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10 HASKINS & SELLS February The Certificate Qualified as to Inventories RAPID strides have been made by the accountancy profession in recent years in improving the quality of its services to clients. Accountants have found through years of study and experience that much of the detail work, once thought necessary, could be eliminated, and more constructive work substituted to the ultimate benefit of their clients. However, there still remains at least one glaring weakness in the accountant's report—the certificate qualified as to inventories because of the absence of inventory verification on the part of the accountant. This weakness is recognized throughout the profession. Many accountants believe that it is an unavoidable condition, because in their opinion the accountant is not qualified to verify inventories as to quantities with any degree of accuracy. Most bankers are of the opinion that the accountant should assume responsibility for inventories. It is but natural that bankers should do so. But, there are also many accountants of high standing in the profession who feel that the accountant should accept responsibility for inventories, and believe that he is qualified so to do. Mr. C. Oliver Wellington, in an address before the New England Chapter of the Robert Morris Associates, advocating the extension of the accountant's responsibility for inventory verification, presented the case so well that the substance of his thesis is worth repeating. Accountants, as a rule, are unusually particular in establishing the existence of the amount of cash and receivables as stated in the balance sheet. In most cases, however, they make little or no attempt to verify inventories. Yet, in most trading and manufacturing companies inventories may represent more than one-half of the current assets. Any attempt at "window dressing" or inflating the value of the assets may be concealed much more easily in the inventory account than in any other asset account. Surely, a balance sheet in which inventories have not been verified is not of much value, when it is possible that the inventory, which usually amounts to more than all the other current assets, may be grossly inflated. Many times the client restricts the work of the auditor and will not permit him to make any verification of inventories whatsoever. In such cases, the accountant can only accept the certificate of the company official as to the inventory, and qualify his certificate accordingly, so as to protect himself and put any reader of the balance sheet on notice. Usually the inventory is counted, priced, extended, and footed by the client and later is subjected to certain tests by the auditors. Such tests, according to present auditing practice, generally comprehend verifying, by test-checking, the valuation at cost or market; test-checking the typed copy of the inventory against the original inventory sheets and perhaps against the perpetual inventory records; investigating ownership of goods and the inventory cut-off; test-checking extensions and footings; and applying gross profit and rate of turnover tests to the inventory figure. The auditor is supposed to make sufficient tests to satisfy himself as to the substantial accuracy of the inventory. The extent of the tests depends upon the effectiveness of the system of internal check and the accuracy of the cost system. After completing these tests satisfactorily, the auditor can certify to the inventory without qualification except as to quantities, which are accepted as certified by the client. While the certificate qualified as to quantities only is more desirable than the certificate which disclaims all responsibility for inventories, it is, nevertheless, far from being effectual in reassuring the
Object Description
Title |
Certificate qualified as to inventories |
Author |
Anonymous |
Subject |
Inventories -- Accounting |
Citation |
Haskins & Sells Bulletin, Vol. 11, no. 02 (1928 February), p. 10-12 |
Date-Issued | 1928 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 11-p10 |