SUBJECT: Accounting 13 NC

Descriptive Title: Auditing and Assurance Concepts and Applications 1

Instructor: Alfredo R. Cabiso

LESSON NO. 2 – Audit of Cash

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Learning Objectives:
The students should be able to:
 Explain and identify the categories of management assertions
 Identify the audit objective for cash and cash equivalents
 Describe the primary substantive audit procedures for cash and cash equivalents
 Identify assertions addressed by audit procedures for cash and cash equivalents
 Identify what items are included as cash and cash equivalents
 Calculate the correct balance of petty cash fund
 Identify bank and book reconciling items
 Prepare bank reconciliation and proof of cash

Audit Objectives and Procedures

An audit program of representative year-end substantive testing procedures in the examination
of cash is presented below:
Assertions Audit objectives Audit Procedures
1. Existence of occurrence A. To determine whether 1. Obtain analysis of cash
cash exists at year-end balance and records to
and cash-related the general ledger
transactions occur within 2. Confirm bank balances as
the year. of balance sheet date
3. Perform cash count
B. To determine that all cash procedures for cash on
balances of the client are hand
reflected on the balance 4. Obtain (prepare) bank
sheet at year-end reconciliation as of the
balance sheet date
5. Trace all transfers
occurring between banks
near year-end.
ii. Completeness C. To determine whether all 6. Obtain a cutoff bank
cash transactions are statement containing
recorded in the proper transactions several days
account g period subsequent to the balance
sheet date. Examine
items returned with the
cutoff bank statements
7. Prepare proof of cash
transactions occurring
during a specified period
as they are recorded by
the bank and the client.
8. Verify the client’s cutoff of
cash receipts and cash
disbursements.
III. Rights and obligations D. To determine that cash 9. Review bank statements
balances are available for and the bank replies to
use without restrictions or confirmation letters
if with restrictions,
properly indicated in the
balance sheet
 IV. Valuation or allocation E. To determine if cash is 10. Verify existence of cash
recorded and presented in banks under
at the proper amount receivership, cash
subject to court’s
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restraining order, in
foreign banks and in
foreign currency. This is
in addition to the
foregoing procedures
which will enable the
auditor to verify proper
valuation of cash.
V. Presentation and F. To determine whether 11. Investigate any checks
disclosure cash is presented in representing large or
accordance with generally unusual payments to
accepted accounting related parties.
principle 12. Evaluate proper financial
statement.

Definition of Cash
Cash includes money and other negotiate instruments that is payable in money and
acceptable by the bank for deposit and immediate credit. It includes cash on hand,
cash in bank, demand deposits and other items that are unrestricted in use in
current operations.
1.Cash on hand (CUTCMoBa)

C Customer’s checks awaiting deposits

U Undeposited cash collections (currencies such as bills and coins
T Traveler’s checks
C Cashier’s/official/treasurer’s/manager’s checks
M Postal money orders
o
Ba Bank drafts ( a written order addressed to the bank to pay an amount of money to the
order of the maker

2. cash in bank
a. Current account/checking account/demand deposit/commercial deposit
b. Savings deposits (savings account)

3. Cash fund for current operations

 Change fund
 Payroll fund
 Purchasing fund (for purchasing of inventories
 Revolving fund (fund that is used for limited or specified purpose by management
 Interest fund
 Petty cash fund (for small and miscellaneous disbursements
 Dividend fund
 Travel fund
 Tax fund

Fund for Noncurrent operations.

These are part of noncurrent assets and should not be included as part of cash.

Examples are:
Pension fund Generally noncurrent investment but if the related liability is
current, the fund is included as cash
Preferred Noncurrent investment unless the preferred share has a
redemption fund mandatory redemption and if redeemable
-within one year from reporting period -part of current investment
-within 3 months from the reporting period – part of current investments
Acquisition of
property, plant Always noncurrent even if expected to be disbursed Page
next year
|3
and equipment
Contingent fund Noncurrent investment
Insurance fund Noncurrent investment
Sinking fund Noncurrent investment. If the related bonds payable is
current, the fund is included as cash

CASH EQUIVALENTS
Cash equivalents are short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant risk
of change in value because of changes in interest rates,
(PAS 7.6) Items that may qualify as cash equivalents include the following:
1. Time deposit
2. Money market instrument or commercial paper
3. Treasury bills, treasury notes and treasury bonds
4. Redeemable preference shares with mandatory redemption period

If the above items are: Treatment

1). Originally invested/acquired more
than 3 months before maturity date
a) Remaining term is 3 months or Short term investment
less from the reporting date
b) Remaining term is 3 months but Short term investment
within 1 year
c) Remaining term is more than one Long term investment
year
2) Originally invested/acquired for 3 Cash equivalents
months or less before maturity

