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Auditing the Accounts


Every year the accounts of a limited company must be approved by auditors. They act

on behalf of the shareholders. Their duty is to ensure that the directors are reporting

correctly on the state of affairs of the company. They do not judge whether the

directors are managing the company efficiently or not. That is some thing the

shareholders must judge for themselves.

Until recently, the accounts of Harper & Grant have been audited by Hector Grant's

son-in-law, who is in private practice as an accountant. A new firm of auditors has

now been appointed. A privately owned limited company is now no longer exempt

from having to publish its accounts. It was therefore considered necessary to have the

accounts audited by independent, auditors in no way connected with Harper & Grant.

William Buckhurst, as Company Secretary, is responsible for seeing that the books

and records for the period in question are ready for checking. It could make a bad

impression if the accounts department was not able to supply immediately any

information wanted by the auditors.

What precisely do the auditors check? They have to be satisfied that everything

which goes into making up the Profit Statement, the Balance Sheet and the Directors*

Report is correct. The Profit Statement (sometimes called a Trading and Profit and

Loss Account) shows how the profit for the year is arrived at. It starts with net sales

or income, and deducts the cost of materials, work and overhead charges. This leaves

a trading surplus, from which charges, such as depreciation on plant and buildings,

auditors' fees, and administration and selling costs must be deducted to produce the

net profit (or loss).

The Balance Sheet is a summarised statement showing the amount of funds employed

in the business and the sources from which these funds are derived. On one side is

listed the capital employed, which usually consists of the issued share capital plus

reserves and retained earnings. You will remember from Unit 13 that the share capital

of Harper & Grant consisted of five thousand I shares, with a total market value of

five hundred thousand pounds. In other words, there are four hundred and ninety-five

thousand pounds in reserves and retained earnings. This starts with the total cost of its

fixed assets (land, buildings and machinery) and any trade investments (interests in

other companies), followed by a breakdown of net current assets (that is, cash and

stocks, plus what the firm is owed by its customers, less its liabilities, or what it owes

to others). The Wentworth

Mattress Company owns shares in Harper & Grant, so this would be shown as a trade

investment in Wentworth's Balance Sheet, The totals on the two sides of the Balance

Sheet must agree; that is, come to the same figure. The total dividend to be paid for

the year is a current liability, and is therefore an item in the compilation of net current


One of the most difficult jobs in preparing accounts is stock valuation; that is, putting

a value on all goods in the hands of the company. It may seem easy, as goods could

be counted, and then the price paid for them could be checked against the suppliers'

invoices. But the value of commodities (e.g. copper) often fluctuates. Furthermore,

much of a company's stock will consist of work in progress or finished stock, and the

volume of all stock is changing daily, if not hourly. The rule for stock valuation is

that it should be taken at cost price or market price, whichever is the lower. So far we

have seen only one case of dishonesty in Harper & Grant, when a cleric in the Sales

Department took some cash left lying on a desk. Unfortunately, there is always a

temptation to people handling money all the time to attempt, in a weak moment, a

fiddle (a slang term for a small cheat or dishonest action) which they feel will not be

noticed. If they get away with it, are successful, they may well be tempted to do it

again, or make a regular practice of it, perhaps on a larger scale.

(William Buckhurst goes into the Accounts Office to speak to the chief


WILLIAM BUCKHURST: Well, Mr. Brent, you've had three hours at those books.

What about some lunch?

BRENT: That would be very welcome.

BUCKHURST: No problems?

BRENT: Er... yes, Mr. Buckhurst, One or two small things. Would you like to go

into them now, or after lunch?

BUCKHURST: Well, perhaps we might do it now, so that I can try and get the

information straight away.

BRENT: The first is this figure here in the stock valuation. This figure for paint. I

suppose you have this paint in stock. It's listed as goods paid for, but: I can find no

record of payment.

BUCKHURST: Ah, I know what that is. There won't be a cheque for the total

amount. We always buy paint on a sale or return basis and pay for it each quarter as

we use it. I'm afraid that's my fault. I accepted the figure in the Stock Department.

We forgot the sale or return arrangement and put the paint in the wrong column.

