AP01 - AUDIT OF CASH AND CASH EQUIVALENTS AUDITING PROBLEMS

FAR EASTERN COLLEGE SILANG

FEU Cavite

Problem 1 Analysis and classification of cash balances

During your audit of Rea Company, you have noted various items related to cash and cash equivalents. In the
process of preparing said line item, you are determining whether the following is properly included in the
balance and if there is an item to be included but not included.
Cash on hand 500,000
Demand deposit - BPI 4,000,000
Certificate of deposit - BDO 2,000,000
Check from Kawaii 300,000
Traveler's check 200,000
Manager's check 100,000
Money order 150,000
Checking account - RCBC (200,000)
Checking account - RCBC 3,500,000
Treasury bonds 1,000,000
Payroll account 500,000
Value added tax account 400,000
Foreign bank account 2,000,000
Postage stamps 50,000
Employee's postdated check 300,000
IOU from president 750,000
Credit memo from a vendor for a purchase return 80,000
Check from Cawaley 150,000
Petty cash fund 50,000
Sinking fund 25,000
Additional information:
A check from Kawaii, a customer dated January 2, 2018 was included in the December 31, 2017
checkbook balance of RCBC
Another customer check from Cawaley deposited on December 22, 2017 was included in the checkbook
balance of BPI but returned by the bank for insufficiency of fund. This check was redeposited on
December 26, 2017 and cleared two days later.
A P400,000 BPI check payable to supplier dated and recorded on December 30, 2017 was mailed on
January 16, 2018.
The foreign bank account is restricted for use until August 25, 2019.
A petty cash fund of P50,000 with the following summary on December 31, 2017:
Coins and currencies 5,000
Petty cash vouchers 43,000
Return value of 20 cases of soft drinks 2,000
50,000
A check of P43,000 was drawn on December 31, 2017 payable to Petty Cash.
In connection with your audit, determine the following amounts:
1. Correct balance of cash in RCBC Bank
2. Cash to be reported under non-current assets
3. Cash to be reported under cash and cash equivalents in the statement of financial position.
4. Cash equivalent to be reported under cash and cash equivalents in the statement of financial position.
5. Total cash & cash equivalent
Problem 2 Cash count and shortage
In connection with your audit of the financial statements of Balderama Co. for the year ended December 31,
2017, you conducted a surprise count of the company's petty cash fund and undeposited collections at 8:20 a.m.
on January 3, 2018. 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
Checks
Date Payee Maker Amount
Dec. 30 Cash Custodian P1,200
Dec. 30 Balderama Co.. Silvia 14,000
Dec. 31 Balderama Co.. Megan Old, sales manager 1,680
Dec. 31 Balderama Co.. Marian R Group. 17,800
Dec. 31 Balderama Co.. ABSZBN Inc. 8,300
Dec. 31 Thick brick Corp. Balderama Co.. 27,000

Unreimbursed vouchers

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AP01 - AUDIT OF CASH AND CASH EQUIVALENTS AUDITING PROBLEMS

Date Payee Description Amount

Dec.23 Megan Old, sales manager Advance for trip to Silang City P20,000
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:

a. Unclaimed pay envelope of LeB-ag Janes. Indicated on the pay slip is his net salary of P7,500. Your inquiry
revealed that LeB-ag Janes salary is mingled with the petty cash fund.
b. The sales manager's liquidation report for his Silang 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 Empoy, salesman 1,000 18,200
Balance P1,800
Accounted for as follows:
Cash returned by Empoy to the sales managerP120
Personal check of the sales manager 1,680
Total P1,800
Additional information:
I. The custodian is not authorized to cash checks.
II. 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, 2017.
OR No. Amount Form of Payment
4352 P13,600 Cash
4353 17,800 Check
4354 3,600 Cash
4355 8,300 Check
III. The petty cash balance per general ledger is P25,000. The last replenishment of the fund was made on
December 22, 2017.
In connection with your audit,
1. What is the amount of shortage due from the sales manager?
2. What is the amount of undeposited collections on December 31, 2017?
3. The adjusting entries on December 31, 2017 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 3 Bank reconciliation and shortage
You are engaged to audit the books of KEAN ENTERPRISES. From the records of the company, you gathered the
following information:
KEAN ENTERPRISES started operation on October 2, 2017 with KEAN 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. The bank statement in December, 2017 showed an ending balance of
P30,500.
Examination of the paid checks disclosed that checks totalling P4,500 were issued by the company in December,
2017, and were presented for payment only in January, 2018.
Cash count of the cashier's accountability amounted to P8,500. You were told by the cashier that P5,000 of
these, in checks, were cash sales on December 29, 2017 deposited on January 3, 2018. The balance, in
currency and coins, represents petty cash fund.
Additional data:
Accounts receivable subsidiary ledgers had a total balance of P70,000 at December 31, 2017.
Supplier's unpaid invoices for merchandise amounted to P60,000.
The bank statement in October showed a bank credit for P98,000, dated October 2, 2017. 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, 2017.
Merchandise inventory at December 31, 2017 amounted to P30,000.
Operating expenses paid during the period amounted to P180,000; while merchandise purchases
amounted to P250,000.
The gross profit rate is 50%.
In connection with your audit,
1. What is the adjusted cash in bank as of December 31, 2017?
2. How much is the cash collection from customers?
3. How much is the cash payment for the merchandise purchased?
4. How much is the cash shortage?
5. How much is the correct cash balance?

