ative and maintains a cash balance in excess of its requirements. If all purchases are discounted and nothing is borrowed, it may not be worth while to criticize, but instances are known where large borrowers have carried cash balances considerably in excess of the requirements of sound business financing. The cost in such cases is large enough to attract attention, and the auditor should tactfully investigate the circumstances leading up to the custom. It may be found that those in charge of the finances are ignorant of the general usage, in which case the auditor can suggest what, in his opinion, would represent an adequate average balance to be maintained throughout a given period.

Auditors of broad experience frequently suggest that where the balances in commercial banks are larger than necessary to secure the maximum line of credit, some funds be transferred to trust companies where interest is allowed on inactive accounts. Some of the largest trust companies now accept active commercial accounts and even allow interest on daily balances. The rule with National and State Banks is by no means uniform, but many of them allow interest to desirable depositors.

Cash on Hand: Where the petty cash balance or fund called for by the balance sheet is small, it may be unnecessary to attempt to account for it, as it might require considerable time to inspect and prove all of the entries between the closing date and the time of the audit. Usually a scrutiny of the subsequent entries will be sufficient.

If the balance is, say, over $100, it had better be verified by actual count and proof. In an English case an auditor who failed to verify a petty cash balance of nearly $4,000 was held to have committed a breach of duty. The actual balance was $150.

The balance should consist of actual cash, not memoranda or "cash items." A cashier who is carrying questionable items as a part of his cash balance may borrow money enough on the closing date to enable him to pay the entire balance into bank, or to exhibit the cash to an executive; after doing so the cashier will immediately put the items back into the cash drawer and again withdraw the cash. If there is any suspicion that this is being done, a second count of the cash on hand should be made toward the close of the audit.

It depends on the auditor whether this part of the work proves pleasant and satisfactory. It is quite possible that an auditor will, in his desire to jump in without notice, really upset a cashier who has certain routine methods of handling the cash and cash records. First impressions are very important, and it never pays to disarrange the work of a single person in a client's office unless a definite reason exists for proceeding offhand and without giving notice. Where the client does not inform his staff that the accounts are about to be audited, it is, of course, desirable for the auditor to take advantage of the chance to surprise the man in charge of the cash. Probably more petty frauds are disclosed in this manner than in any other, for too many men are unable to distinguish between their personal funds and those of their employers. Many of these discrepancies are under one hundred dollars, and if the cashier were given time to put his cash drawer in order, the shortage would disappear. It may be argued that in such a case no great harm would ensue, as there would be no actual money loss to the client. No greater mistake could be made, however, for a man whose moral sense is so blunted that he will pilfer a few dollars is on the highway to further frauds and needs only a good chance to misappropriate anything of larger value on which he can lay his hands.

In practice the auditor's appearance is usually expected. If the audit is a periodical one, an approximate time of commencing is known in advance, and if it is a special engagement, in most cases the negotiations with the auditor are known to all in the client's office. Here the auditor can exercise a little tact or diplomacy. The cashier may, for instance, balance his cash late in the day, and if it is much of a task he will be anxious to hurry off home upon the striking of a balance. The wise auditor will make it a point to tackle him first thing in the morning at a time when the memoranda of the day have not commenced to accumulate and when the cash book is written up and the footings shown.

Very often slips of paper, tickets, and so-called vouchers will make up a large portion of the "cash" in the drawer. In all cases count the actual money first and then list the memoranda. This record should be full and complete, for there may be some delay before it is used again, and cases have been known where unau

thorized tickets carried as cash have mysteriously disappeared immediately after an auditor's count of the drawer.

If there is a difference between the amount on hand and the balance called for by the cash book or the round sum carried in the ledger as a petty cash fund, it is not wise to assume at once that there is something wrong. The auditor should note the cash-book footings, and with this information in his possession, together with his count of the cash drawer, he can afford to give the cashier a chance to hunt for the difference. If the cashier balanced the night before, the error may be in the auditor's own figures. If a shortage exists, it should develop at this point.

When the cash balance consists of several bank accounts or funds, care must be taken to see that the entire balance is verified simultaneously. Instances are known where auditors have been deceived through one balance, after being inspected, having been transferred and used on a later day in connection with another balance.

