IIST :AP03_AUDIT OF CASH AND CASH EQUIVALENTS BATCH 2022

AP03 – AUDIT OF CASH AND CASH EQUIVALENTS

TOPIC OUTLINE
Controls over Cash and
Test of Controls
AUDIT OF CASH AND
CASH EQUIVALENTS Substantive Procedures

FAR Review

LECTURE NOTES

PART 1: CONTROLS OVER CASH & CASH EQUIVALENTS AND TEST OF CONTROLS
Controls over cash transactions are of primary importance in any business since it affects most of the
transaction cycles.

There are three principal considerations in relation to internal controls over cash. They are:
 All sums of cash are received and subsequently accounted for.
 No payments are made which should not be made.
 All receipts and payments are promptly and accurately recorded.
The general and basic control over cash is known as the “IMPREST SYSTEM”. The main purpose of the
imprest system is to prevent cash losses due to misappropriation or theft either by people within the entity
or outside the entity. The primary requirement of this system is for the company to deposit to a trustee
(e.g. bank) all cash receipts and all disbursements shall be made through checks.

If it is inevitable for an entity to transact cash rather than through checks, an entity shall maintain funds to
be used for such (e.g. petty cash fund).

The following is a summary of functions of departments in the receipt cycle along with their
related control procedures.
As a general control rule, no one person should be assigned the function of cash handling and record
keeping. Hence the function of handling cash is with the mail room or receptionist and treasury department
while the function of recording cash receipts transactions rest with the accounting department.

MAIL ROOM OR RECEPTIONIST

 Receives remittance advices and customer checks from customers (separate checks and remittance
advices).
 The opening of the post shall be supervised by a responsible official.
 All checks and postal orders received via post shall be restrictively endorsed or crossed “Account
payee only, not negotiable” as soon as the mail is opened.
 Prepares list of receipts
 A record should be made at the time of the opening of the post of checks and postal orders
received and cash received.
 The cashier and sales ledger shall not have access to the receipts before the record is made.
 Post should be date stamped to prevent lapping.
 Endorses checks and list of receipts to the treasury department
 Endorses remittance advices and list of receipts to the accounts receivable department.
NOTE: For cash sales transactions, it should be recorded at the point of sale through prenumbered cash
sales invoice. As part of the internal control over cash sales, daily reconciliation of cash received with
invoice totals is necessary. For cancelled cash sales invoice, a responsible official should sign such invoices
and be periodically checked for sequential numbering.

TREASURY DEPARTMENT
 Reviews and checks the list of receipts received from the mail room or receptionist.
 Updates cash records
 Prepares deposit slips and deposits collections to the bank on a daily basis.
 Periodically, a comparison should be made between the cash and checks received and recorded
in the cash book and deposited and recorded on deposit slips. This should be done by a person
not making the deposit.

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 Prepares cash summaries, send to accounting department (both AR department and general
accounting) and retain a copy.
ACCOUNTING DEPARTMENT
 Accounts receivable department – (a) compares remittance advice received from mail room or
receptionist against the cash summary received from treasury; (b) updates subsidiary ledgers: (c)
prepares daily summaries forwarded to general accounting.
 General accounting – compares daily summaries received from treasury and accounts receivable
department then updates general ledgers.

The following is a summary of functions of departments in the disbursement cycle along with
their related control procedures.
As a general control rule, all disbursements must be properly authorized and adequately documented. The
voucher system should be implemented in making disbursements. These vouchers are part of the
expenditure cycle which is prepared by the accounts payable department. Only approved purchase invoice
are being prepared by vouchers.

TREASURY DEPARTMENT
 Receive voucher for payment.
 Receive voucher package and review its completeness and approval. The voucher package comprises
the following: (requisition slip, purchase order, receiving report, vendor’s invoice and voucher)
 Prepare prenumbered checks with authorized signatories. Generally, checks should be signed by at
least two authorized persons. Forward or mail the check to vendor or payee.
 Prepare daily check summary then forward the document to accounts payable department and
general accounting.
 Cancel voucher and supporting documents as represented by payment. Forward cancelled voucher
and voucher package to accounts payable department.

ACCOUNTS PAYABLE DEPARTMENT

 Receive cancelled voucher and check summary from treasury department.
 Update AP master file and print cash disbursements journal

GENERAL ACCOUNTING DEPARTMENT

• Receive check summary from treasury department.
• Post to general ledger
• Perform independent check of totals per check summary and amounts journalized and posted by AP
department.
• Perform independent monthly bank reconciliation.