ILLUSTRATIVE PROBLEMS
Audit Case No. 1. Petty Cash and Undeposited Collections

Ana Cruz is the cashier of the Luzon Glass Company. As representative of the Santos, Tan and
Associates, CPAs, you were assigned to verify her cash on hand in the morning of January 4,
2020. You began to count at 9:00 A.M. in the presence of Ms. Cruz. In the course of your
counting, you found currencies in paper bills and coins together with checks, vouchers and
other items, which are mentioned below:

Bills
9 one hundreds, 25 fifties; 50 twenties, 120 tens
Coins
P5.00 – 4 rolls and 5 loose (50 pieces to a roll)
1.0 - 8 rolls and 15 loose (100 pieces to a roll)
1.25 - 2 rolls and 2 loose ( 500 pieces to a roll)
1.10 - 3 rolls and 40 loose (500 pieces to a roll)
0.05 - 2 rolls (400 pieces to a roll)
Checks
Maker Date Payee Amount
Rose Manalo, Asst. 12/23/19 Isabela Company. P600
Mgr.
Ms. A. Cruz, Cashier 12/26/19 Isabela Company. 400
I.O.Us
A. David, Janitor 12/20/19 P350
R. Tirao, Clerk 12/22/19 250
Pedro Munar, 12/24/19 150
Bookkeeper

Petty Cash Vouchers for replenishment Page | 4

Payee Date Account charged Amount
L. Cruz, Messenger 12/16/19 Advances to P100.00
Employees
Rosario & Co. 12/18/19 Supplies 145.00
Victory Liner 12/18/19 Freight-in 182.50
Bureau of Post 12/18/19 supplies 300.00
(stamps)
A. Vallo, Carpenter 12/20/19 Repairs 450.00
B. Tello 12/21/19 Miscellaneous 154.00
expense

Your investigation also disclosed the following:

1. The balance of petty cash fund per books is P9,000.
2. Cash sales of January 2, 2020 amounted to P8,650 per sales records, while cash
receipts book and deposit slip showed that only P7,650 was deposited in the bank on
January 3, 2020.
3. The following employees’ pay envelopes have been opened and the money removed.
Each envelope was marked “unclaimed”
N. Roy P332.50
G. Gloria 247.50

Required:
1. Prepare working papers showing your cash count.
2. Prepare necessary adjusting journal entries without explanation as of December 31,
2019.
3. Determine the amount at which the Petty Cash Fund will be stated in the balance sheet
as of December 31, 2019.

Audit Case 2: Audit of cash and related accounts using the Bank reconciliation
statement

The unadjusted cash balances of Isabela Corporation for the month ended June 30, 2020 are
as follows:

Cash balances per bank statement, June 30, 2020 P249,223.00

Cash balance per company records, June 30, 2020 248,758.80

The bank statement disclosed the following information:

1. A customer note for P24,000 plus P240 interest was collected on June 30, 2020.
2. A customer check for P2,762.80 was returned because of insufficient funds (NSF check)
3. The month service charge was P300.

A review of the company records disclosed the following:

1. A deposit for P22,857.40 mailed to the bank on June 29, 2020 did not appear on the
bank statement.
2. Customer checks totaling P6,548 were on hand at the end of June awaiting deposit.
3. The following company checks were outstanding at the end of June:
#862 P1,923.80
#864 2,943.60
#865 5,265.00
4. Check #843 written for P1,824 in payment of a creditor account and included with the
cancelled checks in the bank statement has been erroneously recorded as P384.00 in
the company records.

Required: 1. prepare bank reconciliation statement.

2. Adjusting journal entries
Audit Case 3: Audit of cash using “Proof of Cash”
The proof of cash for the Isabela Corporation (Prob. 1) requires the following in addition to that
given in the preceding case:

1. May 31, 2020 bank balance P272,348.40

2. Deposit in transit received by the bank June 2, 2020 24,803.00
3. Total receipts recorded by the bank during June 2020 528,423.40
4. Total payments recorded by the bank during June 2020 551,548.80
5. May 31, 2020 book balance Page | 5
289,630.40
6. Outstanding checks on May 31, 2020
#781 3,263.00
#782 4,258.00
7. Total receipts per books during June, 2020 508,785.80
8. Total payments per books during June 2020 549,657.40

Required : Proof of Cash

Audit Case 4.: Cash and Other Items

The following information has been extracted from the accounting records of the Orange
Corporation:

1. Cash on hand (undeposited sales receipts) P1,020

2. Certificates of deposits 25,000
3. Customer’s notes receivables 1,000
4. Reconciled balance in First Standard Bank checking (350)
account
5. Reconciled balance in Prime National Bank checking 9,350
account
6. Balance in Rural Bank savings account 8,560
7. Customer’s postdated check 1,350
8. Employee travel advances 1,600
9. Cash in bond sinking fund 1,200
10. Bon sinking fund investments 8,090
11. Postage stamps 430

Required:
Determine the balance in Orange’s Cash account, and discuss the balance sheet treatment
of any items not included as cash.