Problem 4 Proof of cash

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AP01 - AUDIT OF CASH AND CASH EQUIVALENTS AUDITING PROBLEMS

You have been instructed by your supervisor on an audit of GPB Company to prepare a four-column proof of
cash receipts and disbursements for the month of June, 2017. The bank reconciliation statement prepared by
the client in May is reproduced below:

May 2017 Reconciliation

Bank Balance P32,600 Book Balance P28,540
Plus Undeposited Collections,
May 31 500 Plus proceeds of notes
receivable collected by the
bank in May 3,500
Total 33,100 Plus deposit made in bank on
May 31 not recorded on
books until June 100
Total 32,140
Less Outstanding Checks Less May bank service charges 40
140 P500
152 400
153 100 1,000
Adjusted Bank Balance P32,100 Adjusted Book Balance P32,100
Upon inquiry about the clients June 30 bank reconciliation, you were informed that it has been lost and that the
client is too busy at this time to prepare another. Your supervisor tells you to get the June bank statement and
paid checks and to prepare the June 30 reconciliation so that you may complete the June proof of cash. The
June bank statement is reproduced below:
Bank of the Philippine Island
Account Name: GPB Company
Date Disbursements Receipts
June 1 400 500
June 7 100
June 10 700 1,000
June 15 200
June 20 600 2,800
June 27 900
June 29 (E) 100 (EC) 100
June 30 (SC) 10
June 30 (DM) 150
SC Service Charges E - Error
EC Error Corrected DM Debit Memo
The Debit memo on June 30 represents customer NSF check returned by the bank. The check was redeposited
by the client in the bank on July 1.
Cash received for the period June 21 through June 30 of P 3,500 was deposited in the bank on July 1.
The paid checks accompanying this bank statement (all clearing in June) were:
No. 152 P400
No. 153 P100
No. 154 P700
No. 155 P200
No. 157 P600
No. 158 P900
The check register revealed that the last check in June was No. 159 for P250 and that Check no. 156 was for
P130.
In connection with your audit, determine the following:
1. Unadjusted Book Disbursements in June 30, 2017
2. Unadjusted Book Receipts in June 30, 2017
3. Unadjusted Book Balance as of June 30, 2017
4. Adjusted Bank Receipts as of June 30, 2017
5. Adjusted Bank Balance as of June 30, 2017

Problem 5 Interbank transfers schedule

The information below was taken from the bank transfer schedule prepared during the audit of INDAY Co.s
financial statements for the year ended December 31, 2017. Assume all checks are dated and issued on
December 30, 2017.
Disbursement Date Receipt Date
Check No. From To Per Books Per Bank Per Books Per Bank
101 BDO BPI Dec. 30 Jan. 4 Dec. 30 Jan. 3
202 PNB RCBC Jan. 3 Jan. 2 Dec. 30 Dec. 31
303 BPI HSBC Dec. 31 Jan. 3 Jan. 2 Jan. 2
404 RCBC BOC Jan. 2 Jan. 2 Jan. 2 Dec. 31
In connection with your audit, which of the above checks might indicate kiting?
Problem 6 Substantive Testing

