
 BALANCE, March 31st, 1906 $ 322.18 
 
 The balance of the above account is carried as an Asset on your 
 Books, but it will be readily seen that most of the additions to same 
 during the year were not of a permanent nature. 
 
 DOCK NO. 2 PERSONAL PROPERTY $137.03. 
 
 BALANCE, April 1st, 1905 $142.23 
 
 4 1-ton Dump Coal Buckets 254.80 
 
 $397.03 
 LESS: Repairs, etc., paid for by Ry. Co. 260.00 
 
 BALANCE, March 31st, 1906 $137.03 
 
 It is evident that the above balance does not represent the inven- 
 tory value of Dock Property. The cost of making the various repairs, 
 which has been partly refunded by the receipt of the $260.00 above 
 credited, was originally charged to the Expense Accounts and the 
 refund should have been carried to the same accounts. 
 
 STOCKS as per Inventories. $98,726.22. 
 
 The amounts representing the inventory values of various stocks 
 on hand are as shown on your Books of Account and could not be 
 verified by us. 
 
 FURNITURE AND FIXTURES $658.30. 
 
 BALANCE, April 1st, 1905 $444.50 
 
 Filing Cabinets, etc 107.80 
 
 1 No. 7 Remington Typewriter 60.00 
 
 1 No. 1 Pica Underwood Typewriter 46.00 
 
 BALANCE, March 31st, 1906 $658.30
 
 A SPECIMEN REPORT 61 
 
 BILLS RECEIVABLE $156.07. 
 
 This item represents a note which has since been paid. 
 
 SPECIAL ACCOUNTS $14,655.43. 
 
 The above represents overcharges, and adjustments, which have 
 been charged to various shippers, and are now in process of settle- 
 ment. 
 
 CAPITAL STOCK $250,000.00. 
 
 The entries made for the increase of the Capital Stock from 
 $50,000.00 to the above amount were made prior to April 1st, 1905, 
 but we examined same and found them correct. 
 
 SURPLUS ACCOUNT $17,326.24. 
 
 This account as shown on Balance Sheet represents the Surplus 
 for the season 1905-1906. There was, however, a credit balance of 
 $27,454.39 at the close of the business of the Old Coal Co., March 31, 
 1905, prior to the increase of the Capital Stock. This Surplus was 
 distributed pro rata among the holders of the $50,000.00 Capital 
 Stock, as follows: 
 
 Name, 275 shares $15099.92 
 
 Name, 150 shares 8236.32 
 
 Name, 75 shares 4118.15 
 
 500 shares $27454.39 
 
 ACCOUNT NO. 2. GENERAL PROFIT AND LOSS ACCOUNT. 
 
 The charges entered under the various headings require no ex- 
 planation, the amounts entered opposite each of the items being as 
 accurate as could be obtained from the accounts as kept in your 
 Books. 
 
 ACCOUNT NO. 3. DOCK GENERAL PROFIT AND LOSS 
 ACCOUNT. 
 
 We give below the details of the Superior Coal Account, and 
 Steamer Loss and Gain Account. The amounts entered as the Loss 
 and Gain at the Omaha and Denver Agencies, respectively, are as 
 shown in the accounts in the Chicago Office, but as the General 
 Accounts of these Agencies are not kept in Chicago, we have not
 
 62 RENN'S PRACTICAL AUDITING 
 
 verified these amounts. We understand these Agencies are under the 
 
 personal supervision of Mr. , Secretary. The Losses and Gains 
 
 of Docks No. 1 and 2 are given in Accounts 4 and 5 respectively. 
 
 SUPERIOR COAL ACCOUNT, GAIN $8322.68. 
 CHARGES: 
 
 Coal Purchases $90345.11 
 
 Cargo Insurance 149.44 
 
 Interest on Notes given for purchases 29.03 
 
 CREDIT: 
 
 Coal Sales $98846.26 
 
 PROFIT as above.. 8322.68 
 
 $98846.26 $98846.26 
 
 STEAMER FUEL ACCOUNT, GAIN $3661.08. 
 
 SALES to Steamers $20095.45 
 
 COST OF FUEL as per Fuel bills 16027.59 
 
 $ 4067.86 
 LESS: 10 per cent paid to Agent 406.78 
 
 NET GAIN as above $ 3661.08 
 
 ACCOUNT NO. 4. DOCK NO. 1 PROFIT AND LOSS. 
 
 In considering the cause for this Account showing a large loss, 
 while the Dock No. 2 Account shows a gain, it will be noted that the 
 Selling and General Expenses and the Taxes and Insurance amount 
 to about $6500.00 more than at Dock No. 2. 
 
 At At 
 Dock No. 1. Dock No. 2. 
 The Coal on hand April 1st, 1905, 
 and Coal purchased was approxi- 
 mately $158400.00 $156700.00 
 
 The sales and coal on hand March 31, 
 
 1906, was approximately 217750.00 224900.00 
 
 Leaving Gross Profit against which to 
 charge Cost of Handling and all 
 other expenses $ 59350.00 $ 68200.00 
 
 These figures would indicate that either the coal cost a higher 
 price or was sold at closer figures at Dock No. 1 than at Dock No. 2.
 
 63 
 
 Analyses of certain accounts shown in Account No. 4 are given 
 herewith. 
 
 BITUMINOUS AND ANTHRACITE, DISCHARGING AND 
 LOADING ACCOUNTS. 
 
 Distribution 
 
 Discharging Discharging; 
 Bit. Anth. 
 
 Labor $6158.11 $2419.69 
 
 Fuel 361.29 145.41 
 
 Light 79.58 14.36 
 
 Repairs 64.52 47.05 
 
 Supplies 28.34 18.66 
 
 Loading 
 Bit. 
 
 $8347.60 
 44.16 
 
 57.17 
 13.48 
 
 Loading 
 Anth. 
 
 $7652.28 
 
 181.61 
 67.07 
 21.06 
 14.16 
 
 Total* 
 
 $24577.68 
 
 732.47 
 
 161.01 
 
 189.80 
 
 74.64 
 
 $6691.84 $2645.17 $8462.41 $7936.18 $25735.60 
 
 If the charges against Discharging and Loading Anthracite (as 
 shown by the above statement) are correct, it appears that the coal 
 for the A. & B. Company was handled on too close a margin to insure 
 any profit, as the Anthracite Commission Accounts show receipts of 
 only $10735.01. 
 
 GENERAL AND DOCK EXPENSES $6596.47. 
 
 GENERAL EXPENSES: 
 
 Rent of Dock $ 1933.32 
 
 Rent of Office 387.50 
 
 Expenses with Trade 132.62 
 
 Switching 2.00 
 
 Light $20.87, Water Tax $15.00 35.87 
 
 Postage Stamps 40.00 
 
 Advertising 26.00 
 
 Donations 10.00 
 
 Sundry Supplies and Expense 102.24 
 
 $ 2669.55 
 
 DOCK EXPENSE: 
 
 Labor $ 2840.80 
 
 Machinery Repairs 594.28 
 
 Supplies and Tools 245.88 
 
 Cribbing Bins 138.35 
 
 Light 52.50 
 
 Fuel $25.22, Water $4.78 30.00 
 
 Donations 10.00 
 
 Stationery and Sundries 15.11 
 
 3926.92 
 
 $ 6596.47
 
 64 
 
 RENN'S PRACTICAL AUDITING 
 
 TAXES AND INSURANCE $1785.70. 
 
 Real Estate Taxes, 1904 $ 92.67 
 
 Real Estate Taxes, 1905 615.50 
 
 Personal Property Taxes 231.85 
 
 Fire Insurance 304.03 
 
 Employer's Liability 520.65 
 
 Surety Bond Premium 21.00 
 
 $ 1785.70 
 
 FOREIGN COAL CR. 
 
 $167.35. 
 Inventory 
 
 April 1st, 
 
 BALANCE, 
 
 1905 $ 161.40 
 
 Coal Purchases 27429.04 
 
 Commissions 477.93 
 
 Sales $28235.72 
 
 BALANCE, Profit as above 167.35 
 
 $28235.72 $28235.72 
 
 ACCOUNT NO. 5. DOCK NO. 2 PROFIT AND LOSS. 
 
 Details of various charges and credits are given in the following 
 paragraphs: 
 
 BITUMINOUS AND ANTHRACITE, DISCHARGING AND 
 LOADING ACCOUNTS. 
 
 Diitribution 
 
 Discharging Discharging Loading 
 Bit. Anth. Bit. 
 
 
 Labor $11506.27 $1689.19 $6156.94 $3001.90 $22354.30 
 
 Fuel 
 
 457.03 
 
 120.00 
 
 540.33 
 
 
 1117.36 
 
 Misc. Repairs... 
 Supplies 
 
 46.22 
 44.30 
 
 42.37 
 6.60 
 
 317.09 
 105.61 
 
 9.90 
 .64 
 
 415.58 
 157.15 
 
 Sundries . . . . 
 
 46494 
 
 
 
 
 46494 
 
 Repairing Dam- 
 aged Boat . . . 
 
 90.29 
 
 
 
 
 90.29 
 
 Cribbing 
 
 
 179.78 
 
 
 
 17978 
 
 
 
 
 
 
 
 
 $12609.05 
 
 $2037.94 
 
 $7119.97 
 
 $3012.44 
 
 $24779.40 
 
 The Discharging Bituminous Account was charged with Repairs 
 amounting to $342.21, but the net charge was reduced to $46.22 on 
 
 account of certain repairs being charged to the Ry. Co. We do 
 
 not know the reason for crediting all of the amount so charged to this 
 account, as it would seem probable that some of these repairs were 
 originally charged against other accounts.
 
 A SPECIMEN REPORT 
 
 65 
 
 GENERAL AND DOCK EXPENSE $5553.66. 
 
 GENERAL EXPENSE: 
 
 Rent of Dock $2500.00 
 
 Rent of Office 135.00 
 
 Sundry Office Expenses 70.83 
 
 Sundry Repairs 58.38 
 
 Freight 29.55 
 
 Donations 13.00 
 
 $2806.76 
 
 DOCK EXPENSE: 
 
 Labor $2612.49 
 
 9 Tram Cars 256.50 
 
 Freight on Machinery, etc 108.88 
 
 Repairs to Machinery 23.03 
 
 Repairs to Dock 9.75 
 
 Supplies 16.61 
 
 $3027.26 
 
 Less: Sundry Repairs charged to 
 
 Ry. Co 280.36 
 
 2746.90 
 
 TOTAL as above $5553.66 
 
 TAXES AND INSURANCE $730.53. 
 
 Real Estate Taxes, 1905 $ 140.00 
 
 Employer's Liability 569.53 
 
 Surety Bond Premium 21.00 
 
 TOTAL ..$ 730.53 
 
 Included in the charge as above, for Liability Insurance, is an 
 amount of $147.70 chargeable against the season of 1904-1905, which 
 should have been charged to the Old Coal Co. Profit and Loss Ac- 
 count. 
 
 PLANT ACCOUNT $275.00. 
 
 BALANCE, April 1st, 1905 $4225.00 
 
 (Book value of Dock.) 
 
 Sold to $4500.00 
 
 Profit on Sale.. 275.00 
 
 $4500.00 $4500.00 
 
 DOCK OVERAGE $110.29. 
 
 This being a profit of the season 1904-1905, this amount should 
 have been credited to the Old Coal Co. Profit and Loss Account.
 
 66 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT NO. 6. MINE NO. 1 PROFIT AND LOSS. 
 Details are given for the following accounts: 
 
 MAINTENANCE $2943.30. 
 
 Labor and Material: 
 
 Timbering and Lumber $1563.01 
 
 Re-timbering Escapement Shaft and new Ladders .... 199.47 
 
 Re-timbering Hoisting Shaft 228.93 
 
 Machinery Supplies and Repairs 677.34 
 
 Bricklaying, building Engine Bed in Shop and Stop- 
 pings in Mine 35.20 
 
 Brick for Stoppings 27.50 
 
 Re-plastering Fire Walls 24.35 
 
 Painting 82.91 
 
 Roofing Barn 32.00 
 
 New Drain Pipe from Scale Pit 18.50 
 
 Repairing Roof 7.12 
 
 Repairing and Testing Scales 46.97 
 
 $2943.30 
 
 Items such as building new engine bed and new drain pipe from 
 Scale Pit should have been charged to Improvement Account. 
 
 TAXES AND INSURANCE $1265.42. 
 
 Real Estate Taxes $ 172.07 
 
 Personal Property Taxes 57.08 
 
 Employer's Liability 644.43 
 
 Fire Insurance 291.84 
 
 Steam Boiler Insurance . 100.00 
 
 $1265.42 
 
 To prepare absolutely correct Profit and Loss Accounts it would 
 be necessary to consider unexpired insurance, etc., which has not 
 been done. 
 
 SPECIAL CHARGES $625.28. 
 
 Included in the item of Legal Expense is an amount of $100.00 
 paid to , Attorney, for securing option on property. A sim- 
 ilar payment of the same amount was charged to the Plant Account, 
 as a part of the cost of the property.
 
 A SPECIMEN REPORT 67 
 
 MACHINERY AND IMPROVEMENTS $229.22. 
 
