The auditor will probably call for the original in ventory sheets to see that they are initialed or oth erwise certified to by the persons who took the stock. He may satisfy himself that the individuals who took the inventory were competent to do so, and that they appreciated the importance of their responsibility. He may also test the validity of the prices at which the inventory was extended, by a comparison with recent invoices, or by reference to trade papers. To a cer tain extent he must also verify the extensions and foot ings of the inventory. He can also see that the rate per cent of gross profit on the turnover agrees reason ably well with the rates of preceding years.
The auditor must make a sufficient examination to see that goods received on consignment or "on sale or approval" are not included in the inventory. It will be necessary, too, for him to note whether any goods were included in the inventory for which payment was not made, or the liability for which was not entered in the accounts at the date of the audit. A large in crease or large decrease in the amount of stock on hand would also call for some explanation, and the auditor would have to determine the cause of the in crease or the decrease. Even tho he is not assuming any responsibility for the inventory, and even tho he properly protects himself by a suitable qualification in his certificate, it is always well for him to see that the inventory is not overstated. It is very easy for a dishonest management to manipulate the inventory. If the organization maintains a perpetual book inven tory, the materials on hand may be actually counted, and the results may be compared with the book inven tory. By making such a test the auditor may prove in a general way the accuracy of the stock-room rec ords.
17. Securities and investments should be examined. —Stocks and bonds owned, mortgages receivable and other securities will be verified by actual inspection.
These documents may represent temporary invest ments of cash surplus or permanent investments, con stituting sinking or other special funds. The auditor will see that the securities stand in the name of the owner, and that evidences of debts held are not over due.
In the case of mortgages, he must determine whether there are any fictitious or canceled mortgages, which may be submitted to him as genuine assets. Where securities of this kind have been purchased during the period under review, he may verify them by correspondence, by inspection of the broker's no tices, and also by an examination of the securities themselves.
18. Verification of real property owned.—The au ditor will probably obtain the title deeds and make an inspection of them. The danger here is that tax liens or mortgage liens against the property may not be disclosed by the books. The auditor will satisfy
himself upon these points either by requesting the man agement to have a proper title search made and have the results certified to the auditor, or by himself taking the initiative and having a search made. Tax bills are sometimes a good guide to title, altho, of course, the property may have been disposed of since the tax was assessed, and the cash may have been received and not recorded.
When property is mortgaged, a statement should be obtained from the mortgagee as to the amount of the mortgage. Verification of the purchase of prop erty during the period under review can also be made by seeing the check made out to the vendor in pay ment, and noting whether or not it is properly in dorsed. The examination of correspondence files, too, will help to verify the purchase price. If the under taking is a corporation, the minutes of the board of directors should show a resolution authorizing the pur chase of the property.
19. Verification of plant and machinery.—When the auditor verifies plant and machinery, he must see that items of repairs and renewals are not charged to the capital accounts. He should also make sure that machinery leased is not capitalized by charging the rental to an asset account. In fact, an analysis of all the property accounts should be made in order to ascertain the character of the items that compose them. The question will sometimes be raised, is the auditor responsible or not for the valuation of assets purchased prior to the period of his audit? The answer is, that the auditor will probably make a sufficient examination of the past transactions in the capital account to sat isfy himself that fictitious assets are not included and that inflation has not been resorted to.
The auditor, as has been pointed out above, is not a valuer or an appraiser, and yet he must see that the valuation of fixed property assets is not overstated in the balance sheet, and that the proper provision for de preciation has been made. In some cases his work will be simplified considerably if an accurate record of the plant and machinery as well as of buildings has been kept. In regard to the provision for depreciation, if the auditor has had experience in concerns like the one whose accounts he is examining, he may rely upon his experience in determining whether or not the provi sion for depreciation is adequate. Of course the most satisfactory method is to have an appraisal made, but this is out of the question in the majority of cases. Any equipment purchased during the period under review, or any furniture or fixtures purchased during the audit period may be verified by noting whether or not the invoices of the vendors are properly au thorized by the management, and by examining any contracts made for installation.