Polytechnic University of the Philippines
College of Accountancy and Finance
Sta. Mesa, Manila
ACCO 30053 – Auditing and Assurance: Concepts and Applications 1
Quiz – Audit of Cash and Cash Equivalents
First Semester, A.Y. 2020-2021
Name: _________________________________________________
Course, Year & Section: ___________________________________
Score: ____________
Date: ____________
Theories. 1 pt. each
1. Professional skepticism
A. Neither assumes that the management is dishonest nor of unquestioned honesty.
B. Assumes that management is either dishonest or of unquestioned honesty.
C. Either assumes that management is honest or dishonest.
D. None of the given choices is a correct statement.
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2. With respect to errors and fraud, which of the following should be a part of an auditor’s planning in
an audit engagement?
A. Planning to search for errors or fraud that would have a material or immaterial effect on the
financial statements.
B. Planning to discover errors or fraud that are either material or immaterial.
C. Planning to discover errors or fraud that are material.
D. Planning to consider factors affecting the risk of material misstatements both at the financial
statement and the account balance level.
3. The risk that the auditor may unknowingly fail to appropriately modify the unqualified opinion on
financial statements that are materially misstated is referred to as
A. Audit risk
B. Detection risk
C. Information risk
D. Business risk
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4. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is
A. Inherent risk
B. Audit risk
C. Client risk
D. Control risk
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5. Which of the following is the best definition of detection risk?
A. The auditor will compute audit materiality incorrectly.
B. The auditor will fail to detect material misstatements that exist.
C. The auditor will appy more audit procedures than are required in the circumstances.
D. The auditor will fail to modify the audit opinion on the financial statements that are materially
misstated.
6. An engagement letter is best described as:
A. A letter from company management to the auditors specifying management’s expectations for
completoin of the audit on a timely basis.
B. A letter from the auditors to company management specifying that management is responsible
for the financial statements and the auditors will issue an opinion on the financial statements.
C. A letter from the auditors to the company management that specifies the responsibilities of both
the company and the auditors in completing the audit and the timing for its completion.
D. A letter from the Board of Directors’ audit committee to the auditor that indicates that the auditor
has been engaged to perform the audit and the fees to be paid.
7. Which of the following is/are (a) non-counterbalancing error that need(s) retrospective adjustment?
A. An overhaul cost capitalizable that is otherwise expensed in the period.
B. Change in accounting policy.
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C. Client’s estimate of useful life of a class of PPE for depreciation purposes is five years.
However, in practice, the client maintains a ten-year useful life for depreciation purposes for
the said class of PPE in its fixed asset registry and depreciation run.
D. (1) An overhaul cost capitalizable that is otherwise expensed in the period.; (2) Change in
accounting policy; (3) Client’s estimate of useful life of a class of PPE for depreciation purposes
is five years. However, in practice, the client maintains a ten-year useful life for depreciation
purposes for the said class of PPE in its fixed asset registry and depreciation run.
E. (1) Client’s estimate of useful life of a class of PPE for depreciation purposes is five years.
However, in practice, the client maintains a ten-year useful life for depreciation purposes for
the said class of PPE in its fixed asset registry and depreciation run; (2) An overhaul cost
capitalizable that is otherwise expensed in the period.
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8. Which of the following situations would require a retrospective adjustment in the books of the client?
Assume that the amounts involved are material.
A. An overhaul cost capitalizable that is otherwise expensed in the period.
B. Change in accounting policy.
C. Client’s estimate of useful life of a class of PPE for depreciation purposes is five years.
However, in practice, the client maintains a ten-year useful life for depreciation purposes
for the said class of PPE in its fixed asset registry and depreciation run.
D. (1) An overhaul cost capitalizable that is otherwise expensed in the period.; (2) Change in
accounting policy; (3) Client’s estimate of useful life of a class of PPE for depreciation
purposes is five years. However, in practice, the client maintains a ten-year useful life for
depreciation purposes for the said class of PPE in its fixed asset registry and depreciation
run.
E. (1) Client’s estimate of useful life of a class of PPE for depreciation purposes is five years.
However, in practice, the client maintains a ten-year useful life for depreciation purposes
for the said class of PPE in its fixed asset registry and depreciation run; (2) An overhaul
cost capitalizable that is otherwise expensed in the period.
9. The primary difference between errors and fraud is that
A. Errors are intentional misstatements by management, while fraud involves unintentional
mistakes or omissions.
