52 BULLETIN 381^ U. S. DEPARTMENT OF AGEICULTTJRE. 



AUDIT OF RESOURCES AND LIABIUTIES. 



Because the solvency or insolvency of any business depends on the 

 relation between the resources and liabilities, it is of the utmost 

 importance that the truth of the Balance Sheet be shown. The 

 method of determining this can be stated best by an example. Sup- 

 pose the balance sheet of a cooperative store is as follows: 



RESOURCES. LIABILITIES. 



Cash $100.00 CapitalStock $10,000.00 



Merchandise 8,000.00 Bills Payable 1,000.00 



Accounts Receivable 3,000.00 Accounts Payable 2,000.00 



Bills Receivable 1,500.00 Surplus 2,000.00 



Real Estate 1, 400. 00 



Subscribed Stock 1, 000. 00 



15,000.00 15,000.00 



It is evident that if the resources are understated or the liabilities 

 overstated, or both, the surplus is larger than $2,000; and the reverse 

 is true if there are more liabilities and less resources than appear on 

 the statement. 



The auditor must constantly take into account the weakness of 

 human nature in the manager's disposition to show the business in 

 the brightest light, and he must use every means at his disposal to 

 verify the Balance Sheet. If satisfactory evidence of the statement 

 does not exist, he should say so frankly in his report. The following 

 are the several items of the Balance Sheet in their order: 



Cash. — ^The method of verifying the cash has been given (page 51). 



MerchaTidise. — It is usually impracticable for the auditor to 

 examine every entry and every total of the inventory, but he should 

 require that a proper classification be made under the various accounts 

 found in the ledger, and he should appoint a responsible stockholder 

 or assistant to be present at stocktaking who should also review 

 prices, extensions, footings, etc. Every schedule should bear the 

 O. K. of this assistant. 



Accounts receivable. — The balance of the Customers' Ledger or 

 Account File with the controlling account in the General Ledger is 

 only partial evidence of the correctness of these accounts. Errors in 

 prices, omissions of charges, and the like are not shown by this 

 balance. The only satisfactory method of checking against such 

 errors is a regular review of the tripUcates by the bookkeeper, and 

 also a check by the auditor of several sales slips of each day, week, 

 or month, taken at random. If mistakes are very infrequent, and 

 the total of the Customers' Ledger equals the controlHng account, 

 the Balance Sheet may be regarded as reasonably correct. 



Bills receivable. — The balance shown in the General Ledger must 

 equal the total of notes on hand. This should also be verified by 



