Cash & Cash Equivalents

AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA

What is the amount of Cash and Cash Equivalents?

One must know which items (trial balance accounts) are included or which are excluded as
cash. To simplify cash and cash equivalent is divided in two (2) groups; cash is divided into
three (3) sub-group illustrated below:

Cash On hand
Cash and Cash
Equivalents

In Bank
Cash
Equivalents
Funds

Cash on Hand:
1. Currencies and coins Checks drawn by the company
2. Money order Included as Cash
3. Bank drafts 1. Company’s unreleased check Add
4. Checks 2. Company’s postdated check back
3. Company’s stale check to cash
a. Cashier’s Check
b. Certified Check
c. Customer’s Check Included as Cash
d. Manager’s Check
e. Personal Check
f. Traveler’s Check
g. Customer’s postdated check
h. Customer’s NSF/DAIF check Excluded as Cash
i. Customer’s stale check

It is assumed that the journal entry for payment is already made when the check was drawn. But
because the check (cash) is still in your control as of reporting date, the entry for payment should
be reversed.
Assumed entry when drawn: Entry to reverse since the check is still in your
control:
Accounts Payable xx Cash xx
Cash xx Accounts Payable xx

Cash in Bank:
1. Checking account - Included as Cash
2. Savings Account - Included as Cash
3. Time Deposit - Excluded from cash (treated as cash equivalents)
If the question is:
How much is Cash? EXCLUDE
How much is Cash & CE? INCLUDE

Legally restricted – Excluded from cash (treated as OTHER CA if related

loan is short term; treated as OTHER NON-CA if related loan is long term)

4. Compensating Balance Not legally restricted – Included as cash

Silent – Included as cash

Legally restricted – Excluded from cash (treated as non-current asset)

5. Deposit in Foreign Bank Not legally restricted – Included as cash

Silent – Included as cash

 6. Deposit in Closed Bank - Excluded from cash (treated as other current asset)
Different Bank – Excluded in the computation of cash (treated as current liability)

7. Bank overdraft Same Bank – Included as Cash

Silent – Excluded in the computation of cash (different bank)

Cash in Fund:
1. Sub divided into two (2) categories: (1) cash fund for operations and (2) cash fund not for
operation:

1. Cash fund for operation: 2. Cash fund not for operation:

a. Petty Cash fund a. Sinking fund When is the disbursement?
b. Revolving fund b. Pension Fund Within 12 mos. – Included as Cash
c. Change fund c. Preference share Beyond 12 mos. – excluded from cash
Silent – excluded from cash
d. Payroll fund redemption fund
Included
e. Tax fund d. Plant acquisition fund
as Cash
f. Interest fund e. Depreciation fund Always excluded from cash
g. Dividend fund f. Contingency fund (Treated as non-current asset)
h. Travel Fund g. Insurance fund

Cash Equivalents (CE):

1. Time deposit (aka Certificate of deposit)
2. Money order (aka commercial paper) Within 3 mos. – Included as Cash Equivalents
3. Treasury bills Beyond 3 mos. – Excluded from Cash Equiv.
Silent – Included as Cash Equivalents
4. Investment in preference share
with redemption date

If not classified as cash equivalents, the proper classification would be:

1. Other current assets if from reporting date to maturity date is within 12 mos.
2. Other non-current assets if from reporting date to maturity date is beyond 12 mos.

THREE-MONTH RULE TEST:

The counting of three months is from date of acquisition of CE to the date of maturity of CE.

Usual distractions (items that are NOT considered as cash)

1. I Owe You (IOUs) – treated as receivables
2. Postage Stamps – treated as supplies
3. Credit Memo from suppliers – treated as contra-purchase account
4. Cash surrender value – treated as investment
5. Investment in shares (equity securities) – treated as investment
 Petty Cash Fund
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA

What is the correct journal entries affecting petty cash fund?