CONTROLS OVER PETTY CASH

 There should be restricted access to petty cash fund where cash should be securely held. Only the
custodian should have access.
 All expenditure should require an approved and signed voucher.
 The imprest system should be used in reimbursing funds.
 Vouchers shall be produced before the check is signed for reimbursement. After reimbursement,
vouchers shall be cancelled.
 Rules should exist preferable preventing the issue of IOUs or the cashing or accommodation of
checks.

TEST OF CONTROLS
The following procedures shall be performed by an auditor in testing the controls of the following areas:
CASH RECEIPTS
 Observe control procedures in the mailroom regarding cash receipts via post.
 Review procedures for segregation of duties.
 Inspect evidence that entries in the cash receipts journal have been independently compared with
daily cash summaries and postings to the receivable subsidiary ledger.
 Select samples of recorded cash receipts and vouch them to validated bank deposit slips and
remittance advices. These provide evidence that recorded cash receipts represent cash actually
collected from customers.
 Select samples of daily cash summaries and trace to entries in cash receipts journal, general ledger
and bank statement. These provide evidence that all cash receipts are recorded.

CASH DISBURSEMENTS
 Review procedures for segregation of duties.
 Observe the process of independent check made by treasury staff.
 Inspect sample checks for proper approval and signature.
 Test the numerical sequence of checks issued.
 Observe cancellation of checks and vouchers.
 Compare debits to accounts payable to properly cancel voucher packages.

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 Trade cancelled voucher packages to cash disbursement journal entries.

 Vouch cash disbursement journal entries to cancelled voucher packages.
BANK RECONCILIATION
 Examine evidence of regular bank reconciliation.
 Examine evidence of independent check on bank reconciliation.
 Examine evidence of follow-up to old outstanding items on bank reconciliations. Focus on
disbursements via check that might be considered as stale.

PETTY CASH FUND

 Test petty cash vouchers for approval.
 Test cancellation of paid petty cash vouchers.
 Test for evidence of arithmetical check on petty cash records.
 Examine evidence of independent check of petty cash balance.

PART 2: SUBSTANTIVE PROCEDURES ON AUDIT OF CASH AND CASH EQUIVALENTS

Cash refers to unrestricted items and are immediately available for use. Under good cash management,
cash balance is not that significant as compared to total assets presented in balance sheet. Nevertheless,
auditors devote more audit time in examining cash balances due to its high inherent risk (i.e. susceptibility
to theft).

The following assertions shall be addressed by the auditor in auditing cash and cash equivalents:
 EXISTENCE – To determine that all cash on the balance sheet represent cash and cash items on hand,
in transit to, or in depository banks.
 COMPLETENESS – To determine that all cash owned by the entity at balance sheet date is included in
the balance sheet.
 RIGHTS AND OBLIGATIONS – To determine that cash balances are available for use without
restrictions or not made available to related parties or if with restrictions and made available to
related parties, properly indicated in the balance sheet.
 VALUATION – To determine that cash is recorded and presented at their proper amount and in
accordance with GAAP.
 PRESENTATION AND DISCLOSURE – To determine that cash is properly classified, described and
disclosed in the financial statements, including notes, in accordance with PFRS.

To address the above assertions, an auditor’s primary substantive procedures for cash include the
following:
1. BANK CONFIRMATIONS
Assertions addressed: Existence, Valuation, Rights and Obligations, Presentation and Disclosure

This procedure is a direct approach in testing or proving the existence of cash. Bank confirmations are
recognized by the International Standards on Auditing as a more reliable form of audit evidence.
When determining whether to confirm a bank account, materiality of the account balance is not a
consideration. Even accounts on closed banks should be confirmed.

Hence, bank confirmation letters should be:

(a) Sent to all banks which the client has an account
(b) On the auditor’s letterhead but signed by the client entity
(c) Mailed by the auditor and returned directly to the auditor. (direct form of evidence)

What to confirm? (Contents of a bank confirmation letter)

(a) Balances due to or from the bank, maturity and interest terms.
(b) Terms and repayments conditions of loan and overdrafts.
(c) Collateral given, if any.
(d) Unused facilities of credit and any right to offset.
(e) Asset held in custody or safe.
(f) Contingent liabilities such as guarantees and endorsements.
(g) Listing of authorized account signers.

