Chapter 3 – Audit of Cash & Cash Equivalents

APPLIED AUDITING

OVERVIEW OF DISCUSSION
During the topic discussion for Audit of Cash and its Equivalents, you are required to develop and learn a
(an):
(1) Understanding the nature of cash as a financial instrument;
(2) Understanding the criteria for recognizing “cash equivalents”;
(3) Presentation of Cash & Equivalents in the Financial Statements;
(4) Identify the Internal Controls (ICs) for safeguarding cash;
(5) Test of Controls (TOCs) for cash;
(6) Substantive audit procedures for the audit of cash balances, cash collections, and cash payments;
(7) Preparation of Bank Reconciliation Statements and Proof of Cash;
(8) Petty Cash Funds (PCF) and audit of cash shortages.

STANDARDS USED FOR ACCOUNTING CASH AND CASH EQUIVALENTS

FOR LARGE/ LISTED ENTITIES FOR SMALL & MEDUIM-SIZED FOR SMALL ENTITIES & MICRO-
ENTITIES ENTITIES
PAS 32 – Financial Instrument: Section 11 (PFRS for SMEs) – Basic Section 6 (PFRS for SEs) – Basic Financial
Presentation Financial Instruments Instruments
PFRS 9 – Financial Instrument Published accompanying guidance for
micro-entities while using IFRS for SMEs
PFRS 7 – Financial Instruments:
Disclosure
PAS 7 – Statement of Cash Flows

DEFINITION OF CASH
Cash includes money and other negotiable instruments that is payable in money and acceptable by the
bank for deposit and immediate credit. It includes cash on hand, demand deposits, and other items that
are unrestricted for use in the current operations.

Cash On Hand examples a. Customer’s checks awaiting deposits

b. Undeposited cash collections (currencies, coins, bills)
c. Traveler’s check
d. Cashier’s check, official check, treasurer’s check, manager’s check
e. Postal money orders
f. Bank drafts
Cash In Bank examples a. Current accounts
b. Checking accounts
c. Demand deposits
d. Commercial deposits
e. Savings deposits/ savings accounts
Short-term Cash Funds for a. Change fund
current operations b. Payroll fund
c. Purchasing fund (for purchasing inventories)

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 Chapter 3 – Audit of Cash & Cash Equivalents
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d. Revolving fund
e. Interest fund
f. Petty cash fund
g. Dividend fund
h. Travel fund
i. Tax fund
Unrestricted Foreign Either cash on hand or deposited in banks (converted into their peso
Currencies values using the spot rate or closing rate at the BS date)
Treasury warrants A warrant for the payment of money into or from public treasury
(treated as cash)

Other Funds Normally Classified as Noncurrent Assets

Funds that are intended for non-current operations are part of non-current assets and should not be
included as part of cash.
a. Pension fund (generally noncurrent investment but if the related liability is current, the fund is
included as “cash”)
b. Preferred redemption fund (generally noncurrent investment unless the preferred share has a
mandatory redemption)
 If redeemable within one (1) year from the reporting period, then part of current investment
 If redeemable within three (3) months from the reporting period, then part of current
investment
c. PPE acquisition fund (always noncurrent even if expected to be disbursed next year)
d. Contingent fund (noncurrent investment)
e. Insurance fund (noncurrent investment)
f. Bond sinking fund (generally noncurrent investment, but if the related bonds payable is current,
then fund is included as “cash”)
PRO TIP: The classification of cash fund as current or noncurrent should be parallel to the classification applied to the related
liability. Thus, an entity should reclassify such noncurrent asset if the related liability becomes current.

DEFINITION OF 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 changes in value because of changes in interest
rates (PAS 7 paragraph 6). The following items may qualify as cash equivalents include the following:
a. Time deposit
 If the problem is silent, then it is cash equivalent
 If it is a pre-terminable time deposit, then it is classified as cash
 If purchased three months before maturity, then cash equivalent
 If purchased within one year before maturity, then short-term investment
 If purchased more than one year before maturity, then long-term investment

b. Money market placements, instruments, or commercial paper

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 If the problem is silent, then it is cash equivalent

 If purchased three months before maturity, then cash equivalent
 If purchased within one year before maturity, then short-term investment

c. Treasury bills (these are actually government-issued checks but different from the commercial
checks)
 If the problem is silent, then it is cash & cash equivalent
 If purchased three months before maturity, then cash equivalent
 If purchased within one year before maturity, then short-term investment

d. Treasury notes, and treasury bonds

 If the problem is silent, then it is noncurrent investment
 If purchased three months before maturity, then cash equivalent
 If purchased within one year before maturity, then short-term investment

e. Redeemable preference shares with mandatory redemption period

 If the problem is silent, then it is not considered as purchased but as an issued preference
shares of the entity and is presented as a liability (substance over form)
 If purchased three months before maturity, then cash equivalent
 If purchased within one year before maturity, then short-term investment
 If purchased more than one year before maturity, then long-term investment
PRO TIP: Always look on the DATE OF PURCHASE of items that we may need to consider as cash equivalents.
(a) If the date of purchase/acquisition is within three months or less before the maturity of the instrument, then
consider it as cash equivalent.
(b) If the date of purchase/acquisition is more than three months before the maturity of the instrument, then you can
only classify such item as a short-term or a long-term investment and never a cash equivalent.

