AUDITING IN A COMPUTERIZED ENVIRONMENT

With the rapid development in technology in recent years, computer information systems (CIS) have become feasible,
even essential, for use in small scale business operations. Almost all entities now use computers to some extent in their
accounting systems. This widespread use of computers has offered new opportunities for professional accountants and
also has created some challenging problems to auditors. Regardless of the extent of computerization or the methods of
data processing being used, the establishment and implementation of appropriate internal control systems rests with
management and those charged with governance. The auditor’s responsibility is to obtain an understanding of the
entity’s internal control system to be able to assess control risk and determine the nature, timing, and extent of tests to
be performed.

Characteristics of Computer Information Systems (CIS)

 Ease of Access to Data and Computer Programs - In a CIS environment, data and computer programs may be
accessed and altered by unauthorized persons leaving no visible evidence.
 Concentration of duties - Proper segregation of duties is an essential characteristic of a sound internal control
system. However, because of the ability of the computer to process data efficiently, there are functions that are
normally segregated in manual processing that are combined in a CIS environment
 Systems generated transactions - Certain transactions may be initiated by the CIS itself without the need for an
input document
 Vulnerability of data and program storage media - In a manual system, the records are written in ink on
substantial paper. The information on the computer can be easily changed, leaving no trace of the original
content

Internal Control in a CIS Environment

Many of the control procedures used in manual processing also apply in a CIS environment
Examples of such control procedures include authorization of transactions, proper segregation of duties, and
independent checking
The elements of internal control are the same

General Controls
1. Organizational controls - Just in a manual system, there should be a written plan of the organization, with clear
assignment of authority and responsibility. In a CIS environment, the plan of an organization for an entity’s
computer system should include segregation between the used and CIS department, and segregation of duties
within the CIS department
 Segregation between the CIS department and user department
 Segregation of duties within the CIS department
2. Systems development and documentation controls - Software development as well as changes thereof must be
approved by the appropriate level of management and the user department
3. Access Controls - Every computer should have adequate security controls to protect equipment, files and
programs. Access to the computer should be limited only to operators and other authorized employees
4. Data recovery controls - A data recovery control provides for the maintenance of backup files and off-site
storage
5. Monitoring controls - Are designed to ensure that CIS controls are working effectively as planned. These include
periodic evaluation of the adequacy and effectiveness of the overall CIS operations conducted by persons within
or outside the entity
Applications Controls
The processing of transaction involves three stages: the input, processing, and output stage
The input stage involves capturing a mass of data 
The processing stage involves converting the mass of raw data into useful information
Output stage involves preparation of information in a form useful to those who wish to use it
Controls over Input
 Key verification - This requires data to be entered twice
 Field check - This insures that the input data agree with the required field format
 Validity check - Information entered are compared with valid information in the master file to determine
authenticity of the input
 Self - checking digit - Is a mathematically calculated digit which is usually added to a document number to
detect common Trans positional errors in data submitted for processing
 Limit check - Or reasonable check is designed to ensure that data submitted for processing do not exceed a pre-
determined limit or a reasonable amount
 Control totals - Are totals computed based on a data submitted for processing
 CHAPTER 1
CASH AND CASH EQUIVALENTS
Definition and Standards
Cash includes money and any other negotiable instrument that is payable in money and acceptable by the bank for
deposit and immediate credit (unrestricted in use for current operations)
PAS 1, Par. 66. An entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is
unrestricted to settle a liability for more than twelve months after the end of the reporting period.
 Cash on hand – undeposited cash collections and other cash items awaiting deposit
 Cash in bank – This includes demand deposit or checking account and saving deposit which are unrestricted as
to withdrawal
 Cash fund – set aside for current purposes.
PAS 7, Par. 6. Cash equivalents are 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.
Short-term – must be acquired three months before maturity can qualify as cash equivalents.
Note: What is important is the date of purchase
CLASSIFICATIONS OF INVESTMENTS
TIME DEPOSIT, MONEY MARKET and TREASURY BILLS

MEASUREMENT AND PRESENTATION OF CASH

Cash is measured at FACE VALUE
The caption cash and cash equivalents should be shown as the first line item under current assets
Cash in foreign currency is measured at the current exchange rate.
Deposit in foreign currencies which are not subject to any foreign exchange restrictions are included in “Cash”
(otherwise, noncurrent assets)
BANK OVERDRAFTS
When the cash in bank account has a credit balance, it is said to be an overdraft.
General Rule: A bank overdraft is classified as a current liability and should not be offset against other bank accounts
with debit balances.
Exceptions:
When an entity has two or more accounts in one bank
If the amount is NOT material
Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from
positive to negative as an integral part of cash management.
COMPENSATING BALANCE
Minimum checking or demand deposit account balance that must be maintained in connection with a borrowing
arrangement with a bank.
  Undelivered check is still subject to the entity’s control and may thus be cancelled any time before delivery at
the discretion of the entity.
 A postdated check is a check drawn, recorded and already given to the payee but it bears a date subsequent to
the end of reporting period.
 A stale check is a check not encashed by the payee within a relatively long period of time. (reasonable time)
Adjusting entries will depend on materiality of the transaction (amount).

