11. Sales on approval and their treatment.—The auditor will eliminate from the amount shown as being due from trade debtors, charges made to customers for goods sent out "on sale or return," "approval sales" or "goods shipped on consignment." These should be taken out of the amounts shown to be due from trade debtors and they should be deducted also from the sales of the period. The cost price of the merchandise, awaiting sale in the hands of others, less whatever amounts it may be necessary to deduct for depreciation or for deterioration, will be added to the inventory.
12. Debts due from officers, stockholders and em ployes.—Amounts due from officers, stockholders or employes will be verified by securing an acknowledg ment of the debt, and by such examination of the rec ords and other data as may be necessary. Amounts due from stockholders for subscriptions to stock on the partial payment plan may be verified by com munication with the debtors, or by an examination Of the records to see that the amounts which the sub scribers agreed to pay have been paid according to their contracts.
13. Verification of individual ledgers with control ling account.—The auditor may properly decline to give a certificate as to the validity of the outstandings unless he has compared the amounts in detail with the customers' ledgers and confirmed them in such a way as thoroly to satisfy himself in regard to their validity. In some cases, this rule may be modified when a proper system of internal check has been employed by the firm, and when the practice of the concern has always been conservative. For illustration, let it be assumed that in a concern selling goods on the instalment plan, the auditor found that the practice was to transfer to the doubtful-accounts ledger all accounts the pay ment of which was a definite number of days overdue. Let it also be assumed that it was the custom to trans fer from the doubtful-accounts ledger to the bad-debts ledger, all accounts that had failed of collection where ordinary collection methods had been employed. The auditor, in this instance, might reasonably rely upon the fact that the accounts which the concern shows as good are actually worth their full amount.
14. Advances to subsidiaries.—Advances to subsid iary companies may not be current assets. The subsidiary may have used the amount advanced for construction purposes or even to make good certain losses on current operations. Therefore, such ad vances must be traced into the accounts of the sub companies if their true character is to be determined.
15. Inspection of bills and notes receivable.—The auditor will actually inspect the bills and notes receiv able which make up the amount appearing in the bills or notes receivable accounts. He should make an in vestigation of the character of the bills and notes; that is, he should determine whether they are instruments drawn in the ordinary course of trade or whether they cover special advances of funds not in the ordinary course of business. He should see that they are prop erly made out and that none are overdue. Overdue bills or notes are subject to the same treatment as overdue accounts receivable, in that an adequate re serve against the possibility of their ultimate non-pay ment must be provided for. Each individual note must be valued upon its own merits. Where bills and notes receivable fall due between the terminat ing date of the audit and the completion of the en gagement, the auditor will probably trace the bills flirt' the cash book to see whether or not all have been paid.
In connection with his examination of the bills and notes receivable, he will determine the amount of the contingent liability of the undertaking as regards bills which have been discounted, and which have not as yet matured. This contingent liability for unmatured discounted bills of customers may have an important bearing upon the future of the concern if the makers should fail to pay at maturity.
Fictitious bills and notes receivable are often used to cover up defalcations, and the auditor should bear this in mind in carrying on his process of verifica tion.
16. Proving the accuracy of inventory values.—It is unfortunately true that in the great majority of balance sheets published, inventory values are the asset to which the auditor cannot certify unqualifiedly, either because he was not present at the time the in ventory was taken, or because it was not taken under his supervision. It may also happen that the audit is taken so long after the inventory that an accurate checking of the quantities on hand at the end of the audit period will be impossible. While the auditor in almost every case Is forced to accept a certificate as to the quantity, and in certain cases as to the valu ation of the inventory, from one of the company's re sponsible officials, yet this does not free him from the responsibility of seeing that the asset is not over stated.