At Finewound, Holmes was pleased to see a formal statement of forecasts and goals for both the Springs and the Sprockets divisions. When the reports showed a difference between expected performance and actual performance, there was a written summary of the causes drawn up by the department head.
"Excellent," Holmes commented. "And here's another example of accountability control, Watson." The stockroom had issued 250 springs to the sprocket production line on a requisition. But the sprocket department head came back with a shortage report of 30 springs. The record showed that the missing springs surfaced in a mismarked box after a search by both departments. "In a case like this," said Holmes, "I've always found that both departments will keep more accurate records if they know the other department is doing the same. Human nature, you know.
"Now," said Holmes, "we do on to the best part of the audit: accounting systems. Ask Mr. Finewound for his manual of accounting policies and procedures."
Manual in hand, Holmes examined the chart of accounts to make sure responsibilities and standard procedures were clearly defined. He was pleased to see that the accounting department was a separate entity from production, and that it had no physical custody of cash, securities, or other assets.
The system was good, able to document individual transactions as represented on the financial statements. Holmes explained that he would come back and trace a great many individual transactions on Finewound's books, both as a test of internal control procedures, and to substantiate the actual amounts in the records. Waving his big magnifying glass, Holmes said, "There is no substitute for painstaking attention to detail, whether you are a detective looking at footprints, or an auditor tracing the steps of a financial transaction."
In digging through disbursement records, however, Holmes raised his bushy eyebrows. "What's this?" he asked no one in particular.
"An invoice, Holmes," said Watson proudly.
"Astute observation," said Holmes. "What seems wrong, or missing?"
"It is marked paid, which is good. The purchase order is properly attached. I don't see... Ah! The duplicate of the check is missing. Goodness. That check could have gone anywhere."
"Precisely," said Holmes. "Anywhere. We'll have to bring this matter to Finewound's attention."
Finewound immediately recognized what concerned Holmes: the possibility of unauthorized payments when all supporting documents are not attached to canceled checks. "From now on," said Holmes, "you should check to see that all unissued company forms, particularly blank invoices, are numbered sequentially and are in a protected location to prevent unauthorized use."
While examining accounting systems at Finewound, Holmes ascertained that Finewound had the cash that was listed on its financial statement, and reviewed the company's control over cash. Cash receipts were recorded immediately. Deposits were made daily.
But then he frowned, with another billow of smoke from his pipe. "Finewound's bookkeeper hasn't taken a vacation in two years," observed Holmes.
"Neither have I," said Watson.
"You don't handle may cash, my dear fellow. I believe an annual vacation for a bookkeeper is a must. Not only to refresh the spirit, but to reveal any irregularities with the accounts. I also think that Ms. Diskette should take a vacation, since she also is overdue. We're not here to question the integrity of Finewound's trusted employees, but an occasional vacation helps keep temptation at bay," Holmes concluded.
Other areas of asset protection that Holmes explained he would study during his audit included inventory, plant equipment, and investments. Regardless of the asset, Holmes pointed out that he would expect to find detailed records of accountability, acquisition and retirement procedures, and that the assets were kept in a safe place with some control over access. He'd also check to see if there were regular inventory reviews.
"Now let's trace some more transactions," said Holmes.
"Good show," said Watson, sharpening his pencil.
The two auditors began checking to see that transactions were recorded in the right amounts, in the proper accounting periods, and to correct accounts. They made sure credit sales were approved by the credit department before goods were shipped. They checked to see that shipping forms were matched up with customer orders, sales orders, and invoices to uncover the possibility of unrecorded or inaccurate sales entries.
Holmes called Mr. Finewound on the intercom after an unusual entry caught his attention. "What is 'liquid sprocket?" he asked. "You purchased two cases in December, and the authorization is signed 'Santa Claus."
Mr. Finewound cleared his throat. "Well," he said, "I guess that was for our Christmas office party. We drank a lot of liquid sprocket that evening. It's all right, isn't it?Morale, and all that?"
"Proper event," said Holmes, "but improper accounting." He chuckled. "Perhaps an adjusting entry might be in order here to record a justifiable employee benefit expense rather than liquid sprocket."
After ten days of hard work, Holmes and Watson met with Finewound in his office. The audit had gone well, and the auditors presented their report.
"Finewound Spring & Sprocket has quite appropriate and accurate accounting procedures," said Holmes."You'll find a short list of recommendations attached. I believe your bank and stockholders will be pleased," he added," and if you have good internal control, it's likely that future audits will be less expensive."
Holmes and Watson walked to the door, off to another assignment. "By the way," said Watson, "do I detect a few of Miss Diskette's blonde hairs on your jacket, and a faint scent of Eau de Vie perfume in the air?"
Holmes puffed furiously on his pipe. "There are times, Watson, when you see entirely too much for your own good," he said.
"Quite so," said Watson.