 Steel Rails, etc $138.48 
 
 1 No. 5 O. Sc. Plate 25.00 
 
 1 No. 2 Oil Filter 15.00 
 
 1 No. 1 Forge 14.40 
 
 1-8 ton Lifting Jack 8.00 
 
 1 Drill Press, 2nd hand 8.00 
 
 1 Wooden Pump 5.34 
 
 1 Office Desk . 15.00 
 
 $229.22 
 
 The above should not have been charged against the year's earn- 
 ings. 
 
 ANALYSES PART II. 
 
 ACCOUNT NO. 7. SUMMARIZED TRIAL BALANCE. 
 
 This account shows the balances of the various Asset and Lia- 
 bility Accounts as at Sept. 30th, 1906, and analyses of certain accounts 
 are given in the succeeding paragraphs. 
 
 TREASURY STOCK $49,100.00. 
 
 The balance of this account is the same as shown in Account 
 No. 1. 
 
 REAL ESTATE, PLANT AND IMPROVEMENTS, totalling 
 $103,134.65. 
 
 MINE NO. 1 PLANT. $71,528.38. 
 
 BALANCE, March 31st, 1906 $67597.01 
 
 Coal Rights, 82 Acres 6150.00 
 
 3 No. 1 Drills, purchased Oct. 20th, 1904 21.00 
 
 Labor and brick for fire wall 206.45 
 
 1 Team Horses with harness 335.00 
 
 1 Mule . 135.00 
 
 $74444.46 
 Less: Sales: 
 
 Scrap $131.34 
 
 Machinery 55.20 
 
 1 team Horses 27.50 
 
 $ 214.04 
 
 Royalty charged to Coal Account. 2592.04 
 
 1 Mule killed 110.00 2916.08 
 
 BALANCE $71528.38
 
 68 RENN'S PRACTICAL AUDITING 
 
 MINE NO. 1. IMPROVEMENTS $28,879.63. 
 
 BALANCE, March 31st, 1906 $25733.14 
 
 25 Coal Cars 625.00 
 
 25 Sets 13" S. O. Wheels with axles 225.00 
 
 Iron, Lumber, etc., for new cars 231.00 
 
 1 Armature for Elec. Locomotive 312.00 
 
 1 Rail Bender 16.65 
 
 Steel Rails, etc 867.63 
 
 Lumber, etc., for New Buildings and Extensions. 137.11 
 
 Painting Office Addition and New Engine Room 52.10 
 
 Plastering Engine Room 31.50 
 
 Lumber for New Switches 10.50 
 
 Labor and Supplies used for New Improvements 
 
 and for Repairs 635.34 
 
 Freight 2.66 
 
 BALANCE $28879.63 
 
 SAW MILL $1805.46. 
 
 BALANCE, March 31st, 1906 $ 1745.10 
 
 1 No. 46 B. Sharpener with emery wheel and bolt.. 35.00 
 
 Freight on above 2.08 
 
 Freight on Machinery charged to this account in 
 
 March, 1906 23.28 
 
 BALANCE . ..$ 1805.46 
 
 DOCK NO. 1 PERSONAL PROPERTY $550.20. 
 
 BALANCE, March 31st, 1906 $ 322.18 
 
 1 Single Wagon 50.50 
 
 3 Coal Screens 28.50 
 
 1 Screw Plate 17.85 
 
 1 Anvil $10.54, 1 Vise $7.50 18.04 
 
 7 doz. Scoops, $91.21, 2 Coal Chutes $8.40 99.61 
 
 Misc. Tools, etc 13.52 
 
 BALANCE . ..$ 550.20 
 
 DOCK NO. 2 PERSONAL PROPERTY $296.48. 
 
 BALANCE, March 31st, 1906 $ 137.03 
 
 6 Wheelbarrows 60.00 
 
 7 doz. Scoops 91.43 
 
 Freight on above 8.02 
 
 BALANCE $ 296.48
 
 A SPECIMEN REPORT 69 
 
 The Scoops and Tools charged to the Personal Property Ac- 
 counts, not being permanent assets, should have been charged against 
 operating costs. 
 
 77th ST. YARD PERSONAL PROPERTY $74.50. 
 
 Purchases: 4 Wheelbarrows $ 37.00 
 
 2 Autographic Registers 37.50 
 
 BALANCE $ 74.50 
 
 FURNITURE AND FIXTURES $688.30. 
 
 BALANCE, March 31st, 1906 $658.30 
 
 1 Smyrna Rug 30.00 
 
 BALANCE $688.30 
 
 BILLS PAYABLE $190,382.67. 
 
 The above consists of the following items: 
 NOTES DISCOUNTED AT BANKS: 
 
 Tenth National $35000.00 
 
 Eleventh National 25000.00 
 
 $ 60000.00 
 
 NOTES GIVEN FOR DOCK COAL PURCHASES.. 112890.18 
 
 OTHER NOTES: 
 
 Name, due 6/12/1907 $ 3500.00 
 
 Name, due 3/25/1907 1000.00 
 
 Name, due 3/25/1908 1000.00 
 
 Name, due 5/ 1/1907 1731.25 
 
 Name, due 5/ 1/1908 1731.25 
 
 Name, due 5/ 1/1907 478.12 
 
 Name, due on demand 8051.87 
 
 17492.49 
 $190382.67 
 
 OLD COAL CO. PROFIT AND LOSS $1675.88. 
 
 We understand this account should be charged and credited with 
 all items affecting the business of the Old Coal Co., and the final 
 balance of same will be charged or credited to the Stockholders of the 
 Old Coal Co. as at March 31st, 1905. However, several losses and 
 gains on the business prior to the above date were not carried to this 
 account, as is shown on the Profit and Loss Accounts herewith sub- 
 mitted.
 
 70 RENN'S PRACTICAL AUDITING 
 
 A summary of the charges and credits resulting in the foregoing 
 credit balance is given below: 
 
 CHARGES. 
 
 Reduction and cancellation of R. R. Claims $ 126.61 
 
 Claim collected and credited in error to Special Ac- 
 count. Credit given to Railroad Account and 
 
 charged here, as Special Account is closed 276.00 
 
 Sundry Allowances to Customers 330.80 
 
 BAD DEBTS: 
 
 Name $40.30 
 
 Name 49.50 
 
 Name 49.66 
 
 139.46 
 
 .Claim of M. Co 141.77 
 
 March 1905 Expenses of 204.00 
 
 Freights 191.79 
 
 Commissions, February and March 30.40 
 
 Legal Expenses 763.23 
 
 CR. BALANCE, as above 1675.88 
 
 $3879.94 
 CREDITS. 
 
 BAD DEBTS RECOVERED: 
 
 Superior F. & T. Co $ 31.50 
 
 Coll. through M. & A. (name not 
 
 entered in Cash Book) 11.25 
 
 Unclaimed Credit 4.68 
 
 , Agent, 85 per cent of this account 
 
 transferred, representing estimated 
 
 profit on special purchases 1904-1905... 3832.51 
 
 3879.94 
 
 A portion of the above charge for Legal Expenses should have 
 been charged to The Coal Mining & Shipping Co., and also a part to 
 the Retail Coal Co. as the bill rendered by the attorneys covers 
 organization of The Coal Mining & Shipping Co., and various other 
 services. 
 
 SUNDRY PROFIT AND LOSS ACCOUNTS. 
 
 The amounts entered under the above heading are the totals of 
 the various balances of Profit and Loss Accounts as at Sept. 30th, 1906. 
 No Profit and Loss Accounts can be submitted covering the six 
 months, as the accounts included under this heading were not closed.
 
 A SPECIMEN REPORT 71 
 
 ACCOUNTS NOS. 8 AND 9. ACCOUNTS RECEIVABLE AND 
 
 PAYABLE. 
 
 In these accounts are given the balances of all Sundry Debtor and 
 Creditor Accounts as on Sept. 30th, 1906, which have been carefully 
 examined and verified. Those accounts which appeared doubtful are 
 listed at the close of Account No. 8. 
 
 DIVIDEND ACCOUNT NO. 1. 
 
 Below are the details of this account: 
 
 CREDIT. TRANSFER FROM PROFIT AND LOSS 
 
 for dividend of 8 per cent declared May 7th, 1906. . . .$16072.00 
 
 DEBITS. DISTRIBUTED TO STOCKHOLDERS, 
 as follows: 
 
 Name, 1431 shares $11448.00 
 
 Name, 352 shares 2816.00 
 
 Name, 176 shares 1408.00 
 
 Name, 50 shares 400.00 
 
 16072.00 
 
 After the payment of this dividend there remains a surplus of 
 $1403.32 from the business of the season of 1905-1906, as shown on 
 your Books of Account. 
 
 PROFIT AND LOSS ACCOUNT. OLD. 
 
 The Surplus of $17,326.24 as at March 31st, 1906, was carried to 
 this account and the account has since been changed by the following 
 entries, which represent losses and gains of the season 1905-1906: 
 
 CREDIT BALANCE, March 31st, 1906 $17326.24 
 
 Adjusting Claims 4.14 
 
 Transfer , Agent 676.33 
 
 15 per cent of credit balance, representing estimated 
 profit on special purchases in 1906. 
 
 Unclaimed Credits: 
 
 Name, August, 1904 $167.19 
 
 Name, October, 1905 36.23 203.42 
 
 B. & O. Fuel Co. Account 4.00 
 
 Refund from Subscription to Coal Assn 2.25 
 
 $18216.38 
 CHARGES. 
 
 Dividend No. 1, 8 per cent $16072.00 
 
 Reduction and cancellation of claims 493.78 
 
 Freights 147.61 
 
 Loss on Cargo of "Inter Ocean" 41.69 
 
 Carried forward $16755.08 $18216.38
 
 72 RENN'S PRACTICAL AUDITING 
 
 Brought forward $16755.08 $18216.38 
 
 Bad Debts: 
 
 Name $ 2.35 
 
 Name 3.40 
 
 Name 41.30 
 
 Name 10.93 
 
 57.98 
 16813.06 
 
 CREDIT BALANCE, Sept. 30th, 1906 $ 1403.32 
 
 PROFIT AND LOSS ACCOUNT (1906-1907). 
 
 The following charges have been made to this account: 
 
 Reduction of Claims $17.97 
 
 Cost of re-consigning car 5.00 
 
 BALANCE, Sept. 30th, 1906 $22.97 
 
 The charges for reduction and cancellation of claims should be 
 made against the account which is credited at the time claims are 
 made. 
 
 The cost of re-consigning shipments should be charged against 
 Freight Account, as it is an additional delivery charge. 
 
 CASH. 
 
 The Cash Balance of $17,639.96, as shown on Account No. 7, was 
 verified and the details are given herewith: 
 CASH IN BANKS: 
 
 Tenth National, Chicago $ 9813.91 
 
 Eleventh National, Chicago 7992.16 
 
 Fifth National, Denver 1058.23 
 
 Sixth National, Omaha 810.01 
 
 Peoples Savings, Butte 2006.02 
 
 Seventh National, Seattle 349.66 
 
 Eighth National, Olympia 642.57 
 
 Ninth National, San Francisco 4.14 
 
 $22676.70 
 CHEQUES on hand to deposit 484.78 
 
 $23161.48 
 LESS: CURRENCY OVERDRAFT (due Treasurer) .. 5521.52 
 
 BALANCE, as above $17639.96
 
 A SPECIMEN REPORT 
 
 73 
 
 The Currency Overdraft was caused by entering a currency dis- 
 bursement of $10,000.00 during September in exchange for cheque, 
 and cheque not being issued until October. 
 
 The amount of Cash on hand with your Treasurer on the morn- 
 ing of Oct. 1st, 1906, was counted and found to be made up as fol- 
 lows: 
 
 Exchange for cheque as above $10000.00 
 
 Less: Overdraft 5521.52 
 
 BALANCE, Oct. 1st, 1906 $ 4478.48 
 
 This balance consisted of: 
 
 CASH: 
 
 Currency $1023.00 
 
 Coin 2.75 
 
 $1025.75 
 ADD: Cash received 10/1 for Yard Sales 
 
 during September 76.10 
 
 $1101.85 
 
 LESS: Payment to charged his 
 
 Sept. Account 15.00 
 
 $ 1086.85 
 
 TICKETS: 
 
 Name, dated May 15th, 1906, for stock 
 
 from $2500.00 
 
 Name, paid to 500.00 
 
 Name, Sundry advances dated July to Sep- 
 tember 295.00 
 
 Name 25.00 
 
 Name 10.00 
 
 Name 2.00 
 
 Name (no regular ticket) 29.01 
 
 3361.01 
 
 REVENUE STAMPS 5.15 
 
 $ 4453.01 
 ADD: CASH SHORTAGE . 25.47 
 
 TOTAL . ..$ 4478.48 
 
 We cannot too strongly criticise the practice of carrying such 
 large tickets as Cash on hand, as any large amounts advanced for 
 more than a few days should be charged upon the Books of Account.
 
 74 RENN'S PRACTICAL AUDITING 
 
 The cash shortage above noted and the entire omission of two 
 vouchers paid during July (Nos. 3920 and 3923 amounting to $31.30) 
 would indicate that sufficient time was not given to the keeping of 
 the Petty Cash Account. We recommend the use of a Petty Cash 
 Book in which to record all currency transactions, and from which 
 all entries would be posted to the Ledgers. This book could be kept 
 by a clerk having charge of the currency, and thereby relieve your 
 Treasurer of this clerical work and allow him more time for other 
 duties. We suggest that currency transactions and cash balances in 
 Petty Cash Account, be kept as small as possible, making disburse- 
 ments by cheques where practicable. 
 