Answer:

Transaction Journal Entry Amount

1. Establishment PCF xx - Equal to imprest balance
CIB xx - Equal to imprest balance

2. Disbursement No entry -

3. Replenishment Various Expenses xx - Equal to amount of vouchers

CIB xx - Amount needed to bring back the
remaining balance to imprest bal

4. Year-end adjustment Various Expenses xx - Equal to amount of vouchers

PCF xx - Amount needed to bring down
the
imprest balance to remaining
bal.

What is the amount of shortage or overage of PCF?

Answer:

Accountability Accounted
1 Imprest balance of PCF x x Currencies and coins 1
2 Undeposited collection currencies x x Undeposited collection from customer 2
from customer
3 Undeposited collection check from x x Paid vouchers (regardless of date) 3
customer
4 Unclaimed salaries x x Replenishment check 4
5 Excess of advance of travel x x IOUs 5
6 Employee contributions (always) x x Accommodation check (all) 6
x Employee contribution (only if closed) 7
Total X X Total

Total accountability of custodian x

Less: Total accounted by custodian (x)
Shortage (overage) x

What is the adjusted petty cash fund at the end of the year?

Answer:
Currencies and coins at the date of count xx
Add: Disbursements after December 31 xx
Less: Receipts after December 31 xx
Currencies and coins at December 31 xx

Less: Cash included in currencies but do not belong to PCF xx

1. Undeposited currencies collection xx
2. Unclaimed salaries xx
3. Excess of advance travel xx
4. Employee contributions (only if open) xx xx
Currencies and coins belonging to PCF at December 31 xx

Add: Replenishment checks xx

Add: Accommodation checks (valid checks at 12/31 only) xx
Adjusted balance of PCF at 12/31 xx
 Bank Reconciliation
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
What is the adjusted balance of Cash in Bank?

Answer:

Per book Per bank

Unadjusted balance per ledger x Unadjusted balance per bank statement x
Add: Credit memos Add: Deposit in transit x
1. Note collected by bank in behalf x
2. Interest earned by bank deposit x
3. Loan proceeds directly credited x
Less: Outstanding checks (x)
Less: Debit memos (excluding certified check)
1. NSF check from customer (x)
2. Bank service charge (x)
3. Auto debit agreement (x)
Add: Errors
Add: Errors 1. Overstated disbursements x
1. Overstated disbursements x 2. Understated receipts x
2. Understated receipts x

Less: Errors Less: Errors

1. Understated disbursements (x) 1. Understated disbursements (x)
2. Overstated receipts (x) 2. Overstated receipts (x)
Adjusted balance Ans Adjusted balance Ans

What is the unadjusted balance of Cash in Bank per book or per bank statement?

Answer:
Per book Per bank
Unadjusted balance per ledger x Unadjusted balance per bank statement x
Add: Credit memos Add: Deposit in transit x
1. Note collected by bank in behalf x
2. Interest earned by bank deposit x
3. Loan proceeds directly credited x
Less: Outstanding checks (x)
Less: Debit memos (excluding certified check)
1. NSF check from customer (x)
2. Bank service charge (x)
3. Auto debit agreement (x)
Add: Errors
Add: Errors 1. Overstated disbursements x
1. Overstated disbursements x 2. Understated receipts x
2. Understated receipts x

Less: Errors Less: Errors

1. Understated disbursements (x) 1. Understated disbursements (x)
2. Overstated receipts (x) 2. Overstated receipts (x)
Adjusted balance Ans Adjusted balance Ans

First, compute the adjust balance of either book or bank depending on which unadjusted
balance is given.
Second, whatever the adjusted of one that will also be the adjusted balance or the other
one. Last, from the adjusted balance copied from one record work back the unadjusted
balance.
 What is the amount of the missing reconciling item?

