Accomplishing the unexpected;

              Bulletin HASKINS & SELLS 19
Accomplishing
ONE test of a good auditor is his ability
to apply his technical knowledge in a
given situation and to grasp the meaning
of the results. It is of no avail for the
auditor to prove footings, reconcile bank
accounts, and otherwise verify the correct­ness
of the accounts of a business if he is
not able to recognize an irregularity when
it appears. The ability to "catch the
significance," which may lead to the dis­covery
of an irregularity, is one of the
cardinal virtues of an auditor.
Any auditor, worthy of the name, will
be able to detect irregularities commonly
known as open shortages, detectible
through the verification of balances at a
given date. Any auditor truly keen should
sense the possibility of fraud in any given
situation. Thus, he may develop and ex­pose
concealed fraud which would not have
been detected by strict application of the
procedure originally contemplated in con­nection
with the engagement.
The procedure used in a general audit
or in a cash audit is expected to uncover
cases of concealed as well as unconcealed
fraud, since, in addition to the verification
of cash balances, these two types of service
comprehend a reasonable verification of the
cash transactions. On the other hand, the
procedure for examinations of financial con­dition
and for general examinations does
not contemplate the discovery of concealed
irregularities affecting cash, since it does
not embrace a verification of the cash trans­actions.
However, while the discovery of
a concealed shortage may not be expected
in an examination of financial condition or
in a general examination, it is not im­possible
of accomplishment in certain in­stances
by an accountant who is alert and
able to grasp the leads which come to his
attention.
For instance, suppose the following case
existed. An employe of a certain com­pany
had been defrauding the company by
the Unexpected
manipulating pay-rolls. Checks were made
out for employes who had left the company
or who had been absent for the week cov­ered
by a manipulated pay-roll and the
endorsements of pay-roll checks had been
forged. The checks were cashed at the
bank without the endorsement of the per­son
presenting them for payment. There
were no clock cards for the men for whom
fraudulent checks were drawn and their
names did not appear on the pay-rolls.
The pay-rolls were over-footed to agree
with the total amount of pay-roll checks
drawn.
In such a case there would be perhaps
only one possibility of an accountant dis­covering
the fraud in the course of a general
examination or an examination of financial
condition, unless he were able to detect the
forged endorsements, which is unlikely. If
the accountant reconciles the bank balance
at a date following the balance sheet date,
and if the embezzler has manipulated the
pay-roll for a week or weeks ending within
the period from the balance sheet date to
the date of the bank reconcilement, there
is a possibility that the accountant might
discover the fraud at the time of making
the bank reconcilements.
After reconciling the cash balance as
shown by the bank with that shown by the
company's books at the date of reconcile­ment,
it is necessary for the auditor to
audit the cash transactions from that date
back to the balance-sheet date in order to
arrive at the balance of cash shown in the
balance sheet. While auditing the cash
transactions the auditor would trace the
paid checks back to the original records,
and would compare the paid pay-roll
checks with the pay-roll. In so doing he
might discover that the names of the payees
on some of the pay-roll checks did not
appear on the pay-roll. It would be un­natural
for the auditor to regard such a
discovery as an error in the pay-roll. If