AP 03 - AUDIT OF CASH AND CASH EQUIVALENTS
INTERNAL CONTROL MEASURES FOR CASH
1. Cash receipts should be deposited intact – that is, in
the same amount and form as they are received.
5. Bank reconciliation statement should be prepared
monthly.
2. All disbursements should be authorized and made by
check except those involving small amounts which
should be paid from petty cash fund.
6. Provide physical protection for cash.
3. Both receipts and disbursements should be properly
accounted for in the records.
4. There should be separation of personnel duties for
a. receiving cash
b. recording receipts
c. depositing cash collections
d. reconciling bank account
e. authorizing disbursement
f. disbursing cash
7. Minimize cash on hand in the office.
8. Cash actually present in the office – petty cash,
change fund and undeposited receipts can be
periodically counted and compared with the company
records.
9. Adopt imprest fund system for petty cash.
SUBSTANTIVE AUDIT PROCEDURES FOR CASH
Cash Balances
Existence: Cash recorded on the books exist
1.
2.
3.
4.
Count cash on hand.
Confirm bank balances.
Examine interbank transfers.
Perform analytical procedures.
Completeness: All of the entity’s cash is included
5. Perform cash cutoff test.
6. Prepare proof of cash.
Rights and obligations: Any restrictions on cash have been
identified
7. Examine standard bank confirmations and read the
minutes of the board of directors’ meetings to
determine whether any restrictions have been placed
on cash.
Valuation and allocation: Cash is correctly valued.
8. Obtain bank cutoff statements directly from the bank
and use them to test the bank reconciliation as of the
balance sheet date.
Presentation and disclosure:
disclosed properly.
Cash is presented and
9. Review financial statements and perform analytical
procedures to determine whether accounts are
classified and disclosed in accordance with GAAP.
All receipts of cash and checks are
For a sample of days, verify that all cash receipts are
recorded by reconciling daily listing(s) of cash receipts and
validated deposit ticket to cash receipts journal.
Occurrence: Recorded receipts represent actual collections
of cash from customers
For a sample of entries in cash receipts journal, trace to
the prelisting of cash receipts and to remittance advice.
For a sample of entries, reconcile daily deposit to validated
deposit ticket.
have
been
Review account coding for a sample of entries in the cash
receipts journal.
Accuracy (Valuation):
Debits to cash and credits to
accounts receivable are valued at amounts received
For a sample of entries in cash receipts journal, examine
remittance advice and verify that discount taken was
appropriate. Foot accounts receivable subsidiary ledger
and reconcile to general ledger.
Cash Payments
Completeness: All cash payments made are recorded
Reconcile cash payments per books with cash payments
per bank. Prepare or test bank reconciliation.
Occurrence: Recorded cash payments occurred
Examine paid checks for appropriate
Examine documents underlying payments.
endorsements.
Classification: Cash payments transactions have been
recorded in the proper accounts
Check accuracy of accounts on invoices by reference to
chart of accounts.
Accuracy (Valuation):
Debits to various accounts and
credits to cash are valued at proper amounts
Recalculate invoices paid.
- end -
Cash Collections
Completeness:
recorded
Classification: Cash receipts transactions
recorded in the proper accounts
PROBLEM NO. 1
You were able to gather the following from the December
31, 2020 trial balance of Peso Corporation in connection
with your audit of the company:
Cash on hand
Petty cash fund
BPI current account
Security Bank current account No. 01
Security Bank current account No. 02
PNB savings account
PNB time deposit
P 372,000
10,000
950,000
1,280,000
(40,000)
500,000
300,000
5. Which of the following balance-related audit objectives
typically is assessed as having high inherent risk for
cash?
a. Existence
c. Detail tie-in
b. Cutoff
d. Presentation and disclosure
6. The general cash account is considered a significant
account in almost all audits:
a. Where the ending balance is material.
b. Even when the ending balance is immaterial.
c. Except those of not-for-profit organizations.
d. Where either the beginning or ending balance is
material.