 The Bank Balances as shown by Cash Book were reconciled with 
 the statements rendered by the Banks and found to agree. 
 
 CHEQUES. 
 
 All cheques returned from Banks were carefully examined as to 
 signatures, endorsements, etc., and the amounts of same were com- 
 pared with the corresponding entries in Cash Books, and were found 
 in order with the following exceptions: 
 
 Cheques Nos. 134, 135 and 136 on the Peoples Savings Bank 
 were not seen, although we were informed the bank claimed 
 they had returned them, and had charged them on their state- 
 ment. 
 
 Cheques not endorsed by payees: No. 1816, Tenth National, Chi- 
 cago, to , $250.00, and No. 3179, Tenth National, Chi- 
 cago, to , $27.50. 
 
 Cheques Nos. 3121 to 3125 incl. and 3128 on Tenth National, Chi- 
 cago, were not countersigned. 
 
 Cheque No. 1757, Tenth National, Chicago, and No. 537, Eleventh 
 National, Chicago, were for exchange on collections prior 
 to March 31st, 1905, amount $30.28. These were charged to 
 Exchange Account, but should have been charged to Old 
 Coal Co. Profit and Loss. 
 
 We found that an unusually large number of cheques were marked 
 "Void," which would indicate a lack of care in making them out. 
 
 VOUCHERS. 
 
 All vouchers on file were carefully examined and compared with 
 the corresponding entries in Cash Books, and with a few exceptions 
 were found in order.
 
 A SPECIMEN REPORT 75 
 
 A number of the vouchers were not certified as correct by the 
 parties who made them out and a few were found which were not 
 approved by an officer of the Company. 
 
 Voucher No. 3809 in favor of - was made for $45.00, but the 
 entry in Cash Book, folio 47, was for $60.00. As this was the amount 
 of his salary, we presume the cash book entry is correct. 
 
 Voucher No. 3920, Name, $1.05. 
 
 Voucher No. 3923, Name, $30.25. 
 
 These were made out and paid during July, 1906, but we found 
 they were not entered in Cash Book. 
 
 The following vouchers were not seen by us: 
 
 No. 1499. July 2, 1905. Mine Plant A/c. Purchase of Land 
 
 $4500.00. 
 
 No. 1632. July 26, 1905. -Freight A/c. . 5418.67. 
 
 No. 2183. Oct. 26, 1905. . 247.80. 
 
 No. 4139. August, 1906. 
 
 No. 4252. September, 1906. 
 
 No. 4272. September, 1906. 
 
 No. 4280. September, 1906. 
 
 No. 4304. September, 1906. 
 
 No. 4317. September, 1906. 
 
 No. 4318. September, 1906. 
 
 No. 4366. September, 1906. 
 
 No. 4139 and the succeeding vouchers were not returned at the 
 time we made the examination. 
 
 Vouchers were seen for nearly all cash disbursements. Below we 
 give a list of all disbursements in excess of $1.00, charged to imper- 
 sonal accounts, for which no vouchers were seen: 
 
 1905. Folio. Name of Account. Amount. 
 
 Apr. 30. 213. Expense. Petty Exp $ 3.60 
 
 June 30. 241. Expense. Stamps a'nd Sundries 5.32 
 
 June 29. 241. Expense. Stamps and Sundries 7.48 
 
 July 31. 255. Expense. Stamps (3 items) 2.96 
 
 Aug. 30. 265. Omaha Agency. Currency to - .... 122.00 
 
 Aug. 31. 267. Expense. Stamps 3.24 
 
 Aug. 31. 267. Mine Gen. Expense. Stamps 2.20 
 
 Oct. 23. 299. Expense. Charity "W. W. Home" 2.00 
 
 Dec. 31. 337. Expense. Stamps 9.08 
 
 1906. 
 
 Jan. 31. 355. Expense. Stamps 1.85
 
 76 RGNN'S PRACTICAL AUDITING 
 
 1906. Folio. Name of Account. Amount. 
 
 Feb. 28. 371. Expense. Stamps $ 3.42 
 
 Mch. 26. 385. Mine Plant A/c. Ck. to - - 1000.00 
 
 June 29. 49. Expense. Stamps 1.72 
 
 July 5. 61. Expense. 50.00 
 
 The Revenue Stamps are considered as Cash on hand until used, 
 and when used the details of same should be entered on the Monthly 
 Petty Expense Vouchers. 
 
 CASH BOOK ADDITIONS AND POSTINGS. 
 
 All additions were verified and all postings checked from Ledgers, 
 only one error being found, as below: 
 
 Cash Book Fo. 289, charge of $11.05 to Dock No. 1 Insurance 
 A/c. was posted to Dock No. 2 Insurance Account. 
 
 JOURNALS. 
 VOUCHERS. 
 
 An attempt was made to verify all credits to personal accounts 
 where the amounts were charged against the impersonal accounts. 
 
 Invoices were seen for nearly all credits for purchases, but after 
 examining the Bookkeeper's memos. on file, we find a very large 
 number of credits for allowances, etc., for which no memoranda are 
 filed, and in fact, many of those seen were of little value as they had 
 not been approved. We recommend the use of a form of Journal 
 Voucher for all allowances and special credits, which can be written 
 by your bookkeepers and filed in numerical order. The Journal en- 
 tries will not then require to be written in detail as at present, as each 
 entry will indicate the voucher number. The vouchers will, of course, 
 be approved by whoever authorizes the entries. 
 
 DOCK VOUCHERS AND PAY-ROLLS. 
 
 We carefully examined all Dock Vouchers, comparing them with 
 the corresponding journal entries and found them in good order. A 
 number of the Dock Pay-Rolls were also scrutinized and compared 
 with credits for same on Journal and found to agree. We did not 
 examine all Dock Pay-Rolls as we understand they are carefully
 
 A SPECIMEN REPORT 77 
 
 checked over by your bookkeepers before being credited to the Agen- 
 cies. We suggest the desirability of having the Superintendents at 
 the Agencies certify to the correctness of the Pay-Rolls, before they 
 are forwarded to the Chicago Office. 
 
 MINE NO. 1 PAY-ROLLS. 
 
 The Mine Pay-Roils were found to be made out by your Mine 
 Clerk and the extensions and additions of same verified by the book- 
 keepers in the Chicago Office, but there is absolutely no check as to 
 the names entered on the rolls and the earnings credited to each. 
 
 The Pay-Rolls should be approved by the Foremen and Mine 
 Superintendent, or if this is impracticable, alternate Time Books could 
 be kept for each Department or division and these should be approved 
 by the Foremen and forwarded to the Chicago Office with the Pay- 
 Roils. 
 
 If it is not considered feasible to have Departmental Pay-Rolls, 
 which the employes can sign on receiving their pay, loose receipts 
 should be taken and forwarded to the Chicago Office, where they 
 could be compared with the Pay-Roils at intervals. 
 
 ADDITIONS AND POSTINGS OF JOURNAL ENTRIES. 
 
 All additions in the various Journals were carefully verified and 
 the posting of all charges to impersonal accounts and of credits to all 
 accounts was checked and found correct. 
 
 LEDGERS. 
 
 All of the Ledger Accounts were verified and the Trial Balances 
 as at April 1st, 1905, March 31st, 1906, and Sept. 30th, 1906, were 
 proven correct. 
 
 The examination of the accounts as kept prior to March 31st, 1906, 
 in a large General Ledger and a Dock Ledger required considerable 
 time, and the ledgers now used are more satisfactory. We consider 
 that the keeping of accounts with the employes for their regular 
 monthly salaries, is quite unnecessary, and one voucher could be 
 made each month to cover the Office Pay-Roll, to which would be 
 attached the individual receipts of the employes.
 
 78 RENN'S PRACTICAL AUDITING 
 
 VOUCHER SYSTEM. 
 
 The present method of filing vouchers and invoices in separate 
 places, the entering of credits in the Journals for all purchases and 
 the consequent keeping of many individual creditors' accounts, in- 
 volves considerable clerical work which would be obviated by the use 
 of a modern Voucher Journal or Record. Such a Record would have 
 separate columns for the charging of purchases, etc., to the various 
 merchandise and expense accounts in monthly totals, and all credits 
 would be posted in a monthly total to an Audited Vouchers Account, 
 except where an individual credit account was desirable for some 
 special reason. While the requirements of your business would prob- 
 ably demand some further study before a new Voucher System is 
 devised, we believe considerable improvement can be made in this 
 direction. 
 
 DISTRIBUTION OF ACCOUNTS. 
 
 While we found many distributive accounts are kept for costs at 
 Docks and Mine, a careful examination of the various accounts 
 revealed an apparent lack of method in making the distributions, 
 which has reduced the value of the same to some extent. 
 
 We particularly noticed the distribution of purchases for Supplies 
 and Repairs at the Docks, which seem to have been charged to the 
 Discharging, Loading and other accounts as was considered correct 
 by the Bookkeepers there. 
 
 The charging of miscellaneous tools, etc., to a Personal Property 
 Account was erroneous, as this practice tends to create a fictitious 
 asset, owing to most of the purchases being in the nature of renewals 
 and replacements of worn out property. 
 
 In the Mine Accounts we found many maintenance expenses 
 charged to Improvement Account and some permanent improvements 
 charged to the Expense Accounts. New Machinery was charged in 
 some instances to Plant Account and in others to Improvement Ac- 
 count. 
 
 We are of the opinion that considerable improvement can be 
 made in this direction, which would greatly increase the value of the 
 accounts, but the particular requirements of your business will demand 
 further investigation by us, before we could make specific recom- 
 mendations as to the most desirable changes.
 
 A SPECIMEN REPORT 79 
 
 The charge of $50.00 per month made against The Retail Coal Co. 
 for office work in Chicago Office, seems to be rather low, and if the 
 charge is not approximately correct, the stockholders of The Retail 
 Coal Co. profit at the expense of The Coal Mining & Shipping Co. 
 
 DEPRECIATION. 
 
 This subject requires careful consideration in almost every line 
 of business, particularly where the cost of replacements, repairs and 
 temporary improvements are carried to an Improvement or Plant 
 Account. 
 
 We presume the amount written off monthly for Royalty is con- 
 sidered ample for Depreciation of Mines, but the question of writing 
 off certain percentages on other assets, such as Machinery, Improve- 
 ments, etc., should be given careful thought. 
 
 It would be advisable to have an appraisement made in the near 
 future of the property at the mines, to determine whether the book 
 values are approximately correct, and if not, adjusting entries should 
 be made. 
 
 RECEIVING BOOKS. 
 
 A correct Receiving Book, the need of which at the Mines is 
 icf erred to in the first part of this Report, would consist of a record 
 book ruled with columns in which to enter details of purchases. The 
 headings of the columns should be as follows: 
 
 Date of Receipt. 
 
 From Whom Received. 
 
 Description of Articles. 
 
 Remarks. 
 
 Date Invoice Approved (or sent to Chicago Office). 
 
 Such a record book carefully kept will be of service in checking 
 up all invoices and will practically prevent duplicate bills being 
 passed. 
 
 GENERAL REMARKS. 
 
 With the exception of a rather large number of erasures in the 
 various books, which should not be permitted, the office force deserves 
 commendation for neat and accurate work. 
 
 Every facility was afforded us by the staff during our investi- 
 gation. Respectfully submitted, 
 
 (Signed) GEORGE B. RENN.
 
 80 
 
 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 BALANCE SHEET 
 
 ASSETS. 
 
 CASH $ 33071.47 
 
 BILLS RECEIVABLE $ 4550.00 
 
 Less : Bills Discounted 4393.93 
 
 156.07 
 
 ACCOUNTS RECEIVABLE: 
 
 , Stock Account 160.00 
 
 Old Coal Co. Profit and Loss Account.... 1880.63 
 Sundry Accounts 75976.55 
 
 78017.18 
 
 AGENCY ACCOUNTS: 
 
 Butte, Mont 11610.59 
 
 Seattle, Wash 152.36 
 
 Omaha, Neb 51210.61 
 
 Denver, Colo 23102.91 
 
 86076.47 
 
 SPECIAL ACCOUNTS 14655.43 
 
 CONSIGNMENT ACCOUNTS: 
 
 Name 697.13 
 
 Name 74.53 
 
 771.66 
 
 SALARY ACCOUNTS: 
 
 Name 10.00 
 
 Name 76.60 
 
 Name 269.40 
 
 356.00 
 
 TELEPHONE COUPONS 121.89 
 
 STOCK as per Inventory: 
 
 Coal at Mines 7328.80 
 
 Coal at 77th St. Yard 1307.27 
 
 Coal at Dock No. 1 48393.05 
 
 Coal at Dock No. 2 38373.91 
 
 Wood at Saw Mill 2795.54 
 
 Supplies at Mines 527.65 
 
 98726.22 
 
 REAL ESTATE, PLANT, IMPROVEMENTS, 
 
 ETC.: 
 
 Mine No. 1 Real Estate and Plant 67597.01 
 
 Mine No. 1 Improvements 25733.14 
 
 Saw Mill 1745.10 
 
 Personal Property Dock No. 1 322.18 
 
 Personal Property Dock No. 2 137.03 
 
 95534.46 
 
 FURNITURE AND FIXTURES 658.30 
 
 $408145.15
 
 A SPECIMEN REPORT 
 
 81 
 
 NO. 1. 
 