CASH SHORTAGE / OVERAGE

Where the cash count shows cash which is less than the balance per book, there is a cash shortage.
Where the cash count shows cash which is more than the balance per book, there is a cash overage.

Cash short or over account is only a temporary or suspense account.

If shortage – either receivable or expense account
If overage – either payable or income account

IMPREST SYSTEM AND PETTY CASH FUND

The imprest system is a system of control of cash which requires that all cash receipts should be deposited intact and all
cash disbursements should be made by means of check.
Petty Cash Fund is money set aside to pay small expenses which cannot be paid conveniently by means of check.

Two methods:
1. Imprest fund system
2. Fluctuating fund system
Imprest Fund System
o Establishment of an Imprest Fund
o Payment of expenses
o Replenishment of the fund
o Adjusting entry for unreplenished expenses at the end of the year
o Reversal entry
o Increase or decrease in fund, if any
IMPREST FUND SYSTEM VS. FLUCTUATING FUND SYSTEM
 Event Imprest Fluctuating

Establishment of the fund ✓ ✓

Payment of expense 🗴 ✓

Replenishment of expenses ✓ ✓

Increase/decrease in funds ✓ ✓

Adjusting at the end of the year ✓ 🗴

Reversal at the beginning of the year ✓ 🗴

 CHAPTER 2
BANK RECONCILIATION
BANK DEPOSITS
 Demand Deposit
 Savings Deposit
 Time Deposit
A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance per bank.
A bank reconciliation is necessary only for a demand deposit or checking account.
There are items on the depositor’s book which do not appear on the bank records as of the same date.
There are items on the bank records which do not appear on the depositor’s book.
RECONCILING ITEMS
Book reconciling items
 Credit memos
 Debit memos
 Errors
Bank reconciling items
 Deposit in transit
 Outstanding checks
 Errors

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. They have the effect of increasing the bank balance.
Typical examples of credit memos are note collected by bank in favor of the depositor and proceeds of bank loan
credited to the account of the depositor.
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. They have the effect of
decreasing the bank balance.
Typical examples of debit memos are NSF checks and bank service charges.
DEPOSITS IN TRANSIT are collections already recorded by the depositor as cash receipts but not yet reflected on the
bank statement.
OUTSTANDING CHECKS are check already recorded by the depositor as cash disbursements but not yet reflected on the
bank statement.
Three 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.

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.

GENERAL PROCEDURES IN PREPARING BANK RECONCILIATION

 Determine the balance per book and the balance per bank
 Trace the cash receipts to the bank statements to ascertain whether there are deposits not yet acknowledged by
the bank
 Trace the checks issued to the bank statement to ascertain whether there are checks not yet presented
for payment
 The bank statement should be examined to determine whether there are bank credits or bank debits
not yet recorded by the depositor
 Watch out for errors
 CASH AND CASH EQUIVALENT EXERCISES
1. What is the basic requirement for cash and cash equivalent?
A. Unrestricted in use for current operations
B. Available for the purchase of property, plant and equipment
C. Set aside for the liquidation of long-term debt
D. Deposited in bank
2. Which of the following is usually considered cash?
A. Certificate of deposit
B. Checking account
C. Money Market saving certificate
D. Postdated check
3. All of the following can be classified as cash and cash equivalents, except?
A. Redeemable preference shares acquired and due in 60 days
B. Commercial papers held and due for repayment in 90 days
C. Equity investments
D. A bank overdraft
4. A compensating balance
A. Must be included in cash and cash equivalent.
B. Which is legally restricted and related to a long-term loan is classified as current asset.
C. Which is legally restricted and related to a short-term loan is classified separately as current
asset.
D. Which is not legally restricted as to withdrawal is classified separately as current asset.
5. What is the treatment of customers’ postdated checks?
A. Accounts Receivable
B. Prepaid expenses
C. Cash
D. Accounts Payable
6.Which of the following is not considered as a cash equivalent?
A. A three-year treasury note maturing on May 30 of the current year purchased by the entity on
April 15 of the current year.
B. A three-year treasury note maturing  on May 30 of the current year purchased by the entity on
January 15 of the current year.
C. A 90-day treasury bill
D. A 60-day money market placement
7.The petty cash fund account under the imprest fund system is debited
A. Only when the fund is created
B. When the fund is created and everytime it is replenished
C. When the fund is created and when the size of the fund is increased
D. When the fund is created and when the fund is decreased
8.In reimbursing the petty cash fund, which of the following is true?
A. Cash is debited
B. Petty cash is debited
C. Petty cash is credited
D. Expense accounts are debited
9. A Cash Over or Short account
A. Is not generally accepted
B. Is debited when the petty cash fund proves out over
C. Is debited when the petty cash fund proves out short
D. Is a contra account to cash
10. When a petty cash fund is used, which of the following statements is true?
A. The balance of the petty cash fund should be reported in the statement of financial position as
a long-term investment
 B. The petty cashier’s summary of petty cash payments serves as a journal entry that is posted to
the appropriate general ledger account
C. The reimbursement of the petty cash fund should be credited to the cash account
D. Entries that include a credit to the cash account should be recorded at the time the payments
from the petty cash fund are made.

