Controls for Cash Receipts

CHAPTER 2: AUDIT OF CASH
AND CASH EQUIVALENTS
INTERNAL CONTROL OVER CASH

The control of cash is clearly of prime importance in any business. The central objectives are
that:
§ All sums are received and subsequently accounted for.
§ No payments are made which should not be made.
§ All receipts and payments are promptly and accurately recorded.
The IMPREST SYSTEM is a basic control mechanism over cash which has as its primary
objective, the avoidance of cash loss due to misappropriation or theft either by people within
the entity or outside the entity. Thus, the primary requirement of the imprest system is for the
company not to hold its own cash, but to have it be held by a trustee (e.g. bank). Implicit to
this requirement, therefore are the following: a) all receipts should be deposited in tact to the
bank, preferably on a daily basis and, b) a disbursements should be coursed through the bank.
Thus businesses should as much as possible conduct all their cash transactions by means of
checks or other forms of bank transfers as control over check transactions are easier to
establish and maintain. If it is inevitable, based on the nature of the business transaction, to
transact on a cash basis, rather than through checks, compensating controls should be in place.
A. CONTROLS OVER CASH RECEIPTS BY POST

• The company should safeguard against possible interceptions between the receipt and
opening of the post, e.g. by using a locked mail box and restricting access to keys.
• The opening of the post should be supervised by a responsible official; where the
volume of mail is significant, at least two people should be present when it is opened.
• All checks and postal orders should be restrictively endorsed or crossed ‘Account payee
only, not negotiable’ as soon as the mail is opened.
• A record should be made at the time of the opening of the post of checks and postal
orders received and cash received. This record may be in the form of a rough cash
book, adding machine list or copies of remittance advices. It provides control over the
eventual sums banked and entered into the cash book.
• The cashier and sales ledger personnel should not have access to the receipts before
this record is made.
• Post should be date stamped. It provides evidence of when remittances are received
and can periodically be checked against the date of banking. This helps to prevent cash
received one day being banked as representing different receipts on a later day (a
process known as ‘teeming and lading’ or ‘lapping’)
B. CONTROLS OVER CASH COLLECTED BY SALES PERSONNEL

• Authority to collect cash should be clearly defined.
• Sales personnel should be required to remit cash and report sales at regular intervals
which should be formally notified to such employees.
• A responsible official should quickly follow up sales personnel who do not submit returns
as required.
CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS
• Collections should be recorded when received, e.g. in a rough cashbook or copies of

receipts which should be given to sales personnel.
• The collector’s cash receipts should be reconciled to the eventual banking.
• Periodically, a responsible official should check the sales personnel’s own receipt books
with cash book entries.
• If sales personnel hold inventories of goods, an independent reconciliation of inventory
with sales and cash received should be made.
C. CONTROLS OVER CASH SALES

• Cash sales should be recorded when the sale is made normally by means of a cash sales
invoice.
• If cash sales invoice are used they should be pre-numbered, a register should be
maintained of cash sale invoice books and copies should be retained.
• Cash received should be reconciled daily with the invoice totals.
• This reconciliation should be carried out by someone independent of those receiving the
cash and recording the sale.
• Daily banking should be checked against the invoice total and differences should be
investigated promptly.
• A responsible official should sign cancelled cash sales invoices at the time of
cancellation. All such invoices should be checked periodically for sequential numbering.
D. CONTROLS OVER BANKING

• Receipts should deposited intact daily.
• Each day’s receipts should be recorded promptly in the cash book.
• Sales ledger personnel should have no access to the cash or the preparation of the
deposit slip.
• Periodically, a comparison should be made between the split of cash and checks
received (and recorded in the cash book) and deposited (and recorded on deposit slips).
E. CONTROLS OVER CHECK PAYMENTS

• Unused checks should be held in a secure place.
• The person who prepares checks should have no responsibility over purchase ledger or
sales ledger.
• Checks should be signed only when evidence of a properly approved transaction is
available. Such evidence may take the form of invoices, payroll, petty cash book etc.
• Each check should be evidenced by signing the supporting documentation.
• In a large concern, those approving the original document should be independent of
those signing the checks.
• Check signatories should be restricted to the minimum practical number.
• At least two signatories should be required except perhaps for checks of small amounts.
• The signing of blank checks and checks in favor of the signatory should be prohibited.
• Checks should be crossed before being signed.
• Supporting documents should be cancelled as paid to prevent their use to support
further check payments. This cancellation could be done by the cashier before the
check is signed (provided the cancelation identifies the check number) or by check
signatory at the time of signing of the check.
• Checks should preferably be dispatched immediately. If not, they should be held in a
safe place.
• Returned checks may be obtained from the bank and a sample should be checked
against the cash book entries and supporting documentation.
F. BANK RECONCILIATION
• Bank reconciliations should be prepared at least monthly.
• The person responsible for preparation should be independent of the receipts and
payments function or, alternatively, an independent person should check the
reconciliation.
32 AUDITING/Espenilla
• If the reconciliation is prepared independently, the bank statements should be obtained

directly from the bank and held until the reconciliation is completed.
• The preparation should preferably include a check of at least a sample of receipts and
payments against items on the bank statement.
G. CONTROLS OVER PETTY CASH

• The level and location of cash fund should be laid down formally.
• There should be restricted access to fund.
• Cash should be securely held, e.g. in a locked drawer, with restricted access to keys.
• All expenditure should require a voucher signed by a responsible official, not the petty
cashier.
• The imprest system should be used to reimburse the fund, i.e. at any time the total
cash and value of vouchers not reimbursed equals a predetermined amount.
• Vouchers should be produced before the check is signed for reimbursement.
• Vouchers should be cancelled once reimbursement has taken place.
• A maximum amount should be placed on a petty cash payment to discourage normal
purchase procedures from being by-passed.
• Periodically, the petty cash should be reconciled by an independent custodian.
• Rules should exist preferably preventing the issue of ‘I.O.U.s’ or the
cashing/accommodation of checks.
TEST OF CONTROLS
A. CASH RECEIPTS
ü Inspect evidence of independent bank reconciliation.
ü Review procedures for segregation of duties. Ask about and observe the mail room and
cash handling procedures.
ü Inspect evidence that entries in the cash receipt journal have been independently
compared with daily cash summaries and postings to the receivable subsidiary ledger.
ü Select representative sample of recorded cash receipts:
o Vouch to the validated bank deposit slips.
o Vouch to prelists and remittance advices.
ü Select a representative sample of daily cash summaries:
o Trace to entries in cash receipts journal
o Perform recalculations to check for arithmetical accuracy.
o Trace positing to general ledger.
o Trace to bank statement.
The aforementioned tests focus on cash receipt transaction assertions: occurrence,

completeness, accuracy, cut-off and classification. More specifically:
• OCCURRENCE – recorded cash receipts represent cash actually collected from

customers. To test this control procedure, the auditor inspects the bank
reconciliation and checks that they have been prepared by an independent
employee.
• COMPLETENESS – all cash receipts are recorded. Test of controls to ensure
completeness involve a number of audit procedures. The auditor should observe
and inquire into the mailroom and cash handling procedures, such as opening of
mail and preparation of pre-listings, and inspect evidence such as approval
signatures indicating that independent comparisons have been performed.
• ACCURACY, CUT-OFF AND CLASSIFICATION – all cash receipts are recorded at
their proper amounts, in the proper accounting period and proper accounts. The
auditor should select entries in the cash receipts journal and examine the
remittance advice to make sure that the amount of credit given is appropriate.
By reviewing the cash receipts journal, unusual items can be identified and
investigated for proper classification The auditor should also examine internal
AUDITING/Espenilla 33
checks for evidence of review and approval by supervisory personnel , such as

cash discounts taken.
B. CASH PAYMENTS
ü Ask about and observe the use of prenumbered checks, and test the numerical
sequence in the check register (or cash payments journal) and unused checks.
ü Seek approval from the client to obtain a sample of cancelled checks from the bank:
o Examine for properly approved supporting voucher
o Agree amount on cancelled check and supporting voucher.
o Examine supporting voucher for evidence of cancellation of the voucher and
vendor invoice.
o Examine cancelled checks for authorization signatures.
o Trace cancelled checks to check register (or cash payment journal) and to
accounts payable subsidiary ledger accounts
ü Test arithmetical accuracy of check register (or cash payment journal) and compare
totals to the general ledger postings.
ü Review procedures for segregation of duties
The aforementioned tests focus on cash receipt transaction assertions: occurrence,

completeness, accuracy, cut-off and classification. More specifically:
• OCCURRENCE – recorded cash payments have actually occurred. The auditor