 SHIPPING CO., CHICAGO. 
 
 As on March 31st, 1906. 
 
 LIABILITIES. 
 
 CAPITAL STOCK $250000.00 
 
 Less: Treasury Stock 49100.00 
 
 $200900.00 
 
 BILLS PAYABLE 110202.29 
 
 ACCOUNTS PAYABLE: 
 
 , Stock Account 18.15 
 
 Name 97.75 
 
 Name 15.66 
 
 Mine No. 1 Order Account 1221.42 
 
 , Agent 4508.84 
 
 Retail Coal Co 33906.46 
 
 Sundry Creditors 25101.08 
 
 64869.36 
 
 SALARY AND COMMISSION ACCOUNTS: 
 
 Name 370.60 
 
 Name 42.65 
 
 Name 75.00 
 
 Name 148.96 
 
 637.21 
 
 ACCRUED ACCOUNTS: 
 
 Freight 9408.75 
 
 Mine No. 1 Pay-Roil 4485.18 
 
 Saw Mill Pay-Roll.... 316.12 
 
 14210.05 
 
 SURPLUS (as per Account No. 2) 17326.24 
 
 $408145.15
 
 82 
 
 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 GENERAL PROFIT AND LOSS ACCOUNT 
 
 CHARGES. 
 Coal on hand at Mine $ 2581.17 
 
 1905. 
 Apr. 1. INVENTORY. 
 
 1906. 
 
 Mch. 31. PURCHASES AND COST OF PRODUC- 
 TION: 
 
 Outside Purchases of Coal and 
 
 Wood $279065.85 
 
 Coal from Mine No. 1 . . . 123468.39 
 
 Wood from Saw Mill (see Contra) 
 
 Wood purchased $ 3514.00 
 
 Cutting and Loading 
 
 Wood . 1135.51 
 
 Coal for 77th St. Yard. $1873.99 
 Unloading and Switching 
 
 at 77th St.. 51.00 
 
 1853.97 
 
 4649.51 
 
 1924.99 
 
 SELLING AND GENERAL EXPENSES: 
 Rent of Chicago Office.$ 1200.00 
 Salaries of Officers. . . . 13200.00 
 Salaries of Employes 
 
 at Chicago office.. 9816.93 
 
 $24216.93 
 
 Less 1/3 charged to 
 Dock A/c. and 1/3 
 charged to Mine 
 A/c 16064.62 $ 
 
 Traveling Expenses 
 
 Stationery and Printing 
 
 Telephone and Telegraph $818.- 
 
 86, Postage $791.75 
 
 Adv. and Subscription to Coal 
 
 Journals 
 
 Commercial Agencies 
 
 Commissions 
 
 Supplies at Saw Mill 
 
 Maps and Shipping Guides.... 
 
 Coal Association Dues 
 
 Chicago Shippers Assn 
 
 Sundries . 
 
 8152.31 
 
 2034.98 
 1016.99 
 
 1610.61 
 
 492.55 
 
 233.83 
 
 141.73 
 
 32.08 
 
 54.50 
 
 40.00 
 
 28.00 
 
 388.62 
 
 410962.71 
 
 14226.20 
 
 Carried forward $427770.08
 
 A SPECIMEN REPORT 
 
 83 
 
 NO. 2. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 1906. 
 Mch. 31. 
 
 CREDITS. 
 
 INVENTORIES: 
 
 Coal at Mines $ 7328.80 
 
 Wood at Saw Mill 2795.54 
 
 Coal in 77th St. Yard 1307.27 
 
 $ 11431.61 
 
 SALES: 
 
 Coal and Wood sold through 
 
 General Coal Account $430802.98 
 
 Coal sold from 77th St. Yard. . . . 617.72 
 
 Wood sold to Coal A/c. from 
 
 Saw Mill 1853.97 
 
 Overcharge Account 653.87 
 
 $433928.54 
 
 Less Shortage and Al- 
 lowances $1090.75 
 
 Car Service 234.00 
 
 1324.75 
 
 432603.79 
 
 UNCLAIMED CREDITS 603.94 
 
 COMMISSIONS from Retail Coal Co 2133.00 
 
 MINE NO. 1 PROFIT AND LOSS ACCOUNT, 
 
 Net Gain at Mine per Account No. 6 262.77 
 
 Carried forward $447035.11
 
 84 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 GENERAL PROFIT AND LOSS ACCOUNT 
 
 Brought forward $427770.08 
 
 PERSONAL PROPERTY TAXES 1905 298.99 
 
 INSURANCE, Saw Mill 79.25 
 
 LEGAL EXPENSE, Saw Mill Account 15.25 
 
 COAL, one car sacrificed for Freight 48.00 
 
 DOCK GENERAL PROFIT AND LOSS A/c. 
 
 Net Loss at Docks (A/c. No. 3) 403.04 
 
 BALANCE, Profit carried down 18420.50 
 
 $447035.11 
 
 INTEREST ON BORROWED CAPITAL. 
 
 (Less Interest and Discount earned) $ 883.48 
 
 DONATIONS AND CHARITY 383.01 
 
 BAD DEBTS CHARGED OFF: 
 
 Name $1.10 
 
 Name 2.00 
 
 3.10 
 
 SURPLUS 17326.24 
 
 $ 18595.83
 
 A SPECIMEN REPORT 
 
 85 
 
 NO. 2. Continued. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 Brought forward . 
 
 $447035.11 
 
 $447035.11 
 
 BALANCE, Profit brought down $ 18420.50 
 
 B. & O. FUEL CO. ACCOUNTS 169.90 
 
 BAD DEBTS RECOVERED: 
 
 Name $0-47 
 
 Name 4.96 
 
 5.43 
 
 $ 18595.83
 
 86 
 
 RZNN'S PRACTICAL AUDITING 
 
 LOSSES. 
 
 DOCK NO. 1 PROFIT AND LOSS ACCOUNT. 
 
 (See Account No. 4) $ 7117.61 
 
 OMAHA AGENCY 543.29 
 
 SUNDRY CHARGES: 
 
 Proportion of Chicago Office Salaries and 
 
 Rent $8032.31 
 
 Salary of San Francisco Agent 1200.00 
 
 Traveling Expenses (Officers) 704.65 
 
 Telegraph Bill of San Francisco Agent 188.95 
 
 Printing and Stationery 163.36 
 
 Collection Expenses 31.66 
 
 Sundries 19.37 
 
 10340.30 
 
 BALANCE, Profit on Operating carried down.. 2713.89 
 
 $20715.09 
 
 INTEREST ON BORROWED CAPITAL, less 
 
 Interest and Discount earned $2958.93 
 
 DONATIONS 152.25 
 
 
 
 BAD DEBTS: 
 
 Name 5.75 
 
 $3116.93
 
 A SPECIMEN REPORT 
 
 87 
 
 NO. 3. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 GAINS. 
 
 DOCK NO. 2 PROFIT AND LOSS ACCOUNT. 
 
 (See Account No. 5.) 
 
 DENVER AGENCY. (90 per cent of Net Profit.) 
 
 SUPERIOR COAL ACCOUNT. (Details shown 
 in Report.) 
 
 STEAMER FUEL ACCOUNT 
 
 $ 8033.37 
 697.96 
 
 8322.68 
 3661.08 
 
 $ 20715.09 
 
 BALANCE, Profit brought down 
 
 LOSS carried to General Profit and Loss Ac- 
 count. (See Account No. 2) 
 
 $ 2713.89 
 403.04 
 
 $ 3116.93
 
 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 DOCK NO. 1 PROFIT AND LOSS ACCOUNT 
 
 1905 CHARGES. 
 
 Apr. 1. INVENTORY: 
 
 Coal on hand $ 8500.15 
 
 1906. 
 
 Mch.31. PURCHASES AND COST OF 
 HANDLING: 
 
 Cargo Coal purchased $114787.68 
 
 Car Coal 9743.09 
 
 A. & B. Coal 5031.13 
 
 Retail Coal purchased from A. & 
 
 B. Co 15522.72 
 
 Retail Coal purchased from Out- 
 side '.. 5809.53 
 
 Freight on Cargo Coal 32064.52 
 
 Freight on Rail Coal 299.16 
 
 Switching 9.00 
 
 Discharging Bituminous. (See Re- 
 port) 6691.84 
 
 Discharging Anthracite. (See Re- 
 port) 2645.17 
 
 Loading Bituminous. (See Re- 
 port) 8462.41 
 
 Loading Anthracite. (See Re- 
 port) 7936.18 
 
 $209002.43 
 
 SELLING AND GENERAL EX- 
 PENSES: 
 
 Commissions: 
 
 Bituminous Car Coal 
 
 Sales $2617.53 
 
 Anthracite Car Coal 
 
 Sales 812.70 
 
 $3430.23 
 
 Traveling Expenses 465.26 
 
 Salaries 2525.00 
 
 General and Dock Expense. (See 
 
 Report) 6596.47 
 
 Teaming 2558.02 
 
 Postage, Printing and Stationery. 185.73 
 Telephone and Telegraph 164.35 
 
 15925.06 
 
 TAXES AND INSURANCE 1785.70 
 
 CARGO INSURANCE 275.58 
 
 $235488.92 
 
 BALANCE, Loss brought down .... $6507.08 
 
 INTEREST ON BORROWED 
 CAPITAL (less Interest and Dis- 
 count earned) 610.53 
 
 $7117.61
 
 A SPECIMEN REPORT 89 
 
 NO. 4. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 CREDITS. 
 1906. 
 Mch.31. INVENTORY: 
 
 Coal on hand $ 48393.05 
 
 SALES: 
 
 Bituminous Coal sold 
 
 Customers $121730.38 
 
 Anthracite Coal sold 
 
 Customers 21383.14 
 
 $143113.52 
 Less: Sales to Retail. 36687.66 
 
 $106425.86 
 
 Retail Coal sold to 
 
 Customers 62864.84 
 
 Cargo Coal sold to 
 
 Customers 80.79 
 
 $169371.49 
 Less: 
 
 Bituminous Coal Sales 
 Discount and 
 
 Shortage $14.60 
 
 Overage and Shortage 78.43 
 
 Retail Discount and 
 
 Shortage 94.12 
 
 187.15 
 
 169184.34 
 
 DISCHARGING BITUMINOUS 
 AND LOADING BITU- 
 MINOUS for others 187.60 
 
 ANTHRACITE COMMISSION.. 10735.01 
 
 SUNDRY CREDITS: 
 
 Unclaimed Freight $260.47 
 
 Steam sold 35.70 
 
 Gain in Inventory of Retail 
 
 Coal 18.32 
 
 314.49 
 FOREIGN COAL ACCOUNT. 
 
 (See Report) 167.35 
 
 BALANCE, Loss carried down 6507.08 
 
 $235488.92 
 
 BALANCE, Net Loss carried to 
 Dock General Profit and 
 Loss Account $7117.61 
 
 $7117.61
 
 90 
 
 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 DOCK NO. 2 PROFIT AND LOSS ACCOUNT 
 
 CHARGES. 
 1905 
 
 Apr. 1. INVENTORY: 
 
 Coal on hand : $1732921 
 
 1906 
 
 Mch.31. PURCHASES AND COST OF 
 HANDLING: 
 
 Cargo Coal Account, Cargo 
 
 Purchases $131364.23 
 
 Cargo Coal Account, Car Pur- 
 chases 4526.03 
 
 Retail Coal purchased from 
 
 A. & B. Co 3125.47 
 
 Retail Coal purchased from 
 
 Outside 413.31 
 
 Cargo Freights 31747.94 
 
 Switching 433.00 
 
 Discharging Bituminous. (See 
 
 Report) 12609.05 
 
 Discharging Anthracite. (See 
 
 Report) 2037.94 
 
 Loading Anthracite. (See Re- 
 port) 3012.44 
 
 Loading Bituminous. (See Re- 
 port) 7119.97 
 
 196389.38 
 
 SELLING AND GENERAL EX- 
 PENSES: 
 
 Commissions : 
 
 Bituminous Car 
 
 Coal Sales ....$1511.15 
 Anthracite Car 
 
 Coal Sales .... 580.31 
 
 $ 2091.46 
 
 Traveling Expenses 194.96 
 
 Salaries 2158.32 
 
 General and Dock Expense. 
 
 (See Report) 5553.66 
 
 Teaming 85.41 
 
 Postage, Printing and Station- 
 ery 187.76 
 
 Telegraph and Telephone 115.46 
 
 10387.03 
 
 TAXES AND INSURANCE 730.53 
 
 CARGO INSURANCE 259.71 
 
 BALANCE, Profit carried down.. 8414.27 
 
 $233510.13
 
 A SPECIMEN REPORT 
 
 91 
 
 NO. 5. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 1906. 
 
 Mch. 31. INVENTORY: 
 Coal on hand . 
 
 CREDITS. 
 
 SALES: 
 
 Anthracite Coal Sales 
 
 to Customers $ 26127.46 
 
 Bituminous Coal Sales 
 
 to Customers . . 155071.30 
 
 $181198.76 
 Less: Sales to Retail. 8837.46 
 
 Retail Sales to Cus- 
 tomers , 
 
 Less: 
 
 Bituminous Coal 
 
 Discount and 
 
 Shortage . . . .$ 
 Retail Discount 
 
 and Shortage 
 Overage and 
 
 Shortage . . . 
 
