VERIFICATION OF THE ASSET SIDE OF THE BALANCE SHEET 1. General duties of an auditor in the verification of methods which the auditor will em ploy in verifying the assets and liabilities of a busi ness undertaking will be largely governed by the na ture of the contract that he has made with his clients. It will also vary with conditions as the auditor finds them. Each auditor has his own methods of pro cedure. His report must show all the assets which the business possesses, whether they are reflected in the books of account or not. He is bound to see that the value of the assets is correctly stated, and while he is not an insurer or an appraiser, he must not cer tify to a balance sheet in which the assets have been overstated. The auditor must also ascertain the amount of the liabilities outstanding, whether these are stated in the books or not. If he is careful and thoro in attending to these matters, that is all a client requires of him.
2. Procedure will depend on what reasonable carefulness is, depends upon the cir cumstances of each case. Frequently the books will not disclose the true financial condition, and it is in cumbent upon the auditor to discover, if possible, er rors and omissions. An auditor cannot, of course, be expected to discover dishonesty if the records and other available data contain nothing which would arouse his suspicions.
He must, above all, be honest; he must not certify to that which he does not believe to be true. But if there are no suspicious indications, very little inquiry on his part may be all that is necessary. On the other hand, while it is his duty to ascertain and state the true financial position of the company or undertaking at the time of the audit, and while he can do this only by examining the books of the company, yet he does not fully discharge his duty merely by performing the ex amination.
3. Auditing before a balance sheet is prepared.— For illustration, an auditor may reasonably assume that an individual will not conceal any of his assets if his accounts are being audited for the purpose of preparing a balance sheet to be submitted to a banker as the basis of a loan. The prospective borrower may overstate his assets, or he may represent that the as sets are free from liens when such is not the case.
The prospective borrower may also understate his lia bilities. Hence the auditor, in an examination of this kind, would be on his guard particularly against an overstatement of the assets and the concealment of liens and liabilities.
It is the intention in the present chapter to discuss briefly the methods which the auditor will ordinarily employ to verify the assets and liabilities of a busi ness.
4. Verification of cash in auditor will verify the amount of cash in hand by actually count ing the cash. When notice has been given to the em ployes that an audit is to be made, the auditor may not satisfy himself with merely counting the cash at the beginning of his audit. If he learns of suspicious circumstances, he will probably count the cash again at a later date. If the amount of cash in hand is greater than is needed to meet the demands of the business, he will probably call the attention of the management to this fact.
If the cash is counted on a date subsequent to the terminating date of audit, the auditor will probably audit the petty cash book up to the date when the audit is begun, and verify the cash at that date, first, in order to see that it agrees with the balance shown in the cash book, and secondly, for the purpose of estab lishing the correctness of the balance at the close of the audit period. When cash funds are in the hands of several individuals, the balances should be verified simultaneously, so as to Prevent the same cash being produced twice as representing balances in the hands of several persons.
All I. 0. U.'s in the cash box should bear the ap proval of some responsible authority; checks of em ployes for large amounts exchanged by the cashier for cash, and cashed for the convenience of employes, may require special consideration. Due-bills and ad vances are not cash. If any were on hand at the terminating date of audit period, or if payments were made for expenditures out of petty cash which had not been charged to appropriate expense accounts at the date of the audit, the auditor must make the proper adjustments in the accounts.