Cash on hand includes the following items:
a.
b.
c.
Customer’s check for P60,000 returned by bank on
December 26, 2020 due to insufficient fund but
subsequently redeposited and cleared by the bank on
January 8, 2021.
Customer’s check for P30,000 dated January 2, 2021,
received on December 29, 2020.
Postal money orders received from customers,
P36,000.
The petty cash fund consisted of the following items as of
December 31, 2020.
Currency and coins
Employees’ vales
Currency in an envelope marked “collections
for charity” with names attached
Unreplenished petty cash vouchers
Check drawn by Peso Corporation, payable
to the petty cashier
P 2,100
1,600
1,200
800
4,600
P10,300
Included among the checks drawn by Peso Corporation
against the BPI current account and recorded in December
2020 are the following:
a.
b.
Check written and dated December 29, 2020 and
delivered to payee on January 2, 2021, P50,000.
Check written on December 27, 2020, dated January
2, 2021, delivered to payee on December 29, 2020,
P86,000.
PROBLEM NO. 2
In connection with the audit of the financial statements of
Rupee Company for the year ended December 31, 2020,
you performed a surprise count of the petty cash fund and
undeposited collections under the custody of Ms. Jessie at
8:15 a.m. on January 2, 2021. 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
Unused postage stamps – P730
Date
Dec. 30
Dec. 30
Dec. 31
Dec. 31
Dec. 31
Dec. 31
Date
Dec. 23
Checks
Payee
Drawer
Cash
Ms. Jessie
Rupee Company
Robert
Rupee Company
Jay Ar, sales
manager
Rupee Company
Francis
Rupee Company
Ryan
German Corp.
Rupee
(not endorsed)
Company
Expense Vouchers
Payee
Description
Jay Ar,
Cash advance for
sales manager
trip to Baguio
City
Central Post
Postage stamps
Office
Messengers
Transportation
PC Express
Computer repair
The credit balance in the Security Bank current account
No. 2 represents checks drawn in excess of the deposit
balance. These checks were still outstanding at December
31, 2020.
Dec. 27
The savings account deposit in PNB has been set aside by
the board of directors for acquisition of new equipment.
This account is expected to be disbursed in the next 3
months from the balance sheet date.
Other items found inside the cash box:
Dec. 29
Dec. 29
Amount
P 2,400
28,000
3,360
35,600
16,600
54,000
Amount
P14,000
3,240
300
1,600
QUESTIONS:
a) Two pay envelopes which had been opened and the
contents aggregating P15,000 representing unclaimed
salaries had been removed.
Based on the above and the result of your audit, compute
for the adjusted balances of following:
b) The sales manager’s liquidation report for his Baguio
trip:
1. Cash on hand
a. P282,000
b. P246,000
c. P408,000
d. P342,000
2. Petty cash fund
a. P6,700
b. P9,100
c. P 2,100
d. P10,000
3. BPI current account
a. P1,086,000
b. P 914,000
c. P1,000,000
d. P 950,000
4. Cash and cash equivalents
a. P2,914,700
b. P2,954,700
c. P2,614,700
d. P3,414,700
Cash advance received on
Dec. 23
Less: Hotel accommodation
Bus fare for two
Cash given to Roy,
salesman
Balance
P9,000
800
Accounted for as follows:
Cash returned by Roy to the sales
manager
Personal check of sales
manager
Total
600
P14,000
10,400
P 3,600
P 240
3,360
P 3,600
Additional information:
a.
a) The custodian is not authorized to cash checks.
b.
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, 2020.
O.R. No.
352
353
354
355
c)
Amount
P27,200
35,600
7,200
16,600
Form of payment
Cash
Check
Cash
Check
The Petty Cash balance per general ledger is P20,000.
The last replenishment of the fund was made on
December 22, 2020.
