however, indicate such of the expenses as should be specially investigated.

Almost without exception, some form of departmental accounts, i. e., accounts showing the operations of each department separately, will be found to be in use in every store. Their accuracy and completeness vary: in some cases they are very complete and are controlled by accounts in the general ledger; in other stores they are on a single-entry basis, arbitrary charges for rent, interest on stock, and similar items are made of which no cognizance is taken in the general books, and no attempt is made to bring the aggregate of the results shown in the departmental accounts into agreement with the final results shown on the general books. It is certainly most desirable that the departmental accounts be controlled by the general ledger, and if the system of accounts be well laid out, it is entirely feasible.

While daily statements of sales and weekly or monthly statements of profits (based on estimated inventories) are furnished to the management, most stores close their books and state the final results of their business operations twice a year, the closing dates being either the end of January and July or of June and December. The first half of the year is called the spring season and the latter half the fall season. In comparing the operations of a department for different periods, the comparison should always be made between the same season in different years and not between the two seasons in the one year. The volume and character of the business done in the spring season varies considerably from that of the fall season.

In studying the operations of the various departments, one of the most important things to be considered is the rate of gross profit on sales. Any undue fluctuation therein from one year to another should be thoroughly investigated. Fluctuations in the ratio of selling expenses to sales should also receive careful attention. The volume of business done exerts, of course, a more noticeable influence on the percentage which the expenses are of the gross sales than should be the case with the gross profit.

The basis of the apportionment among the various departments of such expenses as delivery service, wrapping desks, insurance, general administration, etc., ought to be investigated. A rough and ready way of distributing such general charges may

work serious injustice to some departments, undue advantage to others, and result in misleading showings generally.

In verifying the assets and liabilities, no unusual questions of principle are encountered. The principal assets are accounts receivable and merchandise inventory. Customers' accounts receivable should be analyzed as to date; this will furnish a basis for the determination of a proper amount to be reserved for uncollectible accounts. Notes receivable held by a department store may ordinarily be viewed with some suspicion as to the financial strength of the makers. Goods sold at retail are usually purchased by the customer for consumption and not for resale; consequently the account should be paid at maturity and the giving of a note therefor is a confession of the customer's having purchased in excess of his ability to pay.

The important questions in connection with the inventory are the correctness of quantities, prices, arithmetical work, and salability of the stock. For the correctness of the quantities the auditor will be dependent largely on the certification of those who took the inventory and of the "buyer" (department manager). The investigation of large increases or decreases in the inventory as compared with prior dates will sometimes result in the detection of errors in quantities. Prices may be tested by reference to the purchase invoices. Goods which are still in original packages should be inventoried by reference to the purchase invoice therefor, and verification thereof is comparatively simple. Sufficient tests of the extensions and footings should be made to assure the correctness of this element. Goods should be so indicated on the inventory that those purchased prior to the current season can be readily identified and allowance made for eventual loss thereon owing to the necessity for price reductions to close them out. (See page 104, "Inventories.")

Some department stores, in fact quite a number of them, also have a wholesale department. Whenever this is the case, the audit of the accounts pertaining to the wholesale department will follow the lines laid down under "Wholesale Merchants."

AUTOMOBILE DEALERS

It is important that the auditor thoroughly familiarize himself with the terms of the dealer's contract with the manufactur

ers. Deposits with the latter are not accounts receivable, but payments on account of cars to be purchased during the contract period, and the amounts so deposited may be deducted pro rata from the price to be paid for each car or from the last shipments. The unapplied balance of such deposits should be confirmed by correspondence with the manufacturers. Interest on these deposits is sometimes paid by the manufacturers, and where this is the case its collection should be verified.

Deposits by customers with the dealer should appear in separate accounts, as they are not current accounts payable. If any interest is to be allowed on such deposits, the auditor should ascertain that proper entries for the accrued portion thereof have been made.

Cars on hand should be physically examined and their numbers compared with the daily car record. The ownership of cars in the possession of others for alterations or other purposes should be confirmed by correspondence. The invoices for unsold new cars should be used to verify the prices at which they are taken into the inventory and the second-hand cars should be appraised, but in no case should the appraised values exceed the allowances made to the customers for the cars plus the cost of overhauling them. Usually the dealer incurs a loss on the sale of second-hand cars, and this fact must be considered in passing upon their value for balance-sheet purposes.