In instances when the amount indicated in the confirmation request returned by the bank does not
agree with the ledger balance or when repeated non-responses are obtained from the financing
institution, the auditor shall obtain copies of bank reconciliation prepared by the client.

The limitations of bank confirmations come from their reliance on the management of the business.
As mentioned above, the management of the business needs to authorize the bank to provide the
auditor with information. If the management refuses to authorize the bank, the auditor cannot use
bank confirmations as an audit procedure. The refusal may come due to different reasons which will
need to be confirmed by the auditors. Auditors will also need to perform alternative audit procedures
in that case.

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2. CASH COUNT
Assertions addressed: Existence, Valuation, Rights and obligations

In this procedure, to determine any cash shortage or overage, the auditor must be firm with the
accountability of the custodian and if the composition of the cash counted is included as valid
supports (accounted).

Accountability Valid Supports

(1) Petty Cash Fund (the Imprest Balance) Bills and coins
Replenishment checks
Unreplenished petty cash vouchers
Post-dated checks, stale checks, NSF checks
Employees IOUs
(2) Undeposited collections (balance per book adjusted Bills and coins
for unrecorded collections) Checks for deposits
Expense vouchers or other evidence
(3) Unclaimed salary & Unexpended Bills and coins
employee contributions Envelop for unclaimed salary (should be intact)
Note: Post-dated, stale and NSF checks are not valid supports for undeposited collections since in the
first place they are not part of the collections.

In conducting cash counts, the following shall be observed:

 Cash counts must be performed on an unannounced basis (on a surprise basis) on the part of
the custodian to prevent substitution of items.
 Coordinate cash count with count of marketable securities and other negotiable assets of the
client entity.
 An auditor shall maintain control over all cash funds and marketable securities until completion
of the count.
 The custodian shall be present during and throughout the count so as the auditors not to be
blamed for any cash shortage.
 Obtain custodian’s signature to acknowledge return of counted items.
 Follow-up disposition of items in cash counted. (a) Undeposited collections shall be traced to
bank reconciliation prepared during the month and to bank deposits subsequent to balance
sheet date; (b) Accommodated checks shall be deposited after the count to establish validity;
(c) IOUs in the fund should be confirmed and traced to collections in the subsequent period; (d)
expense vouchers should be traced to the succeeding replenishment voucher.

3. TEST ON BANK RECONCILIATION

Assertions addressed: Existence, Valuation, Completeness, Rights and Obligations

Bank reconciliation is ordinarily prepared by the client on a monthly basis as part of its internal
controls over cash in bank. Thus, the auditor shall obtain a copy of such bank reconciliation and test
the clerical accuracy of such.

The nature of the reconciling items in the bank reconciliation shall be reviewed and examined for
reasonableness.
 Bank reconciling items can be verified by obtaining a bank cut-off statement.
A bank cut-off statement is a bank statement as of a date subsequent to the date of the balance
sheet. The date should be at a point in time that will permit most of the year-end outstanding
checks to clear the bank (usually 8 -10 business days after reporting date). The client must
request the cut-off statement from the bank and instruct that it be sent directly to the auditor.
 Book reconciling items are ordinarily traced to bank statement provided and through
examination of other supporting documents.

Test on bank reconciliation focuses more on omission of items in the bank reconciliation to conceal
cash shortage or misappropriation of cash (it emphasizes completeness assertion).

An auditor shall consider preparing a proof of cash when it assesses internal control over cash
receipts and cash disbursements to be weak or ineffective. A proof of cash is a four-column bank
reconciliation which reconciles the beginning and ending balances of cash, cash receipts and cash
disbursements during a certain period.

4. TRACING BANK TRANSFERS

Assertions addressed: Existence, Completeness, Rights and Obligations

Most businesses maintain bank accounts to various banks to conduct business more effective and
efficient. This necessitates transfers of funds from one bank to another. Thus, an auditor shall prepare

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a bank transfer schedule especially towards the end of the reporting period in order to detect
“KITING”.

Kiting, also called check kiting, is a fraudulent scheme that uses checks to embezzle money from a
business. The concept of kiting is quite simple. It uses the float or time it takes for checks to clear to
buy time before the actual money withdrawn from the account. The deposit is reflected in the latter
account but the withdrawal may not be reflected yet in the first bank account due to clearing cut-off.
In conjunction with a bank cut-off statement, if the auditor finds that a prior-period check not on the
list of outstanding checks has cleared the bank then kiting may be present.