Audit Case 5: Reconciliation of Bank and Company Cash Amounts

The December 31, 2019 Bank Statement for Sam Corporation showed a P2,049.25
balance. On this date the company’s Cash account reflected a P325.60 overdraft. In
reconciling these amounts, the following information is discovered:

1) Cash on hand for undeposited sales receipts, December 31, 2019, P130.25.
2) Customer NSF check returned with bank statement, P420.40
3) Cash sales of P640.25 for the week ended December 18, 2019 were recorded on the
books. The cashier reports this amount missing, and it was not deposited in the
bank.
4) Note receivable of P2,500 and interest of P25 collected by the bank and not
recorded on the books.
5) Deposit in transit Dec. 31, 2019, P350.00
6) A customer check for P290.40 in payment of its account was recorded on the books
at P940.20
7) Outstanding checks, P2,040.55. Includes a duplicate check of P70.85 to G. White,
who notified Sam that the original was lost. Sam stopped payment on the original
check and has already adjusted the cash account in the accounting records for this
amount.
 Required:
1. Prepare a December 31, 2019 bank reconciliation for Sam Corporation
2. Prepare any journal entries necessary by Sam Corporation to record the information
from Requirement 1.

Audit Case 6: Bank Reconciliation

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The Odesa Company received a bank statement for February 2020, as follows:

From: Standard Bank, Manila

To: Odesa Company, Legarda St., Manila

Date Checks Deposits Balance

Feb. 1 4,524.80
7 2,700.33 8,642.61
9 3,484.81
14 6.00 SC 460.00 CM
16 274.09
21 4,133.60 3,385.49
23 69.69 NSF
28 6,344.38

The receipt of P460 on February 14 was for P445 note collected by the bank, plus P20 current
interest, less a P5 service charge. The company’s accounting records contained the following
information:

Cash balance on February 28 from the books: P2,610.42

Cash Disbursements Cash Receipts

Check No. 2,700.33 Feb 7 8,624,61
155
156 3,484.81 21 3,385.49
157 274.09 All receipts are verified correct
158 589.02
159 4,133.60
160 2,742.63

Required:
1. Prepare a bank reconciliation on February 28, 2020 for the Odesa Company.
2. Prepare the journal entries that the Odesa Company should record as a result of the
reconciliation

Audit case No. 7: Determination of proper cash balance

Blue Co. closes its books regularly on December 31, but at the end of 2019 it held its cash book
open so that a more favorable balance sheet could be prepared for credit purposes. Cash
receipts and disbursements for the first 10 days of January on the following year were recorded
as December transactions. The following information is given.

1. January cash receipts recorded in the December cash book totaled P39,640, of which
P22,000 represents cash sales, and P17,640 represents collections on account for
which cash discounts of P360 were given.
2. January cash disbursements recorded in the December check register liquidated
accounts payable of P26,450 on which discounts of P250 were taken.
3. The ledger has not been closed for 2019
4. The amount shown as inventory was determined by physical count on December 31,
2019.
Required:
1. Prepare any entries you consider necessary to correct Blue’s accounts at December 31.
2. To what extent was Blue Co. able to show a more favorable balance sheet at December
31 by holding its cash book open? (Use ratio analysis). Assume that the balance sheet
that was prepared by the company showed the following amounts:

Debit Credit Page | 7

Cash 39,000
Receivables 42,000
Inventories 67,000
Accounts payable 45,000
Other current liabilities 14,200

Audit case No. 8: Accounting for cash shortage

The Red Company did not exercise adequate internal control over its cash transactions. During
the audit you found the following data concerning its cash position as of June 30, 2020. On the
company’s records the balance of cash on hand and in bank was P34,700. A credit of P500 for
a note collected by the bank did not appear on the company’s records. The bank statement
balance was P27,000. Outstanding checks were as follows:

Number Amount
192 1,040
193 720
194 816
195 692

The cashier prepared the following reconciliation:

Balance per bank statement P27,000

Deduct: outstanding checks
No. 193 P720
No. 194 816
No. 195 692 2,028
P24,972
Add: cash on hand (this count is correct) P9,228
Collected note 500 9,728
Cash per company records, June 30, 2015 P34,700

Required:
a. Prepare a correct reconciliation
b. What is the amount of the shortage?
c. How did the cashier attempt to conceal the shortage?
d. In the light of this situation, what internal control improvements would you
propose?

