ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 42  October 2021 CPA Licensure Exam  Weeks 16&18
AUDITING (Auditing Problems)
S. Ireneo  C. Espenilla
AP-503: RECEIPT/DISBURSEMENT CYCLE AUDIT OF CURRENT ASSETS: CASH
PROBLEM 1:
1. Cash is the most inherently risky among assets in the perspective of the auditor. This is mostly
associated to the fact that cash has the highest risk of misappropriation either from within or
outside the entity. Which of the following controls most likely would reduce the risk of diversion of
customer receipts by an entity’s employees?
a. Daily deposit of cash receipts.
b. Monthly bank reconciliations.
c. Prenumbered remittance advice
d. A bank lockbox system
2. Which of the following is not consistent with the requirements of imprest system with regard
protecting receipts from possible cash loss due to misappropriation?
a. Requiring customers, where possible, to pay through checks.
b. Requiring the company’s personnel who receives the check first to automatically
restrictively endorse check collections.
c. Requiring the treasury department to prepare monthly bank reconciliation statements
to reconcile bank records against the company’s books.
d. Requesting customers, where possible, to remit payments directly to the bank.
3. Which of the following is not a universal rule for achieving strong internal control over cash
receipts?
a. Separate the cash handling function, record keeping function and regular bank
reconciliation functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days’ cash receipts by the end of the day.
d. Where collections are made through cash and not through checks, cash receipts
should be reconciled with the prenumbered official receipt at the end of the operating
day.
4. As payments are received, one mailroom employee is assigned the responsibility of prelisting check
receipts and preparing the deposit slip prior to forwarding the check receipts, the deposit slip, and
the remittance advices to accounts receivable for posting. Accounts receivable personnel refoot the
deposit slip, stamp a restrictive endorsement on the back of each check, and then forward the
receipts and the deposit slip to the treasury department. Which of the following is a reasonable
assessment of internal control on this process?
a. Internal control is adequate.
b. Internal control is inadequate because mailroom employees should not have
access to cash.
c. Internal control is inadequate because treasury employees should prepare the
deposit slip.
d. Internal control is inadequate because of a lack of segregation of duties.
5. Which of the following would the auditor consider to be an incompatible operation for a cashier if
the cashier receives remittances from the mailroom?
a.
Posting the receipts to the accounts receivable subsidiary ledger cards.
b.
Making the daily deposit at the local bank.
c.
Preparing the daily deposit.
d.
Endorsing the checks.
6. Which of the following is not consistent with the requirement of the imprest system with regard
internal control measures in handing and processing disbursements?
a. All disbursements, without exception, should be made through checks.
b. For very minute disbursements, the company may be allowed to use undeposited
collections.
c. Documents in the voucher package (e.g. sales invoice, purchase order, receiving
reports) should be automatically cancelled once disbursement checks are signed.
d. Checks should be issued immediately to the payee, preferably by the one who signed
the checks last.
7. Which of the following is a standard internal accounting control for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of the
company.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-503
Weeks 16&18: RECEIPT/DISBURSMENT CYCLES – AUDIT OF CURRENT ASSETS: CASH
b. Checks should be sequentially numbered and the numerical sequence should be
accounted for by the person preparing the bank reconciliation statement.
c. Checks and supporting documents should be marked “paid” immediately after the
check is returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares documents
that authorize check preparation.
8. Which of the following cash fraud activities involves the postponement of the recording of receipts
and can be well perpetrated where there is lack of segregation of duties between recordkeeping
and custodial functions?
a. Kiting
b. Lapping
c. Window dressing
d. Salami fraud
9. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In attempting to uncover this embezzlement
scheme, the auditor most likely would compare the:
a. Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.
b. Individual bank deposits slips with the details of the monthly bank statements.
c. Daily cash summaries with the sums of the cash receipts journal entries.
d. Dates checks are deposited per bank statements with the dates remittance credits are
recorded.
10. Which of the following characteristics most likely would be indicative of check kiting?
a. High turnover of employees who have access to cash.
b. Many large checks that are recorded on Mondays.
c. Frequent cash withdrawals from checking accounts.
d. Low average balance compared to high level deposits.
11. Which of the following audit procedures will likely detect or uncover kiting activities of the client?
a. Sending confirmation to banks.
b. Vouch check issuances representing disbursements to source documents.
c. Render cash count on a surprise basis.
d. Simultaneously validate bank reconciliations statements.