The following rules shall be observed by the auditor when tracing bank transfers:
 Book entries for receiving and disbursing should have been within the same month.
 Book entries compared with the bank entries may be made in an earlier month but not in a later
month.
 The receiving per bank should not be in an earlier date than the disbursement per book.

5. CASH CUT-OFF TESTS

Assertions addressed: Existence, Completeness, Rights and Obligations

The purpose of this procedure is to detect window dressing. Window dressing is the deliberate
misstatement of financial statement items which is accomplished by either recording as of the last
day of the accounting period collections made subsequent to the close of the period or recording as of
the last day of the accounting period payments of accounts made subsequent to the close of the
period.

The auditor should compare deposits on the bank statement before and after reporting date to cash
receipts journal. With regards to disbursements, the auditor should compare dates of the
disbursement and receipt of intercompany payments or interbank transfers before and after reporting
date.

6. CASH VALUATION
Assertions addressed: Valuation, Presentation and Disclosure.

The main purpose of this substantive procedure is to examine proper valuation of cash and cash
equivalent items such as:
 Bank accounts in foreign currency shall be converted to the presentation currency (e.g.
Philippine Peso) whether at stated value or net realizable value.
 Cash deposits in banks undergoing bankruptcy shall be measured at net realizable value.

PART 3: FINANCIAL ACCOUNTING REVIEW

CASH AND CASH EQUIVALENTS DEFINITION, MEASUREMENT AND COMPOSITION
Cash includes money and any other negotiable instrument that is payable in money and acceptable by the
bank for deposit and immediate credit.

RECOGNITION
Since there is no specific standard governing cash and cash equivalents, the related standard is ". The only
guidance is found in PAS 1, paragraph 66, which provides that "an entity shall classify an asset as current
when it is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability
for at least twelve months after the end of reporting period." In conclusion, to report an item as part of
cash, it should be UNRESTRICTED IN USE.

MEASUREMENT
Item Measurement
Cash in local currency at face value
Cash in foreign currency at face value but translated to Philippine Peso
using closing rate at year-end
Cash in closed bank or banks in bankruptcy estimated realizable value

COMPOSITION
To properly understand the composition of cash, we will group its parts into three (3): cash on hand, cash
in bank and cash fund.
Part of
Category Items Classification
cash?
Coins and
✔
Cash on currencies
Hand Normal
Checks ✔
customer's

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checks
Cashiers',
Managers' & ✔
Travelers' check
Undelivered & drawn by the entity ✔ revert to payable
Post-dated drawn by another
checks x receivable
person or entity
revert to payable /
drawn by the entity ✔
other income
Stale checks
drawn by another
x receivable
person or entity
Other Money order ✔
instruments Bank drafts ✔
(Non-interest
Demand deposit ✔
bearing)
(Interest
Savings deposit ✔
bearing)
(Interest long-term
Escrow deposit x
bearing) investment
(Interest
Time deposit x cash equivalent
bearing)
unrestricted/informal
✔
* if silent
restriction is more
than 12 months -
Cash in Compensating long-term
bank balance investments
restricted/formal x
restriction is 12
months or less -
short-term
investments
General rule & if
x current liability
silent
exceptions: (a) 2
or more accounts offset from other
Bank overdraft with the same bank accounts
bank (✔)
offset from other
(b) immaterial
cash accounts
current asset ✔
for asset
acquisition non-current long-term
X
asset investment
Examples: change
for use in fund; payroll fund,
✔
operations revolving fund, petty
Cash cash fund; travel fund
fund Examples: interest
current liability fund; dividend fund; ✔
tax fund
for settlement of
Examples: pension
liabilities
non-current fund; contingent long-term
x
liability fund; insurance fund; investment
bond sinking fund

Accounting for Petty Cash Fund

Petty cash fund is money set aside to defray relatively small amount of cash disbursements. Petty
cash fund may be accounted for using the following methods:
(a) Imprest fund system (b) Fluctuating fund system
Summary of journal entries
Imprest Fund System Fluctuating Fund System
A. Establishment Petty cash fund xx Petty cash fund xx
Cash in bank xx Cash in bank xx
B. Payment of expense Memo entry only Expenses xx