 145.04 
 
 33.22 
 
 110.29 
 
 $ 38373.91 
 
 $172361.30 
 
 14213.49 
 
 $186574.79 
 
 288.55 
 
 DISCHARGING Bituminous Car- 
 goes $ 3604.34 
 
 DISCHARGING Anthracite Car- 
 goes 863.43 
 
 (Unloading boats for others) 
 
 ANTHRACITE COMMISSION . 
 
 186286.24 
 
 4467.77 
 4382.21 
 
 $233510.13
 
 92 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 DOCK NO. 2 PROFIT AND LOSS ACCOUNT 
 
 INTEREST ON BORROWED 
 CAPITAL (less Interest and 
 Discount earned) $ 766.19 
 
 PROFIT CARRIED TO DOCK 
 GENERAL PROFIT AND 
 LOSS ACCOUNT. (See Ac- 
 count No. 3) 8033.37 
 
 $ 8799.56
 
 A SPECIMEN REPORT 93 
 
 NO. 5. Continued. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 BALANCE, Profit brought down.. $ 8414.27 
 PLANT ACCOUNT, Dock Prop- 
 erty re-sold 275.00 
 
 DOCK OVERAGE ACCOUNT, 
 
 Season 1904-1905 . 110.29 
 
 $ 8799.56
 
 94 
 
 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 MINE NO. 1 PROFIT AND LOSS ACCOUNT 
 
 1905. CHARGES. 
 
 Apr. 1. INVENTORIES: 
 
 Supplies and Merchandise $ 345.48 
 
 Powder 170.37 
 
 $ 515.85 
 
 1906 
 
 Mch.il. SUPPLIES AND SUNDRY PUR- 
 CHASES: 
 
 Powder $ 5271.19 
 
 Oil (lubricating and illuminating) 1175.30 
 
 Water 353.70 
 
 Switching Coal 69.22 
 
 Miscellaneous Supplies 626.37 
 
 Hay and Feed 1331.11 
 
 Sawdust 49.00 
 
 Coal purchased from other oper- 
 ators 3262.24 
 
 12138.13 
 
 LABOR: 
 
 Mining $ 65687.16 
 
 Day Work 28053.98 
 
 Yardage 6086.18 
 
 Horsebacks and Room Turning. 2002.86 
 
 101830.18 
 
 SUNDRY EXPENSES: 
 
 Proportion of Chicago Office 
 
 Rent and Salaries $ 8032.31 
 
 Fuel used (including some coal 
 
 donated) 2370.25 
 
 Teaming, Hauling and Grading.. 763.98 
 
 Horseshoeing, Veterinary, etc. . . 50.40 
 
 Harness Repairs 97.80 
 
 Freight, Switching and Express. 739.68 
 
 Traveling Expenses, etc 621.78 
 
 Telegraph and Telephone 109.73 
 
 Postage, Printing and Stationery. 93.22 
 
 Coal Associations 69.95 
 
 Sundries 251.18 
 
 13200.28 
 
 MAINTENANCE. (See Report for 
 
 details) 2943.30 
 
 TAXES AND INSURANCE. (See 
 
 Report) 1265.42 
 
 ROYALTY. (Credited to Plant Ac- 
 count) 3772.19 
 
 SPECIAL CHARGES: 
 
 Consulting Mining Engineer $ 344.33 
 
 Legal Expense 280.95 
 
 625.28 
 
 BALANCE, Profit carried down 2872.90 
 
 $139163.53
 
 A SPECIMEN REPORT 
 
 95 
 
 NO. 6. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 1906. 
 Mch.31. 
 
 CREDITS. 
 
 INVENTORIES: 
 
 Supplies and Merchandise $ 517.51 
 
 Powder 10.14 
 
 $ 527.65 
 
 SALES: 
 
 Coal to General Coal Account. . .$123468.39 
 
 Coal to Miners 1509.72 
 
 Coal to Sundry Customers 1707.69 
 
 Powder to Sundry Customers. . . . 1.75 
 
 Powder to Miners 8785.00 
 
 Supplies and Merchandise 1283.80 
 
 Scrap Iron sold 38.12 
 
 136794.47 
 
 MINE ORDER DISCOUNT 524.15 
 
 RENTS 82.25 
 
 DIVIDENDS FROM COAL ASSN. 1223.30 
 PROFIT ON CASH SALES 
 
 THROUGH COAL ASSN.. 11.71 
 
 $139163.53
 
 RENN'S PRACTICAL AUDITING 
 
 1906. 
 Mch. 31. 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 MINE NO. 1 PROFIT AND LOSS ACCOUNT 
 
 CHARGES. 
 
 INTEREST ON BORROWED CAPITAL 
 
 (less Interest and Discount earned) $ 1721.53 
 
 BAD DEBTS CHARGED OFF: 
 
 Name $43.75 
 
 Name 3.75 
 
 Name 5.00 
 
 Name 5.90 
 
 58.40 
 
 DONATIONS (except Coal donated) 42.38 
 
 MACHINERY AND IMPROVEMENTS (see 
 
 Report) 229.22 
 
 LOSS, SEASON 1904-1905. (Invoice for Pow- 
 der omitted from Liabilities March, 1905) . . 558.60 
 
 PROFIT carried to General Profit and Loss 
 
 Account (see Account No. 2) 262.77 
 
 $ 2872.90
 
 A SPECIMEN REPORT 
 
 97 
 
 NO. 6. Continued. 
 
 SHIPPING CO., CHICAGO. 
 
 for the year ended March 31st, 1906. 
 
 1906. 
 
 CREDITS. 
 
 Mch. 31. BALANCE, Profit brought down 
 
 2872.90 
 
 $ 2872.90
 
 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT 
 
 THE COAL MINING AND 
 SUMMARIZED TRIAL BALANCE, 
 
 ASSETS. 
 CASH $ 17639.96 
 
 ACCOUNTS RECEIVABLE: 
 
 Name $ 27.85 
 
 77th St. Yard Cash Sales Account 15.00 
 
 Accident and Guaranty Co 125.00 
 
 , Stock Account 248.00 
 
 Coal Co 303.33 
 
 , Dividend Account 884.00 
 
 Sundry Debtors A. and B. Ledger 5590.83 
 
 Sundry Debtors Personal Ledger 110273.79 
 
 117467.80 
 
 AGENCY ACCOUNTS: 
 
 Butte, Mont 9973.10 
 
 Seattle, Wash 3595.16 
 
 Omaha, Neb 66579.01 
 
 Denver, Colo 19083.75 
 
 99231.02 
 
 SPECIAL ACCOUNTS 2280.60 
 
 CONSIGNMENT ACCOUNTS: 
 
 Name 141.95 
 
 Name 470.03 
 
 611.98 
 
 SALARY ACCOUNTS: 
 
 Advances on Pay Roll Mine No. 1 12.72 
 
 Name 130.21 
 
 Name 290.30 
 
 433.23 
 STOCK, as per Book Values: 
 
 Coal at Mines 4517.43 
 
 Coal at 77th St. Yard 1846.19 
 
 Coal at Dock No. 1 79468.14 
 
 Coal at Dock No. 2 83411.16 
 
 Wood at Saw Mill 4973.27 
 
 174216.19 
 
 REAL ESTATE, PLANT, IMPROVEMENTS, 
 
 ETC.: 
 
 Mine No. 1 Real Estate and Plant 71528.38 
 
 Mine No. 1 Improvements 28879.63 
 
 Saw Mill 1805.46 
 
 Personal Property Dock No. 1 550.20 
 
 Personal Property Dock No. 2 296.48 
 
 Personal Property 77th St. Yard 74.50 
 
 103134.65 
 
 FURNITURE AND FIXTURES 688.30 
 
 $515703.73
 
 A SPECIMEN REPORT 
 
 99 
 
 NO. 7. 
 
 SHIPPING CO., CHICAGO. 
 
 As on September 30th, 1906. 
 
 LIABILITIES. 
 
 CAPITAL STOCK $250000.00 
 
 Less: Treasury Stock 49100.00 
 
 $200900.00 
 
 BILLS PAYABLE 190382.67 
 
 ACCOUNTS PAYABLE: 
 
 Name 15.66 
 
 Name 37.50 
 
 Name 250.00 
 
 Old Coal Co. Profit and Loss Account 1675.88 
 
 Retail Coal Co 18999.44 
 
 Sundry Creditors 73292.72 
 
 94271.20 
 
 SALARY AND COMMISSION ACCOUNTS: 
 
 Name 500.00 
 
 Name 250.00 
 
 Name 150.00 
 
 Name 23.00 
 
 Name 148.96 
 
 Name 100.00 
 
 Name 50.00 
 
 1221.96 
 
 ACCRUED ACCOUNTS: 
 
 Freight 2471.55 
 
 Mine No. 1 Pay Roll 4934.53 
 
 Mine No. 1 Order Account 1698.66 
 
 Saw Mill Pay Roll 171.24 
 
 9275.98 
 
 SUMMARY OF PROFIT AND LOSS ACCOUNTS.. 19651.92 
 
 $515703.73
 
 100 RENN'S PRACTICAL AUDITING 
 
 ACCOUNT NO. 8. 
 
 This account consists of a schedule of the debtors' accounts car- 
 ried in the A. & B. Ledger, and the Personal Ledger. The items are 
 assembled under headings of "folio," "name" and "amount," and are 
 also classified under "good," "doubtful" or "bad." The total of these 
 accounts agrees with the items in Account No. 7, which represent 
 them. 
 
 It is not considered necessary to reproduce this schedule in detail. 
 
 ACCOUNT NO. 9. 
 
 This is a schedule of the Sundry Creditors shown in total in Ac- 
 count No. 7. The items are assembled under headings of "folio," 
 "name" and "amount."
 
 PART III 
 SPECIAL AUDITS 
 
 FIRST AUDIT OF BOOKS OF CORPORATIONS 
 
 In auditing the affairs of a corporation for the first time more 
 is involved than a mere auditing of the trade books of account, 
 for the process of organization and later corporate acts are also 
 subjects for inspection. These details will be found in the cor- 
 poration books, and it is essential that the auditor possess a full 
 understanding of what constitutes a set of these records and the 
 purposes for which they are used. A complete set comprises the 
 minute book, subscription book, stock certificate book, transfer 
 book, stock ledger, and dividend book. 
 
 Minute Book. 
 
 In this book are recorded the transactions of all meetings of 
 stockholders, and of the board of directors. The by-laws are 
 also entered in it, and copies of all corporate papers, including 
 the charter. 
 
 Subscription Book. 
 
 This book contains a list of subscriptions to the capital stock, 
 showing the names of subscribers, and the number and par value 
 
 of the shares subscribed for by each. 
 101
 
 102 RENN'S PRACTICAL AUDITING 
 
 Stock Certificate Book. 
 
 This book is composed of blank certificates and stubs. The 
 certificates are issued to stockholders as evidence that their sub- 
 scriptions have been paid in full, and from entries on the stubs 
 postings are made to the stock ledger, crediting each stockholder 
 with the number of shares held by him. 
 
 Transfer Book. 
 
 This book contains printed forms, with blanks to be filled in 
 transferring stock from one person to another. Through the 
 medium of these forms a stockholder may transfer all or part of 
 his holdings. The stubs of the transfer book become the exclu- 
 sive journal to the stock ledger, after the original issue has been 
 entered from the certificate book. 
 
 Stock Ledger. 
 
 As indicated above, postings to this book are made in the first 
 instance from the stubs of the stock certificate book to the credit 
 of the individual stockholders. Thereafter the entries are made 
 from the stubs of the transfer book, and they consist always of 
 an even transfer as regards debit and credit amounts. Therefore 
 the credit balance of the stock ledger, plus Treasury Stock, should 
 always agree with Capital Stock balance in the general ledger. 
 This book serves as a convenient register of stockholders in the 
 corporation, since it contains the names of all shareholders and 
 the number of shares held by each. 
 
 Dividend Book. 
 
 In this book are written the names, addresses and holdings of 
 each stockholder who has a credit balance in the stock ledger at 
 the time a dividend is declared. It serves as a convenient record 
 for the distribution of dividends.
 
 SPECIAL AUDITS 103 
 
 Frequently small corporations dispense with the less important 
 of these records, and it is often the case that only a minute book 
 and a stock certificate book are kept. 
 
 The auditor should make a careful preliminary study of the 
 charter and by-laws of the corporation to determine the priv- 
 ileges, as well as the limitations, under which the company is 
 operating. Next he should read the minutes of all meetings of 
 the directors, to ascertain what special acts have been authorized. 
 Having acquainted himself with these facts he will be in a posi- 
 tion to examine the various transactions incident to organization 
 as shown in the corporation books, and later the operating en- 
 tries in the regular books of account. 
 
 The stubs in the stock certificate book are to be checked into 
 the stock ledger, and a schedule is to be drawn from the stubs 
 classifying the issue under "preferred" or "common." From 
 this may be ascertained whether the shares have been issued in 
 accordance with the articles of incorporation, as regards the two 
 classes. 
 
 At the same time it will be shown whether the issue is within 
 the limit authorized by the charter. This is also a good time for 
 the auditor to assure himself that the total of the outstanding- 
 stock is fully stated in the general ledger. 
 
