8. Verification of purchase-journal entries.—The principal danger in connection with the purchase journal is that the entry of fraudulent overcharges or credits to fictitious vendors may pass undetected. The auditor should probably check the postings of the debit columns of the purchase journal but he will have to do more than this to discover credits to fic titious vendors or overcredits. It will probably not be necessary, however, to check very thoroly the indi vidual credits to the accounts of the vendors.
Some verification of the individual vouchers sup porting the entries in the purchase journal must be made for the purpose of detecting possible fraudulent credits or overcredits or duplicate entries of purchases or expense. Here again, if an adequate system of internal check has been installed, the work will be sim plified.
9. Methods to be used in checking sales journal.— Fraudulent sales transactions are often made by omit ting to enter sales in the sales book and abstracting the cash when the customer makes remittance. The sales clerk frequently practises this kind of fraud in col lusion with a clerk in the shipping department. If the fraud is great it will generally be revealed either by a discrepancy in the book inventory or by a reduced profit on the turnover. But when the volume of business transactions is large, a small theft is not easily detected. Probably the monthly aggregates of sales postings should be checked, considering the fact that fraud is often practised in the handling of cash sales—that is, the sales clerk will purposely not record them. Sometimes, too, fictitious sales returns or sales allowances are entered in the books.
In conclusion, it will be seen that the only abso lutely safe method to pursue is to check and verify every individual entry in the record. But as this is in so many cases a physical impossibility, and further more, is often precluded on account of the time and expense, recourse must be had to the method of test and scrutiny. Reliance must be placed, to a great degree, upon the system of internal check and upon the ability of the experienced auditor to scent the weak spots in the system, and the suspicious circumstances as they arise.
10. Verification of the accounts assets of accounts receivable should be classified on the balance sheet according to whether they are due from trade debtors or from others, such as officers, employes and stockholders.
The amount due from the first group may be veri tied by mailing to the trade debtors a statement of the amount they owe, with a request that they mail a confirmation statement, properly signed, directly to the auditor. There is, however, a great deal of preju dice against this method among business men, and for this reason the auditor will usually have to use other means of proving the accuracy of the amounts out standing.
In connection with his examination of the accounts receivable, he will take note of any accounts that ap pear to him to be bad or doubtful. In certain in stances, he will prepare a schedule of the open ac counts, classifying them according to age. In many cases, however, this will not be practicable; if it is not he will probably rely upon his experience to de termine whether the amount of the outstandings is normal, and whether or not, based upon the past expe rience of the particular business, the amount bears a proper relation to the sales. He must also be on his guard to discover any fictitious accounts receivable or any long overdue balances or partly paid amounts in the accounts of debtors, which may cover up de falcation.
His investigation may disclose lax methods in the collection department, which he will call to the at tention of the management. Salesmen and credit managers are prone to overvalue the accounts of slow payers, and it is the auditor's duty to see that an ade quate reserve is provided against losses on these ac counts. Each business must be considered by itself in connection with the surrounding circumstances, when an auditor is forming an opinion as to the value of the book debts.
When a concern has been in business for a num ber of years, it will probably be possible to make adequate provision for the reserve for bad debts, based upon a certain percentage of the sales or of the out standing accounts. If the auditor cannot rely upon past experience of the business concern he is in vestigating, he either may create an adequate reserve based upon the experience of other concerns engaged in a similar line, or he may make such other provision as his judgment dictates.