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Petty cash fund xx

C. Replenishment Expenses xx Petty cash fund xx
Cash in bank xx Cash in bank xx
D. A.E for unreplenished fund Expenses xx No entry
Expenses xx
E. Increase in the fund Petty cash fund xx Petty cash fund xx
Cash in bank xx Cash in bank xx
F. Decrease in the fund Cash in bank xx Cash in bank xx
Petty cash fund xx Petty cash fund xx
Other Topics
Fraudulent activities in cash
(a) Lapping - consists of misappropriating a collection from one customer and concealing this defalcation
when collection is made from another customer.
(b) Window dressing - is a practice of opening the books of accounts beyond the close of the accounting
period for the purpose of showing a better financial position and performance. Window dressing is
usually perpetrated as follows: (1) By recording as of the last day of the accounting period collections
made subsequent to the close of the period. (2) By recording as of the last day of the accounting
period payments of accounts made subsequent to the close of the period.
(c) Kiting - is a transfer of cash from one bank to another bank. Kiting is usually employed at the end of
the month. Kiting occurs when a check is drawn against a first bank and depositing the same check
in a second bank to cover the shortage in the latter bank.
Accounting for cash shortage and overage
Summary of journal entries
Cash Shortage Cash Overage
A. Upon discovery Cash short / over xx Cash on hand xx
Cash on hand xx Cash short / over xx
B. Upon investigation Due from cashier xx Cash short / over xx
(cashier is accountable) Cash short / over xx Due to cashier xx
C. Upon investigation Loss from shortage xx Cash short / over xx
(cannot trace anymore) Cash short / over xx Other income xx
CASH EQUIVALENTS
PAS 7, paragraph 6, defines cash equivalents as short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant risk of changes in value
because of changes in interest rates.
RECOGNITION
Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash
equivalents.
Note: Equity securities cannot qualify as cash equivalents since they do not have maturity date, except
redeemable preference shares (with mandatory redemption) that are acquired 3 months before their
redemption date can qualify as cash equivalents.
COMPOSITION
Examples of cash equivalents are:
(a) Time deposit
(b) Money market instrument or commercial paper
(c) Treasury bills
NOTE:
(1) If an item cannot be included as cash equivalent because it did not qualify the cut-off time period, it
will be classified as investments, short-term or long-term, depending on the period up to maturity.
(2) If the problem is silent with regards to the above items (a-c), they are classified as cash equivalents.

BANK RECONCILIATION
A bank reconciliation is a statement which brings into agreement the cash balance per book and cash
balance per bank. It is usually prepared monthly because the bank provides the depositor with the bank
statement at the end of every month.
The source document for bank reconciliation is the bank statement coming from the bank.
A bank statement is a monthly report of the bank to the depositor showing the cash balance per bank at
the beginning, the deposits acknowledged, the checks paid, other charges and credits and the daily cash
balance per bank during the month. Actually, the bank statement is an exact copy of the depositor's ledger
in the records of the bank.
Forms of bank reconciliation
1. Adjusted balance method - Under this method, the book balance and the bank balance are brought to
a correct cash balance that must appear on the balance sheet.

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2. Book to bank method - Under this method, the book balance is reconciled with the bank balance or
the book balance is adjusted to equal the bank balance.
3. Bank to book method - Under this method, the bank balance is reconciled with the book balance or
the bank balance is adjusted to equal the book balance.
NOTE: The above methods are not independent methods, they are inter-related. For a simpler computation,
the suggested solution format below is based on the adjusted balance method.
Reconciling items
Book:
(1) Credit memos refer to items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.
Examples: note collected by bank in favor of the depositor; proceeds of bank loan credited to the
account of the depositor.
(2) Debit memos refer to items not representing checks paid by bank which are charged or debited by
the bank to the account of the depositor but not yet recorded by the depositor as cash
disbursements.
Examples: NSF checks; bank service charges; automatic debits; payments of loans made out directly
from the depositor’s account.
(3) Errors
Bank:
(1) Deposits in transit are collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement.
(2) Outstanding checks are checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement. NOTE: Certified checks should be deducted from the total
outstanding checks.
(3) Errors

