Balance sheet audits;

              62 HASKINS & SELLS July
Balance Sheet Audits
The notions, even of accountants, as to
the purpose, scope, and method of a
balance sheet audit are so varied that we
believe a short discussion of the subject
may be of interest.
While the discussion is entirely technical
and may naturally be expected to appeal
particularly to accountants, it is not with­out
the range of possibility that a definite
statement on this important subject may
contribute something to the information
and ideas which clients may have con­cerning
it.
The comparatively slight extent to
which the corporations of this country
utilize the services of public accountants
may be attributed, to a marked extent,
probably to the fact that many corpora­tion
officials are not cognizant of the many
and varied functions of professional ac­counting
work and the particular ways
in which accountants serve their clients.
It is important and desirable, we believe,
that the business public generally should
be familiarized with the services which
public accountants are prepared to render.
Anything should be regarded as helping
along such work which assists the client
in differentiating as to the kind of service
required and enlightens him as to his part
in the relations in case of retaining a public
accountant.
With the thought in mind of disseminat­ing
information, we make public the
following discussion of a balance sheet
audit showing our conception thereof.
A balance sheet audit contemplates the
verification of assets, liabilities, capital
and surplus (or deficit), at a given date,
without investigation of the causes respon­sible
for the financial condition disclosed
by a balance sheet further than is neces­sary
to substantiate the accuracy thereof.
The procedure calls for an examination
of the books, records, documents, and
minutes (scanning the latter as far back
as they are likely to bear on the financial
condition in question) together with oral
inquiry addressed to certain officers and
employes of the organization, for the pur­pose
of verifying the value, accuracy,
propriety, completeness, or adequacy of
all items on the balance sheet, with inspec­tion
and proof of securities and such cur­rent
assets, except inventories, as are
susceptible to physical examination.
While such an engagement relates to
the verification of balance sheet items and
hence to a given date, it is necessary to
make cursory examination of the recent
substantial additions to property and on
the occasion of a first engagement to
extend the period covered by such examin­ation,
within reason, back to the inception
of the property accounts; to investigate
the surplus account as to the composition
thereof; and in all cases to review the
operating and profit and loss accounts for
the recent preceding period with a view to
detecting improper additions or omissions
in balance sheet items, errors in principle,
or leads to substantial accruals or deferred
proportions, such as interest, rent, taxes,
royalties, guaranties, advertising, etc.
The extent to which such review is carried
should depend upon the adequacy of the
accounting system and the correctness of
practices and methods employed by the
organization under review, particularly
in the system of internal check.
More than passing attention should be
given to maintenance accounts and wast­ing
assets. Regarding the former it may
be necessary, where question as to the
adequacy of depreciation arises, to extend
the investigation of maintenance back
over a considerable period, sometimes to
the inception of such accounts. Wasting
assets should be examined with regard to