AC20 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1

EXERCISE 1
AUDIT OF CASH

PROBLEM 1 (Composition of Cash and Cash Equivalents)

In connection with your audit of DANIEL COMPANY for the year ended December 31, 2020, you
gathered the following:

Current account at Metrobank P2,000,000

Current account at BPI (100,000)
Payroll account 500,000
Foreign bank account-restricted 1,000,000
Postage stamps 1,000
Employee’s post-dated check 4,000
IOU from controller’s sister 10,000
Credit memo from a vendor for a purchase return 20,000
Traveler’s check 50,000
NSF check 15,000
Money order 30,000
PCF (P4,000 in currency and expense receipts for P6,000) 10,000
Treasury bills, due 3/31/2021 (purchased 12/21/20) 200,000
Treasury bills, due 1/31/2021 (purchased 1/1/20) 300,000

Based on the above and the result of your audit, compute for the cash and cash equivalents that will be
reported on the December 31, 2020, balance sheet.

PROBLEM 2 (Petty Cash and Undeposited Collections)

Kyla Cerro is the cashier of the Angel Glass Company. As representative of the Calaor and
Associates, CPAs, you were assigned to verify her cash on hand in the morning of January 6,
2021. You began to count at 9:00AM in the presence of Miss Lim. In the course of your counting,
you found currencies in paper bills and coins together with checks, vouchers and other items,
which are mentioned below:
Bills
2 fifties, 9 twenties, 13 tens

Coins
P5.00 5 loose
1.00 74 loose
0.25 - 5 rolls and 32 loose (50 pieces to a roll)
0.10 -10 rolls and 15 loose (50 pieces to a roll)
0.05 -16 rolls and 9 loose (40 pieces to a roll)

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 Checks
Maker Date Payee Amount
Kim Tut, Asst. Manager 12/24/2020 Angel Glass Company P60.00
Kyla Cerro, Cashier 12/26/2020 Angel Glass Company P40.00
I.O.U.
D. Caballero, janitor 12/21/2020 P35.00
E. Tirao, clerk 12/23/2020 25.00
Simon Munar, bookkeeper 12/26/2020 15.00

Petty Cash Vouchers for Replenishment

Payee Date Amount Charged Amount
L. Escolano, Messenger 12/17/2020 Advances to Employees P10.00
Rosalinda & Co. 12/18/2020 Supplies 14.50
Anaconda Club 12/18/2020 Freight-in 18.25
Postal Office 12/19/2020 Supplies 30.00
S. Micabalo 12/20/2020 Repairs 45.00
C. Sumalinog 12/21/2020 Miscellaneous Exp. 15.40

Your investigation also disclosed the following:

1. The balance of petty cash fund per books is P900.
2. Cash sales of January 4, 2021 amounted to P865 per sales records, while Cash Receipts
Book and Deposit Slip showed that only P765 was deposited in the bank on January 5, 2021.
3. The following employees’ pay envelopes had been opened and the money removed. Each
envelope was marked “unclaimed.”
Ana Soy P33.25
Gloria Gama 24.75

Please prepare the following:

1. Working papers showing your cash count.
2. Adjusting Journal entries without explanation in the books of the company.

PROBLEM 3 (Bank Reconciliation)

As part of the audit procedure, you are assigned to prepare a Bank Reconciliation and Adjusting
Journal Entries for the BAGAIPO Corporation for the month ended June 30, 2020. The
unadjusted cash balances are as follows:

Cash balances per Bank statement, June 30, 2020 P249,223.00

Cash balances per company records, June 30, 2020 P248,758.80

The Bank Statement disclosed the following information:

1. A customer note for P24,000 plus P240 interest was collected on June 30, 2020.

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 2. A customer check for P2,762.80 was returned because of insufficient funds (NSF check)
3. The month service charge was P300.