ACCOUNTS RECEIVABLE

Trade Debtors: In a long-established business where the sales are fairly constant, the accounts can be valued on a basis of past results. Ascertain the percentage of bad debts in past years and apply this percentage to all sales up to the closing date. The sales, for, say, the last month, should be scrutinized (not footed) in order to ascertain whether or not there is any evidence of predating, billing to fictitious customers, or including consigned goods or goods sent on approval as sales at full prices.

Consigned goods may be included among the current sales in good faith, if it has been the custom of the concern to do so, but this, of course, does not justify the practice, which results in anticipating profits that have not been earned.

Accounts current should be obtained for all consignment accounts, and any unsold goods at time of closing should be added to the inventory and priced at cost or market, whichever is the lower. If the goods are salable and practically sure to be sold, accrued charges thereon may be added to the inventory prices.

If past experience is not available the outstandings will have

to be valued on their merits, because the auditor cannot hope to have reliable statistics of other concerns or for a series of years upon which to base his conclusions. The auditor of experience will have a general familiarity with the normal volume of outstandings which various classes of business may be expected to carry, and he should, for his own information, compare the relative outstandings of each business to the gross sales, and of different concerns in the same line of business. The value of such a comparison may be apparent at a glance, and negligence and laxity may stand revealed which might not be apparent in a routine audit. The best method of collating such data is to compile statistics covering gross and net figures and the percentages produced thereby, at the close of each audit. In the course of time a vast quantity of information will be at hand and available at a moment's notice for comparative purposes.

When the list of open balances is compared with the sales ledgers it should be noted that the balances are represented by specific invoices of a recent date; otherwise, the balances should be analyzed. An old item in a running account or a bill partly paid, followed by others fully paid, usually means that an allowance has been or will be made.

Schedules should be made of all overdue accounts classified according to age. Those quite old cannot be considered as worth anything unless a very strong argument is presented, supported by documentary evidence.

It is a rule of law that assent to the correctness of a balance may be inferred from retaining an account rendered without objection within a reasonable time, and the burden of impeaching the accuracy of the account, for fraud or mistake, is cast upon the party complaining of the balance, but the only proper test of ability to pay is payment, and where this is delayed an unreasonable length of time, the inference is that "ability to pay" is lacking.

Accounts ranging from long overdue to those just over the "net" period should be depreciated as may be determined after proper inquiry has been made.

The auditor must ascertain whether any accounts have been pledged or assigned. This is frequently done without any record being made in the books.

The following suggestions will be found useful in fixing a valuation upon trade accounts which are overdue:

(1) Have the terms of credit been habitually ignored? Even so, the debtors may be perfectly good, but such accounts should have special attention from the credit manager.

(2) If payments on account are being made, is the balance being increased or decreased? If the former, this is prima facie evidence that debtor is approaching the time when all payments will stop. This is a class of account which deserves more attention than it receives. The auditor should keep this point in mind, and a word of advice from him may save ultimate loss. Salesmen relinquish these accounts very reluctantly, but they are not the best authorities on the ability of a debtor to pay.

(3) If credit has been stopped and no recent collections appear, ascertain if account has been placed with attorneys for collection.

(4) If in hands of attorneys, ask for correspondence. Accounts are frequently placed with lawyers who are not equipped for collection business and who do not keep after the debtors. Unless frequently checked up, the debtor will not pay. So long as his money lasts, or he desires to preserve his credit, a debtor will pay those who press him the hardest.

(5) If a debtor who has paid cash commences to give notes, ascertain if a sound reason therefor has been offered and whether the change has been approved by some one in authority.

In all, except the rarest cases, those in charge of the outstandings will be found to be optimistic to an unreasonable and undependable degree. Nevertheless, their knowledge must be utilized by the auditor, who can discount their estimates as much as seems necessary and finally draw his own conclusions.

A certificate as to outstandings ought not to be given unless the schedules of accounts have been compared in detail with the customers' ledgers, and the footings of the schedules verified. The procedure in this case should be the same whether or not a controlling account is kept, except that this rule may be modified in the case of a concern having a very large number of open accounts which are subject to internal check.

Discounts which will be deducted by customers and which, while called cash discounts, are greater than a concern would pay for the use of money, must be allowed for. In a stable busi