Substantive of Audit of Cash

Audit objectives for Cash Balances

Existence – Cash record on the books exist

1. Cash count on hand

2. Confirm bank balances

3. Examine interbank transfers

4. Perform analytical procedures

Completeness – all of the entity’s cash is included

1. Perform cash cutoff test.

2. Prepare proof of cash

Obligations/Rights – cash balances are available for use without restrictions or if with restrictions,
properly indicated in the balance sheet.

1. Examine standard bank confirmations and read the minutes of the board of director’s
meetings to determine whether any restrictions have been placed on cash.

Valuation – determine if cash is recorded and presented at the proper amount.

1. Obtain bank cut-off statements directly from the bank and use them to test the bank
reconciliation as of the balance sheet date.

Presentation and Disclosure – whether cash is presented in accordance with generally accepted
accounting principles

1. Review financial statements and perform analytical procedures to determine whether

accounts are classified and disclosed in accordance with GAAP.

Audit objectives for Cash Collections:

Completeness – all receipts of cash and checks are recorded.

Verify that all cash receipts are recorded by reconciling daily listing of cash receipts and
validated deposit slip to cash receipts journal.

Occurrence – recorded receipts represent actual collections of cash from customers

In cash receipts journal, trace to the prelisting of cash receipts and to remittance advice. Or
reconcile daily deposit to validated deposit ticket or deposit slip.

Classification – Cash receipts transactions have been recorded in the proper accounts

Review account coding for a sample of entries in the cash receipts journal.
Accuracy (Valuation) – Debits to cash and credits to accounts receivables are valued at amounts
received.

Examine remittance advice and verify that discount taken was appropriate.

Audit objectives of Cash Payments:

Completeness – all cash payments are recorded

Reconcile cash payments per books with cash payments per bank. Prepare or test bank
reconciliation.

Occurrence – Recorded cash payments occurred

Examine paid checks for appropriate endorsements. Examine documents underlying payments.

Classification – Cash payments transactions have been recorded in the proper accounts

Check accuracy of accounts on invoices by reference to chart of accounts.

Accuracy (Valuation) – Debits to various accounts and credits to cash are valued at proper amount.

Recalculate invoices paid.

Documents and reports needed to check the cash balances.

Cash Count Sheet for cash on hand or petty cash

Bank reconciliation statement – for cash in bank

Proof of cash or reconciliation of receipts and disbursements

Working papers to determine adjusted balance of petty cash Fund

Usual problem in audit of cash:

Misstatement Examples Internal control weaknesses or

factors that increase the risk of
misstatement

1. Recording fictitious cash Overstating cash receipts on Lack of segregation of duties of

receipts the books by transferring cash the functions of access to cash
between bank accounts and record keeping.
without appropriate recording
of the transfer to cover up an
embezzlement of cash
2. Failure to record Fraud – Fails to ring up and
receipts from cash sales record cash sales and
embezzles the cash
Error – Bookkeeper
accidentally omits the
recording of the receipts from
one cash register for the day
3. Failure to record cash Fraud – a cashier embezzles
from collection of cash payments by customers
accounts receivables on receivables, without
recording the receipts in the
customers accounts
- A bookkeeper who has
access to cash receipts
embezzles cash
collected from
customers and writes
off the related
receivables
Error – A bookkeeper
accidentally fails to record
payment on a receivable
4. Early (late) recognition Fraud – Holding the cash
of cash receipts – receipts journal open to record
“cutoff problems” next year’s cash receipts as
having occurred in this year
Error – Recording cash receipts
based on bad information
about date of receipt
5. Inaccurate recording of Fraud – a bookkeeper prepares
purchase or a check to himself and records
disbursement it as having been issued to a
major supplier
Error – A disbursement is made
to pay an invoice for goods that
have not been received
6. Duplicate recording and Error- a purchase is recorded
payment of purchases when an invoice is received
from a vendor and recorded
again when a duplicate invoice
is sent by the vendor
-Inadequate supervision of
cashiers
Inadequate controls for
reconciling cash register tapes
and accounting records.
Lack of segregation of duties
between personnel who have
access to cash receipts and
those who make entries into
the accounts receivable
records.
Lack of segregation of duties.
Inadequate reconciliations of
subsidiary records of accounts
receivable with the general
ledger control account.
Ineffective board of directors,
audit committee, or internal
audit function.
Failure to list and deposit cash
receipts on a timely basis
Inadequate segregation of
duties
Ineffective controls for
matching invoices with
receiving documents before
disbursements are authorized
Ineffective controls over the
input of invoices that allow
invoices from the same vendor
with the same invoice number
to be processed more than
once
 7. Unrecorded Fraud – in conjunction with Ineffective control over record
disbursements unrecorded but deposited cash keeping for and access to cash
receipts, an employee writes
and cashes an unrecorded
check for the identical amount