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AP01 - AUDIT OF CASH AND CASH EQUIVALENTS AUDITING PROBLEMS

1. An auditor would consider a cashiers job d. By preparing independent bank

description to contain compatible duties if the reconciliations as of December 31
cashier receives remittance from the mailroom and
6. By preparing a four-column bank reconciliation
also prepares the
("proof of cash") at year-end, an auditor will
a. Daily deposit slip. c.
generally be able to detect:
Remittance advices.
a. An unrecorded deposit made at the bank at
b. Prelist of individual checks. d.
the end of the month.
Monthly bank reconciliation.
b. A second payment of an account payable
2. An entitys internal control structure requires which had already been paid in full two months
every check request that there be an approved earlier.
voucher, supported by a prenumbered purchase c. An embezzlement of cash receipts not
order and a prenumbered receiving report. To recorded in the cash receipts journal before they
determine whether checks are being issued for had been deposited into the bank.
unauthorized expenditures, an auditor most likely d. A receivable collected that had previously been
would select items for testing from the population of written off as uncollectible.
all
7. Kiting would least likely be detected by:
a. Cancelled checks. c. Purchase
a. Analyzing details of large cash deposits around
orders.
year end.
b. Approved vouchers. d. Receiving
b. Comparing customer remittance advices with
reports.
recorded disbursements in the cash
disbursements journal.
3. A client maintains two bank accounts. One of the
c. Preparing a four-column bank reconciliation for
accounts, Bank A, has an overdraft of P100,000.
all major cash accounts.
The other account, Bank B, has a positive balance
d. Preparing a schedule of interbank transfers by
of P50,000. To conceal the overdraft from the
using the client's records and bank statements
auditor, the client may decide to
around year end.
a. Draw a check for at least P100,000 on Bank A
8. Your client left the cash receipts journal open
for deposit in Bank B. Record the receipt but
after year-end for an extra day and included
not the disbursement and list the receipt as a
January 1 cash receipts in the 12/31/XX totals.
deposit in transit. Record the disbursement at
All of those cash receipts were due to cash sales.
the beginning of the following year.
Assuming the client uses a periodic inventory
b. Draw a check for at least P100,000 on Bank B
system with a 12/31/XX count of the physical
for deposit in Bank A. Record the receipt but
inventory, which of the following is most likely to
not the disbursement and list the receipt as a
be true relating to the year XX financial
deposit in transit. Record the disbursement at
statements?
the beginning of the following year.
a. Sales are understated.
c. Draw a check for P100,000 on Bank B for
b. Accounts receivable are understated.
deposit in Bank A. Record the disbursement but
c. Inventory is overstated.
not the receipt. List the disbursement as an
d. Net income is overstated.
outstanding check, but do not list the receipt as
a deposit in transit. Record the receipt at the
9. An auditor may obtain information on the
beginning of the following period.
December 31 month end balance per bank in which
d. Draw a check for at least P100,000 on Bank A
of the following? (SC Standard Confirmation, COS
for deposit in Bank B. Record the disbursement
Cut-off statement on Jan 1-10)
but not the receipt and list the disbursement as
SC COS
an outstanding check. Record the receipt at the
A Yes Yes
beginning of the following year.
B Yes No
4. Two months before year-end, the bookkeeper C No Yes
erroneously recorded the receipt of a long-term D No No
bank loan by a debit to cash and a credit to sales.
a. Option A
Which of the following is the most effective
b. Option B
procedure for detecting this type of error?
c. Option C
a. Analyze bank confirmation information.
d. Option D
b. Analyze the notes payable journal.
c. Prepare year-end bank reconciliation. 10 An auditor may obtain information on the
d. Prepare a year-end bank transfer schedule. December 31 month end balance per bank in which
of the following? (BS Bank statement on Dec 31,
5. The cashier of Milady Jewelries covered a
SBT Schedule of Bank transfers)
shortage in the cash working fund with cash
BS SBT
obtained at December 31 from a bank by cashing
A Yes Yes
but not recording a check drawn on the company
B Yes No
out of town bank. How would you as an auditor
C No Yes
discover the manipulation?
D No No
a. By confirming all December 31 bank
balances.
a. Option A
b. By counting the cash working fund at the
b. Option B
close of business on December 31.
c. Option C
c. By investigating items returned with the
d. Option D
bank cut-off statements of the succeeding
month.
End of Handouts

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