Solution guide for bank reconciliation

Unadjusted balance per book/ledger xx Unadjusted balance per bank xx
Add: Credit Memos xx Add: Deposit in transit xx
Less: Debit Memos (xx) Less: Outstanding checks (xx)
+/- Errors xx +/- Errors xx
(xx) (xx)
Adjusted balance xx Adjusted balance xx
Note: Errors are to be added or deducted by the party who committed the error based on its nature.
The following is a guide on the treatment of the errors.
Treatment
Nature of the error Understatement Overstatement
Error on receipt (collection) Added Deducted
Error on disbursement (payment) Deducted Added
Based on the guide above, we can say the receipts or collections directly affect cash while
disbursements or payments inversely affect cash.
Proof of cash
A proof of cash is an expanded reconciliation in that it includes proof of receipts and disbursements. This
approach may be useful in discovering possible discrepancies in handling cash particularly when cash
receipts have been recorded but have not been deposited.
In answering proof of cash, always bear in mind that it is just expanded bank reconciliation. You need the
concept you absorbed from the previous topic in answering this topics questions. Follow these basis steps
in answering proof of cash questions.
Step 1: Analyze the beginning and ending column of the format as if it is bank reconciliation.
Step 2: Analyze the middle columns based on the nature of the item.

Solution guide for proof of cash

Per Book:
Prior Month Current
(PM) Receipts Disbursements Month (CM)
Unadjusted balances XXX XXX XXX XXX
Credit Memos:
PM XXX (XXX)
CM XXX XXX
Debit Memos
PM (XXX) (XXX)
CM XXX (XXX)
Errors:

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Under Receipt:
PM XXX (XXX)
CM XXX XXX
Over Receipt:
PM (XXX) (XXX)
CM (XXX) (XXX)
Under Disbursement:
PM (XXX) (XXX)
CM XXX (XXX)
Over Disbursement:
PM XXX (XXX)
CM (XXX) XXX
Adjusted Balances XXX XXX XXX XXX

Per Bank:
Prior Month Current
(PM) Receipts Disbursements Month (CM)
Unadjusted balances XXX XXX XXX XXX
Deposit in Transit:
PM XXX (XXX)
CM XXX XXX
Outstanding Checks:
PM (XXX) (XXX)
CM XXX (XXX)
Errors:
Under Receipt:
PM XXX (XXX)
CM XXX XXX
Over Receipt:
PM (XXX) (XXX)
CM (XXX) (XXX)
Under Disbursement:
PM (XXX) (XXX)
CM XXX (XXX)
Over Disbursement:
PM XXX (XXX)
CM (XXX) XXX
Adjusted Balances XXX XXX XXX XXX

Solution guide to Special Cases on Proof of Cash:

(1) Errors of the PM not yet corrected in the current month (adjusted to either bank side or book
side depending on who committed the error:
Prior Month Current
(PM) Receipts Disbursements Month (CM)
Unadjusted balances XXX XXX XXX XXX
Over Receipt (XXX) (XXX)
Under Receipt XXX XXX
Over Disbursement XXX XXX
Under Disbursement (XXX) (XXX)
(2) NSF checks returned in the current month and redeposited in the current month. This is an
adjustment on the bank side only.
NSF Checks (XXX) (XXX)

(3) NSF Checks recorded as reduction of cash receipts

Returned last month,
recorded this month (XXX) XXX
Returned and recorded
this month XXX XXX

What if the current month’s deposit in transit and outstanding checks were not given by the problem,
how can we determine them to answer a bank reconciliation question or a proof of cash question?
Please follow the solution guide below in computing them.

Solution guide in computing deposits in transit:

Deposit in transit, beginning xx
Add: Deposit made by the company this month xx
Total deposit to be acknowledged by the bank xx
Less: Deposit acknowledged by the bank this month xx

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Deposit in transit, end xx

Computation of the deposits made by the company and the deposits acknowledge by the bank:
Book receipts (debits) xx Bank receipts (credits) xx
Less: Less:
Credit memos last month xx Credit memos this month xx
Book errors last month Bank errors last month
corrected this month: corrected this month:
Understatement of CR xx Understatement of CR xx
Overstatement of CD xx Overstatement of CD xx
Book errors this month: Book errors this month:
Overstatement of CR xx Overstatement of CR xx
Add: Understatement of CR xx Add: Understatement of CR xx
Deposits made by the company xx Deposits acknowledged by the bank xx

Solution guide in computing outstanding checks:

Outstanding checks, beginning xx
Add: Checks issued by the company this month xx
Total checks to be paid by the bank xx
Less: Checks paid by the bank this month xx
Outstanding checks, end xx

Computation of the checks issued by the company and the checks paid by the bank:
Book disbursements (credits) xx Bank disbursements (debits) xx
Less: Less:
Debit memos last month xx Debit memos this month xx
Book errors last month Bank errors last month
corrected this month: corrected this month:
Overstatement of CR xx Overstatement of CR xx
Understatement of CD xx Understatement of CD xx
Book errors this month: Book errors this month:
Overstatement of CD xx Overstatement of CD xx
Add: Understatement of CD xx Add: Understatement of CD xx
Checks issued by the company xx Checks paid by the bank xx

