rate of interest, on the basis of which the investment was made.

The corporations in whose balance sheets marketable investments play a leading part are insurance companies, banks (more particularly savings banks), and trust companies. State laws require that the solvency of insurance companies be tested by the sufficiency of the assets (valuing stocks and bonds at the market prices) to meet the present value of policy contracts in force and sundry other liabilities. Owing to the abnormal decline in the market values of securities in the fall of 1907, the statements of almost all the life insurance companies at December 31, 1907, showed a startling decrease in surplus as compared with the close of the preceding year. This shrinkage attracted considerable attention, and as the corporate bonds owned (the fall in whose market quotations was largely responsible therefor) were yielding the same rate of income as when purchased, and as there was no serious question as to the security of the principal of most of them, emphasis was given to the question of whether the basis of so-called market value was not an erroneous one. This rather startling object lesson resulted in a more general appreciation of the advantages of amortization. A professional auditor should be fully conversant with the principles of amortization and recommend its adoption wherever possible.

In preparing a balance sheet which shows investment securities at their amortized values, it is interesting and advisable to mention, in a footnote or other suitable place, the market values at the date of the balance sheet.

Where securities are purchased for a definite purpose, such as the creation of a fund to retire maturing obligations, the questions of income and of amortization are both important. The auditor should in all cases secure a copy of the board minutes or trust deed provisions which govern the setting aside and handling of the fund. Any variation therefrom may be important and should be fully investigated.

If the balance sheet does not disclose the fund properly, the auditor must insist on its being corrected. Many corporate officers neglect sinking fund and similar requirements where the trustee fails to inquire periodically into the transactions of the

corporation, and when their omissions are called to their attention they in turn point out the excellent financial condition of the company and argue that the provisions are intended merely to safeguard the bondholders from loss in case the company were unsuccessful, and as the contrary is the case, there is no necessity for bothering with the setting aside and investment of a sinking fund.

Many bonds are secured by mortgages on personal property.. Failure to observe trust deed requirements occurs most frequently where there is a sale of a part of the property pledged under a mortgage. When obsolete or worn-out property is sold, all proceeds of such sales are the property of the trustee, and any use thereof by the corporation is conversion.

Therefore, wherever an auditor finds that there has been an issue of bonds he should secure a copy of the mortgage securing the same, examine its provisions, and note any apparent failure to observe them.

It may be that resolutions will be found in the board minutes requiring the investment of part or all of the surplus in specific securities. The latter part of the requirement will not be difficult to verify.

Treasury Stock: When stock has been issued fully paid and has been returned to the treasury of the company which issued it through purchase or gift, it is known as "treasury stock" and should appear on the books as an asset. It represents property of more or less value and is not a deduction from the outstanding capital stock unless it is retired by due process.

If purchased by the corporation, cost price is the correct basis of book entry; if acquired by gift, opinions differ as to the form of entry. The best authorities sanction the setting up of the stock as an asset at par value, offsetting this entry by the creation of a reserve or surplus account which is designated as a capital item, and is clearly differentiated from the surplus which arises out of profits or which is available for dividends.

As treasury stock is sold or otherwise disposed of, the asset account is credited and an adjustment made between this account and the reserve or surplus account for the difference between the book value and the proceeds of the sale.

For the purposes of a balance sheet the auditor should use

his discretion and place such a value upon the stock as in his opinion reflects its actual value. So long as the item is separately and fully stated there is no good objection to using the book figures. It is never proper to include among the current profits or as a part of the surplus available for dividends any part of the book value of treasury stock. This would not, however, apply where stock had been resold at a profit and the profit realized in cash.

In verifying the existence and location of the stock the same rules should be observed as with other securities.

Unissued Capital Stock: This is to be distinguished from treasury stock, and good accounting practice does not require any entry therefor in the books of account until it has been subscribed for.

WASTING ASSETS

Certain assets, such as mines, lumber, etc., are in a sense both current and fixed in their nature, but almost invariably a considerable degree of permanence attaches to them and as their conversion into cash is a very gradual process, such assets should appear as a subdivision of those which are known as "fixed."