Answer:
Per book Per bank
Unadjusted balance per ledger x Unadjusted balance per bank statement x
Add: Credit memos Add: Deposit in transit x
4. Note collected by bank in behalf x
5. Interest earned by bank deposit x
6. Loan proceeds directly credited x
Less: Outstanding checks squeeze
Less: Debit memos (excluding certified check)
4. NSF check from customer (x)
5. Bank service charge (x)
6. Auto debit agreement (x)
Add: Errors
Add: Errors 3. Overstated disbursements x
4. Overstated disbursements x 4. Understated receipts x
5. Understated receipts x

Less: Errors Less: Errors

3. Understated disbursements (x) 3. Understated disbursements (x)
4. Overstated receipts (x) 4. Overstated receipts (x)
Adjusted balance Ans Adjusted balance Ans

The missing reconciling item can be squeezed from the two records as shown above (for example the
missing reconciling item is outstanding check
 Proof of Cash
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA

Expected Questions:
1. What is the adjusted or unadjusted balance of cash in the previous month?
2. What is the adjusted or unadjusted receipt?
3. What is the adjusted or unadjusted disbursements?
4. What is the adjusted or unadjusted balance of cash in the current month?
5. What is the amount of the missing reconciling item?

How much is the unadjusted receipt and disbursement per book?

Cash in Bank
Collections from customer x x Check drawn
Credit memo of prior month x x Debit memo of prior Month
Correction of error x x Correction of error

Unadjusted receipts per book x x Unadjusted disbursement per book

How much is the unadjusted receipt and disbursement per bank?

Cash in Bank
Check encashed x x Deposit received
Debit memo of current month x x Credit memo of current month
Correction of error x x Correction of error

Unadjusted receipts per bank x x Unadjusted disbursement per bank

How to proof of cash the bank balance?

MonthPrevious

ntsDisburseme

MonthCurrent
Receipts

Transactions

Unadjusted balance
Deposits in transit, prior month + -
Deposits in transit, current month + +
Outstanding check prior month - -
Outstanding check, current month + -
Overstated disbursement, prior month, corrected at current month + -
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month - -
Overstated receipt, prior month, not yet corrected at current month - -
Overstated disbursement, current month, corrected at current month - -
Overstated disbursement, current month, not yet corrected at current month - +
Overstated receipt, current month, corrected at current month - -
Overstated receipt, current month, not yet corrected at current month - -
Understated disbursement, prior month, corrected at current month - -
Understated disbursement, prior month, not yet corrected at current month - -
Understated receipt, prior month, corrected at current month + -
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + -
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + -
Adjusted balance xx xx xx xx
How to proof of cash the book balance?

MonthPrevious

ntsDisburseme

MonthCurrent
Receipts
Transactions

Unadjusted balance
Credit memo, prior month + -
Credit memo, current month + +
Debit memo, prior month - -
Debit memo, current month + -
Overstated disbursement, prior month, corrected at current month + -
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month - -
Overstated receipt, prior month, not yet corrected at current month - -
Overstated disbursement, current month, corrected at current month - -
Overstated disbursement, current month, not yet corrected at current month - +
Overstated receipt, current month, corrected at current month - -
Overstated receipt, current month, not yet corrected at current month - -
Understated disbursement, prior month, corrected at current month - -
Understated disbursement, prior month, not yet corrected at current month - -
Understated receipt, prior month, corrected at current month + -
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + -
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + -
Adjusted balance xx xx xx xx
 Trade Receivables and Allowances
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Expected Questions:
1. What is the balance of A/R at year-end?
2. What is the balance of Allowance for Bad Debts at year-end?
3. What is the amount of bad debt expense for the year?
4. What is the net realizable value (NRV) of A/R at year-end?

What is the balance of A/R at year-end?

Situation 1: If the beginning balance is given:

Accounts Receivable
Beginning balance x
Gross Sales x x Collections
Recoveries x x Collection of Recoveries
x Write Offs
x Discounts taken during the period
x Sales actually returned
x Other forms of payment
x
Ending Balance x

Situation 2: If the unadjusted ending balance is given:

Unadjusted balance x
Add: Reversal of customer’s postdated NSF check x
Add: Adding back of customer’s credit balance that was assumed “netted” x
Less: Unrecorded sales returns by the customers x
Less: Recorded sales without transfer of title (e.g. FOB Destination) x
Add: Unrecorded sales with transfer of title (e.g. FOB Shipping point) x
Adjusted balance x

What is the balance of allowance for bad debts at year-end?

