of enterprises sell tickets, or issue coupons at a discount for cash which are a charge on the subsequent operation of the business. Tickets or coupons are issued by taxicab companies, springwater dealers, restaurants, amusement parks, and shows. Telephone companies formerly issued stamps good for long-distance calls.

Not all of the unused tickets, etc., will be presented, but so long as they are outstanding, provision must be made for redemption. The auditor will not attempt to verify the outstanding liability in detail, but he should carefully examine the system followed, because if the proper principles are observed, the outstanding book liability will be in excess of the actual redemption which may be expected. Many tickets, coupons, etc., are lost or destroyed, and it is obviously impossible to issue duplicates.

Deposits: Reference is not made to the deposits received by banks, bankers, and saving funds, but to the funds which are deposited as a guarantee of good faith, or as part payment on a purchase, or as security for an unliquidated or possible debt.

If the concern is operating under a public franchise, as a gas or electric company, it may have the power to require deposits, and in many instances it will be charged with the payment of interest thereon. Interest is not usually paid until the receipt for the original deposit is surrendered, and this may be many years afterward. Large numbers of the receipts are lost or destroyed and demand is never made. Nevertheless, the company should carry all of the deposits as a liability and reserve the interest accruing thereon until a sufficient time has elapsed to warrant writing off such deposits as may have been uncalled for so long that the chances of payment are remote.

The custom of receiving deposits of money from employees is well enough established to warrant the inclusion of the caption "Deposits" as one of the liabilities to be reported by prospective borrowers to banks.

The auditor should investigate the procedure followed from the time a deposit is accepted to the time it is withdrawn. There should be ample safeguards surrounding the handling of such funds, as the deposits are frequently offered by ignorant persons

and foreigners who are not familiar with business methods and who might be induced to accept irregular receipts from clerks not authorized to handle the money. It is important that the books and stationery used should be specially prepared for the purpose, and the utmost care should be taken in writing up the records. The clerk in charge of the books should not be allowed to receive or pay money.

If pass-books are furnished to depositors, the auditor should call in as many as possible and compare the entries and balances. with the books. There are so many different methods in force that the auditor must rely on his general experience in order to satisfy himself that the aggregate deposits appearing on the balance sheet as a liability represent the actual amount due to depositors. The rate of interest paid should be verified and the calculations tested. Accrued interest at the date of the balance sheet not credited to depositors should be added to the total deposits shown by the books.

For various methods of calculating interest see Chap. XXXI. In clubs and similar organizations it is customary for members to deposit a small sum as security against the loss of keys, etc. To avoid bookkeeping in connection therewith, a very loose method may be in force. Frequently the cash received is placed in a drawer or box without any record being made. Subsequent payments are likewise made without record. Theoretically the balance on hand represents the liability for outstanding keys, etc. Practically it is known that part of the cash will never be called for. This permits unauthorized payments to be made from the fund, or part may be fraudulently abstracted. The matter is unimportant except that such laxity places temptation in the way of junior clerks and may be responsible for starting them on a criminal career.

The auditor should call attention to the importance of a careful record being made of all receipts and payments, no matter how small, primarily for the purpose of facilitating an audit, but in reality to inculcate in every employee handling cash the greatest care and accuracy in connection with the handling of money.

Unclaimed Dividends: The proper way of dealing with dividend accounts is to set aside in a separate fund or bank account

the full amount of each dividend declared, charging against it all payments.

It sometimes happens that stockholders cannot be reached, and dividend checks are withheld or, if issued, are not cashed within a reasonable time. This may leave an outstanding liability which may remain undischarged indefinitely. Where such a state of affairs exists, any payments out of the regular order should be noted, as it may be found that unauthorized payments are being charged thereto.

CHAPTER XII

BALANCE-SHEET AUDIT-LIABILITIES (Continued) CONTINGENT LIABILITIES AND CAPITAL

It is not enough that a balance sheet shows what must be paid; it should set forth with as much particularity as possible what may have to be paid. More than one apparently prosperous business house and many corporations have been wrecked. through the necessity of having to meet obligations which did not arise out of the operation of ordinary business transactions. Nevertheless, the obligations were real ones, no matter how unlikely they appeared to be when contracted, and a true statement of the financial affairs of such concerns, prepared at any time. after the obligations had been entered into, would have set them out. Accountants experienced in bankruptcy affairs well know that rarely, if ever, do contingent liabilities appear on the books of account.

It is the duty of an auditor who makes a balance-sheet audit to discover and report upon liabilities of every description—not only liquidated debts, but possible debts. It is true that contingent liabilities are at best difficult to locate, and almost impossible of discovery when an attempt is made to conceal their existence, but a professional auditor is supposed to undertake difficult tasks, and if he cannot report on anything except the entries which he finds in the books, he had better retire from the profession.

Notes Discounted: As shown under "Notes Receivable" (page 101) an apparent asset may represent an actual liability. For instance, a trade debtor may give a note for $1,000 which closes his account. The note is discounted, which closes the Notes Receivable account. The debtor finds he cannot pay and renews the note when due. This may be repeated several times, but at last a renewal cannot be secured and the note must be paid by the indorser. After it is known that the note will not be

paid at maturity by the maker, the liability of the indorser is more than contingent-it is actual.

Of course, if the reserve for bad debts includes a provision for the full amount of the note, it would be duplication to set up a further reserve against the payment of the note. Usually the bad debts reserve is not large enough to take care of the contingent liability on notes discounted, so that the auditor should investigate the status of all notes under discount, and if it appears probable that any will not be met when due, the liability therefor should be shown. In cases where the auditor is satisfied that notes will neither be paid nor renewed he should include the amounts under current liabilities stating the date when due.

Indorsements: In addition to the contingent liability upon notes discounted for the benefit of the indorser, there may exist a liability based on indorsements for the benefit of others, usually known as accommodation indorsements.

It is not proposed to discuss this subject exhaustively, as the question of ultra vires at once arises, but from a practical point of view it may be assumed that every indorsement, whether by an individual, firm, or corporation, may become an ultimate actual liability of the indorser. Promissory notes are negotiable instruments, and, in order that they may circulate freely, an innocent purchaser for value, without notice of a lack of consideration on the part of a maker or indorser, may sue and recover from any or all, in turn.

The assumption that the maker will pay, or that the notes will not be used, or will not find their way into the hands of outsiders, has been dissipated in so many thousands of cases that the auditor who fails to include accommodation indorsements as liabilities because he is advised that there is no possibility of payment being demanded is assuming a risk for which there is no professional, legal, or moral justification.

It is possible that circumstances may exist where such indorsements are not liabilities, as would be the case if a note were overdue and the holder had notice, but the vital point to bear in mind is that solvent, straightforward concerns do not as a rule request nor secure indorsements unless under stress of necessity, or upon the payment of a consideration. If the maker of the note is "hard up," the indorser should expect to pay (as he usu