A review of the company records disclosed the following:

1. A deposit for P22,857.40 mailed to the bank on June 29, 2020 did not appear on the bank
statement.
2. Customer checks totaling P6,548.00 were on hand at the end of June awaiting deposit.
3. The following company checks were outstanding at the end of June:
#205 P1,923.80
#206 2,943.60
#207 5,265.00
4. Check #201 written for P1,824.00 in payment of a creditor account and included with the
cancelled checks in the statement has been erroneously recorded as P384.00 in the
company record.

PROBLEM 4 (Proof of Cash)

In connection with your examination, the TRICIA Company presented to you the following
information regarding its Cash in Bank account for the month of December 2020:

a. Balances per bank statements: November 30, P107,800, and December 31, P115,200.
b. Balances of cash in bank account in company’s books: November 30, P82,725, and
December 31, P113,400.
c. Total receipts per books were P1,110,950 of which P6,050 was paid in cash to a creditor
on December 24.
d. Total charges in the bank statement during December were P1,094,850.
e. Undeposited receipts were November 30, P45,300 and December 31, P50,600.
f. Outstanding checks were November 30, P13,375, and December 31, P9,650, of which a
check for P2,500 was certified by the bank on December 26.
g. NSF checks returned, recorded as reduction of cash receipts were:
• Returned by bank in December, recorded also in December, P5,200.
• Returned by bank in December but recorded in January, P4,300.
h. Collections by bank not recorded by Company were P60,750 in November and P58,200 in
December.
i. Bank service charges not entered in company’s books were November 30, P3,750 and
December 31, P2,100.
j. A check for P4,750 of FRICIA Company was charged to TRICIA Company in error.
k. A check drawn for P4,200 was erroneously entered in the books as P2,400.

Based on the above, answer the following:

1. How much is the adjusted cash balance as of November 30, 2020?
2. How much is the adjusted book receipts for December 2020?
3. How much is the adjusted book disbursements for December 2020?
4. How much is the adjusted cash balance as of December 2020?

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 5. How much is the cash shortage of December 31, 2020?
PROBLEM 5 (Proof of Cash)
You obtained the following information on the current account of ZIA CORPORATION. During
your examination of its financial statements for the year ended December 31, 2020.

The bank statement on November 30, 2020, showed a balance of P918,000. Among the bank
credits in November was customer’s note for P300,000 collected for the account of the company
which the company recognized in December among its receipts. Included in the bank debits
were cost of checkbooks amounting to P3,600 and a P120,000 check which was charged by the
bank in error against ZIA’s account. Also, in November you ascertained that there were deposits
in transit amounting to P240,000 and outstanding checks totaling P510,000.

The bank statement for the month of December showed total credits of P1,248,000 and total
charges of P612,000. The company’s books for December showed total debits of P2,206,800,
total credits of 1,221,600 and a balance of P1,456,800. Bank debit memos for December were
No. 121 for service charges, P4,800 and No. 122 on a customer’s returned check marked “Refer
to Drawer: for P72,000.

On December 31, 2020, the company placed with the bank a customer’s promissory note with a
face value of P360,000 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 2021. A check for P11,880 was
recorded in the company cash payments books in December as P118,800.

1. How much is the undeposited collections as of December 31, 2020?

2. How much is the outstanding checks as of December 31, 2020?
3. How much is the adjusted cash balance as of November 30, 2020?
4. How much is the adjusted cash balance as of December 31, 2020?

THEORIES

1. 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. Chairmen of the Board of Directors

2. 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 not be overstated, and expenses understated
d. Expenses will be overstated, and cash will be understated.

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 3. 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.

4. 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.

5. How will the auditor most likely utilize the bank reconciliation as evidence in the audit of
cash?
a. The auditor tests deposit-in-transit and outstanding items to other corroborating
evidence.
b. The auditor sends the reconciliation to the bank for independent verification.
c. The auditor performs the reconciliation for the client to record
d. The auditor traces the book balance of the reconciliation to the cutoff bank
statement.

6. The auditor will send a standard bank confirmation communicated to which of the
following.
a. Financial Institutions for which the client has greater than simmer grater then P0 at
the end of the year.
b. Financial institutions
c. Financial institutions for which the client.

7. An auditor who is engaged to examine the financial statements business enterprises will
request cut-off 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

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