REQUIRED:
1. Computation of shortage or overage, if any
P40,332
2. Adjusting entries as of December 31, 2020
3. Who is responsible, at all times, for the amount of the
petty cash fund?
a. General cashier
b. President of the company
c. Petty cash custodian
d. Chairman of the Board of Directors
4. What is the effect of not replenishing the petty cash
fund at year-end and not making the appropriate
adjusting entry?
a. A detailed audit is necessary.
b. The petty cash custodian should turn over the
petty cash to the general cashier.
c. Cash will be overstated and expenses understated.
d. Expenses will be overstated and cash will be
understated.
5. An imprest petty cash fund would least likely be used
to pay for which of the following items?
a. Minor office supplies
b. Monthly interest expense
c. Stamps for small mailings
d. Small contributions to a local charity
PROBLEM NO. 3
You are conducting an audit of the Swerte Company for
the year ended December 31, 2020. The internal control
procedures surrounding cash transactions were not
adequate. The bookkeeper-cashier handles cash receipts,
maintains accounting records, and prepares the monthly
bank reconciliations.
The
bookkeeper-cashier
prepared
reconciliation at the end of the year:
Balance per bank statement
Add: Deposit in transit
Note collected by bank
Total
Less outstanding checks
Balance per general ledger
the
P175,250
15,000
following
P350,000
190,250
540,250
246,750
P293,500
In the process of your audit, you gathered the following:

At December 31, 2020, the bank statement and
general ledger showed balances of P350,000 and
P293,500, respectively.

The cut-off bank statement showed a bank charge on
January 2, 2021 for P30,000 representing correction of
an erroneous bank credit.

Included in the list of outstanding checks were the
following:

A check payable to a supplier, dated December 29,
2020, in the amount of P14,750, released on
January 5, 2021.
A check representing advance payment to a
supplier in the amount of P37,210, the date of
which is January 4, 2021, and released in
December, 2020.
On December 31, 2020, the company received and
recorded customer’s postdated check amounting to
P50,000.
QUESTIONS:
Based on the above and the result of your audit, answer
the following:
1. The adjusted deposit in transit as at December 31,
2020 is
a. P175,250
c. P225,250
b. P125,250
d. P125,000
2. The adjusted outstanding checks as at December 31,
2020 is
a. P298,710
c. P209,540
b. P232,000
d. P194,790
3. The adjusted cash to be presented in the statement of
financial position at December 31, 2020 is
a. P235,460
c. P265,460
b. P250,460
d. P310,460
4. The cash shortage as of December 31, 2020 is
a. P45,000
c. P60,000
b. P58,040
d. P 8,040
5. The starting point for the verification of the balance in
the general bank account is to obtain:
a. A bank reconciliation from the client.
b. The client's cash account from the general ledger.
c. A cutoff bank statement directly from the bank.
d. The client's year-end bank statement.
6. Which of the following substantive audit procedures is
most likely to be performed by the auditor to gather
evidence in support of the balance per bank?
a. Confirm directly with bank
b. Compare to general ledger.
c. Trace to cash receipts journal.
d. Trace items on the cutoff bank statement to bank
reconciliation.
7. Which of the following substantive audit procedures is
least likely to be performed by the auditor to gather
evidence in support of the deposits in transit?
a. Inspect supporting documents for reconciling item
not appearing on cutoff bank statement.
b. Trace items on the bank reconciliation to cutoff
bank statement.
c. Trace to cash receipts journal.
d. Inspect bank credit memo.
8. Which of the following substantive audit procedures is
least likely to be performed by the auditor to gather
evidence in support of the outstanding checks?
a. Confirm directly with bank.
b. Trace to cash disbursements journal.
c. Ascertain reason for unusual delay.
d. Trace items on the bank reconciliation to cutoff
bank statement.
9. A partial-period bank statement and the related
canceled checks, duplicate deposit slips, and other
documents included in bank statements, mailed by the
bank directly to the CPA firm's office, is called:
a. A four-column proof of cash.
b. A year-end bank statement.
c. A cutoff bank statement.
d. A short-period bank statement.