uses inquiry and inspection techniques to test the control relating to this
assertion. The auditor ask about the use of pre-numbered checks and examines
the vouchers and supporting documents for evidence of approval for payment.
Cancelled checks are also examined for authorized signatures.
• COMPLETENESS – all cash payments are processed and recorded. In testing
controls for completeness, the auditor examines the clients’ documentation for
evidence that these controls have been adhered to. The auditor might also wish
to test-check the numerical sequence of checks in the check register (or cash
payment journal), as well as unused checks. Further evidence of completeness
in recording is provided by obtaining with the client’s permission, a sample of
issued (cancelled) checks from the bank, and tracing these to the check register
(or cash payments journal) and to accounts payable subsidiary ledger.
• ACCURACY, CUT-OFF AND CLASSIFICATION – cash payments are recorded at
their proper amounts, in the proper accounting period and proper account. To
test the controls over these assertions, the auditor should examine the
cancelled checks obtained form the client’s bank, noting in particular the payee,
amount, check number, date authorized signature and the date cleared by the
bank. Details on the cancelled checks should be compared with the supporting
documents, and also traced to the check register (or cash payments journal)
and to the accounts payable subsidiary ledger. In addition, the auditor should
test check the arithmetical accuracy of he check register by adding the columns
and cross-adding the totals, and checking these total against the general ledger
postings. Client bank reconciliation, as well as reports of discrepancies arising
form independent internal verifications, should also be reviewed and examined
for evidence of supervisory review and approval. For cash payments, reviewing
account codes on a sample vouchers will eliminate chances of inappropriate
classification of transactions and, hence, ensure proper accounts are used.
C. BANK RECONCILIATIONS
ü Examine evidence of regular bank reconciliation (usually one for each bank account per
month)
ü Examine evidence of independent check on bank reconciliations (e.g. a signature).
ü Examine evidence of follow-up of outstanding items on bank reconciliations. Pay
particular attention to old outstanding reconciling items that should be written back
such as stale checks.
D. PETTY CASH
ü Test petty cash vouchers for approval.
ü Test cancellation of paid petty cash vouchers.
ü Test for evidence of arithmetical check on petty cash records.
ü Examine evidence of independent check of petty cash balance.
SUBSTANTIVE TESTING
EXISTENCE
AUDIT OBJECTIVES:
To determine that cash balances at the balance sheet date as presented in the client’s financial
statements represent cash and cash items on hand, in transit to, or in depository banks.
To determine whether cash balances related transactions occurred within the year.
AUDIT PROCEDURES:
1. Conduct a cash count of undeposited collections, petty cash, and other funds.
a. Obtain custodian’s signature to acknowledge return of items counted.
b. Reconcile items counted with general ledger balances.
c. Trace undeposited collections counted to bank reconciliation.
d. Follow up dispositions of items in cash counted:
d.1. Undeposited collections should be traced to bank deposits subsequent to the
balance sheet date.
d.2. Checks accommodated in petty cash should be deposited after the count to
establish their validity.
d.3. IOU’s in the petty cash should be confirmed and traced to collections in the
subsequent period.
d.4. Expense vouchers should be traced to succeeding replenishment voucher.
e. Coordinate cash count with count of marketable securities and other negotiable assets
of the client.
f. Obtain confirmation of year-end fund balances of cash not counted in other offices.
2. Confirm bank balance by direct correspondence with all banks in which the client has had
deposits and loans during the year. Other information such as additional accounts, loans,
may be provided by financial institution. Bank confirmation should (a) sent to all banks in
which the client has an account, (b) signed by the client, (c) mailed by auditor, and
returned directly to the auditor.
3. Obtain or prepare bank reconciliation.

a. Check arithmetical accuracy of reconciliation.
b. Trace balance per book to the general ledger balance of the cash account.
c. Trace balance per bank to bank statement and compare with amount confirmed by
bank.
d. Establish authenticity of reconciling items by reference to their respective sources, like:
d.1. Bank debit or credit advices.
d.2. Duly approved journal vouchers.
2.3. Trace bank reconciling items to the subsequent bank statements or to the cut-off
bank statements (see procedures below – completeness assertion)
e. Investigate check outstanding for a long period of time.
e.1. Consider adjustment, especially if the check is already stale.
e.2. Consider the possibility of an erroneous preparation of the check.
f. Investigate any unusual reconciling items.
g. Where internal control over cash is weak, consider preparing a proof of cash or cash
reconciliation. (see detailed procedures for proof of cash)
4. Obtain a list of interbank transfers a few days before and after the balance sheet date.
a. Vouch supporting documents.
b. Ascertain that the related receipts and disbursements were booked by the client within
the same day or at least within the same week.
COMPLETENESS
AUDIT OBJECTIVES:
To determine that cash transactions have been properly recorded in the correct accounting
period.
AUDIT PROCEDURES:
1. Obtain cut-off bank statement showing the client’s transactions with the bank at least one
week after the balance sheet date, and:
a. Trace year-end reconciling items, like:
a.1. Deposit of the year-end undeposited collections.
a.2. Completeness of year-end outstanding checks.
a.3. Corrections of bank errors.
b. Examine supporting documents of year-end outstanding checks that did not clear in the
cutoff bank statement.
2. Prepare proof of cash:

Where internal control over the recording of cash receipts and disbursements is
considered weak, the auditors may use additional reconciliation procedures such as
preparing proof of cash, with allows a more detailed study of cash transactions
occurring within a specified period. This is essentially a fraud detection procedure which
may be used for the last month of year or for selected months during the year.
3. Test reasonableness of cut off by:

a. Comparing dates of checks returned with cutoff bank statement to dates of recording
the cash disbursements register.
b. Tracing receipts recorded a few days before balance sheet date to bank deposits.
RIGHTS AND OBLIGATIONS

AUDIT OBJECTIVE:
To determine that cash balances are available for use without restrictions or not made available
to related parties or if with restrictions and made available to related parties, properly indicated
in the balance sheet.
AUDIT PROCEDURES:
1. Investigate any checks representing large or unusual payments to related parties or checks
made to cash or bearer. Any large or unusual checks payable to directors, officers,
employees, affiliated companies could be carefully reviewed by the auditors to determine
whether the transactions:
a. Were properly authorized and recorded.
b. Are adequately disclosed in the financial statements.
2. If checks have been issued payable to cash, the auditors should determine who received
these payments and why this form of check was issued.
3. Review bank statements and bank replies to confirmation letters.
VALUATION
AUDIT OBJECTIVE:
Cash is recorded and presented at the proper amount and in accordance with GAAP.
AUDIT PROCEDURES:
1. Verify existence of cash in banks under receiverships, cash subject to court’s restraining
order, in foreign banks and in foreign currency. This is in addition to the foregoing procedures
which will enable the auditor to verify proper valuation of cash.
FINANCIAL ACCOUNTING REVIEW:

CASH AND CASH EQUIVALENTS
(References: PAS 1, PRESENTATION OF FINANCIAL STATEMENTS; PAS 7, STATEMENT OF
CASH FLOWS)
DEFINITION
Cash is anything that can be used as medium of exchange and is acceptable by bank at face
value upon deposit.
RECOGNITION
Cash is recorded as an asset and is reported on the statement of financial position when the
following conditions as set in the conceptual framework are met:
A) It is probable that the future economic benefits associated with cash will flow to the
enterprise.
B) The asset has a value that can be measure reliably
INITIAL MEASUREMENT
Cash is initially measured at face value.
SUBSEQUENT MEASUREMENT (VALUATION)

General rule – at face value
Exceptions:
Cash denominated in foreign currency – at current exchange rate.
Cash being held by a financial institution that is in bankruptcy or other financial difficulty
– is technically no longer cash in as much as it is no longer available for use in the current
operations. Such shall be technically classified as receivable thus shall be measure at amortized
cost or at its estimated realizable value or recoverable value
CLASSIFICATION/PRESENTATION:
CURRENT ASSET – cash is presented in the current asset portion of the statement of financial
position as “cash and cash equivalent”.
CASH AND CASH EQUIVALENT – cash and cash equivalent is usually presented as the first item
on the statement of financial position. The account should only include only those amounts that
are available for use in current operations.
Cash and cash equivalents may either be cash on hand, in banks, cash fund or cash equivalent.
a. Cash on hand includes currencies, coins, and checks, awaiting deposits, and cash
in working funds. Technically defective customer collection check shall not be
included as part of cash on hand. (see SPECIFIC CONCERNS)
b. Cash in banks include deposits in both savings account and checking or current
account (demand deposit) not restricted for use in the current operations.
c. Cash fund are cash set aside for current operating purpose. If cash is set aside
other than for current operating purpose, the same shall be presented as part of
Long term investment (fund investment)
d. Cash equivalent are short term highly liquid investment so near their maturities
that they are subjected to very minimal risk of changes in value (due to interest).
As a rule of thumb, PAS 7 identifies that purchase of short term investments
three-months prior to its maturity shall be regarded as the threshold for the
purpose of this definition.
Those that does not qualify as “cash and cash equivalent” should be classified elsewhere, to wit:
TEMPORARY/SHORT TERM INVESTMENTS – these are instruments which are due more than
three months but within one year from the date of purchase.
LONG TERM INVESTMENTS – cash that is not available for current/ operating purposes, such as
cash accumulated in a sinking fund to retire the principal amount of long-term bonds, or cash
set aside for payment of post-retirement benefits of employees should be reported in the
investments and funds category and not in the current assets.
OTHER ASSETS – cash in financial institution which is in bankruptcy or other financial difficulty,
such as banks ordered “closed” by the Central Bank of the Philippines or deposits made to
guarantee performance of contract, or security deposits on leased properties are examples of
cash items reported under other long-term assets.
CURRENT LIABILITIES – an overdraft, which occurs when a depositor has written checks for a
sum greater than that in the depositor’s bank account, should be reported as a current liability,
except when the depositor has sufficient funds in another account with the same bank to cover
the account that is overdrawn.
DISCLOSURE REQUIREMENTS
The following items must be disclosed in the financial statements or in the accompanying notes
to the financial statements:
Temporary placements of excess cash which can be preterminated included in the cash
balance.
Cash compensating balance in the cash balance.
SPECIFIC CONCERNS:
CUSTOMER COLLECTION CHECKS: (POSSIBLE DEFECTS)
a. Post Dated
b. Stale
c. NSF/DAUD/DAIF
- Defective customer collection check shall be reverted to Accounts Receivable
if the same has been included as part of cash balance.
DISBURSEMENT CHECKS (POSSIBLE DEFFECTS)