Values to be Written Down: It is obvious that a mine or a tract of timber from which ore is being taken or timber removed is worth less at the end of a fiscal period than at its commencement. Consequently the balance-sheet valuation should be reduced in direct proportion to the depletion of the mine or the cutting of the timber. The usual reserve for depreciation is, or should be, superseded by a sinking or extinguishment fund

account.

There is, however, a decided difference between the necessity for providing for the renewal of plant and making good the diminishing value of a mine. In one case it must not and cannot be assumed that there will be no new machinery to buy, whereas the owners of a mine expect that the produce thereof will be converted into cash and become available for distribution as dividends, unless they as owners have decided to retain the proceeds and invest it in other ways.

In such cases the law will not prevent the payment of dividends out of capital, but the by-laws of the board of directors

of a corporation may make it illegal. The auditor must acquaint himself with the facts relating to the phases of each particular

case.

Mines: The auditor should follow the suggestions relating to land (page 119) so far as title and encumbrances are concerned.

In verifying the accuracy of the value placed upon the mining property the auditor as a rule will not have much to guide him. He must, however, keep in mind the fact that as operations proceed the value decreases. An analysis of the original cost, taken into consideration with the engineer's estimates of total contents, will be a valuable check on the allowance for depletion. It may not be customary to submit the engineer's records to the auditor, but the latter is on notice that no well-managed mining company attempts operation on a large scale unless fortified by the scientific calculations of skilled engineers. With these before him and with the records of production as shown by the books, an auditor can arrive at a reasonable conclusion as to how the book valuations have been estimated. If his own figures vary to any great extent from the books, the auditor should decide that the matter demands further investigation.

Timber Land: It will be assumed that all timber propositions which have arrived at a stage where an audit is in order are conducted on a well-thought-out plan. The quantity of standing timber will have been estimated and verified (cruised) and, with this as a starting point, the auditor can estimate the average depletion charge which should be provided for.

It is obvious that an attempt to certify to results based on an examination of money values only would be hazardous to an extreme. The books should show quantities as well. If they do not, the auditor is warranted in having his suspicions aroused.

Contingent Assets: The auditor rarely discovers any trace of assets which have been omitted from the books, but occasionally he is fortunate enough to disclose tangible assets which, when properly applied, increase the net worth of the business under audit.

In addition to the assets discussed in the foregoing pages, the auditor should consider the possibility of the indebtedness to a corporation of any person or persons.

Capital Stock Calls and Assessments: In some states there

is a statutory liability on the part of stockholders in business corporations for an amount additional and equal to the par value of the shares. This corresponds with the liability of stockholders in all National banks and some State banks and trust companies. The possibility of such recovery is an asset which should be taken into consideration wherever it exists; the credit of a company incorporated in a State having such a law should be strengthened thereby, particularly if some or all of its stockholders are of recognized financial standing.

In other cases the auditor may find that the capital stock has been only partly paid and that the uncalled installments are not charged to the stockholders in the books, nor mentioned in the statements. This occurs where the corporation is a close one and the officers and directors are identical. The amount callable should be ascertained and the probability of collection duly considered.

Liabilities of Directors: In another chapter (page 45) attention is called to the liabilities of directors for various shortcomings. In many States directors are personally responsible for debts contracted under certain circumstances and in excess of certain sums. Where there is any possibility of this contingency, the auditor should refresh his memory as to the laws governing corporations of the State in which the company is incorporated, or in which it has its principal office, and ascertain whether or not the directors have automatically made themselves responsible for any part of the indebtedness. This is especially important if an examination is being made for creditors.

SECRET RESERVES

After all recorded assets have been dealt with, and after due consideration has been given to any assets which have been inadvertently or fraudulently omitted from the records, it may be necessary to investigate the authority under which assets. have been intentionally omitted from the books or the balance sheet, or both.

It may be perfectly obvious to everyone connected with the concern under audit that certain assets exist and are known to be the sole property of the enterprise, yet acting under instruc