Note: See solutions in attached spread sheet files.

EXERCISES/ASSIGNMENT

Problem #1.
Assume the following data of Dianne Corp. of its cash and short-term highly liquid investments
for December 31, 2019:
Cash on hand P80,000
Checking account no. 143-BPI 200,000
Checking account No. 155-BPI (30,000)

Securities Date Maturity date Amount

Acquired
120-day certificate of deposit 12/10/2019 1//31/2020 P600,000
BSP-Treasury Bills (No.1) 11/30/2019 04/30/2020 5,000,000
BSP-Treasury Bills (No.2) 10/31/2019 01/20/2020 1,000,000

180 days commercial paper 12/01/2019 06/20/2020 1,400,000

Money market funds 11/21/2019 02/10/2020 2,000,000

The correct cash and cash equivalents balance on December 31, 2019 is
a. 3,850,000 c. 5,250,000
b. 3,880,000 d. 5,280,000

Problem #2.
Page
The petty cash fund of Abigail Company on December 31, 2019 is composed of the |8
following
Coins and currencies 17,000
Petty cash vouchers
Transportation 1,000
Supplies 2,000
Cash advances to employees 3,000
Employees’ check returned by bank marked NSF 4,000
Check drawn by the company payable to the order of the
petty cash custodian, representing salary for the month 18,000
A sheet of paper with names of employees together with
contribution 5,000
Total 50,000

The petty cash ledger account has an imprest balance of P50,000.

What is the correct amount of petty cash on December 31, 2019?
a. 50,000 c. 35,000
b. 40,000 d. 39,000

Problem #3.
Your client, Aira Marie Shon Company, presented you the following data:
Reconciling Items:
Undeposited collections: Bank service charges:
September 30 5,200 September 30 50
October 31 ? October31 65
Outstanding checks: Erroneous bank debits:
September 30 8,007 September 30 600
October 31 ? October 31 900
NSF checks: Erroneous bank credit:
September 30 526 September 30 1,000
October 31 700 October 31 3,000
Customer’s notes collected by bank: Balances:
September 30 1,500 Book – October 31 166,236
October 31 4,277 Bank-September 30 130,560

October transactions:
Receipts:
Book 151,230
Bank 149,951
Disbursements:
Book 111,423
Bank 110,098

Questions:
Based on the above data and the result of your audit, compute for the following:
1. How much is the total disbursements in October?
a. 154,007 c. 110,098
b. 111,612 d. 115,412

2. How much is the undeposited collection, October 31, 2019?

a. 12,856 c. 21,856
b. 11,256 d. 21,586
3. How much is the total outstanding checks, Oct. 31, 2019?
a. 9,821 c. 12,124
b. 11,421 d. 12,142
4. How much is the adjusted balance of cash, September 30, 2019?
a. 127,353 c. 111,612
b. 154,007 d. 169,748
5. How much is the adjusted balance of cash, October 31, 2019?
a. 127,353 c. 111,612
b. 154,007 d. 169,748

Problem #. 4.
Reconciliation of Jazz Company’s bank account at May 31 of the current year is:
Balance per bank statement 2,600,000 Page | 9
Deposits outstanding 300,000
Bank service charge 10,000
Erroneous bank charge 40,000
Outstanding checks (100,000)
Erroneous bank credits (60,000)
CM for collection of note (600,000)
Balance per book 2,190,000

June data are as follows:

Bank Book
Checks recorded 2,200,000 2,500,000
Correction of erroneous bank credit in May 60,000
Deposits recorded 1,600,000 1,800,000
Correction of erroneous bank charge 40,000
Services charges recorded 50,000
CM for collection of bank 550,000 600,000
NSF checks returned with June 30
statement (will be redeposited) 100,000

Questions:
Based on the above data and the result of your audit, compute for the following:
1. How much is the total outstanding checks on June 30?
a. 400,000 c. 190,000
b. 510,000 d. 340,000

2. How much is the total deposit in transit on June 30?

a. 510,000 c. 100,000
b. 500,000 d. 90,000

3. How much is the total adjusted cash receipts in June?

a. 2,350,000 c. 2,190,000
b. 2,400,000 d. 2,030,000
4, How much is the total adjusted cash disbursements in June?
a. 2,650,000 c. 2,500,000
b. 2,280,000 d. 2,490,000
5. How much is the total adjusted cash balance as of June 30?
a. 2,480,000 c. 2,370,000
b. 2,280,000 d. 2,490,000