Statements of accounts receivable balances, after being stamped with request to communicate directly with the auditors if not correct, should be sent to all customers. Liberal allowance, should be made for the probable loss on any old or disputed

accounts.

All accounts with manufacturers should be checked against statements received from them. This is important, as allowances are often made to satisfy customers and charged to the manufacturers, but for which the latter will not pass credit to the dealer.

The inventories should be carefully examined, all obsolete parts eliminated, and allowance made for probable loss by falling off in demand for parts of cars manufactured prior to the audit year. In some cases manufacturers agree to keep a certain quantity of parts on hand at the dealers' repair shops. The value

of such consignments should either be deducted from the inventory or be shown in a separate ledger account.

The correctness of the cost of work in progress in the dealer's repair shop should be tested by examination of the shop cards. All of the cars, both new and second-hand, on hand at the beginning of and purchased during the audit period should be accounted for as charged against some customer or as still on hand at the close of the period.

Tests should be made of the deliveries from stock to ascertain that parts and supplies are paid for in cash, charged to customers either directly or on shop or road repair cards, or are properly used to repair demonstrating cars and second-hand cars taken in exchange. Charges for shop and road repair work should also be checked.

Time reports of workmen in repair shop and the preparation of pay rolls should be investigated to ascertain that actual work only is paid for, and that it is charged on shop or road repair cards. Office, demonstrating, and general expenses should be vouched and compared with prior periods. Contracts with salesmen should be examined and commissions paid to them verified.

A liberal reserve should be made for free repairs to sold cars, which are usually necessary during the year subsequent to car sales in order to retain the good will of customers, but the cost of which will probably not be collected from the manufacturers.

BRANCH ACCOUNTS

The close relation which exists between a branch house and the parent concern presupposes the existence of complete records or reports at the head office; but it will be necessary for the auditor to ascertain definitely how complete the branch records. are and by what system they are reflected in the general books.

Some branches keep a full set of books and furnish regular returns as required by the home office. In such case the latter will have but a current account with the branch in the general books, which will be a controlling account, and will represent the branch's capital, composed of the assets at the branch less the liabilities. Usually such assets will be represented by cash, stock on hand, and accounts receivable, and in preparing the final or consolidated balance sheet, the branch balances must be divided

into the various classes of assets of which they are made up. They should never be treated simply as an account receivable. Where a branch is not visited by the auditor, complete reports or returns should be furnished him, properly certified, and so far as may be necessary he should check them into the head office books. All cash remittances included in the branch report, as well as all cash sent from the head office, should be vouched in the general books. A reconciliation of the account between the branch and the head office should be made, either at a particular date during the audit or as of some date within the period under review. The only items affecting such reconciliation will be the cash or invoices in transit, and these should subsequently be vouched to determine the absolute harmony between the two sets of books.

Some concerns allot a permanent cash fund to each branch, and require that all receipts be deposited to the credit of the home office. In such cases it will be necessary to see that the moneys received at the branch appear on the bank statement or pass books as deposited.

When an auditor accepts the certificate of officials or other persons for the verification of assets at branches, he should limit his responsibility by a statement to that effect in his report. He should, however, satisfy himself that all questions of principle, such as valuation of stocks, depreciation, reserve for bad debts, etc., have been properly considered.

Some head offices now have on file duplicates of all records prepared by the branch houses. The latter are able to furnish these by the use of typewriters or other mechanical bookkeeping devices adapted for the purpose. By one operation customers' ledgers are posted, customers' monthly statements are written, and duplicate ledger sheets are prepared for the head office, while duplicate records of cash receipts and disbursements form a cash book with which it is possible to keep in close touch. The facilities thus afforded, whereby instant reference can be had to branch transactions, make possible a most satisfactory branchhouse internal audit at the home office.

Goods billed to retail branches by the head office are charged either at cost price, at cost price plus a percentage, or at selling price, inventories in each case being taken on a similar basis. For