10. An auditor who is engaged to examine the financial
statements of a business enterprise will request cutoff
bank statement primarily in order to
a. Verify the cash balance reported on the bank
confirmation inquiry form.
b. Verify reconciling items on the client’s bank
reconciliation.
c. Detect lapping.
d. Detect kiting.
PROBLEM NO. 4
You were engaged to audit the books of Davao Company.
From the records of the company, you gathered the
following information:
Davao Company started operations on October 2, 2020
with the owners investing P150,000 cash. Monthly bank
reconciliation statements have not been prepared;
however, bank statements for October, November, and
December were made available to you. Your analysis of
these bank statements showed total bank credits
(deposits) of P575,000 including the owners’ initial
investment and a bank loan, details of which are in
additional data. The bank statement in December, 2020
showed an ending balance of P91,500.
Examination of the paid checks disclosed that checks
totaling P4,500 were issued by the company in December,
2020, and were presented for payment only in January,
2021. Cash count of the cashier’s accountability amounted
to P5,000. You were told by the cashier that these were
collections from credit sales on December 30, 2020,
deposited on January 2, 2021.
Additional information are as follows:
a. Accounts receivable subsidiary ledgers had a total
balance of P70,000 at December 31, 2020. P5,000 of
this was ascertained to be uncollectible.
b. Suppliers’ unpaid invoices for merchandise totaled
P15,000; while an account for store fixtures bought for
P50,000 had an unpaid balance of P5,000.
c. Merchandise inventory at December 31, 2020
amounted to P30,000 but P5,000 of these were spoiled
with no resale value.
d. The bank statement in October showed a bank credit
for P98,000, dated October 2, 2020. Inquiry from the
cashier disclosed that the amount represents proceeds
of a 90-day, discounted bank note. P80,000 of this
loan was paid by check in December, 2020.
e. Operating expenses paid during the period totaled
P180,000; while merchandise purchases amounted to
P250,000.
f. The gross profit rate is 120% of cost.
QUESTIONS:
2. Cash balance per books as of December 31, 2020 is
a. 133,000
c. P138,000
b. P127,000
d. P122,000
3. The cash shortage as of December 31, 2020 is
a. P35,000
c. P30,000
b. P46,000
d. P41,000
4. The primary purpose of sending a standard
confirmation request to financial institutions with which
the client has done business during the year is to
a. Detect kiting activities that may otherwise not be
discovered.
b. Corroborate information regarding deposit and loan
balances.
c. Provide the data necessary to prepare a proof of
cash.
d. Request information about contingent liabilities and
secured transactions.
5. The auditor should ordinarily mail confirmation
requests to all banks with which the client has
conducted any business during the year, regardless of
the year-end balance, since
a. The confirmation form also seeks information
about indebtedness to the bank.
b. This procedure will detect kiting activities which
otherwise not be detected.
c. The mailing of confirmation forms to all such banks
is required by GAAS.
d. This procedure relieves the auditor of any
responsibility with respect to non-detection of
forged checks.
PROBLEM NO. 5
You were able to obtain the following information during
your audit of Euro Company:
Reconciling items:
Undeposited collections
Outstanding checks
Customer’s notes collected by
bank
Bank service charges
Erroneous bank debits
Erroneous bank credits
NSF checks not redeposited
Customer's check deposited
December 10, returned by
bank on December 16
marked NSF, and
redeposited immediately;
no entry made on books for
return or redeposit
Nov. 30
P200,000
80,000
Dec. 31
P120,000
60,000
100,000
2,000
10,000
40,000
5,000
120,000
3,000
20,000
30,000
7,000
10,000
Unadjusted balances:
Books
Bank
?
230,000
90,000
?