12. For the most effective internal control, monthly bank statements should be received directly from
the banks and reviewed by the
a. Controller.
b. Cash receipts accountant.
c. Cash disbursement accountant.
d. Internal auditor.
13. Which of the following assertions does the auditor most likely would like to validate in deciding to
render cash counts?
a. Completeness
b. Existence
c. Valuation
d. Rights and obligation
14. In rendering cash counts, the accountability shall represent:
a. The cash items only.
b. Cash items and other evidences of the use of cash such as unreplenished paid
vouchers.
c. Cash that should be on hand per collection activities of the custodian.
d. The difference between the cash balance per collection records against the valid cash
items and evidences supporting the use of cash.
15. In rendering cash counts, cash shortage results when:
a. Accountability is equal to valid cash and non-cash items.
b. Accountability is higher than valid cash and non-cash items.
c. Accountability is lower than valid cash and non-cash items.
d. Accountability is zero.
16. Which of the following is correct regarding cash counts?
a. Where the accountability is petty cash fund, accommodated checks are considered not
valid support if NSF, post-dated or stale as of the count date.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AP-503
Weeks 16&18: RECEIPT/DISBURSMENT CYCLES – AUDIT OF CURRENT ASSETS: CASH
b. Where the accountability is undeposited collections, customer collection checks are
considered valid support even if they are NSF, post-dated or stale as of the count
date.
c. Where the accountability is petty cash fund, any evidence to claim that cash was used
to pay certain disbursements (e.g. postage stamps) shall be considered valid support.
d. Where the accountability is undeposited collections, any evidence to claim that
collection was used to pay certain disbursements (e.g. postage stamps) shall be
considered valid support.
17. In validating bank reconciliation statements of the client, the auditor should trace back
outstanding checks to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.
18. In validating the bank reconciliation statements of the client, the auditor should trace back the
unrecorded debits, like service charges to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.
19. In preparing the bank reconciliation statement of the client, a cash in bank shortage normally
occurs when:
a. The unadjusted balance per bank is lower than the unadjusted balance per books.
b. The adjusted balance per bank is higher than the unadjusted balance per books.
c. The unadjusted balance per bank is higher than the unadjusted balance per books.
d. The adjusted balance per bank is lower than the adjusted balance per books.
20. The proof of cash statements is usually prepared by the auditor when:
a. Internal control over cash is strong and control risk is placed at the maximum.
b. Internal control over cash is weak and control risk is place at the maximum.
c. Cash balance is very significant.
d. Cash balance is very insignificant.
21. The usefulness of the standard bank confirmation request may be limited because the bank
employee who completes the form may:
a. Not believe that the bank is obligated to verify confidential information to a third
parity.
b. Sign and return the form without inspecting the accuracy of the client’s bank
reconciliation.
c. Not have access to the client’s cutoff bank statement.
d. Be unaware of all the financial relationships that the bank has with the client.
PROBLEM 2:
You were assigned to audit the cash and cash equivalents account of your audit client, Luzon Corp. for
the period ended December 31, 2020. As a result of your investigations, you were able to gather the
following from the Corp.’s trial balance:
Petty cash fund
Cash on hand – undeposited collections
Cash in bank – BPI Current Account No. 2099
Cash in bank – BDO Current Account No. 22013
Cash in bank – UCPB Savings Account No. 02312
Other Items
25,000
1,250,000
3,780,000
(160,000)
3,500,000
2,000,000
Audit notes:
1. The petty cash fund consisted of the following items as of December 31, 2020 (count date):
Currency and coins
P3,800
Employees’ vales/IOUs duly supported by promissory notes
signed by employees concerned.
2,500
Currencies/money in an envelope marked “collections for
Christmas Party” with names attached
5,200
Unreplenished petty cash expense vouchers
3,250
Check drawn by Luzon Corp., payable to the petty cashier
11,200
Unused postage stamps
900
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AP-503
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 16&18: RECEIPT/DISBURSMENT CYCLES – AUDIT OF CURRENT ASSETS: CASH
Personal check of Aljun Li, officer, payable to the account of
the Luzon Corp.
