AUDIT OF CASH AND CASH EQUIVALENT

Problem 1 (Adapted)
In connection with your audit of the financial statements of AGBAYANI COMPANY for the year ended
December 31, 2018, you gathered the following information.

1. The company maintains its current account with Cinco Bank. The bank statement on December 31,
2018 showed a balance of P638,340.

Your audit of the company’s account with Cinco Bank disclosed the following:

 A check for P22,500 received from a customer whose account is current had been deposited and
then returned by the bank on December 28, 2018. No entry was made for the return of this
check. The customer replaced the check on January 15, 2019.

 A check for P5,720 was cleared by the bank as P7,520. The bank made the correction on January
2, 2019.

 A check for P3,500 representing payment of an employee advance was received and deposited
on December 27, 2018, but was not recorded until January 3, 2019.

 Post-dated checks totaling P67,300 were included in the deposits in transit. These represent
collections of current accounts receivable from customers. The checks were actually deposited
on January 5, 2019.

 Various debit memos for drafts purchased for payment of importation of equipment totaling
P230,000 were not yet recorded. These purchases were previously set up as accounts payable.
Said equipment arrived in December 2018.

 Interest earned on the bank balance for the 4 th quarter of 2018, amounting to P1,950 was not
recorded.

 Bank service charges totaling P1,260 were not recorded.

 Deposit in transit and outstanding checks at December 31, 2018 totaled P136,250 and P276,380,
respectively.

2. Various expenses from the company’s imprest petty cash fund dated December 2018 totaled
P16,250, while those dated January 2019 amounted to P5,903. Another disbursement from the fund
dated December 2018 was a cash advance to an employee amounting to P3,500. A replenishment of
the petty cash fund was made on January 8, 2019.

3. The company’s trial balance on December 31, 2018 includes in the following accounts:
Cash in bank – Cinco Bank P 748,320
Cash in bank – Marcellones Bank (restricted account for plant
expansion, expected to be disbursed in 2019) 700,000
Petty cash fund 30,000

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 Time deposit, placed December 20, 2018 and due March 20, 2019 1,000,000
Money market placement – Prudential Bank 4,000,000

Questions:
1. What is the adjusted Petty cash fund balance on December 31, 2018?
a. P4,347 b. P10,250 c. P30,000 d. P24,097

2. The petty cash shortage on December 31, 2018 is

a. P0 b. P5,903 c. P3,500 d. P4,347

3. What is the adjusted Cash in bank – Cinco Bank balance on December 31, 2018?
a. P500,010 b. P748,320 c. P432,710 d. P429,110

4. The entry to adjust the Cash in bank – Cinco Bank account should include a debit to
a. Accounts receivable for P89,800.
b. Accounts receivable for P86,300.
c. Accounts payable for P228,200.
d. Interest expense for P1,950.

5. The December 31, 2018 statement of financial position show “Cash and cash equivalents” at
e. P6,142,960 b. P5,439,360 c. P4,442,960 d. P5,442,960

Problem 2
You were assigned to audit the financial statements of Tenedero Corporation on January 15, 2018, for
the year ended December 31, 2017. The general ledger shows cash account balance of P835,421 as at
December 31, 2017.

The bank reconciliation prepared by the client’s cashier included the following items:

Cash per bank statement, December 31, 2017 P 915,391

Bank loan proceeds, directly credited by the bank to the company account,
recorded in the books in January 2018 120,000
Bank service charge for December, recorded in books in January 2018 7,500
Outstanding checks, including P21,500 certified by the bank 95,985
Customer check deposited in December and returned by the bank with the
December bank statement, marked NSF, redeposited in January 4. No
entry made anymore in the books for return and redeposit 5,250
Check of Tendero Corporation, charged by the bank in error on Dec. 28, 2017;
corrected by the bank on January 2, 2018 18,250
Deposit in transit 90,500

From January 2, 2018, to January 15, 2018, the date of your cash count, total debits to cash appearing in
the books amounted to P185,500. During the same period, bank credits amounted to P163,895. The
following cash and cash items were on hand at the close of business on January 15, 2018:

Currency P 4,275
Customers’ checks 5,850
Postage stamps 1,500

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Other expense vouchers 3,125

Audit notes:

a. Cash collections from accounts receivable were erroneously recorded by the company as follows:

Date
7/5/17 Allowance for bad debts 6,800
Accounts receivable 6,800
12/10/17 Bad debts expense 9,600
Accounts receivable 9,600

b. Check deposit on January 5, 2018, amounting to P21,000 was recorded in the books as P12,000.

Questions:

1. What is the correct cash in bank balance as of December 3,1 2017?

a. P928,156 b. P949,656 c. P959,071 d. P964,321

2. What is the cash shortage as of December 31, 2017?

a. P 4,915 b. P 9,415 c. P 14,665 d. P 30,915

3. What is the net adjustment to cash as of December 31, 2017?

a. P 79,735 b. P 92,735 c. P 114,235 d. P 141,235

4. What is the total cash shortage as of January 15, 2018?

a. P 4,605 b. P 5,020 c. P 14,020 d. P 15,520

5. In validating the bank reconciliation statement of the client, the auditor should trace back the
unrecorded debits, like service charges to the
a. Bank statement of the current month.
b. Accounts payable voucher.
c. Cancelled checks returned by the bank.
d. Cut-off bank statement of the subsequent month.