a. Post Dated
b. Unreleased/Undelivered
c. Stale
- Defective disbursement checks shall be reverted back to Cash and credited to
a payable account if the same has been recorded as a disbursement per client’s
records.
CERTIFICATES OF DEPOSITS (CDs) should normally be included in short-term investments

instead of cash, because banks usually impose substantial interest penalties that discourage
holders from making withdrawals before the securities mature. However, if the time deposits
are not limited as to withdrawal or will be available for withdrawal within three months from
date of acquisition, CDs are classified as cash in the caption cash and cash equivalent.
IOUs should be reported as receivables rather than cash.
EXPENSE ADVANCES, such as advances for employee travel, and postage stamps should be
reported as prepaid expenses, not cash. These items will become expenses and are not
normally converted into cash.
COMPENSATING BALANCES are minimum amounts that a company agrees to maintain in a bank
checking account as partial consideration for a loan or line of credit. Compensating
balances limit the amount of cash that a company can spend in everyday operations.
Maintaining compensating balances are necessary for the following reasons:
• It increases the loan provider’s effective interest.
• It may be considered as a partial service to the loan.
• It ensures future credit availability and viability.
Compensating balances shall be accounted for as follows:

a) If deposit held as compensating balance is legally restricted, this should be
segregated and reported separately. If the balances are the result of short term
financial arrangements, they should be shown separately as other current
assets in the balance sheet; if the compensating balances are in connection with
long term agreements, they should be classified as noncurrent either as
investments or other assets.
b) In other instances, deposits are not legally restricted, but compensating balances
still exist as business commitments in connection with lines of credit. In theses
situations, the amounts and nature of the arrangements should be disclosed in
the notes to the financial statements.
CASH COUNTS
The following steps are undertaken:
1. Identify the accountability and how much it is.
a. If Petty Cash Fund, the accountability is the Imprest Balance per General Ledger
b. If Undeposited Collections, the accountability is total undeposited collections per
books/records adjusted further for any unrecorded collections (based on
additional information of the problem)
If there is no direct information about collections per records,
accountability is collections per Official Receipts, Cash receipt vouchers
or other documents evidencing collections.
2. Identify valid supports to the accountability as presented in the problem.

a. For Petty Cash Fund, acceptable valid support shall include:
- Bills and Coins, Replenishment Check, Accommodated Checks which are
readily depositable to the bank (not NSF, post-dated or stale)
- Unreplenished Petty Cash Expense Vouchers (Adjusted to Various
Expense)
- Employee IOUs (Adjusted to Receivables)
- Post dated/NSF/Stale Checks (Assumed to be previously accommodated
checks which shall be adjusted to Receivable)
* unused postage is not a valid support where the accountability
is the Petty Cash Fund
**return of an expense advances (e.g. excess from travel
advance) is added to the accountability to get the total
accountability and not added to valid supports
b. For Undeposited Collections
- Bills and Coins
- Readily depositable customer Collection Checks as of the count date
(Post dated, stale and NSF collection checks of the count date is not
included as valid collection, thus should not be included as valid
support)
- Copies of expense vouchers or other evidence of the use of the
collection to pay certain expenses
- Unused postage stamps (valid support where accountability is
Undeposited Collections.)
BANK RECONCILIATION
Under the adjusted balance method:
BANK BOOK
Unadjusted Balance XX XX (b) Unadjusted Balance
Deposits in Transit/ Unrecorded Bank Credits
Undeposited Collections XX XX - Note and interest collection by bank,
- Customer payments to bank,
- Bank loan proceeds
Outstanding Checks Unrecorded Bank Debits
(excluding certified checks) (XX) (XX) - Bank service charges,
- Customer NSF checks,
- Note payments through the bank,
- Bank loan and interest payments
Bank errors XX(XX) XX(XX) Book Errors
Adjusted Balance XX (a) XX(c) Adjusted Balance
(a) the adjusted balance per bank shall be the CORRECT CASH BALANCE
(a) – (b): the net adjustment to cash shall be the difference between the
unadjusted balance per books and the adjusted balance per bank
(a) – (c): the cash shortage/overage shall be the difference between the two
adjusted balances
SHORTAGE if: Bank < Book; OVERAGE if: Bank > Book
PROOF OF CASH PROBLEMS

Beg. Receipts Disburse. End
Unadjusted balance per bank XX XX XX XX
Deposits in transit, beginning XX (XX)
, end XX XX
Outstanding checks, beginning (XX) (XX)
, end XX (XX)
Bank Errors (Receipt, beg is over) (XX) (XX)
(Receipt, beg is under) XX (XX)
(Disbursement, beg is over) XX (XX)
(Disbursement, beg is under) (XX) (XX)
(Receipt, end is over) (XX) (XX)
(Receipt, end is under) XX XX
(Disbursement, end is over) (XX) XX
(Disbursement, end is under) XX (XX)
Bank OVERSTATEMENT errors in the
current month corrected also in the (X) (X)
current month*
Bank errors in the previous month, not X(X) X(x)
yet corrected by the current month
Adjusted Balances XX XX XX XX
Beg. Receipts Disburse. End

Unadjusted balance per book XX XX XX XX
Unrecorded credit, beginning XX (XX)
, end XX XX
Unrecorded debit, beginning (XX) (XX)
, end XX (XX)
NSF check, beginning (XX) (XX)
NSF check, end XX (XX)
NSF check received and redeposited the
same period (not recorded by book)** XX XX
Book Errors (Receipt, beg is over) (XX) (XX)
(Receipt, beg is under) XX (XX)
(Disbursement, beg is over) XX (XX)
(Disbursement, beg is under) (XX) (XX)
(Receipt, end is over) (XX) (XX)
(Receipt, end is under) XX XX

(Disbursement, end is over) (XX) XX
(Disbursement, end is under) XX (XX)
Book OVERSTATEMENT errors in the
current month corrected also in the (X) (X)
current month*
Book error in the previous month, not X(X) X(X)
yet corrected by the current month
Adjusted Balances XX XX XX XX
*Observe that if there is an overstatement error (whether receipt or disbursement) during

the current month that is also corrected in the current month, the reconciliation is to
deduct the overstatement in both the receipt the disbursement column, since while the
error is committed in the receipt side, the correction will be recorded in the disbursement
side, and vise versa. If it is however an understatement error during the current month
corrected also in the current month, the same will no longer a reconciling item since if it is
say an error in receipt (under) the correction will also be made in the receipt.
**An NSF check which is recorded correctly during the current period is no longer a
reconciling item.
**An NSF check which is recorded as a reduction against the receipts for the period shall
be added to both receipt and disbursement columns. (cash ending balance is unaffected)
**An NSF check received from the bank and redeposited during the same period shall no
longer be included in the proof of cash statement if receipt and redeposit were recorded in
the books correctly, otherwise if the same was not recorded in the book, the item shall be
added to both the receipt and disbursement columns.
DISCUSSION PROBLEMS
CHAPTER 2-PROBLEM 1:
1. Which of the following is not a universal rule for achieving strong internal control over cash?
a. Separate the cash handling function and record keeping functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days’ cash receipts by the end of the day.
d. Have bank reconciliation performed by employees independent with respect to
handling cash.
2. Which of the following controls most likely would reduce the risk of diversion of customer
receipts by an entity’s employees?
a. Daily deposit of cash receipts.
b. Monthly bank reconciliations.
c. Prenumbered remmitance advice
d. A bank lockbox system
3. The following statements relate to the audit of cash

Statement 1: An improper bank reconciliation designed to conceal a cash shortage is more
likely to overstate than to understate the amount of outstanding checks.
Statement 2: The bank confirmation request used by auditors is a means of obtaining

documentary evidence of both assets and liabilities.
Statement 3: Contact with banks for purpose of opening company bank accounts should
normally be the responsibility of the corporate treasurer.
Statement 4: An auditor will request cut-off bank statement primarily in order to verify
reconciling items on the client’s bank reconciliation statement.
a. All statements are true.