What is the amount of bad debt expense for the year?
__________________________________________________________________________________________________
METHOD 1: Using Percentage of A/R method

First, solve for the allowance for doubtful accounts as follows:

Accounts receivable ending balance x

Multiply by: Percentage of uncollectibility x%
Allowance for doubtful accounts ending balance x

Second, solve for the bad debt expense by squeezing it in the T-account of allowance:

Allowance for bad debts

x Beginning balance
Write off of receivable x x Bad debt expense (squeeze)
x Recovery of write-off

x Ending Balance
__________________________________________________________________________________________________
METHOD 2: Using Percentage of Sales method

First, solve for the bad debts expense as follows:

Sales x
Multiply by: Percentage of uncollectibility x%
Bad debt expense x
Second, solve for the allowance by using T-account as follows:

Allowance for bad debts

x Beginning balance
Write off of receivable x x Bad debt expense
x Recovery of write-off

x Ending Balance
__________________________________________________________________________________________________
METHOD 3: Using Aging of A/R method

First, solve for the allowance for doubtful accounts as follows:

Group 1 Group 2 Group 3 Group 4
Accounts Receivable x x x x
Multiply by: Percentage of uncollectibility x% x% x% x%
Allowance for doubtful accounts x x x x

Second, solve for the bad debt expense by squeezing it in the T-account of allowance:

Allowance for bad debts

x Beginning balance
Write off of receivable x x Bad debt expense (squeeze)
x Recovery of write-off

x Ending Balance

What is the net realizable value (NRV) of accounts receivable?

Answer:
Accounts receivable balance, ending balance x
Less: Allowance for doubtful accounts (x)
Allowance for sales discount (x)
Allowance for sales returns (x)
Net realizable value of A/R x

If the percentage of uncollectibility is not given, it may be computed as follows:

Total amount of write-off – Total amount of recovery = % of uncollectibility

Total amount of credit sales
 Notes Receivable
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Expected Questions:
1. What is the initial measurement of notes receivable (fair value at the date received)?
2. What is the gain or loss on sale of property, plant & equipment?
3. What is the amount of revenue or sales where the consideration received is in a form of
notes?
4. What is the subsequent measurement of notes receivable (carrying amount at year-end)?
5. What is the interest income for the year?
6. What is the interest receivable as of year-end?
7. What is the current portion of the notes receivable?
8. What is the non-current portion of the notes receivable?

What is the initial measurement (fair value) of the notes receivable at the date received?

METHOD 1: If the fair value of the consideration given up is available:

Fair value of the consideration given up (e.g. inventory, service or PPE) x

Less: Down payment x
Fair value of the notes receivable x

METHOD 2: If the fair value of the consideration given up is not available:

Type of Note Fair Value at date of recognition

1. Interest bearing Face Amount
2. Non-interest bearing Present value of principal
3. Interest Bearing with unrealistic PV of Principal
Nominal interest rate + PV of Nominal Interest

What is the gain or loss on sale of property plant and equipment?

Fair value of the notes receivable x

Add: Down payment, if any x
Total consideration received x
Less: Carrying amount of PPE sold (x)
Gain or (Loss) on sale of PPE x

Cost of PPE sold x

Less: Accumulated depreciation x
Carrying amount of PPE sold x

What is the revenue or sales when the consideration given is in a form of notes receivable?

Fair value of the notes receivable x

Add: Down payment, if any x
Revenue or sales x

What is the subsequent measurement of notes receivable (carrying amount @ year-end)?

Type of Note Carrying amount @ year-end

1. Interest bearing Face amount

2. Non-interest-bearing Initial measurement x

Times: 1 + Effective Rate x
Less: Principal payment x
CA @ year-end x

3. Interest bearing with Initial measurement x

Unrealistic nominal rate Times: 1 + Effective rate x
Less: Nominal rate (Face x NR) x
 Less: Principal payment x
CA @ year-end

What is the amount of interest income for the year?