Problem 3
You are conducting an audit of the Arena Company for the year ended December 31, 2017. The internal
control procedures surrounding cash transactions were not adequate. Ester Santos, the bookkeeper-
cashier, handles cash receipts, maintains accounting records, and prepares the monthly reconciliations
of the bank account

The bookkeeper-cashier prepared the following reconciliation at the end of the year:

Balance per bank statement P350,000

Add: Deposit in transit P175,250
Note collected by bank 15,000 190,250
Balance P540,250
Less: outstanding checks 246,750

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Balance per general ledger P293,500

In the process of your audit, you gathered the following:

a. At December 31, 2017, the bank statement and the general ledger showed balances of P350,000
and P293,500, respectively
b. The cut-off bank statement showed a bank charged on January 2, 2018 for P30,000 representing
a correction of an erroneous bank credit
c. Included in the list of the outstanding checks were the following:
 A check payable to a supplier, dated December 29, 2017, in the amount of P14,750,
released on January 5, 2018
 A check representing advance payment to a supplier in the amount of P37,210, the date
of which is January 4, 2018 and released in December 2017
d. On December 31, 2017, the company received and recorded customer’s postdated check
amounting to P50,000

Questions:

1. The adjusted deposit in transit at December 31, 2017:

a. 175,250 b. 125,250 c. 225,250 d. 125,000

2. The adjusted outstanding checks at December 31, 2017:

a. 298,710 b. 232,000 c. 209,540 d. 194,790

3. The adjusted cash to be presented in the balance sheet as at December 31, 2017:
a. 235,460 b. 250,460 c. 265,460 d. 310,460

4. the cash shortage:

a. 45,000 b. 58,040 c. 60,000 d. 8,040

5. The net adjustment to the cash account:

a. 43,040 b. 60,000 c. 58,040 d. 45,000

6. The net adjustment to the accounts payable accounts:

a. 14,750 debit b. 14,750 credit c. 51,960 debit d. 51,960 credit

Problem 4
Your firm is currently conducting the audit of EVERLASTING COMPANY’s financial statements for the
year ended May 31, 2016. you are now concentrating on the review of the working papers prepares by
your staff where possible adjusting journal entries may be drafted to arrive at the adjusted balances of
the accounts that may be affected.

Working Paper no. 1

CASH - BPI
May 31, 2016
Balance per bank statement P7,823,170
Add (deduct) reconciling items:
Deposit in transit (note 1) 93,812
Outstanding check (Note 2) (108, 832)

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 Note charges by the bank (Note 3) 41,850
Fund transfer from PNB (12,500)
Balance per general ledger P7, 837,500

The top schedule for Cash showed the following accounts with their unadjusted balances:

Cash – BPI P7, 837,500

Cash – PNB 112,500
Cash – SB 187,500
Total P8, 137, 500

Audit Notes:

1. Inclusive of a customer’s check in the amount of P18,750 dated April 25, 2016, which up to now is
not yet deposited because it has been misplaced.
2. Includes two checks totaling P14,354 which were among the items counted during the cash count
conducted early morning of June 1, 2016
3. This is the maturity value of a two-year note maturing on May 31, 2016. The note bears interest of
12%. Interest for the year ended May 31, 2015 was properly accrued.
4. Upon cross-referencing this with the working paper showing the bank reconciliation with PNB,
whereby the bank balance was reconciled with the general ledger balance, you verified that the
P12,500 was appropriately shown as an addition to the bank balance.

Working Paper No. 2

ACCOUNTS RECEIVABLE
Reconciliation between Subsidiary Ledger and General Ledger Balances
May 31. 2016

Balance per subsidiary ledger P4,023,527

Add (deduct) reconciling items:
Write-offs (See Working Paper No.3) (187,608)
Sales (note 5) 61,250
Collections (Note 6) 36,845
Balance per general ledger P3,934,014

The Company maintains a credit term of n/30

Audit Notes:

5. The goods were in transit as at May 31, 2016, terms FOB shipping point. The company recognizes a
gross profit of 25% on this sale.
6. This was collected from a customer by the company’s branch on May 31, 2016, on sales made on
March 25, 2016, and was remitted to the company on June 15, 2016. Collections from branches are
charged to Cash – SB account.

Working Paper No.3

ALLOWANCE FOR BAD DEBTS
May 31, 2016

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 Balance, June 1, 2015 P407,500
Add (deduct) transactions during the year:
Write-offs of accounts aged 5 years (187, 608)
Bad debt provision for the year 108,930
Balance, May 31. 2016 P328,822

Based on the company’s past experience, an allowance should be set up based on the following rates:

Aging Distribution Per Subsidiary Ledger Percentage

Current P868,845 2
Pat due:
1 – 30 808,670 5
31 – 60 718,853 10
61 – 90 737,225 15
Over 90 889,934 20
Total P4,023,527

Based on the preceding information, determine the adjusted balances of the following:

1. Cash in Banks
A. P8,128,099 B. P8,165,599 C. P8,091,254 D. P8,140,599

2. Accounts receivable
A. P3,854,669 B. P3,482,039 C. P3,879,074 D. P3,878,419

3. Allowance for bad debts

A. P378,285 B. P605,612 C. P 793,220 D. P328,822

4. The principal amount of the 12% two-year note payable

A. P37,800 B. P41,850 C. P33,750 D. P1,850

5. Cash in bank- BPI

A. P7,778,754 B. P7,803,754 C. P7,788,734 D. P7,812,546