B. Errors are unintentional mistakes or omissions, while fraud involves intentional misstatements.
C. There is no difference as errors and fraud have the same effect in the financial statements.
D. Errors are more likely to provide an indication that an illegal act may have occurred.
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10. If the auditor has no reservations concerning the fairness of the financial statements, the auditor
issues a (an)
A. Qualified opinion
B. Unqualified opinion
C. Adverse opinion
D. Disclaimer of opinion
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11. I. Bank confirmation procedures corroborate completeness of cash and cash equivalents.
II. The auditor may refer to the Board of Directors’ minutes of the meeting to obtain evidence
supporting the presentation and disclosure of cash and cash equivalents.
Both statements are true.
Both statements are false.
Statement I is true; Statement II is false.
Statement I is false; Statement II is true.
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A.
B.
C.
D.
12. As part of the entity’s control over cash receipts process, cash receipts should be deposited on the
day of receipt or the following business day. Select the most appropriate audit procedure to
determine that cash is promptly deposited.
A. Review the functions of cash receiving and cash disbursing for proper separation of duties.
B. Review cash register tapes prepared for each sale.
C. Review the functions of cash handling and maintaining accounting records for proper
separation of duties.
D. Compare the daily cash receipts totals with the bank deposits.
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13. An auditor who is engaged to examine the financial statements of a business entity will request
cutoff bank statement primarily in order to
A. Verify reconciling items on the client’s bank reconciliation.
B. Verify the cash balance reported on the bank confirmation inquiry form.
C. Detect lapping.
D. Detect kiting.
14. In cash valuation procedure, the auditor
A. Tests the correctness of amounts and propriety of presentation in the client’s bank
reconciliation.
B. Aims to detect kiting and lapping.
C. Tests the accuracy of translation of foreign currency-denominated cash into local currency.
D. Writes down the cash in financial institutions under bankruptcy proceedings to its net realizable
value.
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15. During an observation of client’s cash count procedures, you have noted some certificates of
deposits (CODs) and commercial papers. As an auditor, what should you do?
A. Ignore. The objective of cash count procedure is to verify the accuracy of cash on hand. Review
of CODs and commercial papers is a subject of another audit procedure.
B. Include the items as part of the cashier’s accountability for cash on hand.
C. Review information on these CODs and commercial papers. Check whether the instruments
are in the name of the company and look for the terms. This might affect the presentation of
cash and cash equivalents.
D. Take note of the information on the instruments and cross-check against the client’s investment
strategies. Make inquiries with the treasury department if they have knowledge of these.
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16. A client maintains two bank accounts. One of the bank accounts, Bank A, has an overdraft of
P100,000. The other bank account, Bank B, has a positive balance of P50,000. To conceal the
overdraft from the auditor, the client may decide to
A. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the receipt but
not the disbursement and list the receipt as a deposit in transit. Record the disbursement at the
beginning of the following year.
B. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record the receipt but
not the disbursement and list the receipt as a deposit in transit. Record the disbursement at the
beginning of the following year.
C. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the disbursement but not
the receipt. List the disbursement as an outstanding check, but do not list the receipt as a
deposit in transit. Record the receipt at the beginning of the following period.
D. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the disbursement
but not the receipt and list the disbursement as an outstanding check. Record the receipt at the
beginning of the following year.
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17. While performing an audit of cash, an auditor begins to suspect check kiting. Which of the following
is the best evidence that the auditor could obtain concerning whether kiting is taking place?
A. Documentary evidence obtained by vouching credits on the latest bank statement to supporting
documents.
B. Documentary evidence obtained by vouching entries in the cash account to supporting
documents.
C. Oral evidence obtained by discussion with controller.
D. Evidence obtained by preparing a schedule of interbank transfers.
18. Which of the following items should be reported as part of cash?
A. Customer’s postdated check
B. Compensating balance, unrestricted as to withdrawal
C. A certificate of deposit (COD) with the bank with a term of 90 days
D. Both (1) compensating balance, unrestricted as to withdrawal and (2) a certificate of deposit
(COD) with the bank with a term of 90 days
19. As of December 31, 2020, you determined that your client did not book adjustments for bank service
charges and interest income. The client, however recorded the same in the succeeding accounting
period (January 2021) when the bank reconciliations were performed. The amounts involved are
below your testing thresholds in accordance with the materiality as documented in the audit plan.
As an audit associate, what should you do?
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A. Propose the following adjustments: (1) book the bank service charges and interest income in
December 2020 and (2) reverse the bank service charges and interest income pertaining to
December 2020 in January 2021 records.
B. Notify your senior that the audit opinion should be modified with respect to the misstatement
identified.
C. Waive further procedures. The amounts involved are not material.
D. Obtain supporting documents for bank service charges and interest income and inquire why
are these items booked in the wrong accounting period.
