one requiring comparatively little time, perhaps not so much as to verify the footings or postings for a short period, and is of very much more importance.

As stated elsewhere, the unexpired portion of premiums prepaid at the date of the balance sheet is a deferred asset. In a going business it is proper to set up the full unexpired proportion of the premiums paid in advance, but in a statement of affairs, such as is required in the event of proposed or forced liquidation, it may be necessary to base the calculations upon the "short" rates which are used in the cancellation of policies.

Freight and Express: Freight is another class of expense which is passed by many auditors on the assumption that the amounts paid are sure to be accurate, and that it is a waste of time to attempt to go into detail. As a matter of fact, transportation companies, and particularly express companies, are chronic overchargers, and every bill must be checked most carefully.

An auditor need not go into tariff details, but he should inquire closely into the method of check in use, and if he finds that the freight and express bills are not approved as to weights and rates by an intelligent clerk who uses all possible sources of information to secure the lowest quotations, he will probably find an opportunity to make a constructive report on the situation.

Many trades have a central association with a traffic bureau, which furnishes full and free information when requested to do so by its members. The Interstate Commerce Commission will also assist a shipper who feels aggrieved.

In one very large manufacturing company being audited for the first time by the author's firm, it was found that practically no attention was given to the inspection of freight bills, it being assumed that the charges were always in order. A careful test disclosed the fact that many purchases had been made on a basis of freight being prepaid by the shipper. Now it is the custom in such cases for the consignee to pay the freight and deduct same from the invoices. The company under audit had paid the freight in every case, but had charged it to purchases account instead of to the shipper. The investigation was carried back several years and many thousands of dollars were actually recovered.

Postage: Vouchers should be secured for all purchases of

stamps. Postmasters will always sign receipts when requested to do so.

Defalcations of small sums are frequently found in connection with postage accounts, so that an auditor should not only scrutinize such payments very carefully, but should suggest safeguards which will reduce future possibilities of loss, and more important still, remove a serious source of temptation to junior clerks.

There should be some relation between the total cost of postage and other expense accounts, such as stationery and printing, advertising circulars, etc.

A daily mail book showing the total postage used on outgoing mail requires very little time to compile and is valuable for several reasons. It affords an opportunity to apportion the cost to various accounts and has a most excellent moral effect on those who handle the stamps, as some one in authority from each department should initial the charges to such department at least weekly.

Inquiry should be made to ascertain if postage is paid on outgoing shipments of goods in small quantities. Many concerns add postage to such shipments, and custom permits it unless quotations are made "prepaid." If not so made and a considerable number of shipments are made by mail, it will be in order for the auditor to suggest that the cost of the postage be added to the invoice.

In one instance, where quotations distinctly stated that postage would be added where small lots were sent by mail, the shipping department was extremely careless and few such charges were made. The auditor who discovered the laxity received warm commendation for his vigilance and was requested to make the most comprehensive investigation into all the other departments of the business.

Journal Vouchers: Vouchers should be submitted for all journal entries and the auditor need not announce in advance how many of them he intends to inspect. If formal vouchers have not been taken, the journal should be read over carefully and all entries for which authority should have been secured pointed out as requiring proof.

The journal can be used fraudulently by fictitious or irregular

credits to customers or other personal accounts to conceal the misappropriation of cash collected therefrom. To detect this, all credits to customers for allowances, returns, etc., and all accounts charged off as bad should be approved by some authorized official. If no such approval appears, the auditor should ask that the journal entries themselves be initialed. Other credits to personal accounts are made for salesmen's expenses, etc. These should be verified in the same manner as cash vouchers.

Well-managed concerns now supply their salesmen with a fixed fund, and payments for expenses cover the exact expenditures during a given period. This obviates the necessity for paying out round sums after the first item. Subsequent payments can be charged direct to the proper expense account and journal entries are done away with.

Transfers from one account to another may be for the purpose of fraudulently increasing one account or decreasing another.

The experienced auditor need not spend very much time on the journal, as a careful glance over the pages will develop any entries which require explanation. The inexperienced auditor should examine the entries carefully and call for documentary evidence to support an item which by any chance might be irregular.

There is a tendency on the part of bookkeepers to use a printed form for journal vouchers which serves in most cases as a memorandum from which the actual book entry is made, the result being that every entry is duplicated. One, however, is called a voucher, although it may not be approved nor have attached any evidence of its authenticity. If such a form is used, any papers or documents relating thereto, such as original correspondence from attorneys stating that an account is worthless, etc., should be attached. Where founded on the action of a committee or board of directors, reference should be made to the page of the minute book where recorded. If reference is made to a contract or agreement, the file or location of the original document should be stated.

Purchase Returns: It is no part of the normal conduct of a business to return goods which have been purchased and received. For this reason, when goods are returned because they

are defective or unsatisfactory, or because they were not ordered, etc., the record of such returns is not always a permanent or satisfactory one.

In most cases dependence is placed on a memorandum on the original invoice, and if made before the invoice is entered on the books, it is practically sure to prevent payment. But sometimes the invoice will have been entered, and if care is not taken, the account will be paid in due course without making any deduction.

The best preventive is to have a good-sized book labeled plainly "Returned Purchases," in which shall be entered a memorandum covering every return. This book should be compared with the purchase books regularly to prevent errors in payments.

Cancellation of Vouchers: Instances are known where dishonest clerks have used old vouchers to support fictitious, duplicate payments, altering the dates thereof. It is always important for an auditor to mark a voucher in such a way that there can be no possibility of its being presented or used again.

The best method of cancellation is to use a rubber stamp bearing the name of the auditor and the initial or number of the clerk in charge of the audit. Some auditors use a conductor's punch.

The book entries should be marked in some distinctive way to indicate that a voucher therefor has been compared with the entry, and as the voucher may be more or less incomplete, it is wise to use different marks or initials to indicate the kind of voucher submitted.

Each auditor should select his own marks. It is advisable to change them from time to time as the client's clerks become. familiar with the marks, as well as the procedure of a routine. audit.

CHAPTER XX

THE DETAILED AUDIT (Continued)

THE TRIAL BALANCE

ONE of the most important matters in any audit is the verification of the trial balance. By this is not meant the routine checking of the ledger footings and extraction of the balances merely to test its arithmetical accuracy, but that careful examination or study of it which will throw light on the entire and detailed working of the whole system. Every ledger caption should mean something. After some experience, an auditor, by simply looking at the various accounts scheduled on the trial balance, will be able to discuss the whole system, and without further data suggest improvements therein. Of course, no sane practitioner would commit himself after such a cursory glance, but he will have gained sufficient insight into the affairs of his client to suggest the next and succeeding steps in the audit. He must not spend too much time on trifling errors in a trial balance, but should take enough time to satisfy himself that the trial balance honestly represents the face of the ledgers and that it may be relied on as a basis for a report or balance sheet.

The auditor should secure a copy of the last trial balance at the earliest possible moment. Usually, if he will ask for it at the commencement of an audit, it will be copied for him by an office clerk. He need not ask for the customers' balances in detail, as he will wish to compile these himself, as explained hereafter. As to the other accounts, however, the trial balance is of great importance. Subsequent analyses of accounts will lead up to the trial balance, and any alteration of figures in the ledger would probably be disclosed thereby.

If the trial balance is not correct, it is no part of an auditor's duties to locate the error or errors therein. He should insist on the client's staff securing an exact balance, or, if this is impracticable, the matter should be referred to the client and an understanding reached as to further procedure.