VALUATION AND PRESENTATION OF CASH AND CASH EQUIVALENTS IN THE BALANCE SHEET
a. It is generally valued at face amount
b. Cash in foreign currencies are valued in Philippine Peso using the current exchange rate/ spot
rate/ closing rate as of the balance sheet date.
c. Cash in bank from financial institutions having financial difficulty or in bankruptcy should be
shown as its estimated realizable value or recoverable value. (presented as a receivable)
d. Presentation: shown as the first item among the current assets, as one line item but the detail of
which should be disclosed in the notes to financial statements.

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 Chapter 3 – Audit of Cash & Cash Equivalents
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EXERCISE 1 – CASH & CASH EQUIVALENTS

The cash and cash equivalents in the ledger of BRISBANE [Bris’bn] Company had a balance of P5,935,000
as at December 31, 2020. An examination of the account, however, disclosed the following:

(1) Current account at East West Bank P 2,000,000

(2) Current account at BPI (100,000)
(3) Payroll account at Security bank 500,000
(4) Savings account in Urban Bank 1,000,000 note A
(5) Treasury warrants 200,000
(6) Treasury note, due on November 30, 2022 400,000
(7) Change fund 10,000
(8) Credit memo from a vendor for a purchase return 20,000
(9) Traveler’s check 50,000
(10)Customer’s check returned by the bank marked DAIF 15,000
(11)Money order 30,000
(12)Petty Cash fund 10,000 note B
(13)Treasury note, due on February 28, 2021 200,000 note C
(14)Treasury bills, due on January 01, 2021 300,000 note D
(15)Cash sinking fund 500,000
(16)Preferred redemption fund 800,000

Audit notes:
(a) Urban bank was closed two years ago. The company expects to recover only P0.60 for every peso
deposited.
(b) This amount includes unreplenished vouchers totaling P7,000 as of December 31, 2020.
(c) This is a two-year treasury note acquired on December 31, 2020.
(d) This is a 180-day treasury bill acquired on July 31, 2020.

Required:
How much should BRISBANE Company report as cash and cash equivalent on its 12/31/20 balance sheet?

EXERCISE 2 – BANK RECONCILIATION STATEMENT

You are the auditor of BULAGA, Inc. You obtained the bank statements and paid checks directly from the
bank. In reconciling the bank balance at December 31, 2020, you observed the following facts:

Balance per general ledger, 12/31/20 28,064

Balance per bank statement, 12/31/20 11,046
Outstanding checks 12/31/20 (including certified check of P15,000) 45,500
Receipts of 12/31/20, deposited 01/02/21 22,482
Proceeds of bank loan, 12/31/20, discounted for 90 days at 10% per year, omitted from records 48,750

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Deposit of 12/31/20, omitted from the bank statement 12,871

Check # 143 of BALUGA, Inc. charged by the bank in error to BULAGA, Inc. 7,200
Deposit of BULAG, Inc. credited in error to BULAGA, Inc. on 12/06/20 8,755
Debit memo for the cost of a checkbook 150
Check of BULAGA in payment of accounts payable had been recorded by the bookkeeper as
P1,230; the correct amount is… 12,300
The ledger account for Cash in Bank included petty cash fund amounting to 4,200
Proceeds from cash sales for July 18 were stolen. The company expects to recover this amount
from the insurance company. The cash receipts were recorded in the books, but no entry
was made for loss. 15,700
The company account was charged on December 26 for a customer’s uncollectible check
amounting to 31,350

(1) Prepare a bank reconciliation statement to arrive at the adjusted cash balance at December 31,
2020.
(2) Adjusting journal entries as of December 31, 2020.
PRO TIP: The Adjusted Cash Balance is also known as “True Cash Balance” or “Correct Cash Balance” in other financial
accounting terminologies while the Unadjusted Cash Balance is also known as “Cash Balance Per Record” or “Cash Balance Per
Books”.

EXERCISE 3 – BANK RECONCILIATION ITEMS

The following information pertains to YOSEMITE [Yoh-sem-it-ee] Corporation:

YOSEMITE CORPORATION BANK RECONCILIATION

November 30, 2018

Balance per bank statement P 371,500

Less: Outstanding checks
No. 7645 P 9,000

7648 12,000

7654 8,800

7661 3,225 33,025

338,475
Add: Deposits in transit 20,600
Balance per books P 359,075

CHECK REGISTER
December 31, 2018

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DATE PAYEE Voucher Voucher Discount Cash

No. Amt
Dec 1 Asia Corporation 7662 20,000 1,000 19,000
Dec 3 Promil Trading 7663 2,400 2,400
Dec 7 Ariel Enterprises 7664 1,875 1,875
Dec 12 Masagana Corporation 7665 9,000 9,000
Dec 15 Payroll 7666 73,000 73,000
Dec 16 Enfagrow Co. 7667 8,000 200 7,800
Dec 18 Tide Corp. 7668 13,700 200 13,500
Dec 21 Lactomil, Inc. 7669 6,000 6,000
Dec 22 Petty cash fund 7670 7,000 7,000
Dec 28 Payroll 7671 84,000 84,000
TOTAL 224,975 1,400 223,575

BANCO DE ORO
Period: November 30, 2018 – December 31, 2018
DATE DESCRIPTION CHECK DEBIT CREDIT BALANCE
NO.
Balance forwarded 371,500
Dec 1 Cash deposit 20,600 392,100
Dec 1 Check issued 7648 12,000 380,100
Dec 4 Check issued 7662 19,000 361,100
Dec 4 Check issued 7661 3,225 357,875
Dec 5 Check deposit 62,000 419,875
Dec 6 Check issued 7663 2,400 417,475
Dec 8 Check deposit 23,000 440,475
Dec 10 Check issued 7664 1,875 438,600
Dec 15 Encashment 7666 73,000 365,600
Dec 22 Encashment 7670 7,000 358,600
Dec 28 Encashment 7671 84,000 274,600
Dec 29 Debit Memo – BSC 1,000 273,600
Dec 29 Credit Memo – IE 1,550 275,150

Deposit in transit at December 31, 2018 totaled P52,000.