Bank
P420,000
500,000
Books
P270,000
407,000
December Transactions:
Receipts
Disbursements
Based on the above and the result of your audit, answer
the following:
REQUIRED:
1. Total collections from sales for 2020 is
a. P414,000
c. P419,000
b. P425,000
d. P430,000
1. Prepare a 4-column bank reconciliation for the month
of December, using the form that reconciles both the
book and bank balances to a correct cash amount.
2. Adjusting entries as of December 31.
SOLUTION GUIDE:
Bank
(B)
11/30
(R)
Dec.
(D)
Dec.
(E)
12/31
Unadjusted bal.
DIT – 11/30
- 12/31
OC – 11/30
- 12/31
Error, Dr.–11/30
- 12/31
Error, Cr.–11/30
- 12/31
NSF check red.
Adjusted bal.
2. How much is
December?
a. P284,840
b. P281,640
(B)
11/30
(R)
Dec.
(D)
Dec.
(E)
12/31
Unadjusted bal.
Note coll.– 11/30
- 12/31
BSC – 11/30
- 12/31
NSF check–11/30
- 12/31
NSF check red.
Adjusted bal.
PROBLEM NO. 6
In your audit of the cash account of Cebu Company, you
were requested by the client to prepare a four-column
reconciliation of receipts, disbursements, and balances to
reconstruct the balances per books.
e)
f.
g.
h.
i.
j.
k.
l.
m.
n.
Based on the above and the result of your audit, answer
the following:
1. How much is the unadjusted cash balance per books as
of November 30?
a. P13,290
c. P11,690
b. P12,490
d. P11,190
Books
a)
b)
c)
d)
QUESTIONS:
Nov. 30
Dec. 31
Balances per bank
P14,010
P19,630
Deposits in transit
2,740
3,110
Outstanding checks
4,260
3,870
Bank collections not in
books
1,200
1,600
Bank charges not in
books
950
640
Of the checks outstanding on December 31, one check
for P700 was certified at the request of the payee.
Receipts for December, per bank statement –
P281,070.
DAIF check from customer was charged by the bank on
December 28, and has not been recorded – P800.
DAIF check returned in November and recorded in
December, P1,050.
DAIF check returned and recorded in December, P900.
Check of Cibo Company charged by the bank in error,
P2,010.
Receipt on December 6 paid out in cash for travel
expenses, P750.
Recorded as receipts and
disbursements per books.
Error in recording customer’s check on December 20,
P165 instead of P465.
Error in disbursements journal for December, P3,250
instead of P325.
You noted in your audit that the DAIF checks returned by
the bank are recorded as a reduction on the cash receipts
journal instead of recording it at cash disbursements
journal; redeposits are recorded as regular cash receipts.
the
unadjusted
book
receipts
for
c. P279,540
d. P282,190
3. How much is the unadjusted book disbursements for
December?
a. P273,100
c. P275,335
b. P271,565
d. P274,635
4. How much is the unadjusted cash balance as of
December 31?
a. P18,195
c. P21,580
b. P17,495
d. P24,965
5. Auditors are likely to prepare a proof of cash when the
client has:
a. Material control weaknesses in cash receipts and
cash disbursements.
b. Material control weaknesses in accounts receivable
and revenue.
c. Material control weaknesses in accounts payable
and inventory.
d. Material control weaknesses in payroll.
6. A proof of cash represents:
a. A test of controls and substantive test of
transactions.
b. A substantive test of transactions.
c. A substantive test of transactions and test of
details of balances.
d. A test of details of balances.
SOLUTION GUIDE (Questions 1 to 4):
(B)
11/30
Unadj. bank bal.
DIT – 11/30
- 12/31
OC – 11/30
- 12/31
CM-coll.– 11/30
- 12/31
DM-BSC – 11/30
- 12/31
DAIF checks: (h)
(i)
(j)
Bank error, Dr.
Receipts used for
payments
Book errors: (m)
(n)
Unadj. book bal.
(R)
Dec.
(D)
Dec.
(E)
12/31