Problem # 5:
The cash account of Dolly, Inc, disclosed a balance of P17,056.48 on October 31. The bank
statement as of October 31 showed a balance of P21,209.45. Upon comparing the statement
with the cash records, the following facts were developed.
(a) Dolly’s account was charged on October 26 for a customer’s uncollectible check
amounting to P1,143.
(b) A 2-month, 9%, P3,000 customer’s note dated August 25, discounted on October 12,
was dishonored October 26 and the bank charged Dolly P3,050.83, which included a
protest fee of P5.83.
(c) A customer’s check for P725 was entered as P625 by both the depositor and the bank
but was later corrected by the bank.
(d) Check no. 661 for P1,242.50 was entered in the cash disbursements journal at
P1,224.50 and check no. 652 for P32.90 was entered as P329,000. The company uses
the voucher system.
(e) Bank service charges of P39.43 for October were not yet recorded on the books.
(f) A bank memo started that M Sin’s note for P2,500 and interest of P62.50 had been
collected on October 29, and the bank charged P12.50. (No entry was made on the
books when the note was sent to the bank for collection)
(g) Receipts of October 29 for P6,850 were deposited November 1.
The following checks were outstanding on October 31:
No. 620 P1,250 No. 671 P732.50
No. 621 3,448.23 No. 673 187.90
No. 632 2,405.25 No. 675 275.72
No. 670 1,775.38 No. 676 2,233.15

The bank reconciliation as of October 31 will show an adjusted cash balance of:
a. 21,209.45 c. 28,059.45 Page | 10
b. 15,751.32 d. 17,056.48

Problem # 6.
The following information was obtained in connection with the audit of Kathereen Company’s
cash account as of December 31, 2019:
 Cash balance per general ledger on December 31 was P37,500. The company
recorded actual company collections amounting to P152,500 from its customers during
December. Also, in December, the company recorded bank service charges of P2,500,
including November bank service charges of P1,500. The December bank statement
showed total deposits credited by the bank of P145,000 and total checks paid amounting
to P133,750 and bank service charges of P3,250.
 The outstanding checks on November 30 and December 31 were P16,250 and P12,500
respectively while deposit in transit on November 30 was P12,500.
 The cash receipts book of December is under-footed by P2,500.
 The bank erroneously charged the company’s account for P3,750 check for another
company. This bank error was corrected on January 2020.

Questions:
Based on the above data and the result of your audit, compute for the following:
1. Book disbursements in December 2019:
a. 126,250 c. 128,750
b. 125,500 d. 129,750

2. Deposit in transit, December 31, 2019:

a. 19,000 c. 22,000
b. 12,000 d. 20,000
3. Adjusted cash in bank balance, December 31, 2019:
a. 26,500 c. 37,750
b. 37,500 d. 26,750

4. How much is the unrecorded bank service charges as of December 31, 2019:
a. 1,250 c. 2,350
b. 3,250 d. 2,250

5. Adjusted cash in bank balance, Nov. 30, 2019:

a. 18,500 c. 12,250
b. 14,750 d. 17,450

Problem #7.
The following data were taken from the records of Brayden Company:
Undeposited collections:
September 30 5,000
October 31 7,000
Outstanding checks:
September 30 ?
October 31 6,000
Bank service charge
September 30 2,500
October 31 1,500
Customer’s notes collected
September 30 8,000
October 31 13,000
NSF returned this month redeposited also this
month (no journal entry was made on the books
both on the return and when it was redeposited 3,000
Balances:
September 30, bank balance 100,000
September 30, book balance 91,500
 October 31, book balance 139,500
October transactions:
Receipts:
Book (2,000 thereof was paid out in currency) 196,000
Bank 200,000
Disbursements:
Book ?
Bank 150,000 Page | 11

Questions:
Based on the above data, compute for the adjusted balances of the following:
1. Outstanding checks, September 30
a. 2,000 c. 6,000
b. 8,000 d. 4,000
2. Cash in bank balance, September 30
a. 97,000 c. 99,500
b. 105,000 d. 94,000

3. Cash receipts on October 31

a. 201,000 c. 188,000
b. 202,000 d. 209,000
4. Cash disbursement on October 31
a. 147,000 c. 148,000
b. 142,000 d. 152,000

5. Cash in bank balance, October 31

a. 151,000 c. 156,000
b. 157,000 d. 141,000