Required:

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 Chapter 3 – Audit of Cash & Cash Equivalents
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(1) What is the cash balance per record as of December 31, 2018?
(2) Compute the amount of outstanding checks as of December 31, 2018.
(3) What is the correct cash balance as of December 31, 2018?

EXERCISE 4 – BANK RECONCILIATION (CASH SHORTAGE)

The RIVER THAMES [TEMs] Company did not exercise adequate internal control over its cash transactions.
During an audit, you found the following data concerning the cash position as of June 30, 2019. 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 does not appear on the company’s records. The bank statement balance is P27,000.
Outstanding checks are as follows:

Number Amount
1972 P 1,040
1973 720
1974 816
1975 692

The cashier prepared the following reconciliation:

Balance per bank statement……………………………………………………………………………….P 27,000

Deduct: Outstanding checks:
No. 1973……………………………………………P 720
No. 1974…………………………………………… 816
No. 1975………………………………………….. 692 2,028
P 24,972
Add: Cash on hand (this count is correct) P 9,228
Collected note………………………………………………...... 500 9,728
Cash per company records, June 30, 2019……………………………………………………………P 34,700

Required:
(1) What is the amount of the shortage?
(2) How did the cashier attempt to conceal the shortage?

EXERCISE 5 – PROOF OF CASH

Following is the general format of a four-column bank reconciliation with various categories and
operations numbered (1) to (16):

Balance, December December Balance,

November 30 Receipts Disbursements December 31
Balance per bank XXXX XXXX XXXX XXXX
Items to be added (1) (2) (3) (4)

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Items to deduct (5) (6) (7) (8)

Adj. bank balance XXXX XXXX XXXX XXXX

Balance per books XXXX XXXX XXXX XXXX

Items to be added (9) (10) (11) (12)
Items to deduct (13) (14) (15) (16)
Adj. book balance XXXX XXXX XXXX XXXX

Required: For each of the following items, indicate in which the reconciling items would appear:
(a) Deposit in transit of P5,000 at December 31
(b) November bank charges of P75
(c) P18,000 checks written in November have not cleared the bank by November 30
(d) Proceeds of bank loan of P80,000 was credited by the bank to the company’s account in December
and recorded by the Company in January of the following year
(e) Check drawn in December in payment of accounts payable amounting to P15,000 was recorded
by the bookkeeper as P1,500
(f) Checks outstanding at December 31 amounted to P16,700
(g) Customer’s NSF check of P17,000 was returned by the bank in December and recorded by the
company in January
(h) The bank in error, credited the company’s account for P4,500 in December for deposit of another
company
(i) Erroneous bank credit of P14,000 in November was corrected by the bank in December
(j) Erroneous bank credit of P17,000 in December was corrected by the bank in December

EXERCISE 6 – TWO-PERIOD BANK RECONCILIATION

Data for VERSAILLES [Ver-SYE] Corp. are assembled as follows:

Nov. 30, 2019 Dec. 31, 2019

Cash account balance P 1,000 P 3,790
Bank statement balance 6,690 10,350
Deposit in transit 400 600
Checks outstanding 1,300 1,500
Bank service charge for the month, not shown on
Company’s cash books 10 40
Collections by bank from Versailles Corp. customers
not shown on the company’s cash books 5,000 6,000
Bank charges for NSF checks, not shown on the company’s
cash books 200 300

Tapes for bank and company cash data offer the following totals:

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 Chapter 3 – Audit of Cash & Cash Equivalents
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Deposit and credit memos per bank statement, P13,800

Cancelled checks and debit memos per bank statement, P10,140
Cash receipts per cash receipts book, P8,000; Cash disbursement, per cash disbursements book,
P10,000

Required:
(1) Prepare a reconciliation of receipts, disbursements, and bank balances for December
(2) Give whatever entries may be required on the company’s books

EXERCISE 7 – FOUR-COLUMN BANK RECONCILIATION

The following information was obtained during the audit of WORCESTER [Woos-ter] Company’s financial
statements:

Outstanding checks:
Nov 30 8,007
Dec 31 ?
Deposit in transit:
Nov 30 ?
Dec 31 13,356
Customer’s note collected by bank:
Nov 30 1,500
Dec 31 4,277
NSF checks:
Nov 30 526
Dec 31 700
Bank service charges:
Nov 30 60
Dec 31 65
Erroneous bank debits:
Nov 30 600
Dec 31 900
Erroneous bank credits:
Nov 30 1,000
Dec 31 3,000
Balances:
Book December 31, 2019 166,236
Bank November 30, 2019 130,640
December transactions:
Receipts:
Book 151,230

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Bank 149,451
Disbursements:
Book 111,513
Bank 110,098
Required:
(1) Outstanding checks as of December 31
(2) Deposits in transit as of November 30
(3) Adjusted cash balance as of November 30
(4) Adjusted cash balance as of December 31