CASH AND CASH PROBLEM SOLVING

PROBLEM 1:
The following are the cash balances of ABC Co. at December 31, 2019:
  P40,200
Undeposited collections (in currency and coins
Current account – unrestricted 620,000

Disbursement checks written and recorded in December 2019 but are to be released 130,000
to the payees in January 2020
Restricted time deposts (expected use in June 2020) 2,000,000

ABC, Co. has agreed to maintain a P200,000 compensating balance in its unrestricted current
account in accordance with the loan covenant.
How much should ABC, Co. report as CASH on its December 31, 2019 statement of financial
position?

PROBLEM 2:
Which of the following items should be included in the cash balance at December 31, 2019?
I – A check payable to the company, dated January 3, 2020, in payment of a sale made in December
2019.
II – A check payable to a vendor, dated and recorded in the company’s books on December 31, 2019,
but not released until January 4, 2020
A. I only C. Both I and II
B. II only D. Neither I nor II

PROBLEM 3:
On January 1, 2019, ABC Co. established a petty cash fund of P10,000. On December 31, 2019, the
petty cash fund was examined and found to have receipts and documents for miscellaneous general
expenses amounting to P8,120. In addition, there was cash amounting to P1,500.
What is the amount of petty cash shortage or overage?
What entry would be required to adjust the petty cash fund on December 31, 2019?

PROBLEM 4:
ABC Co. had the following balances on December 31, 2018:

The cash on hand included a P200,000 check payable to ABC Co., dated January 15, 2019?
What total amount should be reported as cash and cash equivalents on December 31, 2018?

CASH AND CASH EQUIVALENTS

1. The amount reported as “Cash” on a company’s statement of financial position normally
should exclude:
A. Postdated checks that are payable to the company
B. Cash in a payroll account
C. Undelivered checks written and signed by the company
D. Petty cash
2. What is the proper accounting treatment for a stale check?
A. Revert back to cash and accounts payable
B. Revert back to cash and a credit to gain or income
C. Ignored
D. Either a or b

PROBLEM 3:
On January 1, 2002, Kyle Corporation established a petty cash fund of ₱400.

On December 31, 2002, the petty cash fund was examined and found to have receipts and
documents for miscellaneous expenses amounting to ₱364. In addition, there was cash amounting to
₱44. What entry would be required to record replenishment of the petty cash fund on December 31,
2002?
PROBLEM 4
On December 31, 2009, West Company had the following cash balances:
Cash in banks     P1,800,000
Petty cash funds (all funds were reimbursed on 12/31/09)                    50,000
Cash in banks includes P600,000 of compensating balances against short-term borrowing
arrangements at December 31, 2009. The compensating balances are not legally restricted as to
withdrawal by West. In the current assets section of West's December 31, 2009, balance sheet
(statement of financial position), what total amount should be reported as cash?

