Another case in point is furnished by a concern whose records were kept by single entry. This con cern negotiated a loan at a bank out of town. The check transactions with the out of town bank were carried in a separate check book and did not appear in the cash book or other records of the undertaking. The check book on the out of town bank was not pre sented to the auditor at the time that he called for all the concern's records. Here was a deliberate attempt on the part of the firm to withhold information from the auditor and to cancel an outstanding liability.
While it is not possible as a rule, for the auditor to have access to the incoming mail to uncover any lia bilities that may not be disclosed by the books at the closing date of his audit period, he is under obligations to make such other independent investigation as is necessary in order to arrive at the amount of the outstanding debts. The auditor will probably check the statements received from creditors at the first of the month against the open balances appearing in the ledger accounts. However, there will be some cases where reliance cannot be placed upon this method of verifying the outstandings, as there are some business houses who do not send statements to debtors every month.
An inspection of the records of the receiving de partment may disclose receipts of merchandise that were taken in the inventory, the liability for which has not been set up on the books. If the amounts are small and relatively unimportant, the auditor will probably ignore them. On the other hand, if they are large, the auditor must include them both in the in ventory and among the liabilities.
3. Other liabilities that may be omitted.—If the final date of the audit period falls in the middle of a week, the auditor must accrue that portion of the week's payroll which falls within his audit period. This also applies to salaries and commissions. He will also probably go thru the ledger expense ac counts for rent, taxes, heat, light, etc., in order to see that all amounts due for current expenses of this char acter have been entered and charged to the expense accounts up to the date of the balance sheet. If in terest has accrued on overdue accounts payable, he will include the amount of such interest as a current liability in his balance sheet.
4. Procedure in the verification of notes payable and acceptances outstanding.—Notes payable are of two classes; those which are issued with collateral sup porting them and those which are issued without ac companying collateral. Where a note has been se
cured by a pledge of collateral, the nature of the col lateral should be specified in the balance sheet. The collateral security may consist either of a pledge of assets or the deposit of unissued bonds. In some cases it will be found that notes are given to creditors in payment for goods bought for which no entry has been made in the accounts altho the goods them selves have been included in the inventory. Notes are occasionally given for the accommodation of others and a record of them may not appear in the books. These liabilities are very difficult to trace and in many cases are discovered only by accident. However, the auditor's experience will often enable him to discover some clue to the existence of undisclosed liabilities.
The interest accrued on all loans and notes up to the date of the balance sheet must be charged to the appropriate expense accounts of the business, and the liability therefore expressed in the accounts. In his examination of the profit-and-loss account, the auditor will scrutinize the expense accounts and also the out standing expenses, in comparison with those of previ ous periods in order to see whether or not any large difference exists in the amounts. Correspondence or bills from attorneys may show that the concern is in volved in litigation, and this fact may possibly render necessary the creation of a reserve against the con tingency of an unfavorable outcome of a pending suit.
5. Examination of public records.—The auditor may find it necessary to consult the public records in order to verify mortgages outstanding. He may also communicate with the creditor to verify the amount of the mortgage and the interest dates as well as the due date, and to note the security underlying the mort gage. Communication with the creditor would also disclose whether or not payments alleged to have been made in reduction of the amount of the mortgage have actually been made.
From an examination of the public records, judg ments against an organization may be revealed. Judgments are rarely recorded on the books of the debtor until they are paid. There may be other liens against the real property, such as assessments, over due taxes or water rates, all of which may be deter mined by a proper inspection of the public records.