3,000
2. Cash on hand represents undeposited collections as of December 31, 2020 and includes the
following items:
a. Customer’s check for P160,000 returned by bank on December 26, 2020 due to
insufficient fund but subsequently redeposited and cleared by the bank on December
30, 2020.
b. Another customer’s check for P125,000 returned by bank on December 28, 2020 due to
insufficient fund but subsequently redeposited and cleared by the bank on January 2,
2021.
c. Another customer’s check for P56,000 dated January 5, 2021, received on December
29, 2020.
d. A customer check for P99,000 dated June 1, 2020 received on the same date, still on
hand and yet to be deposited to the bank.
e. Postal money orders and bank drafts received from customers, P100,000.
3. Included among the checks drawn by Luzon Corp. against the BPI Current Account No. 2099
and recorded in the cash disbursement journal in December 2020 are the following:
a. Check written on December 29, 2020 dated January 2, 2021, delivered to payee on
December 29, 2020, P94,000.
b. Check written and dated December 29, 2020 and delivered to payee on January 2, 2021,
P72,000.
c. Check dated April 1, 2020 amounting to P90,000 still outstanding by December 31, 2020
as per the client-prepared December bank-reconciliation statement.
4. The credit balance in the BDO Current Account No. 22013 represents checks drawn in excess of
the deposit balance. These checks were still outstanding at December 31, 2020.
5. The UCPB Savings Account No. 02312 has been set by the board of directors for acquisition of
new computers. This account is expected to be disbursed in the next 3 months from the balance
sheet date.
6. Other items included:
a. P1.2M time deposit with BPI which was purchased on November 1, 2020 and shall
mature on November 1, 2021 (This deposit is not allowed to be pre-terminated as per
the signed agreement with the bank)
b. P500,000 money market placements purchased December 1, 2020 and shall Mature on
March 1, 2021, and;
c. P200,000 investment in ordinary shares designated as FVPL, purchased on November
15, 2020, expected to be sold by February 14, 2021.
d. P100,000 investment in redeemable preference shares purchased on December 1, 2020
with a mandatory redemption date on February 28, 2021.
Determine the audited balances of the following:
1. Petty cash fund
2. Petty cash shortage/overage
3. Cash on hand – undeposited collections
4. Total cash in banks (excluding undeposited collections) to be included as cash and cash
equivalents in the current asset section of the balance sheet
5. Assuming that the company has a cash management policy of deliberately rendering current
accounts as “overdrawn” to take advantage of “check float”, what is the total cash in banks
(excluding undeposited collections) to be included as cash and cash equivalents?
6. Total Cash and cash equivalents to be reported in the 2020 balance sheet
PROBLEM 3:
You were asked by your audit manager to render a cash count on your audit client’s petty cash fund in
line with your audit of Visayas Inc.’s financial statements as of December 31, 2020. You failed to
schedule the cash count exactly on December 31 due to client-imposed constraints, thus you decided
to schedule the count on January 4, 2021, instead. The petty cash fund had an imprest balance of
P10,000 as reflected in the company’s general ledger. Jon A. Tan, the custodia, presented the following
items in support to his accountability on the said count date:
Coins and currency
Paid vouchers:
12/27 Transportation
P 2,900
P 550
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AP-503
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 16&18: RECEIPT/DISBURSMENT CYCLES – AUDIT OF CURRENT ASSETS: CASH
12/27 Gasoline
12/28 Office supplies
12/29 Postage stamps
12/30 Employee IOU (with promissory note)
1/2 Office repairs
1/3 Representation expense
Officer’s check returned by bank marked “NSF”
Check drawn by company to the order of Jon A. Tan
Unused postage stamps
Petty cash receipt voucher (for a return of expense
advance, see note below)
420
590
300
500
375
325
3,060
1,000
3,000
300
500
Note: The company has no separate travel fund to defray official business trips expenses, instead, the
company uses petty cash fund to pay for travel expenses. Based on your further audit procedure after
the cash count, you were able to confirm that the P500 cash was subsequently deposited to the
company’s current account.
Requirements:
1. What is the petty cash shortage?
2. What is the correct/adjusted balance of the Petty Cash Fund account as of December 31,
2020?
PROBLEM 4:
A count of the undeposited receipts under the custody of Gor G. Nyo, cashier of Macario Corp., on
September 30, showed the following composition:
Currency and coins
Unused postage and documentary stamps
Employee IOU’s (supported by promissory notes)
Other disbursement vouchers paid from cash receipts
Checks:
Date
3-24-20
9-20-20
9-27-20
9-30-20
10-2-20
Total per count
Payee
Macario Corp.