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DISCUSSION EXERCISES
STRAIGHT PROBLEMS
PROBLEM 1 (CASH COUNT)
In connection with your audit of the financial statements of PORTLAND CORP. for the year ended December
31, 2019, you conducted a surprise count of the company's petty cash fund and undeposited collections at
8:20 a.m. on January 3, 2020. Your count disclosed the following:

Bills and coins

Bills Coins
P100.00 5 pieces 5.00 18 pieces
50.00 40 pieces 1.00 206 pieces
20.00 48 pieces 0.25 32 pieces

Postage stamps (unused) - P365

Date Payee Maker Amount

Dec. 30 Cash Custodian P1,200
Dec. 30 PORTLAND CORP. SLV, Inc. 14,000
Dec. 31 PORTLAND CORP. MANDA RAMBONG,
sales manager 1,680
Dec. 31 PORTLAND CORP. MSU Corp. 17,800
Dec. 31 PORTLAND CORP. Ateneo, Inc. 8,300
Dec. 31 Taiwan Corp. PORTLAND CORP. 27,000
Unreimbursed vouchers
Date Payee Description Amount
Dec. 23 MANDA RAMBONG, Advance for trip to P20,000
sales manager Tagaytay City
28 Central Post Office Postage stamps 1,620
29 Messengers Transportation 150
29 Byte, Inc. Computer repair 800

Other items found inside the cash box:

1) Unclaimed pay envelope of DINA KINAYA. Indicated on the pay slip is his net salary of P7,500. Your
inquiry revealed that DINA salary is mingled with the petty cash fund.
2) The sales manager's liquidation report for his Tagaytay City trip.
Cash advance received on Dec. 23 P20,000
Less: Hotel accommodation, meals, etc. P16,000
Bus fare for two 1,200
Cash given to DIABLO, salesman 1,000 18,200
Balance P1,800
Accounted for as follows:
Cash returned by DIABLO to the sales manager P120
Personal check of the sales manager 1,680
Total P1,800

Additional information:
1) The custodian is not authorized to cash checks.
2) The last official receipt included in the deposit on December 30 is No. 4351 and the last official receipt
issued for the current year is No. 4355. The following official receipts are all dated December 31,
2019.
OR No. Amount Form of Payment
4352 P13,600 Cash
4353 17,800 Check
4354 3,600 Cash
4355 8,300 Check
3) The petty cash balance per general ledger is P25,000. The last replenishment of the fund was made
on December 22, 2019.
REQUIREMENTS:
(1) What is the amount of shortage due from the sales manager?
(2) What is the amount of undeposited collections on December 31, 2019?
(3) The adjusting entries on December 31, 2019 should include a net debit to Travel expenses of
(4) The cash count should include total checks of
(5) What is the total cash shortage?

PROBLEM 2 (PROOF OF CASH)

The following information was available for the current month’s cash in bank balance of MEMPHIS CORP.:
Book debits in March P550,000

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Bank credits in March 600,000

Book credits in March 250,000
Bank debits in March 300,000
Interest income on deposits in February recorded on March 10,000
Collection of note receivable by the bank of February recorded on March 150,000
Interest income on deposits for March 12,000
Note receivable collected on March 100,000
Bank service charge – February 20,000
Bank service charge – March 25,000
Deposit in transit – February 120,000
Outstanding checks – February 300,000
Summary of Errors
Overstatement on book receipts – February 15,000
Overstatement on book receipts – March 20,000
Customer check for P50,000 recorded by MEMPHIS on February as 5,000
Customer check for P100,000 recorded by MEMPHIS on March as 10,000
Overstatement on book disbursements – February 30,000
Overstatement on book disbursements – March 25,000
Supplier check for P150,000 recorded by MEMPHIS on February as 15,000
Supplier check for P90,000 recorded by MEMPHIS on March as 20,000
Overstatement on bank receipts – February 30,000
Overstatement on bank receipts – March 40,000
REQUIREMENT(S):
(1) Compute the deposit in transit for the month of March.
(2) Compute the outstanding checks for the month of March.