b. All statements are false.
c. Only one statement is false.
d. Only one statement is true.
4. Which of the following cash fraud activities involves the postponement of the recording of
receipts and can be well perpetrated where there is lack of segregation of duties between
recordkeeping and custodial functions?
a. Kiting
b. Lapping
c. Window dressing
d. Salami fraud
5. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use
by lapping customer checks received in the mail. In attempting to uncover this
embezzlement scheme, the auditor most likely would compare the:
a. Dates uncollectible accounts are authorized to be written off with the dates the
write-offs are actually recorded.
b. Individual bank deposits slips with the details of the monthly bank statements.
c. Daily cash summaries with the sums of the cash receipts journal entries.
d. Dates checks are deposited per bank statements with the dates remittance
credits are recorded.
6. Which of the following characteristics most likely would be indicative of check kiting?
a. High turnover of employees who have access to cash.
b. Many large checks that are recorded on Mondays.
c. Frequent ATM checking account withdrawals.
d. Low average balance compared to high level deposits.
7. Which of the following audit procedures will likely detect or uncover kiting activities of the
client?
a. Sending confirmation to banks.
b. Vouch check issuances representing disbursements to source documents.
c. Render cash count on a surprise basis.
d. Simultaneously validate bank reconciliations statements.
8. Sound internal control dictates that, immediately upon receiving checks from customers by
mail, a responsible employee should:
a. Add the checks to the daily cash summary.
b. Verify that each check is supported by a prenumbered sales invoice.
c. Record the checks in the cash receipts journal.
d. Restrictively endorse the check collections and prepare a duplicate listing of
checks received.
9. Checks from customers are received in the company mailroom each day. Which of the
following controls should be in place to safeguard them?
a. Establish a separate post office box for customer payments.
b. Forward all checks to the cashier upon receipt.
c. Provide bonding protection for mail clerks.
d. Require specific mail clerk to list and restrictively endorse each check.
10. For the most effective internal control, monthly bank statements should be received directly
from the banks and reviewed by the
a. Controller.
b. Cash receipts accountant.
c. Cash disbursement accountant.
d. Internal auditor.
11. As payments are received, one mailroom employee is assigned the responsibility of
prelisting receipts and preparing the deposit slip prior to forwarding the receipts, the deposit
slip, and the remittance advices to accounts receivable for posting. Accounts receivable
personnel refoot the deposit slip, stamp a restrictive endorsement on the back of each
check, and then forward the receipts and the deposit slip to the treasury department. Which
of the following is a reasonable assessment of internal control on this process?
a. Internal control is adequate.
b. Internal control is inadequate because mailroom employees should not have
access to cash.
c. Internal control is inadequate because treasury employees should prepare the
deposit slip.
d. Internal control is inadequate because of a lack of segregation of duties.
12. Which of the following is a standard internal accounting control for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of
the company.
b. Checks should be sequentially numbered and the numerical sequence should be
accounted for by the person preparing the bank reconciliation statement.
c. Checks and supporting documents should be marked “paid” immediately after
the check is returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares
documents that authorize check preparation.
13. Which of the following observations, made during the preliminary survey of a local
department store’s disbursement cycle, reflects a control strength?
a. Individual department managers use prenumbered forms to order merchandise
from vendors.
b. The receiving department is given a copy of the purchase order complete with
description of goods, quantity ordered, and extended price for all merchandise
ordered.
c. The treasurer’s office prepares checks for suppliers based on vouchers prepared
by accounts payable department.
d. Individual department managers are responsible for the movement of
merchandise from the receiving dock to storage or sales areas as appropriate.
14. To provide assurance that each voucher is submitted and paid only once, an auditor most
likely would examine sample of paid vouchers and determine whether each voucher is:
a. Supported by a vendor’s invoice.
b. Stamped “paid” by check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.
15. Which of the following assertions does the auditor most likely would like to validate in
deciding to render cash counts?
a. Completeness
b. Existence
c. Valuation
d. Rights and obligation
16. In rendering cash counts, the accountability shall represent:

a. The cash items only.
b. Cash items and other evidences of the use of cash such as unreplenished paid
vouchers.
c. Cash that should be on hand per collection activities of the custodian.
d. The difference between the cash balance per collection records against the valid
cash items and evidences supporting the use of cash.
17. In rendering cash counts, cash shortage results when:

a. Accountability is equal to cash items.
b. Accountability is higher than cash items.
c. Accountability is lower than cash items.
d. Accountability is zero.
18. On receiving a client’s bank cutoff statement, an auditor most likely trace
a. Deposits recorded in the cash receipt journal after year-end to the cut-off
statement.
b. Checks dated after year-end listed in the cutoff statement to the year-end
outstanding checklist.
c. Deposits in transit listed in the cutoff statement to the year-end bank
reconciliation.
d. Prior-year checks listed in the cut-off statement to the year-end outstanding
checklist.
19. The usefulness of the standard bank confirmation request may be limited because the bank
employee who completes the form may:
a. Not believe that the bank is obligated to verify confidential information to a third
parity.
b. Sign an return the form without inspecting the accuracy of the client’s bank
reconciliation.
c. Not have access to the client’s cutoff bank statement.
d. Be unaware of all the financial relationships that the bank has with the client.
20. Which of the following audit procedures would be used to verify the payment of note in
July?
a. Check the mathematical accuracy of the July 31, reconciliation.
b. Check for absence of note on July 31, bank confirmation.
c. Trace payment to duplicate deposit slip.
d. Obtain cutoff bank statement.
21. The auditor would perform the following procedures to verify the unrecorded disbursement
check, except:
a. Obtain cutoff bank statement.
b. Examine checks returned with the July bank statement.
c. Trace check number to absence in the July cash disbursement journal and
recording in August.
d. Examine supporting documentation.
22. In validating bank reconciliation statements of the client, the auditor should trace back
outstanding checks to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.
23. In validating the bank reconciliation statements of the client, the auditor should trace back
the unrecorded debits, like service charges to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.
24. In preparing the bank reconciliation statement of the client, a cash in bank shortage
normally occurs when:
a. The unadjusted balance per bank is lower than the unadjusted balance per
books.
b. The adjusted balance per bank is higher than the unadjusted balance per books.
c. The unadjusted balance per bank is higher than the unadjusted balance per
books.
d. The adjusted balance per bank is lower than the adjusted balance per books.
25. The proof of cash statements is usually prepared by the auditor when:
a. Internal control over cash is strong and control risk is placed at the maximum.
b. Internal control over cash is weak and control risk is place at the maximum.
c. Cash balance is very significant.
d. Cash balance is very insignificant.
In the course of your audit of Cash of Mapera Corporation as of and for the period ended
December 31, 2018, the following is a list that comprise the company’s Cash and cash
equivalent account:
Current account at Metrobank P3,250,000

Savings account at Rural Bank 2,750,000
Current account at BDO (240,000)
Undeposited collections on hand 1,278,000
Travel fund 50,000
Interest and Dividend fund 120,000
Payroll fund 400,000
Pension fund 250,000
Change fund 25,000
Bond Sinking fund 500,000
Petty cash fund, imprest balance 30,000
Cash in closed bank 300,000
Postage stamps 3,000
IOU from a key officer 30,000

Credit memo from a vendor for a purchase return 60,000
Investment in debt securities, due 3/31/19 (purchased 12/31/18) 600,000
Investment in debt securities, due 1/31/19 (purchased 1/1/18) 900,000
Investment in equity securities 1,000,000
Audit notes:
1. The current account at Metrobank included the recordings of the following:
a. P75,000 check to a supplier, in payment of an outstanding invoice dated
December 1, 2018. The check was issued as of December 30, 2018 but were
dated January 5, 2019.
b. P120,000 check to a supplier, in payment of another invoice dated December
20. The check which was dated December 30, 2018 was still on hand as of
December 31, 2018 and yet to be released to the payee.
c. P180,000 check to another supplier dated December 31 and released on the
same date for the payment of an invoice dated December 15.
2. The savings account at Rural bank included a P500,000 compensating balance related to
a 5 year, 12%, P5M bank loan dated January 1, 2016. The terms of the loan called for
the legal restriction on drawing from the said compensating balance at any time during
the five year term of the loan.
3. The undeposited checks, bank drafts and money orders included the following items:
a. P180,000 check from a customer dated 6/1/18.
b. P125,000 check from a customer dated 1/6/19.
c. P155,000 check from a customer dated 11/6/18, returned by the bank with the
November bank statement marked DAUD, yet to be redeposited.
d. P127,000 check from an employee dated 12/20/18.
e. P80,000 check from an officer dated 12/2/18 returned by the bank marked NSF.
f. P150,000 postal money order.
g. P120,000 bank drafts.
4. On hand by the petty cash custodian on December 31, 2018 were:

• P7,000 worth of bills and coins
• P11,500 replenishment check
• P10,000 worth of unreplenished paid petty cash vouchers
5. All other cash funds were accounted for as equaling cash/securities on hand.
6. The company made an estimate that only 50% from cash in closed bank shall be
recovered but the period of recovery is indefinite.
7. The investment in equity securities comprise of the following:

• P400,000 investment in ordinary shares acquired on 12/1/18 which are
intended for short term profit purposes. The company intends to sell the
same by 2/28/19
• P300,000 investment in ordinary shares acquired on 12/1/17 which the
client is intending to hold as available for sale.
• P300,000 investment in preference shares acquired on 12/1/18 redeemable
at the option of the issuer by 2/28/19.
Requirements:
1. What is the adjusted Current account at Metrobank that should be presented as part of
Cash and cash equivalent?
2. How much from the Savings account with Rural Bank shall be presented as part of Cash
and cash equivalent?
3. How much from the Current account with BDO Bank shall be presented as part of Cash
and cash equivalent?
4. How much from the undeposited checks, money orders and bank drafts shall be
presented as part of Cash and cash equivalents?
5. How much is the adjusted petty cash fund?
6. How much from the total cash funds (including the adjusted petty cash fund) shall be
presented as part of Cash and cash equivalent in the Statement of Financial Position?
7. How much from the debt and equity securities shall be presented as part of cash and
cash equivalents?
8. What is the total cash and cash equivalent to be reported by the company in its
December 31, 2018 Statement of Financial Position?
9. How much in aggregate from the listed items shall be presented elsewhere as part of
current assets in the December 31, 2018 Statement of Financial Position?
non-current asset in the December 31, 2018 Statement of Financial Position?
current liabilities in the December 31, 2018 Statement of Financial Position?
A count of the Petty Cash Fund in the morning of January 3, 2019, of Manny Co. with an
imprest balance of P40,000 showed its composition as follows:
Bills and coins:

P1,000, 5 pieces
500, 10 pcs.
200, 5 pcs.
100, 10 pcs.
50, 10 pcs
20, 20 pcs
10, 25 pcs
5, 50 pcs
Unreplenished paid vouchers
12/29 Transportation P500
12/30 Office repairs 300
12/30 Officers’ meeting meals 900
12/30 Due to employees 1,000
1/2 Gasoline 1,000
Unreplenished unpaid vouchers
1/3 Transportation 800
1/3 Office supplies 1,500
Checks on hand
12/30 E. Dikong, employee 2,000
11/30 M. Dugas, employee, returned by the bank
marked NSF 1,000
12/27 Manny Co., payable to the custodian 10,000
Cash receipt voucher for a return of an expense advance 900
Requirements:
1. How much is the total accountability?
2. How much is the total shortage/overage if there are any?
3. What is the correct petty cash fund balance to be reported as of December 31, 2018?
4. Prepare a adjusting journal entry/ies to correct the petty cash fund balance as of
December 31, 2018.
A count of the undeposited receipts under the custody of Mando Rugas, cashier of Makwarta
Company, on October 11, 2018, in relation to your audit of cash for the period ended
September 30, 2018, showed the following composition:
Currency and coins P12,310
Unused postage and documentary stamps 110
Checks:
Date Payee Drawer
3-24-14 Cash R. Zamora 1,000
9-30-14 Makwarta Co. Baguio Corp. 2,350
10-3-14 Makwarta Co. L. Reyes 1,960
10-3-14 MWSS Makwarta Co. 900
10-4-14 Makwarta Co. La. Union Corp. 1,590
Voucher paid out of receipts 1,500
Official Receipts 100801 – 100820 dated October 1 – 11, 2018 28,840
Other information:
a. The audited bank reconciliation for September showed deposits in-transit
totaling to P4,500 and a bank charge error amounting to P1,400. (all collections
as at September 30 has been deposited)
b. Total bank credits for the period October 1 to October 11, per the cut-off bank
statement requested to the bank amounted to P16,550.
Requirement:
What is the amount of shortage/overage on October 11, 2018?
You are examining the accounts of BETTY Co. The balance of the Petty Cash account,
December 31, 2018 was P10,000; your count of the imprest fund, made at 9:00 am on January
3, 2019, in the presence of A. Ang, petty cashier revealed the following:
Coins Bills
Quantity Denomination Quantity Denomination
76 P10 3 P1,000
124 5 2 500
50 1 2 100
112 .25 16 20
20 .10
Checks
Date Payee Maker Amount
Dec. 27 Betty Co. B Co., Customer P1,000*
30 Cash D. Dong, Vice President 1,220
30 Betty Co. Errol Corp., Customer 1,300
31 Beneco Betty Co. 2,000
Jan. 2 Cash Junior, Employee 312
2 Betty Co. R. Rarr, Customer 1,200
*returned by the bank together with December 31, 2018 bank statement marked NSF.
Unused Postage Stamps P100
Vouchers
Date Particulars Amount
Dec. 15 Transportation P130
16 Office supplies 140
17 Xerox fees 160
28 Postage 300
Jan. 2 Newspapers 20
2 Freight bill on merchandise purchases 100
IOUs
Date Particulars Amount
Dec. 20 T. Tiy – Employee P500
23 R. Ron – Salesman 200
Sales Invoices (for cash sales, all in cash no checks)

Invoice # 200889 Dec 29 P300
# 200890 Dec 30 340
# 200891 Dec 31 420
# 200901 Jan 2. 610
Required:
1. How much is the correct accountability as of January 2?
2. How much is the petty cash shortage as of January 2?
3. The adjustment to correct petty cash fund involves a credit to petty cash fund at:
4. What is the adjusted petty cash fund as of December 31?
The Datung Manufacturing Co. had very poor internal control over its cash transactions. Data
pertaining to its cash position at October 31, 2018 were as follows:
The cash book showed a balance of P125,245, which included undeposited receipts. A credit of
P8,000 per bank statements for the month of October, for deposits made did not appear on the
books of the company. Moreover a customer check dated September 12, amounting to P2,300
was returned by the bank with the October bank statement for insufficiency of fund.
The bank statement had a balance of P144,975.00.
The outstanding checks were as follows:

No. 0210667 P 4,720
0210671 5,200
0210693 10,130
0210734 7,620
0210737 16,270
0210749 6,610
The cashier misappropriated all undeposited receipts in excess of P10,770 and prepared the
following reconciliation:
Datung Manufacturing Co.
Bank Reconciliation
October 31, 2018
Balance per books, October 31, 2018 125,245

Add: Outstanding checks
No. 0210734 7,620
0210737 16,270
0210749 6,610 30,500
155,745
Less: Undeposited receipts 10,770
Balance per bank, October 31, 2018 144,975
Less: Unrecorded credit 800.00
Correct cash balance, October 31, 2018 136,975
You also discovered per the cut-off bank statement dated November 15, 2018 that the bank
was not able to include among October bank debits, the October bank service charge amounting
to P1,250.
Requirements:
1. How much did the cashier misappropriate?
2. What is the correct cash balance to be reported in the October 31, 2018 Statement of
Financial Position?
3. Adjusting entries to correct the cash balance involves a net credit to cash amounting to:
You were assigned to audit the financial statement of Jade Corp. on January 15, 2019, for the
year ended December 31, 2018. The general ledger shows cash account balance of P726,600
as at December 31, 2018.
The bank reconciliation prepared by the client’s cashier included the following items:
Cash per records, December 31, 2018 P726,600
Cash per bank statement, December 31, 2018 792,285
Note receivable collection by the bank in December, recorded in the
books in January 3 20,000
Bank service charge for December, recorded in books in January 3 5,000
Outstanding checks 75,975
Check of Jude Corp., charged by the bank in error on December 28,
2018; corrected by the bank on January 2, 2019 2,250
Deposit in transit 10,500
From January 2, 2019, to January 15, 2019, the date of your cash count, total cash receipts
appearing in the cash records amounted to P180,500. During the same period, deposits clearing
the bank amounted to P143,895. The following cash and cash items were on hand at the close
of business on January 15, 2019:
Currency P4,275
Customers’ checks 5,850
Expense vouchers 1,125
Audit notes:
a. Cash collections from accounts receivable were erroneously recorded by the company as
follows:
Date
7/05/18 Allowance for bad debts 12,000
Accounts receivable 12,000

12/10/18 Inventory 9,000
12/15/18 Bad debt expense 10,500
b. Check deposit on January 5, 2019, amounting to P6,000 was not recorded in the books.
c. Undeposited collections on January 10, 2019 amounting to P13,500 was also not recorded
in the books.
Requirements:
1. What is the correct cash in bank balance as of December 31?
2. What is the net adjustment to cash as of December 31?
3. What is the cash shortage as of December 31?
4. What is the total cash shortage as of January 15?
In the course of your audit of the cash in bank account of Pira Co., you obtained the following
information:
a. The bank statement on May 31, 2018 showed a balance of P1,836,000.
b. Among the bank credits in May was customer’s note for P600,000 collected for the
account of the company which the company recognized in June among its receipts.
c. Included in the bank debits for the month of May were cost of service charges
amounting to P7,200 and a P240,000 check which was charged by the bank in error
against Pira’s account.
d. You also ascertained that there were deposits in transit amounting to P480,000 and
outstanding checks totaling P1,020,000 by the end of May.
e. The bank statement for the month of June showed total credits of P2,496,000 and total
charges of P1,224,000.
f. The company’s books for June showed total debits of P4,818,600, total credits of
P2,443,200 and a balance of P2,913,600.
g. Bank debit memos for June were: No. 121 for service charges, P9,600 and No. 122 on a
customer’s returned check marked “Refer to Drawer” for P144,000.
h. On June 30, 2018 the company placed with the bank a customer’s promissory note with
a face value of P720,000 for collection. The company treated this note as part of its
receipts although the bank was able to collect on the note only in July, 2018.
i. A disbursement check of P45,000 was recorded by the company as P450,000 in the