PROBLEM 5:
Trans Co. had the following balances at December 31, 2009:

Cash in checking account         P    35,000

Cash in money market account       75,000
Treasury bill, purchased 11/1/2009, maturing 1/31/2010        350,000
Treasury bill, purchased 12/1/2009, maturing 3/31/2010   400,000

Tran’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three
months or less when purchased. What amount should Trans report as cash and cash equivalents in
its December 31, 2009, balance sheet (statement of financial position)?
Trans Co. had the following balances at December 31, 2009:

Cash in checking account P 35,000

Cash in money market account 75,000
Treasury bill, purchased 11/1/2009, maturing 1/31/2010 350,000
Treasury bill, purchased 12/1/2009, maturing 3/31/2010 400,000

Tran’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three
months or less when purchased. What amount should Trans report as cash and cash equivalents in
its December 31, 2009, balance sheet (statement of financial position)?
6. At the end of the current year, an entity had various checks and papers in safe. Which of the
following should NOT be included in “cash” in the current year-end statement of financial
position?
A. US $20,000 cash
B. Past due promissory note issued in favor of the entity by the President
C. Another entity’s P150,000 check payable to the entity dated December 15 of the current year
D. The entity’s undelivered check payable to a supplier dated December 31 of the current year.
7. Which of the following should be excluded from cash and cash equivalents?
A. The minimum cash balance in the current account which is maintained to avoid service charge.
B. A check issued by the entity on December 27 of the current year but dated January 15 of next
year
C. Time deposit which matures in one year
D. A customer’s check denominated in a foreign currency

CHAPTER 2 – BANK RECONCILIATION

1. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation which
ends with adjusted balance
A. Note receivable collected by bank in favor of the depositor and credited to the account of the depositor
B. NSF customer check
C. Service charge
D. Erroneous bank debit
2. In preparing a bank reconciliation, interest paid by the bank on the account is
A. Added to the bank balance
B. Subtracted from the bank balance
C. Added to the book balance
D. Subtracted from the book balance
3. Which of the following must be deducted from the bank statement balance in preparing a bank reconciliation which
ends with adjusted cash balance
A. Deposit in transit
B. Outstanding check
C. Reduction of loan charged to the account of the depositor
D. Certified check
4. If the balance shown on an entity’s bank statement is less than the correct cash balance and neither the entity nor the
bank has made any errors, there must be
A. Deposits credited by the bank but not yet recorded by the entity
B. Outstanding checks
C. Deposits in transit
D. Bank charges not yet recorded by the entity
5. Bank statements provide information about all of the following, except
A. Checks cleared during the period
B. NSF checks
 C. Bank charges for the period
D. Errors made by the depositor
BANK RECONCILIATION
PROBLEM 1:
Entity A is preparing its February 28, 20x1 bank reconciliation statement. The following information was determined:
Cash balance per accounting books, Feb. 28, 20x1 ₱260,000
Cash balance per bank statement, Feb. 28, 20x1 ₱205,000 
When investigating the difference, the accountant determined the following:
A customer deposited ₱30,000 to Entity A’s bank account as payment for an account receivable. This is not yet recorded
in the books of accounts.
A ₱102,500 check deposited by Entity A during the month is not yet credited to Entity A’s account.
A check drawn in the amount of ₱22,500 is not yet presented to the bank for payment.
The bank returned a check deposit amounting to ₱5,000 because of insufficiency in the funds of the drawer. The check
was received from a customer as payment for accounts receivable.
What is the amount of Cash in Bank to be reported in Feb 28, 20x1?

PROBLEM 2:
On July 7, 2020, TWICE CORP. received its bank statement for the month ending June 30. The statement showed a
P209,500 balance while the cash account balance on June 30 was P35,000. In reconciling the balances, the auditor
discovered the following:

The June 30 collections amounting to P176,000 were recorded on the books but were not deposited in July.
The bank charged the company for a DAUD check of a customer
A paid check for P24,300 was entered incorrectly in the cash disbursements journal as P42,300.
Outstanding checks as of June 30 totaled P354,400

Question 1: What is the amount of the customer’s DAUD check?

Question 2: What is the amount of adjusted cash balance?
PROBLEM 3:
In preparing the bank reconciliation for the month of December, BLACKPINK Company provided the following data:

Question 1: What is the adjusted cash in bank?

Question 2: What is the unadjusted cash in bank balance per book?

PROBLEM 4:
EXO Company received the bank statement for the month of March. However, the closing balance of the account was
unreadable.
EXO Company received the bank statement for the month of March. However, the closing balance of the account was
unreadable.
Attempts to contact the bank after hours did not secure the desired information.

What is the cash balance per bank statement?

PROBLEM 5:
What is the cash balance per bank statement?
The information below relates to 2NE1’s cash in bank:

The cash balance in the books of 2NE1 on December 31, 2020, is?