PROBLEM 3 (PROOF OF CASH)

In the audit of GOLDEN STATE CORP. cash account, you obtained the following information:
The company’s bookkeeper prepared the following bank reconciliation as of November 30, 2021:
Bank balance – November 30, 2021 P90,800
Undeposited collections 5,000
Bank service charges 100
Bank collection of customer’s note (8,000)
Outstanding checks:
Number Amount
7159 P3,000
7767 5,000
7915 2,000 (10,000)
Book balance – November 30, 2021 P77,900

Additional data are given as follows:

a) Company recordings for December:
Total collections from customers P165,000
Total checks drawn 98,000
b) Bank statement totals for December :
Charges P123,800
Credits 169,000
c) Check no. 7159 dated November 25, 2021, was entered as P3,000 in payment of a voucher for
P30,000. Upon examination of the checks returned by the bank, the actual amount of the check was
P30,000.
d) Check no. 8113 dated December 20, 2021 was issued to replace a mutilated check (no.7767), which
was returned by the payee. Both checks were recorded in the amount drawn, P5,000, but no entry
was made to cancel check no. 7767.
e) The December bank statement included a check drawn by GOLDEN EGG CORP. for P1,500.
f) Undeposited collections on December 31, 2021 - P8,000.
g) The service charge for December was P150 which was charged by the bank to another client.
h) The bank collected a note receivable of P7,000 on December 28, 2021, but the collection was not
received on time to be recorded by GOLDEN STATE
i) The outstanding checks on December 31, 2021, were:
Check No. Amount Check No. Amount
7767 P5,000 8910 P2,300
8856 1,300 8925 4,100
REQUIREMENTS:
Based on the above and the result of your audit, determine the following:
(1) Unadjusted cash balance per books as of December 31, 2021
(2) Adjusted cash balance as of November 30, 2021
(3) Adjusted book receipts for December 2021
(4) Adjusted bank disbursement for December 2021

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(5) Adjusted cash balance as of December 31, 2021

PROBLEM 4 (MULTIPLE CHOICE – THEORIES)

Answer each of the following questions independently:
1. 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 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 daily cash receipts totals with the bank deposits.

2. Which of the following sets of information does an auditor usually confirm on one form?
A. Cash in bank and collateral for loans.
B. Accounts payable and purchase commitments.
C. Accounts receivable and interest receivable.
D. Inventory on consignment and contingent liabilities.

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. Corroborate information regarding deposit and loan balances.
B. Provide the data necessary to prepare a proof of cash.
C. Detect kiting activities that may otherwise not be discovered.
D. Request information about contingent liabilities and secured transactions.

4. 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. Date checks are deposited per bank statements with the dates remittance credits are recorded.
B. Daily cash summaries with the sums of the cash receipts journal entries.
C. Individual bank deposit slips with the details of the monthly bank statement.
D. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are
actually recorded.

5. 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. Low average balance compared to high level of deposits.
D. Frequent ATM checking account withdrawals.

6. Which of the following would the auditor consider to be an incompatible operation for a cashier of the
cashier receives remittances from the mailroom?
A. Posting the receipts to the accounts receivable subsidiary ledger.
B. Making the daily deposits at the local bank.
C. Preparing the daily deposit.
D. Endorsing checks.

7. There is a risk that customer checks are misappropriated after being forwarded to the cashier for
deposit. Which of the following most likely would assist the entity in preventing or detecting such
error or irregularity?
A. Goods returned for credit are approved by the supervisor of the sales department.
B. Remittance advices are separated from the checks in the mailroom and forwarded to the
accounting department.
C. The cashier examines each check for proper endorsement.
D. Total amounts posted to the accounts receivable ledger from remittance advices are compared
with the validated bank deposit slip.

8. Which of the following would prevent a paid disbursement from being paid a second time?
A. Individuals responsible for signing checks should prepare vouchers.
B. The official signing the check should cancel the supporting documents.
C. Disbursements should be approved by at least two responsible officials.
D. The disbursement date should be within a few days of the date the voucher is presented for
payment.

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9. The procedure that would discourage the resubmission of vendor invoices after they have been paid is
A. A requirement for double endorsement of checks.
B. The cancellation of vouchers by accounting personnel.
C. The cancellation of vouchers by treasurer personnel.
D. The mailing of payments directly to payees by accounting personnel.

10. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After
the client's treasurer had signed the request, it was mailed by the assistant treasurer. What is major
flaw in this audit procedure?
A. The confirmation request was signed by the treasurer.
B. Sending the request was meaningless because the account was closed before the year-end.
C. The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.

- END OF HANDOUTS -

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