month of May. This error was corrected in the books in June.
j. Another check for P23,760 was recorded in the company cash payments books in June
as P237,600.
Requirements:
1. How much is the unadjusted cash balance per books as of May 30?
2. How much is the adjusted cash balance as of May 30?
3. How much is the cash shortage/overage on May 30?
4. What is the correct deposit-in-transit as of June 30?
5. What is the correct outstanding checks as of June 30?
6. How much is the adjusted cash balance as of June 30?
The following information was provided by Krame Inc. as of the fiscal year ended September 30,
2018:
Ausgust 31 September 30
Loan proceeds directly credited by the bank 200,000 250,000
Note payable payment by the bank 120,000 80,000
Undeposited collections 450,000 ?
Outstanding checks 180,000 ?
Total credits per bank statement 1,955,000
Total debits per bank statement 1,655,000
Total debits per books 1,795,000
Total credits per books 1,800,000
Additional information:
a. A P100,000 collections was erroneously recorded twice in the books in September, the
company discovered the error and corrected the same immediately in September.
b. A P50,000 disbursement check was recorded in the books as P5,000 in August. The
correction was made in September.
c. The bank erroneously credited the company P80,000 in August for a collection of Kare
Corp. The bank corrected the error in September.
d. The unadjusted balance per book in August was at P640,000. The unadjusted balance
per bank in September was at P785,000.
Requirements:
1. What is the correct cash in bank balance as of August 31?
2. What is the correct deposit in transit as of September 30?
3. What is the correct outstanding checks as of September 30?
4. What is the correct cash in bank balance as of September 30?
Following the information pertains to the Cash in Bank account of Mango Company for the
month of April, 2018:
a. Balances per bank statement March 31, P21,560, and April 30, P23,040.
b. Balances of Cash in Bank account in Company’s books: March 31, P16,545, and April
30, P22,680.
c. Total receipts per books were P222,190 of which P1,210 was paid in cash to a creditor
on April 16.
d. Total charges in the bank statement during April were P218,970.
e. Undeposited receipts were: March 31, P9,060 and April 30, P10,120.
f. Outstanding checks were: March 31, P2,675 and April 30, P1,930, of which a check for
P500 was certified by the bank on April 22.
g. NSF checks returned, recorded as reductions of cash receipts were:

1. Returned by Bank in April, recorded also in April, P1,040
2. Returned by Bank in April but recorded in May, P860.
h. Collections by Bank not recorded by company were P12,150 in March, and P11,640 in
April.
i. Bank service charges not entered in company’s books were: March 31, P750, and April
30 P420.
j. A check for P950 of Marang Company was charged to Mango Company in error.
k. A check drawn for P840 was erroneously entered in the books as P480.
Requirement:
In four-column proof-of-cash statement where the bank and book figures are brought to
corrected balances, determine the following:
1. Adjusted cash in bank as of March 31 per bank and per books.
2. Adjusted cash in bank as of April 30 per bank and per books.
3. Adjusted cash receipts for April per bank and per books.
4. Adjusted cash disbursements for April per bank and per books.
MULTIPLE CHOICE EXERCISES:

CHAPTER 2-EXERCISE 1:
The cash account in the ledger of Ilang-Ilang Company had a balance of P105,600 at December
31, 2018. An examination of the account, however, disclosed the following:
1. The sales book was left open up to January 5, 2019, and cash sales totaling P15,000
were considered as sales in December.
2. Checks of P9,300 in payment of liabilities were prepared before December 31, 2018,
recorded in the books, but not mailed or delivered to payees
3. Post-dated customer collection checks totaling P7,800 are being held by the cashier as
part of cash. The company’s experience shows that post-dated checks are eventually
realized.
4. Customer’s check for P1,500 deposited with but returned by bank, “NSF”, on December
27, 2018. Return was not recorded in the books.
5. The cash account includes P40,000 earmarked for the purchase of a mini-computer
which will soon be delivered.
The cash balance to be shown on the balance sheet on December 31, 2018 should be:
a. P105,600 c. P58,400
b. P50,600 d. P60,500
In connection with your audit of BIG BROTHER CORP. for the year ended December 31, 2018,
you gathered the following information:
Current account at Bank of the Philippine Islands P6,000,000

Current account at Equitable PCI Bank (300,000)
Payroll account 1,500,000
Foreign bank account – restricted (in USD) ** 60,000
Postage stamps 3,000
Employee’s post dated check 12,000
IOU from a key officer 30,000
Credit memo from a vendor for a purchase return 60,000
Traveler’s check 150,000
Customer’s not-sufficient-funds check 45,000
Money orders 90,000
Petty cash fund (P12,000 in currency and expense 30,000
vouchers for P18,000)
Treasury bills, due 3/31/19 (purchased 12/31/18) 600,000
Treasury bills, due 1/31/19 (purchased 1/1/18) 900,000
Change fund 10,000
Bond sinking fund 1,000,000
**current exchange rate as of December 31, 2018 is at P50 for every USD1.
Requirements:
1. What is the total cash and cash equivalent to be reported by the company in its
December 31 balance sheet?
a. 9,262,000 c. 8,362,000
b. 8,380,000 d. 8,122,000
2. How much from the list above should be presented as part of Noncurrent assets?
a. 1,000,000 c. 4,900,000
b. 4,000,000 d. 5,500,000
UHAWSAIYO COMPANY
General and Petty Cash Count
Audit Year: 2018
Date of count – January 5, 2019, 9:10 am
Bills and Coins

Denom. Bundles of 100 pcs Rolls of 50 coins Loose
P500 1 9
100 2 27
50 3 5
20 5 4
10 10
5 6 4
1 10 20
.25 40 16
Checks
Maker Payee Date Amount
T. Otis – customer Uhawsaiyo 12/30/18 P11,920
R. Eyes – customer Uhawsaiyo 12/26/18 12,505
O. Liever – customer Uhawsaiyo 1/2/19 5,707
F. Rancisco – customer Uhawsaiyo 12/21/18 13,350
Uhawsaiyo ABC Co. 12/27/18 14,500
M. Doza – officer Cash 1/5/19 310
O. Campo * Cash 12/29/5\19 260
*Amount is for a return of travel advance made to the employee in an earlier period.
Vouchers and IOUS

Paid to Date Amount
PNR – transportation expense 1/2/19 P35
Post office – postage stamps 12/20/18 150
Italian Village – Christmas party 12/23/18 6,290
I. Dio – IOU 12/27/18 300
Others
1. Cash sales invoices (all currencies No. 17903 to 18112), P100,500
2. Official receipts
NumberAmount Form of Collection
31250 P560 Cash
31251 12,505 Check
31252 1,202 Cash
31253 11,920 Check
31254 13,350 Check
3. Stamps of various denomination amounted to P80.
4. A notation on a sheet of paper as follows:

“Proceeds from employee contribution for Christmas Party, P9,500”
5. Petty cash per ledger, P15,000.
Required:
1. How much is the petty cash shortage as of January 5?
a. 13,913 c. 15,303
b. 14,503 d. none
2. The adjustment to correct petty cash fund involves a credit to petty cash fund at:
a. 15,000 c. 14,988
b. 14,953 d. 14,688
3. What is the adjusted petty cash fund as of December 31?

a. 0 c. 12
b. 47 d. 312
The Silver Company’s internal control over its cash transaction is very weak. The company’s
cash position at December 31, 2018 were as follows:
The cash book showed a balance of P15,000, which included cash on hand. A credit of P150 on
the bank’s records did not appear on the company’s books. The bank statement showed a
balance of P12,300; and the outstanding checks were: 0100 – P120; 0201 – P100; 0300 –
P230; 1501 – P110; 1510 – P140; and 1515 – P150.
The cashier removed all of the cash on hand in excess of P3,000 and then prepared the
following reconciliation:
Balance per books, Dec. 31, 2018 P15,000
Add: Outstanding checks:
No. 1501 P110
1510 140
1515 150 300
P15,300
Deduct: Cash on hand 3,000
Balance per bank, Dec. 31, 2018 12,300
Deduct: Unrecorded credit 150
True cash, Dec. 31, 2018 P12,150
1. What is the cash shortage?

a. 300 c. 500
b. 400 d. 700
2. A correct reconciliation will show that the cashier’s accountability for cash on hand is:
a. 3,300 c. 3,500
b. 3,400 d. 3,700
3. The adjusted cash in bank excluding cash on hand as of December 31 is:

a. 11,300 c. 11,600
b. 11,450 d. 11,850
4. The adjusted cash balance to be reported in the Statement of Financial Position as of

December 31:
a. 14,300 c. 14,600
b. 14,450 d. 14,850
You were assigned to audit the financial statement of Home Corp. on January 10, 2019, for the
year ended December 31, 2018.
BANK RECONCILIATION
The cashier prepared the bank reconciliation statement as of December 31, 2018, which
included the following information:
Bank loan proceeds credited by the bank in December,

recorded in the books in January 3 200,000
Bank service charge for December, recorded in books in
January 3 10,000
Outstanding checks, P34,550 of which has been certified 186,500
by the bank
Check of Holmes Inc., charged by the bank in error on
December 28, 2018; corrected by the bank on 4,500
January 2, 2019 as per the cut-off bank statement
Deposit in transit 21,000
Cash per general ledger, December 31, 2018 1,239,200
Cash per bank statement, December 31, 2018 1,548,570
Audit note:
Cash collections from customers on account were erroneously recorded by the company as
follows:
Date
7/05/18 Allowance for bad debts 42,000
12/15/18 Bad debt expense 21,000
CASH COUNT
From January 2, 2019, to January 10, 2019, the date of your cash count, total cash receipts
appearing in the cash records for the said period amounted to P521,000. During the same
period, deposits clearing the bank amounted to P322,790. The following cash and cash items
were on hand at the close of business on January 10, 2019:
Currencies and coins P4,275
Customers’ checks
Dated January 4, 15,200
Dated January 6, 4,000
Dated January 10, NSF 10,775
Expense vouchers 22,250
Audit notes:
a. Check deposit on January 5, 2019, amounting to P12,000 was not recorded in
the books.
b. Undeposited collections on January 10, 2019 amounting to P27,000 was also not
recorded in the books.
Requirements:
1. What is the correct cash in bank balance as of December 31?
a. 1,546,200 b. 1,453,620 c. 1,458,120 d. 1,422,120
2. What is the cash shortage as of December 31?

