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Wednesday, January 22, 2014

Lesson 2 AP: Audit of Cash and Cash

Equivalents - Notes
Assertions (COVER)
1. Completeness (Cut-off, Proof of Cash)
2. Obligations
3. Valuation (Face Value, Exchange Rate, NRV)
4. Existence (Cash Count, Bank Reconciliation,
Interbank Transactions)
5. Rights

Composition of Cash
1. Cash on Hand = includes undeposited currency and
coins, undeposited checks (payable to the entity or
bearer), bank drafts and money orders.
2. Cash in Bank = demand deposit, checking account
and saving deposit that are NOT legally restricted.
3. Cash Fund = are set aside for CURRENT purposes
such as petty cash fund, payroll fund and dividend
fund.

Composition of Cash Equivalents

*Commercial Paper / Money Market Instrument / Time
Deposit / Treasury Bills
acquired at MOST three months before maturity.

Initial Valuation
*Face Value

Subsequent Valuation
*General Rule = Face Value
*Except:
a. Foreign Currency
*at Current Exchange Rate
b. Cash in Financial Institutions with Financial
Difficulty or in Bankruptcy
*lower of NRV or Face Value

Necessary Disclosures:
1. Temporary Placements of Excess Cash
(Predetermined)
2. Cash Compensating Balance

Other Things to Remember:

1. Bank overdrafts are liabilities. Offset it only against
other existing accounts in the same bank to reflect the
total balance of your account in that bank.

2. Post-dated checks are not yet part of cash receipts

or disbursements because before the date written on
the check, the holder of such CANNOT encash it yet.

3. Commercial Paper / Money Market Instrument / Time

Deposit / Treasury Bills with 3 months left until maturity
but purchased more than 3 months before maturity are
still classified as short-term investments because the
standard says so. The standard does not consider it as
"highly liquid".

4. Undelivered checks are still part of cash and

removed from cash disbursements because the
payment of a check requires its delivery to the payee.

5. Returned checks are restored back to its

corresponding receivable or payable because there
was no encashment made by the payee.

6. Stale checks are restored back to its corresponding

receivable or payable because the negotiability of the
check expired. Banks usually don't honor checks that
are not encashed within a "reasonable time" (normally
within six months) after the indicated issue date. If the
amount of the stale check is immaterial, it is normally
accounted as miscellaneous income or expense.

7. Legally restricted compensating balances carries the

classification of its related loan (either short-term or
long-term investment). It is not classified as cash
because you cannot withdraw such amount
immediately.

8. NSF or DAIF checks are debit memos from the bank

because no amount was collected from such check.
Therefore, the corresponding receivable of such check
is restored.

Cash Short or Over

*Accountability = the amount of cash that MUST BE
present.
*Accounted for = the amount of cash COUNTED.
*Cash Shortage if Accountability > Accounted for
*Cash Overage if Accountability < Accounted for
In computing for the cash shortage or overage, do not
account for cash that you did not include in the
accountability.

Bank Reconciliation
1. Book reconciling items:
a. Credit memos
b. Debit memos
c. Book errors

2. Bank reconciling items:

a. Deposits in transit
b. Outstanding checks
c. Bank errors

Sources: Financial Accounting 1 (Valix et. al),

Advanced Auditing (Espenilla) & The Accounting
Standards

reikovyn at 5:39 AM

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