APPLIED AUDITING MODULE

SCHOOL OF ACCOUNTANCY
MODULE 3
AUDIT OF CASH & CASH EQUIVALENTS, PART 2

OVERVIEW:
We will discuss in this module the audit program, including the substantive procedures performed during
cash audit. Main area of focus for audit of cash and cash equivalents:
a. Types of bank account and facilities provided by bank.
b. Bank reconciliation to identify any adjusting entries.
c. Bank confirmations
d. Cash count for the year-end balance of cash in hand.
e. Subsequent position of checks that were not cleared in the year end.
f. Test of control over bank payments, petty cash payments and bank receipts.

KNOWLEDGE REQUIRED:
This course requires mastery of accounting standards for cash and cash equivalents, knowledge in the
information systems and related cycles, such as revenue and collection cycles; and familiarity with the
different assertions made by the client.

LEARNING OBJECTIVES
1. Enumerate the assertions relevant to cash audit.
2. Explain the nature of the audit procedures to accomplish the objectives.
3. Know the audit working papers to document the audit.

LESSON 1: AUDIT PROGRAM FOR CASH (AUDIT ASSERTIONS / OBJECTIVES / PROCEDURES)

The audit must be performed in order to answer whether all management assertions are valid. The
procedures must be aligned with the objectives related to the assertions.

In the audit of cash, we usually test the following management assertions:

❖ Existence - Cash balances on the balance sheet really exist at the reporting date.
❖ Completeness - Cash balances include all cash transactions that have occurred during the
accounting period. No transaction is not recorded.
❖ Rights and obligations - Client owns and has title to the cash accounts as of the reporting date.
❖ Valuation or allocation - The recorded balances reflect the true value of the cash and cash
equivalents.
❖ Presentation and disclosure - Cash is properly classified on the balance sheet and adequate
disclosure has been made in the notes to the financial statements.

ASSERTIONS OBJECTIVES SUBSTANTIVE PROCEDURES

Existence To determine whether cash exists at
year end and cash-related transactions
occur within the year.
▪ Select samples of cash receipts from cash book and
trace to remittance advices, pay-in slips, and bank
statement.
▪ Select samples of cash payments from cash book
and trace to payment vouchers (with supporting
documents) and bank statements.

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Completeness To ensure that there is no unrecorded
cash, and that all transactions are
recorded in the proper accounting
period.
Valuation To ensure cash balances have been
recorded at their proper valuations.
Cut-off To ensure all transactions were
recorded within the correct reporting
period.
Classification To ensure all transactions have been
recorded within the correct accounts in
the general ledger.
▪ Scan through the entries and trace all the unusual
items, like contra items, stopped payment
items and cancelled cheques, to support
documents and authorization.
▪ Trace a sample of remittance advices and pay-in
slip to cash receipt journal.
▪ Trace a sample of payment vouchers (with
supporting documents) to cash book.
▪ Compare a sample of remittance advices with
amount in cash receipts recorded in the cash book.
▪ Compare a sample of (cancelled) cheques with
amounts in cash recorded in the cash book.
▪ Compare the dates for recording a sample of cash
transactions with the dates of cash deposited in
bank or cheques sent.
▪ Examine a sample of cash receipts and payments
transactions for proper classification.

LESSON 2: SPECIFIC AUDIT PROCEDURES DISCUSSED:

✓ Get some info:

In our previous modules, you have learned that you have to obtain detailed knowledge of your
client. During cash audit, that would include knowing about the bank accounts, types of bank
accounts and the purpose of each bank account, banking facilities arrangements, overdraft
facilities, bank guarantees, authorized signatories, bank payment and receipt process, and petty
cash processes.

✓ Bank Confirmation
Bank confirmation is one of the easiest things to do during cash audit. There are two main kind of
confirmation, as follows:

Positive Negative
Type A Type B (Blank)
Requests that the customer Asks the customer to indicate the Requests that the customer
respond whether or not the amount owed at a certain date respond only if the customer
balance is correct (i.e. fill in the blank) disagrees with the stated
amount in the letter
Requests that the customer Higher quality evidence but Lower quality evidence than
respond whether or not the usually has a lower response rate positive confirmations
balance is correct
More common approach,
usually has a better response
rate

Firms usually have their own letter formats for bank confirmation. Bank confirmations are sent by
the auditor, requesting the bank to disclose the information directly to the auditor. In a bank confirmation

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APPLIED AUDITING MODULE
SCHOOL OF ACCOUNTANCY
letter, both the auditor and the client will sign. The client’s authorized signatories will sign in the bank
confirmation letter in order to authenticate the auditor’s request. The bank confirmation letter will have
to be printed in audit firm’s letterhead. Ask the bank to confirm the balances directly to you, auditor. If the
bank doesn't send you balance confirmation letters, you can arrange a conversation with the bank officials
and if possible, send the confirmation letters in scanned copy through e-mail. You may also perform
alternative procedures as long as it will result to same output.