Problem Solving:

1. You were able to gather the following from the December 31, 2019 trial balance of Peso
Corporation in connection with your audit of the company:
Cash on hand P372,000
Petty Cash fund 10,000
BPI Current account 950,000
Security Bank current account No. 01 1,280,000
Security Bank current account No. 02 (40,000)
PNB Savings account 500,000
PNB time deposit 300,000

Cash on hand includes the following items:

a. Customer’s check for P60,000 returned by bank on December 26, 2019 due to insufficient fund
but subsequently redeposited and cleared by the bank on January 8, 2020.
b. Customer’s check for P30,000 dated January 2, 2020, received on December 29, 2019.
c. Postal money orders received from customers, P36,000.

The petty cash fund consisted of the following items as of December 31, 2019.
Currency and coins P2,100
Employees vale P1,600
Currency in an envelope marked “collections for charity” with names attached P1,200
Unreplenished petty cash vouchers P800
Check drawn by Peso Corporation, payable to the petty cashier P 4,600
Total P10,300

Included among the checks drawn by Peso Corporation against the BPI current account and
recorded in December 2019 are the following:
a. Check written and dated December 29, 2019 and delivered to payee on January 2, 2020,
P50,000.
b. Check written to payee on December 27, 2019 dated January 2, 2020, delivered to payee on
December 29, 2019, P86,000.

The credit balance on the Security Bank current account No. 2 represents checks drawn in excess of
the deposit balance. These checks were still outstanding at December 31, 2019.
The savings deposit in PNB has been set aside by the Board of Directors for acquisition of new
equipment. The account is expected to be disbursed in the next 3 months from the balance sheet
date.

Questions:
Based on the above and the result of your audit, compute for the adjusted balances of the following:
1. Cash on hand
2. Petty Cash Fund
3. BPI Current account
4. Cash and cash equivalents

Solutions:
Answer: Cash on hand – P282,000

Unadjusted balance, Cash on hand P372,000

Less: Returned Customer’s check, redeposited on January 2020 60,000
Customer’s Post-dated check 30,000
Adjusted balance, Cash on Hand P282,000

Answer: Petty Cash Fund – P6,700

Currency and coins P2,100
Check drawn by Peso Corporation, payable to the petty cashier P 4,600
Total P6,700

Answer: BPI current account – P1,086,000

Unadjusted, BPI Current account P950,000

Add: Check written December 29, 2019 but delivered on Jan 2020 50,000
Check written Dec, 2019 dated Jan. 2, 2020, delivered Dec 2019 86,000
Adjusted, BPI current account P1,086,000

Answer: Cash and cash equivalents – P 2,914,700

Adjusted Cash on hand P282,000

Petty cash Fund 6,700
Adjusted BPI Current account 1,086,000
Security Bank current account No. 01 1,280,000
PNB time deposit 300,000
Total P 2,914,700

2. A count of the undeposited receipts under the custody of T. Sanchez, cashier of Santol
Company, on October 1, 2017, 9AM, showed the following computation.
Currency and coins P14,750
Checks:
Date Payee Drawer Amount
2/29/2017 Cash T. Sanchez P 1,000
9/29/2017 Santol Co. Cebu Corp 3,400
9/30/2017 Santol Co. L. Reyes 2,500
9/30/2017 Meralco Santol Co. 1,900 8,800

Postage and documentary stamps 120

Paid vouchers covering transactions and expenses 1,200
Customer’s check returned by bank, NSF 900
Money in envelope with list of contributions to Sweepstakes pool 800
IOUs from employees 500
Total P 27,070

How much is the shortage or overage on October 1, 2017 if the cashier’s accountability is
P24,500? Show your solution.

Answer: Cash Shortage of P 2,030

Solution:
Currency and coins P14,750
Postage and documentary stamps 120
Checks:
Date Payee Drawer Amount
9/29/2017 Santol Co. Cebu Corp 3,400
9/30/2017 Santol Co. L. Reyes 2,500 5,900
Paid vouchers covering transactions and expenses 1,200
IOUs from employees 500
Total P22,470
Cashier’s accountability 24,500
Cash shortage P2,030