EXERCISE 8 – PROOF OF CASH RECEIPTS AND DISBURSEMENTS

You have been instructed by your supervisor in an audit of Worcestershire [Wusta-sheer] company to
prepare a four-column proof of cash receipts for the month of June 2019. The bank reconciliation
statement prepared by the client in May is reproduced below:

May 2019 Reconciliation

Bank balance P 32,600 Book balance P 28,540
Plus Undeposited Plus proceeds of notes

Collections 5/31 500 receivable collected by the

P 33,100 bank in May 3,500

Less: Outs. Checks: Plus deposit made in bank

140 P 500 on May 31 not recorded

152 400 on books until June 100

153 100 1,000 P 32,140
Adj. bank balance P 32,100 Less May bank service

charges 40
Adj. book balance P 32,100

Upon inquiry about the client’s June 30 bank reconciliation you were informed that it has been lost and
that the client is too busy at this time to prepare another. Your supervisor tells you to get the June bank
statement and paid checks and to prepare the June 30 reconciliation so that you may complete the June
proof of cash. The June bank statement is reproduced below:

THE PHILIPPINE NATIONAL BANK

Account of Worcestershire Company

Date Disbursements Receipts

June 1 400 500
June 7 100

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June 10 700 1,000

June 15 200

June 20 600 2,800

June 27 900

June 29 50 E 50 EC
June 30 10 SC

June 30 150 NSF

EC – Error corrected NSF – Customer’s check returned by the bank for due to
insufficiency of funds
E – Error
SC – Service charges

Cash received for the period June 21 through June 30 of P3,500 was deposited in the bank on July 1. The
paid checks accompanying this bank statement (all clearing in June) were:

No. 152 P400 No. 154 P700 No. 157 P600

No. 153 P100 No. 155 P200 No. 158 P900

The check register revealed that the last check issued in June was No.159 for P250 and that Check No. 156
was for P130.

Required:
(1) Unadjusted book disbursements in June 30, 2019
(2) Unadjusted book receipts in June 30, 2019
(3) Unadjusted book balance as of June 30, 2019

EXERCISE 9 – PETTY CASH COUNT

The auditor of BEAULIEU [Bew-lee] Company, examined the petty cash fund immediately after the close
of the business on June 30, 2019, the end of company’s fiscal year. The following fund composition was
arrived at:

Currency P 972
Unreplenished vouchers:
Supplies 388
Transportation 240
Repairs 170
Stamps 400
Check drawn by Beaulieu payable to Bicester [Bister], cash custodian 1,100

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An employee check returned by bank, marked NSF 230

An open envelop with a sheet of paper bearing the signatures of several
employees together with the list of their contributions for a gift to
a departing employee 400

The petty cash fund general ledger account has an imprest balance of P4,000.

Required:
(1) Compute the amount of cash shortage, if any
(2) Adjusting journal entries on June 30, 2019

EXERCISE 10 – PETTY CASH COUNT

The following cash count sheet and additional information pertain to the accounts of MOUSEHOLE
[Mouzle] Inc. for the year ended December 31, 2019.

Cash count date: December 16, 2019

Currency – details omitted P 4,800

Unreplenished petty cash vouchers
Voucher Date Explanation Amount

11/20/19 Postage stamps 100

12/04/19 Repair of typewriter 150

12/15/19 Transpo – messenger 60

12/15/19 Office supplies 90 400

Advances – all properly approved 500

Total amount accounted P 5,750

Accountability:
Petty cash fund 1,000

Undeposited collections 4,900 5,900

Shortage P 150
Additional information:
(1) The last replenishment of the fund was made on December 14, 2019 covering the period from
December 1 to 14, 2019.
(2) Found inside the cash box were two pay envelopes which has been opened and the contents
aggregating P240 removed. The face of the envelope bore the notation “unclaimed”.

Required: Compute for the amount of cash overage (shortage) on the space provided below.

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EXERCISE 11 – PETTY CASH ACCOUNTABILITY

Kerina Landipa, is the cashier of the Godmanchester [Gum-ster] company. As representative of the Sycip,
Gorres, Velayo (SGV) & Co., CPAs, you were assigned to verify her cash on hand in the morning of January
04, 2020. You began to count at 9:00AM, in the presence of Miss Landipa. In the course of your counting,
you found currencies in paper bills and coins together with checks, vouchers and other items, which we
mentioned below:

Bills
2 fifties, 8 twenties, 12 tens, 5 fives, 15 twos
Coins
P1.00 8 loose

P0.50 – 6 rolls and 12 loose (20 pcs to a roll)

P0.25 – 5 rolls and 32 loose (50 pcs to a roll)

P0.10 – 10 rolls and 15 loose (50 pcs to a roll)

P0.05 – 14 rolls and 20 loose (40 pcs to a roll)

P0.01 – 6 rolls and 45 loose (50 pcs to a roll)

Checks
Maker Date Payee Amount
Krizzy Aquino, asst. mngr. 12/23/19 Godmanchester Co. P 60
Miss Landipa, cashier 07/26/19 Godmanchester Co. 40
I.O.Us
Kris Chew, janitor 12/20/19 35
Bob Uy, clerk 12/22/19 25
Kenneth Sy, president 12/24/19 15
Petty cash vouchers for replenishment
Payee Date Account Charged Amount
Andy Lim, messenger 12/06/19 Advances to employees P 10
Fortune Co. 12/18/19 Supplies 14.50
Victory Liner 12/18/19 Freight-in 18.25
Bureau of Posts (Stamps) 12/20/19 Supplies 30.00
Mae Kho Liling, maintenance 12/20/19 Repairs 45.00
B. Bo 12/21/19 Miscellaneous expense 15.40