20. A proof of cash is used by an auditor to
A. Prove the correctness of the cash balance in the client’s year-end statement of financial
position.
B. Prove that the client’s bank did not make an error during the period under examination.
C. Determine if there were any unauthorized disbursements or unrecorded receipts during the
reconciliation period.
D. Comply with the Philippine Standards on Auditing (PSAs).
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Problem Solving. Write your answers on the space provided. Any form of alteration will render your answer
void. For questions requiring journal entries, include a brief explanation of the entry. (2 pts. each)
CASE 1
You are assigned to audit the Cash and Cash Equivalents line item in the December 31, 2020 financial
statements of Candace Corp. (the “Company”) with offices in Manila and in Cebu. You were given the
following excerpt from the client’s trial balance by your senior:
Acct No.
1011001
1011002
1011101
1011102
1011103
1011104
1011201
1011210
1021101
1022998
2011010
6011560
6021998
7021340
7001105
Description
Petty Cash – Main
Petty Cash – Cebu
CIB - BPI Current – Manila
CIB - BPI Current – Cebu
CIB - MTBC Current - Manila
CIB - HSBC - Dollar Savings
Temporary Placements - Cash
Short-term investments
Accounts Receivable - trade
Misc. Receivable - Cash short
Accounts Payable – trade
Interest Income – Banks
Misc. Income - Cash over
Foreign exchange gains/losses
Miscellaneous expense
Balance
P110,000.00
50,000.00
8,499,675.54
4,121,560.95
2,677,810.48
1,088,476.74
1,578,549.20
500,000.00
17,249,661.25
2,499.00
(14,266,714.38)
217,864.20
(14,832.46)
14,969.28
Audit Notes
A
A
B, D
C
D
E
F
F
A
A
A
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A. The following is the composition of petty cash accounts as of December 31, 2020:
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Bills and coins
Employee's IOU
Expense receipts
Postage stamps
Cash contributions for charity event
(in a separate envelope)
Check drawn payable to the order of petty cash
Custodian
Manila
P35,143.85
24,161.80
26,400.00
1,200.00
Cebu
P18,104.78
12,366.42
8,475.00
800.00
3,000.00
-
20,000.00
109,905.65
10,000.00
49,746.20
The Company has a policy of charging shortages to miscellaneous expense if the amount is less than P100.
If the amount is more than the said threshold, the entire amount is charged to the cashier. Any surplus in
the petty cash is recognized as income.
B. The last check issued for the year is No. 8995. Upon investigation, check no. 8994 for P16,242.89
dated December 31, 2020 was issued on January 4, 2021 due to holiday breaks. Check no. 8992 for
P24,069 dated January 5, 2021 as payment for a supplier was issued on December 29, 2020. Deposits
in transit amounting to P116,230 cleared with the bank on January 3, 2021. Interest income and bank
charges for December amounting to P1,324.71 and P500.00, respectively were recorded on
January 3, 2021. A customer check was returned on December 29, 2020 amounting to P29,831.40 due
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to insufficiency of funds. No entry was recorded when the check was returned. The same was
redeposited and cleared with the bank on January 4, 2021.
C. A check for P41,892.75 for a supplier dated December 27, 2020 was delivered on January 6, 2021.
Interest income and bank charges for December amounting to P1,480.00 and P500.00, respectively
were recorded on January 4, 2021.
D. The account is used for payroll for Manila and Cebu employees. Funds are transferred from the
Company’s general cash account (BPI account - Manila) to the payroll account. Your senior has
prepared the following interbank transfers schedule:
Interbank transfers
From
To
BPI-M
MTBC
BPI-M
MTBC
Disbursement
Books
Bank
28-Dec
2-Jan
2-Jan
3-Jan
Receipt
Books
Bank
26-Dec
28-Dec
31-Dec
31-Dec
Amount
P1,276,311.94
567,249.75
E. The balance is already reconciled. Balance in USD is $21,566.81. USD to PHP closing rate is P49.96,
while the average rate for the year is P49.81.
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F. The Company placed its excess cash in various investments to earn interest in the short term. The
following is the schedule of temporary placements (mapped as “Cash Equivalents”).
Date acquired
29-Nov-20
7-Dec-20
15-Dec-20
15-Dec-20
Instrument
Five-year bond dated
February 11, 2016 of Millennial
Corp., a listed entity
Six-month time deposit with MBTC
Money market instrument
Money market instrument
Maturity
11-Feb-21
5-Jun-21
15-Mar-21
11-Sep-21
Amount
P800,000.00
400,000.00
276,143.40
102,405.80
1,578,549.20
Short-term investments pertain to a 270-day time deposit with a local bank maturing in January 15, 2021.
