Catching the significance;

              18 HASKINS & SELLS March
SUPPOSE that while an accountant is
doing preliminary work on an engage­ment,
he were to compare the receipts as
entered in the cash book for the last five
days of, say, the month of October, with
the deposits in bank for the corresponding
days, and he finds that on one or more of
the days the deposits were in excess of the
receipts as shown by the cash book, what
should he conclude?
The fact has a very definite significance,
or no significance, depending upon the
technical knowledge and aliveness of the
individual who develops the fact.
Is it not natural to conclude that the
cause of the difference between cash book
entries and amounts deposited was some
interruption of the regular office routine
whereby certain checks received were not
deposited until the day after they were
entered in the cash book, and to attach
no importance to the difference?
From the point of view of auditing the
answer most emphatically is, "No!"
It is unnatural for an auditor to be
stupid. He is stupid when he is lulled into
an unnatural condition by self-developed
explanations, or plausible excuses offered
by employes.
The significance of deposits which ex­ceed
cash book entries toward the end of
a month is "kiting." If comparisons of
daily deposits with cash book entries are
made, working back from the end of the
period and going back far enough, the
chances are that a day, or days, will be
discovered when the amounts entered in
the cash book will be in excess of those
deposited in bank. This would signify
the possibility of an open shortage which
had been "kited" over the ends of months,
by borrowing from receipts not entered in
the cash book until after the beginnings of
months following.
"Significant, but not conclusive," one
says. "How can the accountant be sure
that he isn't grossly misjudging old and
honorable employes of the client?"
The answer is simple. An immediate
and simultaneous verification of the
balance of cash in hand and on deposit,
with close scrutiny of deposits for a short
period prior to the time of verifying the
balance will expose a shortage if it exists.
If all receipts up to the time of beginning
the verification are entered in the cash
book and deposited in bank, assuming that
a shortage exists, the amount of the open
shortage will be the difference between
the balance shown by the cash book and
the aggregate of cash in hand and on
deposit.
The suggestion that the embezzling em­ploye
may have expected the verification
and have obtained sufficient funds to de­posit
and make good the shortage fails to
convince on two points. If the shortage is
small and he is able to procure and deposit
the necessary amount, the "stray" deposit,
or an excessive deposit, will be apparent
and will equal amounts not deposited at
some previous date. If the shortage has
grown to substantial proportions, the em­bezzler
will find difficulty in procuring the
necessary sum on short notice.
Usually when confronted by the client
with a charge of embezzlement, even
though the evidence may not yet be com­plete
or sufficient at the time for court
proceedings, the embezzler confesses.
All the research, study, and procedure in
the world is fruitless if one fails to catch
the significance of situations developed.
In the present matter, the fact of a differ­ence
between cash book receipts and de­posits
would have led nowhere if it had not
been properly interpreted. This article is
prompted by and based on a case where
intelligent interpretation of a difference of
the character mentioned led to the exposure
of an embezzler. Baltimore office will,
please, respond to the applause.
Catching the Significance