a. 88,080 b. 92,580 c. 70,080 d. 25,080
3. What is the correct accountability as of January 10?

a. 560,000 b. 360,000 c. 521,000 d. 321,000
4. What is the cash shortage from undeposited collections from January 2 to January 10?
a. 15,210 b. 16,985 c. 37,460 d. 11,210
You are auditing the cash account of Carrera Inc. for the fiscal year ended July 31, 2018. The
client has not prepared the July 31, bank reconciliation. The following information were made
available:
General Ledger Bank Statement

Beginning balances P140,330 P172,590
Deposits 751,680
Cash receipts journal 763,680
Checks clearing the bank (708,450)
Cash disbursements journal (654,330)
July bank service charge (2,610)
Note paid by the bank (183,000)
NSF check (9,330)
Ending balances P249,680 P20,880
Audit notes:
a. Bank reconciliation in June included the following information: Bank statement balance,
June, P172,590; Deposits in transit, P18,000; Outstanding checks, P52,260, and; Balance
per general ledger, June, P140,330.
b. Checks clearing the bank in July, outstanding by the end of June was at P50,760.
c. Checks clearing the bank in July and were recorded in the July cash disbursement journal
was at P614,010.
d. A check for P31,800 cleared the bank, but had not been recorded in the cash
disbursement journal. It was for a payment of an accounts payable.
e. A check for P11,880 was erroneously charged by the bank to Carrera Inc.
f. Deposits included P18,000 from June and P733,680 from July.
g. The bank charged Carrera Inc.’s account for a non-sufficient-fund check totaling to
P9,330. The credit manager concluded that the customer intentionally closed its account
and the owner left the city. The check was turned over to a collection agency.
h. A note for P174,000, plus interest, was paid directly by the bank under an agreement
signed four months ago. The note payable was recorded at P174,000 on Carrera Inc.’s
books.
Required: Based on your audit procedures and appreciation of the above data, answer the
following:
1. How much is the total outstanding checks as of July 31?

a. 29,940 c. 41,820
b. 32,490 d. 10,020
2. How much is the deposit in transit as of July 31?

a. 20,940 c. 18,000
b. 30,000 d. 27,330
3. What is the correct cash in bank balance as of July 31?

a. 20,940 c. 32,820
b. 11,160 d. 9,060
4. How much is the cash in bank shortage as of June 31?

a. none c. 2,000
b. 1,200 d. 2,200
In the course of our audit of Mindanao Inc.’s cash in bank for the year ended December 31,
2018, you ascertained the following information:
November 30 December 31
Cash per books P82,350 P201,425
Cash per bank statements 535,410 689,085
Undeposited collections 41,005 64,400
Outstanding checks 138,590 150,560
Bank service charges 3,600 3,000
Insufficient fund check 41,250
Company’s notes receivable
collected by bank 359,075 404,500
The bank statement and the company’s cash records show the following totals:
Checks and debit memos per bank statement P1,091,865

Cash receipts per cash records ?
Cash disbursements per cash records ?
Deposits and credit memos per bank statement 1,245,540
The insufficient fund check was redeposited in the same month. No entries are made to take up
the return and redeposit.
Requirements:
1. What is the unadjusted book receipts in December?
a. 1,227,685 c. 1,160,660
b. 1,182,260 d. 823,185
2. What is the unadjsuted book disbursements in December?

a. 1,059,585 c. 1,063,785
b. 1,063,185 d. 1,066,185
3. What is the adjusted book balance on November 30?

a. 434,825 c. 441,425
b. 437,825 d. 445,025
4. The adjusted bank receipts in December should be:

a. 1,268,935 c. 1,265,335
b. 1,268,337 d. 1,245,540
5. The adjusted bank disbursements in December should be:

a. 1,105,035 c. 1,097,835
b. 1,103,835 d. 1,091,865
6. What is the adjusted book balance on December 31?

a. 561,075 c. 605,325
b. 602,925 d. 644,175
Shown below is the May 31, 2018, bank reconciliation prepared by HALALAN CORP.’s staff:
Halalan Corp.
Bank Reconciliation: BPI Acct No. 0021261
May 31, 2018
Bank balance P652,000
Add: Deposit in transit 10,000
Total P662,000
Less: Outstanding checks
No. 640 P10,000
652 8,000
653 2,000 20,000
Adjusted balance P642,000
Book balance P570,800

Add: Proceeds of note receivable collected in May P70,000
Deposit on May 31 not recorded on books
until June 2,000 72,000
Total P642,800
Less: Bank service charge 800
The June 2018 bank statement is shown below:
Bank of the Philippine Island

From May 31, 2018 to June 30, 2018
Account No.: 0021261
Date Checks Deposit
June 1 P8,000 P10,000
June 8 2,000
June 11 14,000 20,000
June 13 1,000 DM 1,000
June 16 4,000
June 21 12,000 56,000
June 27 18,000
June 29 1,000 EC 1,000 EC
June 30 200 SV
June 30 3,000 DM
SV – Service Charge DM – Debit Memo

EC – Error Corrected CM – Credit Memo
The paid checks accompanying this bank statement (all clearing in June) are the following:
No. 652 P8,000
No. 653 2,000
No. 654 14,000
No. 655 4,000
No. 657 12,000
No. 658 18,000
The check register reveals that the last check issued in June is No. 659 for P5,000 and that
check no. 656 is for P2,600. Cash received for the period June 22 through June 30 of P70,000
was deposited in the bank on July 1. The bank erroneously charged the company P1,000 on
June 29 but immediately corrected the error on the same date.
The debit memos on June 13 and June 30 represent customers’ NSF checks returned by the
bank. The June 13 NSF check was immediately redeposited without entry. The June 30 NSF
check was redeposited on July 1 without entry.
1. What is the total bank receipts in June per bank statement?

a. 87,000 b. 88,000 c. 77,000 d. 78,000
2. What is the total bank disbursements in June per bank statement?

a. 59,200 b. 58,000 c. 58,200 d. 63,200
3. What is the balance per bank statement on June 30?

a. 676,800 b. 627,200 c. 732,400 d. 729,200
4. What is the total receipts in June per books?

a. 88,000 b. 220,000 c. 146,000 d. 219,000
5. What is the total disbursement in June per books?

a. 53,000 b. 57,400 c. 56,400 d. 63,200
6. What is the cash balance per books on June 30?

a. 732,200 b. 729,200 c. 732,400 d. 676,800
You are auditing the cash of Saluyot Corp. for the fiscal year ended September 30, 2018.
The bank reconciliation prepared by the accountant of Saluyot Corp. for the months of August is
presented below:
Bank balance, per bank statement P156,000
Add: Deposit in transit, August 31 2,700
Total 158,700
Less: Outstanding checks:
No. 547 P600
561 5,400
562 4,200
565 1,800 12,000
Book balance, per general ledger P120,000

Add: Proceeds of note receivable collected
by bank in August 24,000
Deposit made in bank on August 31
not recorded on books until
September 3,000
Total 147,000
Less: Bank Service charge 300
There was no available bank reconciliation for the month of September, instead, the accountant
provided you a copy of the September bank statement to aid you in your audit.
The September bank statement included the following bank debits and credits:
Date Particulars Debits Credits
August 31
September 1 Chk #561 5,400 2,700
September 6 Chk #562 4,200
September 9 Chk #565 1,800 30,000
September 12 420 DM 420
September 17 600
September 20 Chk #567 2,100 42,000

September 29 300 EC 300 EC
September 30 1,320 SV
September 30 900 DM
SV—Service charges DM—Debit Memo
EC—Error Corrected CM—Credit Memo
Further investigation revealed the following information:
a. All book reconciling items during August has been recorded in September
b. The check register revealed that the last check issued in September was No. 571 for
P3,000 and that check No.568 was P7,200.
c. Cash received for the period September 25 through 31 of P28,200 was deposited in the
bank on October 1.
d. The debit memo on September 12 and September 30 were customer NSF checks
returned by the bank. The check on September 12 was immediately redeposited without
entry. The check returned on September 31 was redeposited by the client in the bank
on October 1 also without entry.
e. Among the bank credits for the month was P600 deposit of Baluyot Corp. credited by
the bank to the company’s account.
Required: Based on your audit procedures and appreciation of the above data, answer the
following:
1. How much is the unadjusted bank balance as of September 30?

a. 101,100 b. 109,200 c. 192,900 d. 202,800
2. How much is the total book receipts for September?

a. 75,420 b. 106,620 c. 127,200 d. 129,900
3. How much is the total book disbursements for September?

a. 25,080 b. 25,380 c. 26,280 d. 29,220
4. How much is the unadjusted book balance as of September 30?

a. 221,820 b. 222,120 c. 224,620 d. 224,920
5. How much is the adjusted cash balance as of September 31?

a. 219,000 b. 219,600 c. 220,200 d. 221,820
The following information was obtained in connection with the audit of Wise Company’s cash
account as of December 31, 2018:
Outstanding checks, 11/30/2018 P16,250