Your investigation also disclosed the following:

(1) The balance of petty cash fund per books is P900
(2) Cash sales of January 02, 2020 amounted to P865 per sales records, while cash receipts book and
deposit slips showed that only P765 was deposited in the bank on January 03, 2020

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(3) The following employees’ pay envelopes have been opened and the money removed. Each
envelop was marked “unclaimed”
Anthony Koon P33.25
Leo Lim 24.75

REQUIRED: Prepare a cash count sheet and compute for the amount of cash shortage on the space
provided below. (see Petty Cash Fund count sheet next page)

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COMPANY:
NAME OF FUND:
CASH COUNT DATE:
DENOMINATION QUANTITY AMOUNT TOTAL
BILLS

COINS & FRACTIONAL DENOMINATIONS

TOTAL BILLS AND COINS

CASH ITEMS
Checks and PMOs for deposit
Vouchers not yet replenished
Advances or I.O.U.s
Others
AMOUNT OF FUND PER CASH COUNT
AMOUNT OF FUND PER BOOKS OR RECEIPTS
DIFFERENCE, if any
I hereby certify that the above fund of P_______ was counted in my presence by
_________________ on ______________, 20__ at ________ AM/PM and the same was returned to
me intact. There are no other funds for which I am accountable for except as noted below:
OTHER FUNDS: (Simultaneously counted or physically controlled)
__________________
Signature of Cashier
Prepared by: Initial: Date:
Reviewed by: Initial: Date:

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EXERCISE 12 – PETTY CASH ACCOUNTABILITY

You were examining the accounts of BELVOIR CASTLE [Bea-ver Castle] Corporation, the balance of the
Petty Cash account, December 31, 2019, was P5,000. You count of the imprest cash fund, made at 9:00AM
on January 02, 2020 in the presence of Jay, petty cashier, revealed:

Coins and bills

Quantity Denomination Quantity Denomination

32 P 1.00 4 P 500
40 0.25 2 100
10 20
15 10

Checks

Date Payee Maker Amount

December 27 Cash Mike, clerk P 1,000
30 Belvoir Rey, customer 6,100
30 Belvoir May, customer 6,500
January 10 Belvoir Geoffrey, beautician 4,000

Vouchers

Date Nature of Disbursements Amount

December 15 Transportation P 65
16 Office supplies 70
17 Xerox fees 80
28 Postage 150
January 02 Newspaper 10
02 Freight charges 50

IOUs

Date Maker Amount

December 20 Roel, employee P 250

23 Ruben, salesman 100

Sales invoices (for cash sales, all in cash, no checks)

Invoices #2007 December 30 P 4,000
#2008 December 31 5,100
#2009 January 02 3,050

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REQUIRED: Prepare a cash count sheet and compute for the amount of cash shortage or overage.

COMPANY:
NAME OF FUND:
CASH COUNT DATE:
DENOMINATION QUANTITY AMOUNT TOTAL
BILLS

COINS

FRACTIONAL DENOMINATIONS

TOTAL BILLS AND COINS

CASH ITEMS
Checks and PMOs for deposit
Vouchers not yet replenished
Advances or I.O.U.s
Others
AMOUNT OF FUND PER CASH COUNT
AMOUNT OF FUND PER BOOKS OR RECEIPTS
DIFFERENCE, if any
I hereby certify that the above fund of P_______ was counted in my presence by
_________________ on ______________, 20__ at ________ AM/PM and the same was returned to
me intact. There are no other funds for which I am accountable for except as noted below:
OTHER FUNDS: (Simultaneously counted or physically controlled)
__________________
Signature of Cashier
Prepared by: Initial: Date:
Reviewed by: Initial: Date:

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PROBLEM 1
The internal control procedures for cash transactions in the PROCTER & GAMBLE Co. were not adequate.
Alvin, the cashier-bookkeeper handles cash receipts, made small disbursements from cash receipts,
maintained accounting records, and prepared the monthly reconciliation of the bank account. At
November 30, the bank statement showed a balance of P17,500. The outstanding checks were as follows:

No. 7062 P 268.55 No. 8621 P 175.19

No. 7183 170.00 No. 8623 341.00
No. 7284 261.45 No. 8632 172.80

The cash balance as shown on the PROCTER & GAMBLE Co. records was P20,258.31, and this included the
cash on hand. The bank statement for November showed a credit of P200 arising from the collection of a
note left with the bank. The company’s book did not include an entry to record the collection.

The cashier prepared the following reconciliation in an attempt to conceal his theft.