Type of Note Carrying amount @ year-end

1. Interest bearing Face amount x

Times: Nominal rate x%
Interest Income x

2. Non-interest-bearing CA @ beg. of year x

Times: Effective rate x%
Interest Income x

3. Interest bearing with CA @ beg. of year x

Unrealistic nominal rate Times: Effective rate x%
Interest Income x

What is the amount of interest receivable @ year-end?

Type of Note Carrying amount @ year-end

1. Interest bearing Face amount x

Times: Nominal rate x%
Interest Income x

2. Non-interest-bearing -none-

3. Interest bearing with Face amount x

Unrealistic nominal rate Times: Nominal rate x%
Interest Income x

What is the current portion of the notes receivable?

What is the non-current portion of the note receivable?

Answer: If note is a term note (principal is payable one time, the whole NR will be classified as
current if the principal is payable within one year. If the principal will be paid beyond 1 year, the
whole NR will be classified as non-current asset.

If the note is a serial note, it is both current and non-current and can be computed as follows:

Type of Current portion Non-current portion

Note
Interest- Payment of face and interest w/ one x Carrying amount of NR at year-end x
bearing year
Less: Nominal interest for one year (x) Less: Current portion of N/R (x)
Current portion of NR x Non current portion of N/R x

Non- Carrying amount of NR at year-end x Carrying amount of NR at year-end x

Interest- Less: Non-current portion of N/R (x) Times: 1 + Effective Rate x%
bearing Current portion of NR x Less: Principal payment next year x
Non-current portion of NR x

Interest- Carrying amount of NR at year-end x Carrying amount of NR at year-end x

bearing Less: Non-current portion of N/R (x) Times: 1 + Effective Rate x%
with Current portion of NR x Less: Nominal interest (x)
unrealisti Less: Principal payment next year (x)
c nominal Non-current portion of NR x
 Loans Receivable
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Expected Questions:
1. What is the initial measurement of loans receivable (fair value at the date received)?
2. What is the subsequent measurement of loans receivable (carrying amount as of year-end)?
3. What is the interest income for the year before impairment?
4. What is the impairment loss for the year?
5. What is the carrying amount of the loans receivable subsequent to the date of impairment?
6. What is the interest income for the year after impairment?

What is the initial measurement (fair value) of the notes receivable at the date received?

METHOD 1: Face amount of loans receivable x

Add: Origination cost (direct only) x
Less: Origination fee (x)
Initial measurement of LR x

METHOD 2: PV factor x Principal amount x

PV factor x nominal interest x
Initial measurement of LR x

What is the subsequent measurement of LR (carrying amount as of year-end)?

Type of Note Carrying amount at year-end

1. Interest Bearing Face amount
Initial measurement x
Times: 1 + Effective rate x%
2. Interest bearing with unrealistic nominal Less: Nominal rate (Face x NR) (x)
Less: Principal payment, if any (x)
Carrying amount at year-end x

What is the interest income for the year?

Type of Note Carrying amount at year-end

Face amount x
1. Interest Bearing Times: Nominal rate x%
Interest Income x
x
Carrying amount @ beg of year
x%
2. Interest bearing with unrealistic nominal Times: Effective rate
x
Interest Income

What is the impairment loss of the notes for the year?

Carrying amount of the LR at the date of impairment x

Add: Interest receivable, if any (if stated “did not accrued” no interest receivable to be added) x
Total receivable subject to impairment x
Less: Measurement of new receivable
PV Factor * New principal x
PV Factor * New nominal interest, if any x (x)
Impairment Loss x
What is the carrying amount of LR subsequent to impairment?
Measurement of new receivable x
Times: 1 + original effective rate x%
Less: Nominal interest, if any x
Less: Principal payment, if any x
Carrying amount of LR at year-end x

What is the interest income subsequent to impairment?