✓ Bank Reconciliation/Proof of Cash

After the banks confirm the balances as per their record, you need to match the amounts confirmed with
the client’s book balances. You need to perform bank reconciliation, even when client does this on a
monthly basis, for independent verification. We will have to identify if there are any adjusting entries that
are yet to be reconciled.

✓ Post year-end Procedures

After re-performing the bank reconciliations, you will have to check whether the reconciling items have
been subsequently cleared or not. You need to obtain bank statements for the first few months of the
subsequent year. Check the items that were not cleared in the year end and check if they were
subsequently cleared. If not, inquire to the management.

✓ Physical Cash Count

You must have to attend during the physical cash count in the year end. Collect a cash certificate from the
client and sign off your worksheet as well by the client. In addition to that to check the control on petty
cash balances, you can conduct a surprise cash count.

✓ Bank Overdrafts
You will have to check the overdraft balances with the bank accounts. Make sure that overdraft balances
are reflected in the balance sheet as current liabilities, except those allowed by the standard to be deducted
from asset.

✓ Authorization check
You may obtain from the bank a list of authorized signatories and check whether these signatories are the
ones that actually sign.

✓ Foreign Currency
If there are any foreign currency bank account exists, please do confirm that appropriate exchange rate is
used for the presentation of foreign currency account balances in the financial statements.

✓ Interest Income
Make sure that interest income is properly accounted for in accruals basis instead of cash basis.

LESSON 3: COMMON CASH WORK PAPERS

Work papers normally include the following:
a. An understanding of cash-related internal controls
b. Risk assessment of cash assertions at the assertion level
c. Documentation of any control deficiencies
d. Cash audit program
e. Bank reconciliations for each significant account

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APPLIED AUDITING MODULE
SCHOOL OF ACCOUNTANCY
f. Bank confirmations

ACTIVITY SECTION

ACTIVITY 1: CASE OF THE MISSING PETTY CASH

ACTIVITY 2:
Compute for the audited balances
You were able to gather the following from the December 31, 2019 trial balance of Bongga Corporation in
connection with your audit of the company:
Cash on hand P 500,000
Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000
Cash on hand includes the following items:
a. Customer’s check for P40,000 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 P20,000 dated January 2, 2020, received on December 29, 2019.
c. Postal money orders received from customers, P30,000.
The petty cash fund consisted of the following items as of December 31, 2019.
Currency and coins P 2,000
Employees’ vales 1,600
Currency in an envelope marked “collections for charity”
with names attached 1,200
Unreplenished petty cash vouchers 1,300
Check drawn by Bongga Corporation, payable to

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APPLIED AUDITING MODULE
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the petty cashier 4,000
Included among the checks drawn by Bongga 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, P80,000.
b. Check written on December 27, 2019, dated January 2, 2020, delivered to payee on December 29, 2019,
P40,000.
The credit balance in 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 account deposit in PNB has been set aside by the board of directors for acquisition of new
equipment. This account is expected to be disbursed in the next 3 months from the balance sheet date.

Compute for:
1. Cash on Hand
2. Petty Cash
3. BPI current
4. Cash and cash equivalents

ACTIVITY 3:
Proof of Cash
Prepare a portion of proof of cash with necessary adjustments, assuming client’s NSF checks are recorded
as a reduction of cash receipts. NSF checks which are later redeposited are then recorded as regular
receipts. Data regarding NSF checks are as follows:
1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000.
2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000.
3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000.

Item November 30 Receipts Disbursements December 31

1.
2.
3.

ACTIVITY 4:
Proper Classification/Presentation
Identify the classification of the following assuming the report date is December 31, 2019:
_________________ 1. Investment in 1-year T-bills purchased last September 30, 2019 and will mature on
January 15, 2020.
_________________ 2. Investment in 1-year T-bills purchased last November 30, 2019 and will mature on
January 15, 2020.
_________________ 3. Investment in money market placement due on February 1, 2020.
_________________ 4. Check payable to Ms. Apple Pie dated December 2, 2020.
_________________ 5. Check from customer dated February 14, 2020.

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APPLIED AUDITING MODULE
SCHOOL OF ACCOUNTANCY

EVALUATION

Which part of the discussion did you Which part of the discussion did you
find most enjoyable to learn? find most difficult?

Do you have question(s) in mind? Write it here

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