 If any transfers have been made the stubs in the transfer 
 book are to be checked into the stock ledger, and it is to be noted 
 whether the original certificates (now canceled) have been re- 
 attached to their stubs in the stock certificate book. 
 
 It is next in order to ascertain what consideration was re- 
 ceived by the corporation in exchange for its capital stock. There 
 are two methods by which subscriptions may be settled one is 
 the direct payment of cash; the other is through exchange of 
 some valuable consideration, such as services rendered, or trans- 
 fer of property. 
 
 It is of the first importance that the cash proceeds from capital 
 stock issues should appear in the regular cash book, therefore
 
 104 RENN'S PRACTICAL AUDITING 
 
 the auditor should check from the cash book against the stock 
 certificate stubs. This will leave unchecked such stubs of certifi- 
 cates as were issued in exchange for some other consideration, 
 and those must be compared with the record in the minute book 
 to ascertain whether they were issued upon proper authority from 
 the directors. The return derived from the exchange of capital 
 stock must appear in the regular books of account under some 
 heading which expresses its character. 
 
 If it is found that stock has been issued to a promoter in set- 
 tlement of his services, the auditor should ascertain whether steps 
 have been taken to extinguish this expense. 
 
 The audit of the regular books of account is to be conducted 
 as described in Part II. During its progress the auditor should 
 observe whether important transactions, such as the acquisition 
 of property, the placing of mortgages thereon, the declaration of 
 dividends, etc., have been duly sanctioned by the board of di- 
 rectors. 
 
 PERIODICAL AUDIT 
 
 The Periodical Audit is so called from the fact that it covers 
 a statistical period usually an entire fiscal year. The one de- 
 scribed in Part II is an example of a periodical audit. 
 
 CONTINUOUS AUDIT 
 
 The Continuous Audit is the same as the periodical audit in 
 regard to details of inspection, but it is taken up at shorter inter- 
 vals usually once a month. After the first audit subsequent 
 audits take up the work at the point where the previous one 
 ended. In this way the audit is carried to the end of the fiscal 
 period, at which time the report is rendered.
 
 SPECIAL AUDITS 105 
 
 INVESTIGATION ON ACCOUNT OF SUSPECTED 
 
 FRAUD 
 
 This kind of work calls for the auditor's best efforts, as it is 
 frequently a case where his wits are opposed by those of an- 
 other. 
 
 The occasion for an investigation of this kind may arise 
 from a variety of causes. It may be due to an embezzling clerk 
 or cashier ; or it may be a case where the gross profits are not in 
 proportion to the amount of the turnover, which would indicate 
 theft of merchandise or concealment of sales. In a great many 
 cases it is merely "a suspicion that something is wrong." 
 
 Again, the investigation may be needed on account of manipu- 
 lation by a tricky partner who aims to gain an advantage over 
 his less acute associate. This course is sometimes prompted by 
 the preponderance of capital interest held by one partner over 
 the other, who hopes by apparently depreciating the value (or 
 earnings) of the business to make an advantageous purchase of 
 the discouraged partner's interest. 
 
 Before entering upon actual work, the auditor should make 
 a careful survey of conditions in order to localize the difficulty, 
 if possible. It is also important that he should mask the real 
 object of the investigation, which may be accomplished best by 
 making it appear that it is merely a routine audit. The course 
 of the investigation will be determined largely by the department 
 under suspicion, or by the opportunities of the suspected indi- 
 vidual. 
 
 If the cashier is the suspected person, the investigation should 
 be centered in the first instance upon the cash book, and the open 
 accounts receivable. This involves, as the first step, the balanc- 
 ing of the cash book and verification of the balance; then the 
 bank statement with returned cheques should be procured, and 
 from them the auditor will draw up the reconcilement himself. 
 Next, verification statements should be sent to all book debtors, 
 as described under Controlling Account.
 
 106 RENN'S PRACTICAL AUDITING 
 
 Both sides of the cash book are to be footed for the entire 
 period under audit, and extreme care is to be taken that the foot- 
 ings are forwarded correctly both as respects amounts and loca- 
 tion in columns. Doubtful figures must be investigated. Cash 
 sales and all other cash receipts, outside of those from credit sales 
 customers, are to be checked from their place of record into the 
 cash book. 
 
 The cash credits in all ledgers are to be checked from the 
 ledgers into the cash book, and it must be ascertained positively 
 that the opening and closing balances in the cash book agree with 
 the respective balances of the cash account in the ledger. 
 
 The deposits as shown in the bank book are to be identified 
 with the entries in the cash book, where this is possible; other- 
 wise the individual items from the deposit slips are to be traced 
 into the cash book. 
 
 Sometimes the auditor may intercept an effort at "kiting," 
 or an attempted eleventh-hour restitution, by comparing with 
 the cash book the actual contents of an outgoing deposit before 
 it has passed out of the office. 
 
 The disbursement side of the cash book must be vouched 
 rigidly. Original invoices as well as receipts must be exacted 
 for all charges to impersonal accounts, and great caution is to 
 be observed that the two do not represent duplicate entries. The 
 invoices must, of course, be properly O. K.'d as respects receipt 
 of goods and correctness of price and extension. All charges to 
 personal accounts must be supported by receipts and the reasons 
 for payment are to be ascertained. Attention should also be 
 given to the character of the charges to impersonal accounts, 
 especially those which are easily "loaded," such as expense, sala- 
 ries, wages, and merchandise accounts. 
 
 The returned bank cheques are to be scrutinized in respect 
 to name of payee and amount, and they are also to be compared 
 with the entries in the cash book in regard to the same. All
 
 SPECIAL AUDITS 107 
 
 endorsements on cheques are to be examined for possible evi- 
 dence of collusion. 
 
 If suspicion points to the concealment of sales, the first point 
 to be investigated is the cash sales department. Inspection should 
 be made to ascertain whether the safeguards are adequate, and 
 then the entries in the cash book from this source should be 
 checked against the initial records of cash sales. These usually 
 consist of counterfoil copies of sales tickets, or the inside record 
 of a cash register. 
 
 Another possible leak may be the shipment of goods on 
 "charge" accounts without entry in the sales book. This may be 
 due to lack of system, or it may be done advisedly for the pur- 
 pose of appropriating the proceeds when payment is sent in. To 
 discover whether this has been going on the auditor should check 
 the shipping records against the sales book. 
 
 In cases where outright theft of merchandise is suspected, 
 some system for detection should be adopted, and should include 
 a system of double-checking the contents of all packages before 
 they leave the establishment. Proper precautions should also be 
 taken at the doors to prevent employes from carrying out stolen 
 goods when they quit work. A reorganization of the shipping 
 room staff may also prove beneficial. 
 
 If suspicion of theft is based solely upon the percentage of 
 gain on the turnover, it might be well, before instituting other 
 investigations, to determine definitely whether the per cent added 
 for profit is really as much as it is thought to be. 
 
 If there is belief that the difficulty centers in the purchasing 
 department, a thorough analysis of the merchandise purchase ac- 
 count is indicated as the first step. Then all charges thereto are 
 to be checked with the original invoices, which are to be exam- 
 ined closely in regard to all salient points, viz.: date, to whom 
 made out, and whether properly O. K.'d as regards receipt of 
 goods, quantities, prices and extensions. A feature of some im- 
 portance is that invoices should appear on printed forms. All
 
 108 RENN'S PRACTICAL AUDITING 
 
 endorsements on returned bank cheques relating to purchase of 
 merchandise are to be scrutinized for possible indication of collu- 
 sion. A survey of the internal check on invoices should also be 
 made, to determine whether the responsibility for passing them is 
 sufficiently distributed. 
 
 The foregoing suggestions are based on conditions where the 
 circumstances direct attention to some particular department, 
 thus localizing the investigation. Where there is merely a gen- 
 eral suspicion that "something is wrong," and the auditor cannot 
 by himself discover any specific "lead," then the general audit 
 described in Part II is indicated as the correct course to follow. 
 
 The method of auditing the books in complete detail is also 
 to be followed in cases of partnership disagreements, of which 
 mention has been made. As a preliminary step the auditor should 
 make a careful study of the co-partnership agreement, and ob- 
 serve during the audit whether its provisions have been duly car- 
 ried out as respects the individual rights of each partner. 
 
 EXAMINATION ON BEHALF OF AN INTENDING 
 PURCHASER 
 
 Examinations on behalf of intending purchasers are made 
 principally with the object of determining the earning capacity 
 of the business. Therefore the attention of the auditor should be 
 directed chiefly to an investigation of the statistical accounts, to 
 ascertain : 
 
 First. The amount of the sales by monthly comparison, and 
 whether they are bona fide. 
 
 Second. The cost of the goods sold, and whether the cost is 
 fully stated ; also the per cent of gross gain on the turnover. 
 
 Third. The expenses and what per cent they bear to the turn- 
 over ; also whether they are fully stated. 
 
 Fourth. What amount of working capital is required to con- 
 duct the business.
 
 SPECIAL AUDITS 109 
 
 The foregoing points should be investigated for a period of 
 sufficient length to afford ample opportunity for comparison, and 
 to serve as a chart for judging whether the enterprise is prosper- 
 ing, or the contrary. The investigation should cover at least three 
 years' business and, when practicable, should cover five years. 
 
 Aside from the information which can be gathered from the 
 books, there is also the speculative consideration whether the en- 
 terprise is capable of expansion. This feature is considered later 
 in this chapter under "Good- Will." 
 
 To proceed to the examination in detail: 
 
 In making a sale of course the cash on hand is not involved, 
 consequently no attention need be paid to the correctness of the 
 cash balance. 
 
 As regards the open accounts receivable and bills receivable, 
 if they are to be purchased outright without a reserving clause, 
 they will require the most rigid investigation, both as to their 
 genuineness and their realizable values. A cautious purchaser, 
 however, will reserve to himself the right to charge back such 
 as shall prove uncollectible, and will also withhold a fair portion 
 of the purchase money to protect himself in regard to them. 
 Where such a clause is inserted in the contract, no investigation 
 is required in respect to these accounts, other than to check them 
 from the trial balance into the ledger as proof that they are prop- 
 erly recorded. 
 
 The Stock of Merchandise will need to be inventoried, as of 
 the date when the sale is consummated, and valuations should be 
 made, by agreement, either upon invoice cost less proper allow- 
 ance for depreciation, or by appraisal. In this connection it 
 should be ascertained whether the goods have been paid for, and if 
 it is found that they are still unpaid, proper provision should be 
 made for payment in concluding the purchase. 
 
 Real Estate, Buildings and Personal Property would doubt- 
 less be sold at an upset price, or by appraisal. However, the 
 auditor should ascertain their cost by analyzing and checking with
 
 110 RENN'S PRACTICAL AUDITING 
 
 vouchers, in complete detail, the accounts which represent them. 
 A point of especial importance is to examine all titles to the prop- 
 erties, and to ascertain at the place of record whether they are 
 encumbered, and if so, to what extent. 
 
 Good-Will is an intangible kind of asset, but has value in 
 proportion to the actual prosperity of the enterprise, and even 
 prospective prosperity may be accorded some attention. There 
 are many considerations which enter into the value of good-will. 
 The primary one, of course, is the earning capacity of the enter- 
 prise; then, where the property is not held in freehold, there is 
 the question of the duration of the leasehold ; the prospects of its 
 renewal ; the amount of competition in the neighborhood ; whether 
 the business is capable of expansion, etc. 
 
 The value of good-will is usually determined by the principals 
 to a sale, and without doubt they are influenced by the auditor's 
 statistical statement, gathered from the books of account, and by 
 his report of surrounding conditions. To qualify himself to value 
 good-will, the auditor must cultivate the ability to make broad 
 surveys of conditions through observation and by judicious in- 
 quiry. 
 
 Patents should be valued according to earnings, and it would 
 be necessary also to consider whether the earnings are on the in- 
 crease or not. A further point for attention is to ascertain what 
 remains of the patent's original term of seventeen years. As 
 patents are manifestly assignable, investigation should also be 
 made into present ownership. 
 
 Copyrights would be valued in almost the same manner as a 
 patent. A point of difference is that the original term of a copy- 
 right runs for twenty-eight years, and is subject to renewal for a 
 further term of fourteen years; but as this renewal is restricted 
 to the author or designer, or to his widow or children, it is evi- 
 dent that an outside purchaser would be limited to the original 
 period of twenty-eight years. However, copyrights usually out- 
 live their earning power long before the original term has expired.
 
 SPECIAL AUDITS 111 
 
 In explanation of the following outline it may be said that 
 there is not much likelihood of either assets or earnings being 
 understated by the vendor; on the contrary, the danger is that 
 the earning capacity may be represented too favorably through 
 understatement of cost, or through omission of expenses. 
 
 Check the latest trial balance into the ledgers, and verify the 
 footings of the trial balance. 
 
 Draw up a balance sheet. 
 
 Analyze all capital accounts from their beginnings, and exam- 
 ine vouchers for all charges to those accounts. 
 
 Analyze the following accounts for the entire period under ex- 
 amination, and in summarizing place the monthly totals of the 
 various classes of items opposite each other during the different 
 years, for comparison: 
 
 SALES ACCOUNT, 
 PURCHASE ACCOUNT, 
 ALL EXPENSE ACCOUNTS. 
 
