Certificate qualified as to inventories;

              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