Balance per books, Nov. 30 P 20,258.31

Add: Outstanding checks
No. 8621 P 175.19

No. 8623 341.00

No. 8632 172.80 588.99

P 20,847.30
Less: Cash on hand 3,347.30
Balance per bank statement P 17,500.00
Less: Unrecorded credit 200.00
True cash balance, Nov. 30 P 17,300.00

(1) The cash shortage is…

(a) P2,347.30
(b) P1,000.00
(c) P4,347.30
(d) P3,347.30
(2) A correct reconciliation will show that the cashier’s accountability for cash on hand is…
(a) P20,458.31
(b) P1,000.00
(c) P4,347.30
(d) P3,347.30
(3) The adjusted cash in bank balance for statement of financial position is…
(a) P20,458.31 (d) P18,458.31
(b) P19,458.31
(c) P17,500.00
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PROBLEM 2
Your examination of the financial statements of MERALCO Inc. for the year ended December 31, 2019.
You obtained the following information on the checking account of the company:

a. The bank statement on November 30, 2019 showed a balance of P15,300

b. Among the bank credits in November was a customer’s note for P5,000 collected for the
account of the company which the company recognized in December among its receipts
c. Included in the bank debits in November was a cost of checkbooks amounting to P60
d. A check for P2,000 issued by MERALMO Inc. in November was charged by the bank in
error against MERALCO Inc. account
e. You also ascertained that there were deposits in transit amounting to P4,000 and
outstanding checks totaling P8,500 as of November 30, 2019
f. The bank statement for the month of December showed total credits of P20,800 and total
charges of P10,200
g. Company books for December showed total receipts of P36,780 and disbursements of
P20,360
h. Bank debit memos for December were: No. 418 for service charges, P80 and No. 504 on
customer’s returned check marked “Refer to Drawer” for P1,200
i. On December 29, 2019, the company placed with the bank a customer’s promissory note
with a face value of P6,000 for collection. The company treated this note as part of its
receipts although the bank was able to collect on the note only in January, 2020
j. A check for P198 was recorded in the company cash payments books in December as
P1,980

(1) Adjusted cash balance as of December 31, 2019

(a) P24,280
(b) P36,880
(c) P18,782
(d) P16,940
(e) Some other amount
(2) Unadjusted book balance November 30, 2019
(a) P12,800
(b) P7,800
(c) P12,860
(d) P7,860
(e) Some other amount
(3) Adjusted cash balance November 30, 2019
(a) P8,800
(b) P12,800
(c) P21,300
(d) P10,800
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(e) Some other amount

(4) Deposit in transit as of December 31, 2019
(a) P21,980
(b) P10,980
(c) P8,890
(d) P18,098
(e) Some other amount
(5) Outstanding checks as of December 31, 2019
(a) P19,940
(b) P16,818
(c) P19,880
(d) P19,098
(e) Some other amount

PROBLEM 3
You have been engaged to examine the financial statements of McVean Pacific, Inc. The company is a
distributor of automotive parts across the Asia Pacific.

You were given a copy of the unadjusted trial balance for its year ended December 31, 2019. As a senior
in charge of the audit, you were provided the following summarized information:

A. A surprise count of cash and other items conducted by your junior audit associate on January 04,
2020 disclosed the following compositions:
B. Bills and coins P 2,255
C. Check payable to PCF custodian representing his salary 2,000
IOU notes of several employees, all dated December 2019 5,600
A sheet of paper bearing the signatures of several employees, together with
their contributions (total P500) for a gift to a departing employee.
Attached to the paper currency of… 500

D. Paid petty cash vouchers

No. Date Description Amount
125 Dec 29 Representation & advertising P 5,200
126 Dec 30 Office and store supplies 3,054
127 Dec 31 Repairs and computers 6,500
128 Jan 03 Transportation expense 260
129 Jan 04 Representation 131

E. The company maintains account with North South Bank and you were given a copy of the bank
reconciliation statement which showed the following…

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Balance per bank statement P 3,500,000

Add: Deposits in transit 375,250
Bank charges 142,100
Total P 4,017,350
Less: Outstanding checks 546,750
Balance per ledger P 3,470,600

Your further examination disclosed the following:

1. Postdated checks totaling P84,200 were included in the deposit in transit. These represent
collections of account receivable whose accounts are aged as not due. The checks were actually
deposited on January 10, 2020.
2. Various bank debit memos totaling P140,000 were for drafts purchased for payments of imported
panel doors. These purchases were previously credited to accounts payable.
3. Bank service charges for December amounting to P2,100 were not yet taken up in the books.
4. Included in the outstanding checks are in payment of accounts payable for P226,000. These checks
were prepared and recorded in December 2019 but were released only in January 2020
5. A check issued to a supplier for P32,300 was recorded in the cash payments journal as P33,200.
This check is one of the outstanding checks.

F. A trial balance prepared by the client as of December 31, 2019 showed a petty cash balance of
P25,000 and a cash in bank balance of P3,470,600.

(1) What is the correct amount of the deposits in transit at year-end?

(a) P459,450
(b) P339,250
(c) P375,250
(d) P291,050
(e) Other amount
(2) What is the correct amount of outstanding checks at December 31, 2019?
(a) P319,850
(b) P320,750
(c) P321,650
(d) P546,750
(e) Other amount
(3) How much is the correct balance of petty cash fund to be reported in the balance sheet on
December 31, 2019?
(a) P4,146
(b) P4,646
(c) P2,255
(d) P2,646

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(e) Other amount

(4) How much is the adjusted cash in bank balance as of December 31, 2019?
(a) P328,500
(b) P3,470,300
(c) P3,470,600
(d) P3,471,200
(e) Other amount
(5) How much is the correct amount of cash shortage at December 31, 2019?
(a) P1,500
(b) P2,000
(c) P2,500
(d) P-0-
(e) Other amount

PROBLEM 4
You have been asked by the proprietor of Bebelgum Company to verify the accountability of the cashier-
bookkeeper, who was allowed to take a vacation leave a few days ago.

a. The bank reconciliation statements prepared by the cashier-bookkeeper are presented below:

Nov. 30, 2019

Balance per bank statement P 21,500
Cash on hand 500
Total 22,000
Outstanding checks:
No. 2520 P 2,000
No. 2521 1,400
No. 2522 1,900 (3,300)
Erroneous bank charge 2,000
Erroneous bank credit (500)
Book balance P 20,200

Dec. 31, 2019

Balance per bank statement P 135,000
Cash on hand 6,300
Total 141,300
Outstanding checks:
No. 2674 P 31,000
No. 2675 10,300
No. 2676 5,000 (41,300)
Erroneous bank charge 3,000

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Erroneous bank credit (600)

Book balance P 102,400

b. The cash in bank account in the general ledger shows the following debits and credits during
December of 2019:

General Control Account: Cash in bank

Dec. 1 Balance 20,200 Dec. 1 Checks issued 2,000
2 Received – customers 4,500 5 Checks issued 5,200
7 Received – customers 5,000 14 Checks issued 31,000
12 Received – customers 20,000 24 Checks issued 46,000
17 Received – customers 30,000 28 Checks issued 7,600
23 Received – customers 9,000
27 Received – customers 70,000
31 Received – customers 48,500 31 Balance 102,400
Total debit 198,200 Total credit 198,200

c. The following summarized transactions were taken from the bank statement for the month of
December 2019:

Balance Dec. 1, 2019 P 16,500

Total deposits 173,700
Total deposits per bank statement include:
Collection of notes receivable P 5,000
Correction of Nov. erroneous bank charge 2,000
Dec. 10 deposit of Bubble Gum credited in error to Bebelgum 600
Total bank disbursements 65,200
Total checks per bank statements include:
Correction of Nov. erroneous bank credit 500
Dec. check of Bubble Gum credited in error to Bebelgum 3,000

d. Cash on hand per count in the early morning of Jan. 02, 2020 amounted to P6,300.
e. Before leaving his company for a one-week vacation, the proprietor had left several signed checks
that the cashier-bookkeeper had cashed for his personal use.

(1) What is the cash shortage as of November 30, 2019?

(a) P5,000
(b) P7,000
(c) P33,000
(d) P13,200
(e) Other amount
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(2) What is the adjusted cash balance on November 30, 2019?

(a) P16,500
(b) P13,200
(c) P20,200
(d) P14,500
(e) Other amount
(3) The amount of unaccounted receipts in December 2019 is?
(a) P11,000
(b) P13,200
(c) P9,000
(d) P15,100
(e) Other amount
(4) The amount of unrecorded/unsupported disbursements in December 2019 is?
(a) P15,100
(b) P10,900
(c) P7,000
(d) P5,000
(e) Other amount
(5) What is the total cash shortage as of December 31, 2019?
(a) P26,000
(b) P15,100
(c) P33,000
(d) P7,000
(e) Other amount
(6) What is the adjusted cash balance on December 31, 2019?
(a) P102,400
(b) P125,000
(c) P87,400
(d) P11,400
(e) Other amount

PROBLEM 5
The following information pertains to the cash in bank account of Mango Company for the month of April
2019:

a. Balances per bank statement March 31, P21,460 and April 30, P23,040.
b. Balances of cash in bank account in Company’s books: March 31, P16,645 and April 30, P22,680
c. Total receipts per books were P222,090 of which P1,210 was paid in cash to a creditor on April 16
d. Total charges in the bank statement during April were P218,870
e. Undeposited receipts as of March 31 amounted to P9,060

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f. Outstanding checks as of April 30 were P1,930 of which a check for P500 was certified by the bank
g. NSF checks returned, recorded as reductions of cash receipts were:
1. Returned by bank in April recorded also in April, P1,040
2. Retuned by the bank in March recorded by the company in April, P100
3. Returned by the bank in April recorded in May, P860
h. Collections by the bank not recorded by the Company were P12,150 in March and P11,640 in April
i. Bank service charges not entered in the Company’s books were: March 31, P750 and P420 in April
j. A check for P950 of Manga Company was charged by the bank in error to Mango Company’s
account in April
k. A check drawn in April for P840 was erroneously entered in the books as P480

(1) Undeposited collections as of April 30, 2019?

a. P9,270
b. P10,160
c. P10,840
d. P10,120
e. Other amount
(2) Outstanding checks as of March 31, 2019?
a. P2,225
b. P2,145
c. P2,675
d. P2,575
e. Other amount
(3) Adjusted balance per books as of March 31, 2019?
a. P27,845
b. P27,945
c. P30,520
d. P22,400
e. Other amount
(4) Adjusted balance per books as of April 30, 2019?
a. P31,060
b. P33,120
c. P33,400
d. P32,680
e. Other amount

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 Chapter 3 – Audit of Cash & Cash Equivalents
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DO IT YOURSELF (DIY) DRILL

DIY DRILL 1 – PROOF OF CASH

Celtics Company had the following bank reconciliation on June 30, 2019:

Balance per bank statement, June 30, 2019 P 3,000,000

Add: Deposit in transit 400,000
Total P 3,400,000
Less: Outstanding checks 900,000
Balance per book, June 30 P 2,500,000

The bank statement for the month of July 2019 showed the following:

Deposits (including P200,000 note collected for Celtics) P 9,000,000

Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000

All reconciling items on June 30, 2019 cleared through the bank in July. The outstanding checks totaled
P600,000 and the deposits in transit amounted to P1,000,000 on July 31, 2019.