 Measurement of new receivable x
Times: Original effective interest rate x
Interest income subsequent to impairment x

Receivable Financing
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Expected Questions:
1. Assignment
a. What is the balance of AR assigned?
b. What is the balance of loans payable?
c. What is the equity to be disclosed in the notes to financial statement?
2. Factoring
a. What is the net proceeds from factoring of receivable?
b. What is the cost of factoring?
3. Discounting
a. What is the net proceeds from discounting of NR?
b. What is the gain or loss from discounting of NR?
c. What is the journal entry for discounting of NR?

What is the balance of A/R assigned?

Accounts Receivable – assigned

Balance x x Collection of Accounts Receivable
Recoveries x x Collection of Recovery
x Write off of Accounts Receivable
x Discounts taken during the period
x Sales actually returned

Ending balance x

What is the balance of loans payable?

Amount of loan x Cash collection from AR – assigned x

Less: Cash remittance allocated to the loan (x) Less: Payment for Interest expense (x)
Balance of loan payable @ year-end x Cash remittance allocated to loan x

What is the equity to be disclosed in the notes to financial statement?

Accounts Receivable – assigned balance at year-end x

Less: Loans payable balance at year-end (x)
Equity x

What is the net proceeds from factoring?

Selling price of accounts receivable x

Less: Assessment fee, service fee, commission fee (x)
Less: Factor’s holdback (x)
Less: Interest charge (Interest*No. of days/360) (x)
Net proceeds from factoring x

What is the cost of factoring?

Assessment fee, service fee, commission fee x

Add: Interest charge (Interest*No. of days/360) x
Add: Fair value of recourse obligation (only if w/ recourse) x
Total cost of factoring x

What is the net proceeds from discounting of NR?

Step 1: Compute the total interest over the term of note

Face amount of note x

Times: Nominal interest x%
Times: Term of the note/12 mos. x/12
 Total interest over the term x

Step 2: Compute the maturity value

Face amount of the note x

Add: Total interest over the term x
Maturity value x

Step 3: Compute the discount charge

Maturity value x
Times: Discount rate x%
Times: Remaining term/12 mos. x/12
Discount charge x

Step 4: Compute the net proceeds

Maturity value x
Less: Discount charge (x)
Net proceeds x

What is the net gain or loss from discounting NR?

Step 1: Compute the interest receivable earned

Face amount of note x

Times: Nominal interest x%
Times: Months holding the NR/12 mos. x/12
Interest receivable sold x

Step 2: Compute the total receivable sold

Face amount of the note x

Add: Interest receivable sold x
Total receivable sold x

Step 3: Compute the gain or loss on discounting of NR

Total receivable sold x

Less: Net proceeds x
Gain or loss from discounting x

What is the journal entry for discounting of NR?

Type of Discounting Journal Entry

Cash (net proceeds) xx
Loss from discounting xx
1. Without recourse
Notes Receivable (face amount) xx
Interest Receivable xx
Cash (net proceeds) xx
2. With recourse – Loss from discounting xx
Conditional sale Notes Receivable (face amount) xx
Interest Receivable xx
Cash (net proceeds) xx
3. With recourse – Interest expense xx
secured borrowing Loans payable (face amount) xx
Interest Receivable xx
 Audit of Property, Plant & Equipment (PPE)
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Recognition : must be probable and measurable
Measurement: Initial :
1. Purchase price except refundable taxes, rebates etc regardless if taken or
not
2. Direct Cost
3. Razing cost @present value
Subsequent:
1. Cost model – CV = Cost – Accum. Dep – Impairment loss
2. Revaluation – CV = Revalued amount – Accum. Dep. – Impairment loss
Modes of Acquisition:
1. For Cash = Face value
2. On Account – Cash price equivalent, net of discount regardless if taken
3. Installment – 1) Cash price equivalent 2) PV of Cash flows
4. Issuance of shares – 1) FV of asset received; 2) FV of shares issued; 3) Par value of shares
issued
5. Exchange – if with commercial substance
1) FV of asset given up plus cash paid – cash received
2) FV of asset received
3) Carrying value of asset given up plus cash paid – cash received
6. Exchange – without commercial substance
Carrying value of asset given up
7. Donation = FV of asset received