 This analysis will indicate pretty clearly whether there have 
 been any suspicious fluctuations in the business. If it shows 
 either an extraordinary increase in sales lately, or an unnatural 
 reduction in purchases, or a conspicuous decrease in the expenses, 
 there will be cause to suspect an attempt at "salting," and closer 
 investigation will be required. 
 
 If, on the other hand, the figures run about normally, they 
 may be accepted as genuine, although the sales book may still be 
 examined profitably for the last thirty days or so, to make sure 
 that there has been no inflation of sales. 
 
 In preparing the Trading account and the Profit and Loss ac- 
 count for his report, the auditor should state separately any items 
 which would be subject to modification under a different manage- 
 ment; such as salaries of officers or managers, rent, interest on
 
 112 RENN'S PRACTICAL AUDITING 
 
 borrowed capital, etc. Where no salary has been charged up for 
 the proprietor's services, that fact must be noted in the report, in 
 order that proper allowance may be made for this item, in esti- 
 mating future expenses. Also any earnings not strictly a result 
 of business transactions should be stated separately. 
 
 To ascertain the working capital employed in a business, 
 take the amount of the share capital actually paid in; add the 
 liabilities to trade creditors; deduct the charges to investment 
 accounts, and the cash on hand. The remainder will be the actual 
 working capital investment. 
 
 To arrive at an estimated value of the inventory for advance 
 information, deduct from the sales account an average per cent 
 for gross profit, and subtract the remainder from the purchase 
 account. The balance is the approximate value of the inventory. 
 
 Liabilities of the vendor do not concern an intending pur- 
 chaser further than to require precautions that there shall be no 
 lien against his purchase. 
 
 So far as liabilities are any indication of the condition of the 
 business, that information can be gathered from the balance 
 sheet. 
 
 EXAMINATION ON BEHALF OF A CREDITOR, 
 ACTUAL OR PROSPECTIVE 
 
 The purpose of this kind of an examination is to ascertain from 
 the debtor's books one of two things : whether a loan or other in- 
 debtedness already in effect is secure ; or, whether a loan or grant 
 of credit pending may be extended with safety. 
 
 If the loan is to be made upon a mortgage secured by real 
 estate, the examination should be confined to matters relating to 
 the property concerned. Its value should be ascertained either 
 from the cost shown by the books, or by appraisal. The title is 
 to be inspected and inquiry is to be made at the recorder's office 
 in regard to records of title; also, whether the property is en-
 
 SPECIAL AUDITS 113 
 
 cumbered, and if so, to what extent. A report embodying the 
 foregoing would cover the requirements. 
 
 If, on the other hand, it is to be a short-time loan or a grant 
 of credit, such as nearly all trading concerns need from time to 
 time, the examination should be directed to a thorough inspec- 
 tion of the "quick" assets, and to a survey of the liabilities, in 
 order to determine whether the assets which are easily converti- 
 ble into cash are sufficiently in excess of the liabilities to warrant 
 the accommodation. 
 
 Real estate investments are not usually given much attention 
 in connection with unsecured loans; although such investments, 
 less encumbrances, must of course be stated upon the balance 
 sheet. They should be in a separate division from the "quick" 
 assets. 
 
 EXAMINATION IN DETAIL 
 
 Check the latest trial balance into the ledger. 
 From the trial balance construct a balance sheet. 
 Examine the assets in the following manner : 
 
 The Cash Balance. Where the cash balance is stated at a mod- 
 est amount, it may be accepted without investigation further than 
 to check the item from the balance sheet into the cash book. 
 
 Should the cash appear abnormally large, however, it will be 
 necessary to make close inspection, for the carrying of a large 
 cash balance while seeking credit would seem inconsistent. 
 
 Bills Receivable. The possibilities in bills receivable for fabri- 
 cating assets have been demonstrated amply. If circumstances 
 permit, the auditor should in all cases confirm bills receivable by 
 communication with the reputed drawers. However, in an ex- 
 amination of this character it is hardly permissible to resort to 
 that measure, and the auditor must be content with a preliminary 
 examination of the notes in respect to date, amount, time, where 
 and to whom payable, and signature.
 
 114 RENN'S PRACTICAL AUDITING 
 
 After seeing that none of the notes are past due, they should 
 be checked into the debtors' accounts in the ledgers, to make 
 sure that they came through regular channels. 
 
 In the case of notes, either singly or collectively, for an un- 
 usually large amount from a single debtor, inquiry should be made 
 as to his responsibility ; it might be well also to inspect the con- 
 tract or order through which the obligation was incurred. 
 
 After the notes have passed inspection they should be listed, 
 and the total should agree of course with the bills receivable item 
 on the balance sheet. 
 
 Accounts Receivable should be examined in the ledgers in de- 
 tail: 
 
 First. As to their origin ; whether they originated in the sales 
 book or, if elsewhere, of what they consist. 
 
 Second. As to the length of time they have been outstanding ; 
 whether they are due or past due. In the case of past due accounts 
 it should be ascertained what are the expectations of securing 
 payment. 
 
 Third. In the case of unusually large accounts, inquiry should 
 be made into the standing of the debtors. 
 
 Fourth. Inquire whether there are any heavy offsets to be 
 considered; such, for instance, as freight charges on carload lots 
 which were sold at a delivered price, with the freight following 
 shipment. 
 
 It would seem to be unnecessary, but it will be safer, to in- 
 quire whether all trade discounts were deducted before sales were 
 charged into the ledgers. The matter of probable cash discount 
 on sales accounts may be disregarded in an examination of this 
 kind. 
 
 Inventory of Merchandise. Where an inventory is submitted, 
 it may be confirmed approximately by deducting from the purchase 
 account the estimated cost of the goods sold in the manner de-
 
 SPECIAL AUDITS 115 
 
 scribed in the preceding section. Where no inventory is fur- 
 nished, it may be estimated by the same process. 
 
 Furniture and Fixtures, and personal property in general may 
 be listed at book values, unless they appear excessive. This class 
 of assets should be placed on the balance sheet in the same division 
 with the other investment accounts. 
 
 Real Estate and Buildings. The item of real estate in this 
 kind of an examination has been treated already. Buildings upon 
 leased ground should be so stated, giving book values and the time 
 limits of the lease. 
 
 Good-Will and Leaseholds have comparatively little value in 
 connection with a loan, and should be placed in last position upon 
 the assets side of the balance sheet. 
 
 LIABILITIES AND REVENUE ACCOUNTS 
 
 Liabilities should be looked into carefully to ascertain whether 
 they are stated fully upon the books. Reference should be made 
 to the purchase account to see whether the more recent purchases 
 have been entered. From there they should be followed, to learn 
 whether they have been paid for, or, if not, whether they appear 
 among the liabilities as unpaid accounts. 
 
 The bank deposit book should be inspected for the last four 
 months preceding the examination, for entries of personal notes 
 discounted; and such notes should in turn be followed into bills 
 payable account, and from there to the balance sheet. 
 
 Expense Accounts should be examined in detail ; and by com- 
 parisons it can be learned whether all important expenses for the 
 recent period have been met. 
 
 Purchase Account inspection for a recent period has been pro- 
 vided for already. However, the examination of this account may 
 be extended profitably to include a comparison of the monthly
 
 116 RENN'S PRACTICAL AUDITING 
 
 totals for the last six months with those for the same period of 
 the year before. This inspection should expose any protracted 
 failure to enter purchases on the books. 
 
 Sales Account should be compared similarly for a six months' 
 period, to prove that there has been no "padding" of sales. It 
 must be remembered that the accounts receivable have been ac- 
 cepted as genuine, largely from the fact that they appeared in the 
 ledgers as having originated in the sales book. 
 
 CONCLUSION OF THE EXAMINATION 
 
 If credit is to be based solely upon the net surplus and char- 
 acter of the assets the investigation is completed by verification 
 of the balance sheet, as outlined above. 
 
 If it is required, however, to secure information also in regard 
 to the earning capacity of the business, the auditor should analyze 
 the purchase account, the sales account, and the various expense 
 accounts for a period of two years at least, and show the monthly 
 results for each year in parallel columns. It would be necessary 
 also to furnish a yearly Trading Statement and Profit & Loss 
 account. 
 
 FINAL AUDIT 
 
 FOR THE PURPOSE OF PARTNERSHIP ADJUST- 
 MENT IN CASE OF A RETIRING OR 
 DECEASED PARTNER 
 
 This kind of an audit is markedly similar to the one described 
 in detail in Part II of this manual, for the conditions demand 
 that it shall be made in a thorough and exhaustive manner. In 
 this case, however, the period to be reviewed cannot be left to 
 choice, but must cover the entire term of the partnership ; unless 
 an audit has been made at some previous time, in which case 
 the new audit would begin at the point where the old one left off.
 
 SPECIAL AUDITS 117 
 
 After procuring the usual abstract in the form of a trial 
 balance and verification of the cash, the next step is to make a 
 careful study of the co-partnership agreement. A thorough 
 understanding of this document is imperative, in order that its 
 stipulations may be safeguarded during the progress of the audit. 
 
 The principal points in these agreements comprise: 
 
 First; the date of the agreement, and the names of the respec- 
 tive partners and their places of residence. 
 
 Second; the firm name under which it is proposed to conduct 
 business, the line of trade to be engaged in, location, date of 
 beginning and term of duration. 
 
 Third; the amount of capital to be contributed by each part- 
 ner. 
 
 Fourth; the amount of time and attention to be devoted to the 
 business by each partner. 
 
 Fifth; the amount of salary to be drawn by each partner. 
 Sixth; limitation on cash withdrawals by partners. 
 
 Seventh; the rate of interest (if any) to be credited to the 
 partners on their investments. Also the rate of interest to be 
 charged on withdrawals. 
 
 Eighth; apportionment of profits or losses between the part- 
 ners. 
 
 Ninth; assignment of special duties to individual partners, es- 
 pecially the right to sign cheques and other negotiable papers. 
 
 Tenth; the signature of each partner to the agreement, prop- 
 erly witnessed. 
 
 In connection with the partnership agreement the auditor 
 should give special attention to the following points : 
 
 (a) That each partner has actually contributed his share to 
 the capital, and whether he has devoted his agreed proportion of 
 time and attention to the business.
 
 118 RENN'S PRACTICAL AUDITING 
 
 (b) That each partner has received his full compensation 
 in the shape of salary, and that none has been overpaid. Also 
 that the partners have been duly credited with interest on their 
 investments, if the agreement stipulated it. 
 
 (c) That capital withdrawals have all been charged to the 
 proper individual accounts of the partners, and that interest on 
 same has been charged in accordance with the agreement. 
 
 (d) That profits or losses have been carried in proper pro- 
 portion to the individual accounts of the partners. 
 
 (e) Although not specifically mentioned in the agreement, it 
 is the auditor's duty to see that each partner's personal account 
 has been charged with all purchases made through the firm for 
 his private use, as well as any merchandise taken by him from 
 stock. 
 
 There are still other points to which more particular attention 
 is to be paid than in an ordinary audit, especially as regards 
 provision for contingencies. It must be remembered that this 
 audit will be a concluded one, and therefore does not afford much 
 opportunity for later rectification of oversights. 
 
 Usually the call for an audit of this kind comes from the 
 retiring partner's side. Therefore, in his capacity of representing 
 the absent partner, the auditor should endeavor to protect the 
 interests of his client. Of course this does not mean that any 
 undue advantage is to be taken by him, but rather that none is to 
 be permitted to the other side. 
 
 In valuing the inventory of stock on hand, the rule of "cost 
 or market, whichever is lowest," does not apply in this case. The 
 retiring partner is entitled to his share of full cost, plus all ex- 
 penses of placing staple merchandise in its present location; but 
 in the case of certain lines which have deteriorated in value by 
 growing stale or out of date, the rule of charging at cost does
 
 SPECIAL AUDITS 119 
 
 not apply and an appraisal must be made by independent ap- 
 praisers. 
 
 Fixtures should be valued at cost less proper allowance for 
 depreciation. 
 
 Good-will should be valued upon the basis of past earnings, 
 with due consideration for the fact that the business is a "going" 
 concern. 
 
 Where an immediate settlement is to be concluded, the book 
 accounts should be valued according to their ratings under analy- 
 sis. However, where circumstances permit of the necessary 
 delay, a much more equitable way is to postpone final adjustment 
 in order to give opportunity for payment of the better class of 
 these accounts. Under this arrangement no further entries should 
 be made in the ledgers containing these accounts except such as 
 relate to their settlement. An adjustment account needs to be 
 opened, to which allowances should be charged and from which 
 they should be carried eventually to the accounts of the respective 
 partners. The proceeds of collections should, of course, be divided 
 among the partners. After a reasonable time the residue of these 
 accounts could be valued much more accurately than at first. 
 
 The auditor should survey recent expenditures to determine 
 whether they included any prepayments, such as rent, discount on 
 notes given at the bank, insurance, etc. If such are found, the 
 retiring partner is to be credited with his share. 
 
 In justice to the continuing partner a survey should be made 
 also in respect to accrued accounts, such as wages, interest, taxes, 
 etc., earned but unpaid. If such are found, the retiring partner 
 is to be charged with his share. 
 
 The routine work of the audit, if followed as suggested in the 
 beginning of this article, will have verified the revenue accounts. 
 Finally, a careful examination of the balance sheet should be 
 made for the detection of any possible oversight.
 