Outstanding checks, 12/31/2018 12,500
Deposit in transit, 11/30/2018 12,500
Cash balance per general ledger 12/31/2018 37,500
Actual company collections from its customers during December 152,500
Company checks paid by bank in December 130,000
Bank service charges recorded on the company books in
December 2,500
Bank service charges per December bank statement 3,250
Deposits credited by bank during December 145,000

November bank service charges recorded on company books in
December 1,500
The cash receipts book of December is underfooted by P2,500.
The bank erroneously charged the company’s account for a P3,750 check of another depositor.
This bank error was corrected in January 2019.
1. How much is the deposit in transit on December 31?

a. 5,000 b. 20,000 c. 22,500 d. 17,500
2. The total unrecorded bank service charges as of December 31?

a. 750 b. 2,250 c. 1,750 d. 4,250
3. What is the total book receipts in December?

a. 150,000 b. 152,500 c. 155,000 d. 147,500
4. What is the total amount of company checks issued in December?

a. 130,000 b. 123,000 c. 133,750 d. 126,250
5. What is the total book disbursements in December?

a. 123,750 b. 128,500 c. 126,250 d. 128,750
6. What is the book balance on November 30?

a. 16,250 b. 21,250 c. 37,500 d. 35,000
7. What is the bank balance on November 30?

a. 23,000 b. 18,500 c. 43,500 d. 16,250
8. What is the total bank receipts in December?

a. 120,000 b. 140,000 c. 145,000 d. 150,000
9. What is the total bank disbursements in December?

a. 154,500 b. 132,500 c. 129,500 d. 137,000
10. What is the bank balance on December 31?

a. 21,500 b. 26,500 c. 31,000 d. 33,250
In your audit of I-Bot Inc.’s cash account as of December 31, 2018, you ascertained the
following information:
The bookkeeper’s bank reconciliation on November 30, 2018, is as follows:

Bank balance per bank statement, November 30 P24,298
Add: Deposit in transit 3,648
Total P27,946
Less: Outstanding checks
No. 3408 P440
3413 300
3414 6,820
3416 3,924
3417 800 12,284
Balance P15,662
Add: Bank service charge for November 36 *
Balance per books P15,698
*Entered in Check Register in December
The Cash Receipts Journal shows a total receipts for December of P371,766. The Check
Register reflects total checks issued in December of P377,632. A collection of P5,912 was
recorded on company books on December 31 but was not deposited until January 2, 2019.
The balance per bank statement at December 31, 2018, is P17,516. This statement shows total
receipts of P373,502 and checks and other charges paid of P380,284.
Your examination revealed the following additional information:
a. Check no. 3413 dated November 24, 2018, was entered in the Check Register as P300.
Your examination of the paid returned with the December bank statement reveals that
the amount of the check is P30.
b. Check no. 3417 was mutilated and returned by the payee. A replacement check (no.
3453) was issued. Both checks were entered in the Check Register but no entry was
made to cancel check no. 3417.
c. The December bank statement includes an erroneous bank charge of P480.
d. On January 3, 2019, the bank informed your client that a December bank charge of P42
was omitted from the statement.
e. Your examination of the bank credit memo accompanying the December bank
statement discloses that it represents proceeds from the note collection in December for
P4,000.
f. The outstanding checks at December 31, 2018, are as follows:
No. 3408 P440
No. 3417 800
No. 3418 2,814
No. 3419 5,788
1. What is the total book disbursements for the month of December?

a. 377,668 b. 377,710 c. 377,632 d. 377,596
2. What is the book balance at December 31?

a. 9,832 b. 9,868 c. 9,754 d. 9,796
3. What is the total outstanding checks at December 31?

a. 8,602 b. 9,072 c. 9,042 d. 9,842
4. What is the adjusted bank balance on November 30?

a. 16,690 b. 16,732 c. 16,804 d. 16,774
5. What is the adjusted book receipts for the month of December?

a. 375,724 b. 371,766 c. 371,238 d. 375,766
6. What is the adjusted book disbursements for the month of December?

a. 377,590 b. 377,662 c. 377,674 d. 377,632

a. 14,824 b. 14,866 c. 14,908 d. 14,782
Halal Corp. has a current account in PNB. Your audit of the company’s cash account reveals the
following:
a. Balances taken from the company’s general ledger:

Cash balance, November 30, 2018 P637,860
Cash balance, December 31, 2018 576,420
Receipts, December 1 – 31, 2018 306,220
b. Balances taken from the December bank statement:

Bank balance, November 30, 2018 P685,180
Bank balance, December 31, 2018 637,220
Disbursements (debit) 356,080
c. Outstanding checks, November 30, 2018 (P26,140 was paid by the bank in December),
P64,140.
d. Checks written and recorded in December; not included in the checks returned with the
December bank statement, P36,080.
e. Deposit in transit, November 30, 2018, P15,260.
f. Deposit in transit, December 31, 2018, P16,140.
g. A bank credit memo was issued in December to correct an erroneous charge made in
November, P1,500.
h. Note collected by bank in December (company was not informed of the collection),
P2,060.
i. A check for P2,020 (payable to a supplier) was recorded in the Check Register in
December as P3,000.
j. A check for P2,240 was charged by the bank as P2,420 in December.
k. Halal Co. issued a stop payment order to bank in December. This pertains to a check
written in December which was not received by the payee. A new check was written
and recorded in the Check Register in December. The old check was written off by a
journal entry also in December, P780.
l. Bank service charge, November 30, 2018, P60.
1. What is the total book disbursements in December?

a. 367,660 b. 244,780 c. 369,720 d. 368,540
2. What is the total bank receipts in December?

a. 260,160 b. 308,120 c. 306,060 d. 309,020
3. What is the total outstanding check on December 31?

a. 100,220 b. 38,000 c. 62,220 d. 74,080
4. What is the adjusted bank balance on November 30?

a. 636,300 b. 685,180 c. 637,800 d. 634,800
5. What is the adjusted book receipts in December?

a. 307,500 b. 306,220 c. 303,380 d. 305,440
6. What is the adjusted bank disbursements in December?

a. 353,980 b. 365,840 c. 345,960 d. 366,020

a. 577,500 b. 577,400 c. 576,420 d. 579,460

Controls for Cash Receipts

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Controls for Cash Receipts

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CHAPTER 2: AUDIT OF CASH

AND CASH EQUIVALENTS

INTERNAL CONTROL OVER CASH

A. CONTROLS OVER CASH RECEIPTS BY POST

B. CONTROLS OVER CASH COLLECTED BY SALES PERSONNEL

• Collections should be recorded when received, e.g. in a rough cashbook or copies of

C. CONTROLS OVER CASH SALES

D. CONTROLS OVER BANKING

E. CONTROLS OVER CHECK PAYMENTS

• If the reconciliation is prepared independently, the bank statements should be obtained

G. CONTROLS OVER PETTY CASH

The aforementioned tests focus on cash receipt transaction assertions: occurrence,

• OCCURRENCE – recorded cash receipts represent cash actually collected from

checks for evidence of review and approval by supervisory personnel , such as

The aforementioned tests focus on cash receipt transaction assertions: occurrence,

• OCCURRENCE – recorded cash payments have actually occurred. The auditor

3. Obtain or prepare bank reconciliation.

2. Prepare proof of cash:

3. Test reasonableness of cut off by:

RIGHTS AND OBLIGATIONS

3. Review bank statements and bank replies to confirmation letters.

FINANCIAL ACCOUNTING REVIEW:

SUBSEQUENT MEASUREMENT (VALUATION)

Cash compensating balance in the cash balance.

DISBURSEMENT CHECKS (POSSIBLE DEFFECTS)

CERTIFICATES OF DEPOSITS (CDs) should normally be included in short-term investments

IOUs should be reported as receivables rather than cash.

Compensating balances shall be accounted for as follows:

2. Identify valid supports to the accountability as presented in the problem.

PROOF OF CASH PROBLEMS

Beg. Receipts Disburse. End

(Receipt, end is under) XX XX

*Observe that if there is an overstatement error (whether receipt or disbursement) during

3. The following statements relate to the audit of cash

Statement 2: The bank confirmation request used by auditors is a means of obtaining

a. All statements are true.

d. Low average balance compared to high level deposits.

16. In rendering cash counts, the accountability shall represent:

17. In rendering cash counts, cash shortage results when:

d. Obtain cutoff bank statement.

Current account at Metrobank P3,250,000

IOU from a key officer 30,000

4. On hand by the petty cash custodian on December 31, 2018 were:

7. The investment in equity securities comprise of the following:

5. How much is the adjusted petty cash fund?

Bills and coins:

2. How much is the total shortage/overage if there are any?

Currency and coins P12,310

Unused postage and documentary stamps 110

Voucher paid out of receipts 1,500

Official Receipts 100801 – 100820 dated October 1 – 11, 2018 28,840

Unused Postage Stamps P100

Sales Invoices (for cash sales, all in cash no checks)

2. How much is the petty cash shortage as of January 2?

4. What is the adjusted petty cash fund as of December 31?

The outstanding checks were as follows:

Balance per books, October 31, 2018 125,245

Accounts receivable 12,000

2. What is the net adjustment to cash as of December 31?

3. What is the cash shortage as of December 31?

4. What is the total cash shortage as of January 15?

a. The bank statement on May 31, 2018 showed a balance of P1,836,000.

i. A disbursement check of P45,000 was recorded by the company as P450,000 in the