QUESTIONS:
1. How much is the total petty cash to be reported as part of Cash and Cash Equivalents? P83,248.63
2. What is the proposed adjusting journal entry (PAJE) to take up cash shortage/overage? Have
separate entries for the Manila and Cebu accounts.
GL Acct.
1022998
1011001
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Date
12/31/2020
1022998
1011002
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12/31/2020
Description
Misc. Receivable - Cash short
Petty Cash – Main
To record petty cash shortage in the
main office
Debit
4,294.35
Misc. Receivable - Cash short
Petty Cash – Cebu
To record petty cash shortage in the
main office
1,053.80
Credit
4,294.35
1,053.80
3. How much is the adjusted cash balance in BPI – Manila? P7,943,730.99
4. Give the PAJEs to record adjustments in BPI – Cebu account.
Date
12/31/2020
GL Acct.
1011102
7001105
2011010
6011560
Description
CIB - BPI Current – Cebu
Miscellaneous expense
Accounts Payable – trade
Interest Income – Banks
To record book reconciling items for
CIB – BPI Current - Cebu
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Debit
42,872.75
500.00
Credit
41,892.75
1,480.00
5. What is the PAJE to translate USD account in HSBC to PHP?
Date
12/31/2020
GL Acct.
7021340
1011104
Description
Foreign exchange gains/losses
CIB - HSBC - Dollar Savings
To adjust dollar savings account to
closing rate
Debit
10,998.91
Credit
10,998.91
6. How much interest income should be disclosed in the notes to financial statements? P220,668.91
7. How much is the cash equivalents? P1,076,143.40
8. How much should be presented as Cash and Cash Equivalents in the statement of financial
position? P17,022,845.03
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CASE 2
Beverly Co.’s net income for 2015, 2016 and 2017 were P100,000, P145,000 and P185,000; respectively.
The following items were not handled properly.
A. Rent of P6,500 for 2018 was received on December 23, 2017, and recorded as outright income in
2017.
B. Salaries payable at the end of the following years were omitted:
2014
2015
2016
2017
P2,500
5,500
7,500
4,700
C. The following unused office supplies were omitted in the accounting records:
2014
2015
2016
2017
P3,500
6,500
3,700
7,100
D. On January 1, 2015, the company completed major repairs on the company’s machinery and
equipment totaling P220,000, which was expensed outright. The said equipment is five years old
as of January 1, 2015. As of December 31, 2017, the equipment had an original cost of P500,000
and a carrying value of P250,000.
C. P51,250
D. P70,000
10. The corrected 2015 net income is:
A. P80,000
B. P234,000
C. P240,000
D. P300,000
11. The corrected 2016 net income is:
A. P113,700
B. P120,200
C. P126,700
D. P139,300
12. The corrected 2017 net income is:
A. P184,700
B. P170,900
C. P165,600
D. P164,700
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9. The correct 2017 depreciation expense is:
A. P31,250
B. P50,000
13. The effect of the above errors on 2017 beginning retained earnings is:
A. P176,200 understatement
C. P116,200 understatement
B. P136,200 understatement
D. P3,800 overstatement
CASE 3
In the course of your examination of the December 31, 2020 financial statements of Dolomite Company,
you discovered certain errors that had occurred during 2019 and 2020. No errors were corrected during
2019. The said errors are summarized below:
A. Beginning merchandise inventory (January 1, 2019) was understated by P389,000.
B. Merchandise costing P72,000 was sold for P120,000 to Manila Bay Sands Company on
December 28, 2019, but the sale was recorded in 2020. The merchandise was shipped FOB
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C.
D.
E.
F.
Shipping point and was not included in ending inventory. Dolomite uses the periodic inventory
system.
A two-year fire insurance policy was purchased on May 1, 2019, for P172,800. The whole amount
was charged to Prepaid Insurance. No adjusting entry was prepared in 2019 and 2020.
A one-year note receivable of P288,000 was held by Dolomite beginning October 1, 2019.
Payment of 10% note and accrued interest was received upon maturity. No adjusting entry was
made on December 31, 2019.
Equipment with a ten-year useful life was purchased on January 1, 2019 for P1,176,000. No
depreciation expense was recorded during 2019 and 2020. Assume that the equipment has no
residual value and that Dolomite uses the straight-line method for recording depreciation.
The company reported a P1,500,000 and P1,750,000 net income in 2019 and 2020, respectively.
14. What is the net adjustment to beginning retained earnings account in 2020?
A. P69,600
B. P175,200
C. P127,200
D. P48,000
15. What is the adjusted net income in 2020?
A. P1,168,800
B. P1,512,400
C. P1,538,800
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D. P1,418,800
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