BRENT: Very understandable. This sort of thing often happens.

BUCKHURST: What's the other anomaly?

BRENT: Well, these cheques made out to members of the staff. Could you tell me

something about them?

BUCKHURST: Certainly. We often cash cheques for staff as a service. The cheques

are made out to the company by the individuals. The cashier then totals up the value

of the cheques, comes to me for a company cheque for the same sum, and then goes

to the bank. He pays in the staff members' cheques and draws out an equivalent sum

of cash with the company cheque,

BRENT: But I notice from the bank statement that the amount paid in is less than the

amount drawn out. Here are the paying-in vouchers. This was the sum paid in to the

bank, but this was the amount drawn out.

BUCKHURST: Oh dear... yes. It does seem to be different. A difference of fifteen

pounds. I don't like the look of that one. Will you leave it with me and I'll look into it

this afternoon, and come and talk to you again.

(Later Mr. Buckhurst looks in on Mr. Brent again. )

BUCKHURST: I've found out the reason for the difference in those two amounts.


BUCKHURST: I'm afraid it was a fiddle. It can only have been Donald

Kennet, the clerk who always goes to the bank. I'm very upset about it.

We've never had a thing like this before.

BRENT: I wonder what he'll have to say for himself.

BUCKHURST: Yes. I'm just going to see him now. He's waiting in my office...

(In Mr. Buckhurst's office.)

BUCKHURST: Ah, Donald.

DONALD KENNET: You wanted to see me, Mr. Buckhurst?

BUCKHURST: Yes, Donald. We have a problem here which the auditors have

raised. Perhaps you can help.

KENNET: Oh, yes. I certainly will if I can, sir.

BUCKHURST: You usually go to the bank on Fridays to cash staff cheques, don't


KENNET: Es, Mr. Buckhurst.

BUCKHURST: Can you remember any occasion in the last few months when you

have not gone?

KENNET: Er... I was away for my holidays in the summer. I think that was the only

time I didn't go.

BUCKHURST: Yes, that was in August, wasn't it? Well, this figure he's querying

was in October... and there was another occasion in... in... er...June.

KENNET: What occasion do you mean? What are you referring to?

BUCKHURST: The auditor has found that on these two occasions more was drawn

out from the bank than was paid in. Can you explain the reason for that?

KENNET: Er... I'm sure I don't know why the amounts should be different. They

should be exactly the same- Can I look at the bank statements?

BUCKHURST: Certainly. Here they are.

KENNET: Thank you.

BUCKHURST: And here are the two paying-in vouchers for the two dates; both in

your handwriting, I think?

KENNET: Yes... but I don't understand...

BUCKHURST: The withdrawal on the bank statement here must be the cash for the

staff, because on both days it is the only amount drawn. You don't think you could

somehow have lost one of the cheques you were paying in?

KENNET: Look, I'm sorry, Mr. Buckhurst. I can explain it. I really was going to pay

it back later. You see I... my mother was ill and...

BUCKHURST: Why didn't you come and ask me for help if you were in trouble? Or

you could have seen the Personnel Manager. We might have arranged for you to draw

your pay in advance. But this--- this is stealing. KENNET: I didn't mean to steal it. I

was going to pay it back. I intended to pay it back, I didn't mean to be dishonest,

really I didn't...


BUCKHURST: Well, Mr. Brent, when do you think you'll be finished?

BRENT: Oh, I think I should be through by the end of the month. But now I've seen

the extent of the work, I'll bring in two of the others to help me.

BUCKHURST: No more problems so far?

BRENT: No, I don't think so. It all seems to be in order,

BUCKHURST: Thanks- By the way, that clerk was responsible.

BRENT: Oh dear! Poor fellow. You'll have to dismiss him, I suppose.

BUCKHURST: Yes, we may have to. It's a pity. He works hard and he's been

satisfactory in every way, apart from this.

BRENT: Well, I'm sorry to have been the cause of such an unhappy discovery.

BUCKHURST: We're very glad you did discover it. You have probably saved the

company from an even bigger loss.

Date: 2015-12-17; view: 1869

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