 120 RENN'S PRACTICAL AUDITING 
 
 DIFFERING FEATURES IN AUDITS OF VARIOUS 
 LINES OF BUSINESS 
 
 AUDITING TRADING CONCERNS 
 
 The audit described in detail in Part II of this manual covers 
 every requirement for auditing the books of a trading concern. 
 
 AUDITING MANUFACTURING ESTABLISHMENTS 
 
 In auditing the books of a manufacturing concern, or any 
 enterprise where labor is an extensive factor, the pay-rolls are an 
 important feature for the auditor's attention. He should assure 
 himself that safeguards are in force which will prevent the car- 
 rying of "dummy" names, or any over-payment to real employes. 
 There should be a sufficient distribution of the work in preparing 
 the pay-roll to prevent collusion, and the pay-roll should be 
 certified finally by the manager or foreman. It is desirable, also, 
 that the actual paying of the wages should be done by some person 
 who has no connection with the preparation of the pay-roll. 
 
 If further investigation seems to be desirable, an occasional 
 pay-roll should be checked into the time book, and the extensions 
 and footings should be verified. 
 
 It is important that a proper factory-cost system should be 
 maintained, and if it is lacking the auditor should recommend its 
 installation. 
 
 Probably the point in which the audit of a manufacturing con- 
 cern differs most from other lines is in connection with the in- 
 ventory. In the case of a factory the inventory of stock consists 
 really of three divisions, viz. : raw material, partly finished stock, 
 and finished stock. 
 
 Raw Material is to be valued at initial cost, plus all expenses 
 incurred in bringing it into the warehouse.
 
 SPECIAL AUDITS 121 
 
 Partly Finished Stock is valued at the cost, upon the above 
 basis, of the raw material which has actually been used towards 
 its construction, plus the direct labor so far expended on it, and 
 its proper percentage of overhead expenses. 
 
 Completed Stock is valued upon the same lines as partly fin- 
 ished stock, but includes its entire cost to completion. 
 
 AUDITING MINING ENTERPRISES 
 
 The remarks in the foregoing article in relation to pay-rolls 
 apply equally to those of a mining concern. 
 
 There should also be an efficient system for determining 
 monthly the result of the operations from the revenue point of 
 view. 
 
 Often there is much confusion in the distribution of expendi- 
 tures between capital accounts and expense accounts. The auditor 
 should see that any errors of that kind are corrected. 
 
 Another important point is to ascertain whether provision is 
 being made for extinguishing the capital accounts, in anticipation 
 of the ultimate exhaustion of the mineral. The method usually 
 followed is to set aside each month a reserve based on the tonnage 
 mined during that month. 
 
 AUDITING BANKS 
 
 It is to be understood that these suggestions for bank auditing 
 are not limited to governmental inspection requirements. The 
 federal as well as the state bank examiners work under direction 
 of their respective departments, and their instructions require an 
 investigation adapted to the special purposes of those departments. 
 Their mission is to ascertain whether the banks are solvent, and 
 that the banking laws are being observed.
 
 122 RENN'S PRACTICAL AUDITING 
 
 Moreover, owing to the large number of inspections assigned 
 to each examiner, it would be a physical impossibility for him to 
 make the detailed inspection in each case which is contemplated 
 in this article. Therefore the following suggestions are to be 
 construed as covering the requirements of an independent audit, 
 made by a professional auditor. 
 
 So far as it relates directly to the books of account, the audit 
 of a bank does not differ materially from that of any other line 
 of business. To do the work thoroughly, the same attention 
 should be paid to the details of footing the books of original entry, 
 and following the entries forward into the general ledger, as 
 would be given to the books of a trading concern. The revenue 
 expenditures and transfers through the journal should be sup- 
 ported by vouchers, the same as in other lines of business. 
 
 At this point, however, the banking business assumes dis- 
 tinctive features, for, dealing exclusively in cash, there can be no 
 equivalent to the Trading Account of other lines; therefore the 
 auditor cannot make any calculations from that standpoint. Of 
 course, there is the revenue from loans and discounts, but as the 
 volume of loans and the rate of interest both fluctuate constantly, 
 it cannot be used as a guide. 
 
 Owing to this inability to secure confirmation through the 
 statistical accounts, it is evident that the proper way to prove the 
 balance sheet is by independent verification of each item. 
 
 The audit should be made to correspond with the close of 
 business on a certain day, and whenever it is practicable to arrange 
 it, by all means let it be on the last day of the month. This will 
 save much extra labor for the bookkeepers of the bank under 
 audit, as well as those of its correspondents. It will also make 
 it possible to utilize the regular monthly statements to depositors, 
 for verification purposes. It is not necessary, however, to wait 
 for the closing hour before making a beginning ; on the contrary,
 
 SPECIAL AUDITS 123 
 
 it is desirable that the work should be advanced as far as possible 
 during the day on which the audit is begun. 
 
 An important part of the work may be accomplished in ad- 
 vance by counting the reserve during business hours, this should 
 be gauged so that it will be completed by the time the tellers have 
 balanced; in order that then their cash and cash items may be 
 taken immediately in hand for verification. 
 
 After the reserve has been counted the auditor should place 
 the money under lock, so as to have it under his personal control 
 during the time occupied in verifying the tellers' balances. Should 
 there be occasion to draw on the reserve while it is in the auditor's 
 possession, he should not permit anyone else to have access to it, 
 but should hand the money out himself. 
 
 On the first night of the audit a complete summary of the cash 
 count is to be made, which shall show in separate groups the 
 various items which enter into it. Of course the total must agree 
 with the Cash Account in the general ledger. 
 
 A schedule is to be made of the cheques on other banks car- 
 ried over by the tellers ; this should show in detail the date of the 
 cheque, names of the drawers and endorsers, the bank drawn on, 
 and the amount. The auditor will see that these cheques are 
 included in the "clearings" next day, and will also enclose a verifi- 
 cation statement with each clearing house package, requesting 
 endorsement as to correctness, and its return to the auditor's 
 office. 
 
 The receptacles containing securities, discounted notes and 
 collateral should be sealed over night with the auditor's private 
 seal, awaiting examination the next day. 
 
 Verification statements should be dispatched on this night to 
 all banks to whom balances are due, and should likewise be 
 requested from depository banks and others from whom balances
 
 124 RENN'S PRACTICAL AUDITING 
 
 are owing. Reports should also be requested from every bank 
 holding drafts or cheques for collection on which no returns have 
 been made. 
 
 By the time the counting of the cash has been completed, the 
 assistants, who have meanwhile been balancing the general ledger, 
 and drawing off the balances from the depositors' ledgers, will 
 have finished their work. After agreeing the total of the deposi- 
 tors' ledgers with the controlling account, matters may be post- 
 poned safely until next day. 
 
 Next morning, while the auditor is constructing the balance 
 sheet, one of his assistants should be preparing such schedules as 
 will be required in connection with verification of the same. 
 
 On this day verification statements are to be sent to all deposi- 
 tors whose names appear on the schedule drawn off the night 
 before. A sufficient force must be set at filling in the blank spaces 
 of these forms to expedite the work properly. 
 
 In the first trial of this method, some judgment must be 
 exercised in the preparation of these forms, which should be in 
 the shape of a circular letter. They should state in effect that the 
 bank management, with a view of conserving the best interests 
 of its depositors, had inaugurated a system of having the 
 bank audited periodically by independent auditors ; that, in order 
 to make these audits effective, it is necessary for each depositor 
 to pass upon the correctness of the balance to his credit at the 
 date of the audit, viz. : date, ; amount, . 
 
 He should be requested to return the verification letter either 
 endorsed "Correct," or with notation of any exceptions; these 
 statements in all cases to be returned to the auditor, through 
 return envelopes sent out with them. A suggestion should fol- 
 low that the depositor's monthly statement is awaiting him at the 
 bank, and that it is hoped he will call for and check the same over 
 promptly.
 
 SPECIAL AUDITS 125 
 
 The next item in order for direct verification is the notes held 
 by the bank. The author has paid his compliments to bills receiv- 
 able several times heretofore, and will only repeat that they must 
 be verified by communication with both makers and endorsers. It 
 is desirable that the verification statement be so constructed that it 
 will indicate the original amount of the note, less any partial pay- 
 ments. It is believed that this form will more surely direct atten- 
 tion to any omission of credit for partial payment, than a mere 
 statement of the net amount would do. 
 
 Unnecessary handling of the notes may be avoided by drawing 
 up a schedule of the same, and examining the collateral at the 
 time when the verification statements are being made out. The 
 collateral is to be listed, and it is to be noted whether the values 
 are sufficient to protect the loan ; also whether it has been properly 
 endorsed over to the bank. 
 
 Notes rediscounted, in attorneys' hands, or with banks for col- 
 lection, must be verified by letter. 
 
 All securities held by the bank are to be inspected at one 
 sitting. 
 
 Outstanding cash items in transit are to be verified from the 
 remittance register as at date of the audit, and a list of those still 
 outstanding at the close of the audit is to be incorporated in the 
 report. 
 
 Outstanding certificates of deposit and unpaid dividend 
 cheques are listed and the total compared with representative item 
 on balance sheet. 
 
 By this time returns from statements sent out or requested 
 will be coming in. Each day's arrivals should be checked against 
 the respective schedules, and delinquents should be urged to send 
 them in, so that all accounts may stand verified by the time the 
 routine work of the audit is completed.
 
 126 RENN'S PRACTICAL AUDITING 
 
 As intimated in the beginning of this article, the detail work 
 relating to the books of account does not differ materially from 
 that in other lines of business, therefore a study of Part II of 
 this manual should provide all additional information necessary 
 to a complete audit of a bank.
 
 GEORGE B. RENN 
 
 PUBLIC ACCOUNTANT AND AUDITOR 
 
 REGULAR AND SPECIAL. AUDITS 
 EXAMINATIONS. INVESTIGATIONS 
 
 1341 DAKIN STREET 
 
 PROFESSIONAL ENGAGEMENTS 
 
 SOLICITED CHICAGO 
 
 127
 
 INDEX 
 
 Page 
 
 Accounts Payable controlling account 24 
 
 Receivable controlling account 23 
 
 Analysis of accounts 20 
 
 Audit for partnership adjustment 116 
 
 Auditing banks 121 
 
 manufacturing establishments 120 
 
 mining enterprises 121 
 
 practical directions for 29 
 
 trading concerns 120 
 
 Auditor's attitude toward the office staff 19 
 
 certificate 51 
 
 relation to his client 18 
 
 report, The 50 
 
 report, A specimen 52 
 
 responsibility 18 
 
 working sheet 26 
 
 " illustrated 27 
 
 Balance sheet, The 48 
 
 " form .....80, 81 
 
 Bank balance 33 
 
 Bills Receivable and securities 34 
 
 Books of corporations, first audit of 101 
 
 Cash balance 31 
 
 " book 36 
 
 Combined controlling account 25 
 
 Completed stock 121 
 
 Condensed outline of an Examination Ill 
 
 128
 
 INDEX 129 
 
 Continuous audit 104 
 
 Controlling account, The 21 
 
 " accounts, illustrated 23, 24, 25 
 
 Copyrights 110 
 
 Different kinds of audits 17 
 
 lines of business classified 16 
 
 Differing features in audits 120 
 
 Dividend book 102 
 
 Errors in accountancy 15 
 
 " of principle 15 
 
 Examination for a creditor 112 
 
 " an intending purchaser 108 
 
 Final audit for partnership adjustment 116 
 
 First audit of books of corporations 101 
 
 Form of Auditor's report 53 
 
 " " Auditor's working sheet 27 
 
 " Balance sheet 80, 81 
 
 " " Controlling accounts 23-25 
 
 ' General Profit and Loss account 82-85 
 
 " " Individual Profit and Loss accounts 86-97 
 
 " Summarized Trial Balance 98, 99 
 
 " Turnover 28 
 
 Fraud 16 
 
 Furniture and Fixtures 115 
 
 General consideration of principles and methods 13 
 
 Good-Will 1 10, 115 
 
 Investigation on account of suspected fraud 105 
 
 Journal, The 45 
 
 Leaseholds and Good- Will 115 
 
 Liabilities 115 
 
 Merchandise inventory 109, 1 14 
 
 how to estimate 112 
 
 Minute book . . 101
 
 130 RENN'S PRACTICAL AUDITING 
 
 Order of procedure 31 
 
 Part 1 13 
 
 " II 29 
 
 " III 101 
 
 Partly finished stock 121 
 
 Patents 110 
 
 Periodical audit 104 
 
 Practical auditing 29 
 
 Profit and Loss account, The 48 
 
 forms 82-97 
 
 Purchase book 43 
 
 Raw material 120 
 
 Real estate, buildings and personal property 109, 115 
 
 Review and conclusion of the audit 46 
 
 Sales book 44 
 
 Special audits 101 
 
 " instructions 29 
 
 Specimen report 52 
 
 Stock certificate book 102 
 
 Stock ledger 102 
 
 Subscription book 101 
 
 Technical errors 15 
 
 Transfer book 102 
 
 Trial balances 33 
 
 Turnover 28 
 
 Vouchers 20 
 
 Voucher Register 41
 
 UNIVERSITY OF CALIFORNIA LIBRARY 
 
 Los Angeles 
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 Ur- ^raity of California 
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