Macario Corp.
Macario Corp.
MERALCO
Macario Corp.
Drawer
Rita Co. (Customer)
Tams Co. (Customer)
Jonli Inc. (Customer)
Macario Corp.
X24E Co. (Customer)
P24,620
220
2,000
1,600
2,000
4,700
3,920
5,700
1,500
P 44,760
**
**Marked NSF by the bank (replaced by the customer and redeposited on October 5)
Assuming the cashier’s accountability is P33,540 per the client’s records as of September 30:
1. What was the amount of shortage/overage on September 30?
2. What is the adjusted balance of undeposited collections as of September 30?
PROBLEM 5:
You obtained the following information on the current account of Park Shin Corp. During your
examination of its financial statements for the year ended December 31, 2020.
Audit notes:
a. November items:
•
The bank statement on November 30, 2020 showed a balance of P1,872,000.
•
Among the bank credits in November was customer’s note for P600,000 collected for
the account of the company which the company recorded in the cash receipts journal in
December.
•
Included in the November bank debits were cost of checkbooks amounting to P7,200
and a P240,000 check which was charged by the bank in error against Park Shin Corp.’s
account. Bank errors are usually automatically corrected the following month.
•
November deposits in transit amounted to P480,000 and outstanding checks totaling
P1,050,000 (P30,000 of which has been certified by the bank in November).
•
A P195,000 customer collection in November was recorded in the books at P159,000.
This was discovered and corrected in the cash receipt journal in December.
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AP-503
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Weeks 16&18: RECEIPT/DISBURSMENT CYCLES – AUDIT OF CURRENT ASSETS: CASH
b. December items:
•
The bank statement for the month of December showed total credits of P4,496,000 and
total charges of P1,724,000.
•
The company’s books, on the other hand, showed total December debits of P4,413,600,
total credits of 2,443,200. The December cash balance per books was at P2,913,600.
•
A December credit memo for bank loan proceeds amounted to P800,000 was among the
year-end bank credits.
•
Bank debit memos for December were: No. 121 for service charges, P9,600 and No.
122 on a customer’s returned check marked “NSF” for P144,000.
•
A P95,000 collection check of Perk Shan Corp. was erroneously credited by the bank to
the company’s account in December.
•
On December 31, 2020 the company authorized the bank to automatically settle a
P360,000 note payable to a supplier. The note matures on January 5, 2021. The
company treated this note as part of its disbursements although the bank was able to
settle the note only the maturity date.
•
A check for P11,880 was recorded in the company cash payments books in December
as P118,800. This error was discovered by the company in December and has already
made the necessary correction in the December cash records.
Requirements:
1. How much is the undeposited collections as of December 31?
2. How much is the outstanding checks as of December 31?
3. How much is the adjusted cash balance as of November 30?
4. How much is the adjusted cash balance as of December 31?
PROBLEM 6:
The following information was provided by Spoon Corp. as of the fiscal year ended September 30,
2020:
Customers’ direct deposits credited by the
bank (recorded per books the following
month)
Bank loan and interest payments
Undeposited collections
Outstanding checks
Total credits per bank statement
Total debits per bank statement
Total debits per books
Total credits per books
August 31
55,000
September 30
72,000
120,000
89,000
122,000
80,000
?
?
1,819,000
1,618,000
1,795,000
1,800,000
Additional information:
a. A P25,000 customer check collection was erroneously recorded twice in the books in
September, the company discovered the error and corrected the same immediately in
September.
b. A P30,000 disbursement check was recorded in the books as P3,000 in August. The correction
was made in September.
c.
The bank erroneously charged the company P40,000 in August for a disbursement of Spin
Corp. The bank corrected the error in September.
d. A September customer collection check was correctly record in the books at P21,000. This was
erroneously credited by the bank at P12,000. The error was discovered and immediately
corrected by the bank also in September.
e.
The unadjusted balance per book in August was at P683,000. The unadjusted balance per
bank in September was at P785,000.
Requirements:
1. What is the correct cash in bank balance as of August 31?
2. What is the correct deposit in transit as of September 30?
3. What is the correct outstanding checks as of September 30?
4. What is the correct cash in bank balance as of September 30?
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