Determine the following:

(1) Cash receipts per books in July

(2) Cash disbursements per books in July
(3) Cash balance per books at July 31
(4) Adjusted cash balance at July 31

DIY DRILL 2 – THREE DATED BANK RECONCILIATION

The client, Noel Corporation, obtained bank statements for November 30 and December 31, 2019 and
reconciled the balances. You obtained directly the statements of January 12, 2020 and obtained the
necessary confirmation. You have found that there are no errors in addition or subtraction in the client’s
books.

11/30/2019 12/31/2019
Balance, bank statement P 344,420 P 275,020
Balance, company records 271,260 226,010
Deposits in transit 35,000 ?
Outstanding checks 88,240 ?

12/1-31/2019 01/1-12/2020
Receipts, cash records P 963,230 P 292,500
Credits, bank statement 941,010 321,490
Disbursements, cash records 1,008,480 177,570
Charges, bank statement 1,010,410 230,180

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The following information was also obtained:

a) Check no. 804 for P340 cleared by the bank in December as P1,340. This was found in proving
the bank statement. The bank made the correction on January 8, 2020.

b) A note of P20,000, sent to the bank for collection on November 15, 2019, was collected and
credited to the account on November 28, 2019, net of collection fee of P80. The note was
recorded in the cash receipts on December 21, 2019, at which date the collection fee was
entered as a disbursement.

c) The client records the returned checks in red in the cash receipts journal.
The checks listed in the table were returned by the bank:

AMOUNT RETURNED RECORDED REDEPOSITED

Co. A P3,270 12/6/2019 No entries 12/8/2019
Co. B 6,730 12/27/2019 1/3/2020 1/15/2020

d) Two payroll checks for employee’s vacations totaling P5,500 were drawn on January 3, 2020,
and cleared by the bank on January 8, 2020. These checks were not entered in the client’s
records because semi-monthly payroll summaries are entered only on the 15th and the last day
of each month.

REQUIRED:
1. Compute for the following:
i Deposits in transit as of December 31, 2019
ii Outstanding checks as of December 31, 2019
iii Deposits in transit as of January 12, 2020
iv Outstanding checks as of January 12, 2020
2. Prepare a Proof of Cash (POC) for the month of December 2019 and for the period January 1 to
12, 2020 using the adjusted balance method.

DIY DRILL 3 – CASH COUNT AND SHORTAGE COMPUTATION

In connection with the audit of the financial statements of Rupee Company for the year ended
December 31, 2019, you performed a surprise count of the petty cash fund and undeposited collections
under the custody of Ms. Jessie at 8:15AM on January 3, 2020. Your count disclosed the following:

Bills and Coins

Bills Coins
P100 10 pieces P1.00 410 pieces
50 80 pieces 0.50 324 pieces
20 70 pieces 0.25 64 pieces
10 54 pieces

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Unused postage stamps – P730

Checks
DATE PAYEE DRAWER AMOUNT
Dec. 30 Cash Ms. Jessie P 2,400
Dec. 30 Rupee Company Robert 28,000
Dec. 31 Rupee Company Jay Ar, sales manager 3,360
Dec. 31 Rupee Company Francis 35,600
Dec. 31 Rupee Company Ryan 16,600
Dec. 31 German Corp. Rupee Company 54,000

Expense Vouchers
DATE PAYEE DESCRIPTION AMOUNT
Dec. 23 Jay Ar, sales manager Cash advance for trip P 14,000
to Baguio City
Dec. 27 Central Post Office Postage Stamps 3,240
Dec. 29 Messengers Transportation 300
Dec. 29 PC Express Computer repairs 1,600

Other items found inside the cash box:

(a) Two pay envelopes which had been opened and the contents aggregating P15,000 representing
unclaimed salaries had been removed.
(b) The sales manager’s liquidation report for his Baguio trip:
Cash advance received on Dec. 23 P 14,000
Less: Hotel accommodation P 9,000
Bus fare for two 800
Cash given to Roy, salesman 600 10,400
Balance (for return) P 3,600

Accounted for as follows:

Cash returned by Roy to the sales manager P 240
Personal check of sales manager 3,360
Total P 3,600

Additional information:
(a) The custodian is not authorized to cash checks.
(b) The last official receipt included in the deposit on December 30 is No. 351 and the last official
receipt issued for the current year is No. 355. The following official receipts are all dated
December 31, 2019.
O.R. Number Amount Form of payment
352 P27,200 Cash
353 35,600 Check
354 7,200 Cash

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355 16,600 Check

(c) The petty cash balance per general ledger is P20,000. The last replenishment of the fund was
made on December 22, 2019.

REQUIRED:
(1) Determine the shortage or overage, if any
(2) Adjusting entries as of December 31, 2019

DIY DRILL 4 – CLASSIFICATION OF CASH

For each of the items listed in the table below, place an X in the column indicating the correct classification
for statement of financial position purposes. If classified as “Other”, please indicate the specific
classification. The first one is completed for you.

STATEMENT OF FINANCIAL POSITION CLASSIFICATION

Cash Cash Short-term Other
Equivalent Investment
Coins and currencies X
Checking account
Savings account
Rare coins kept for long-term
speculation
Post-dated checks received
Money orders received
Petty cash fund
Treasury bills purchased when two
months remain in term
Compensating balance for a short-
term loan
Sinking fund to retire a bond in five
years
Certificate of deposit (6-month term)
Short-term investment in
marketable equity securities
Marginal deposit on letters of credit
Cryptographic currencies (mined by
block chain developers) held for sale
Crypto assets other than crypto
currencies not held for sale

29 | P a g e Prof. Markie Grabillo