BM2008

AUDIT OF CASH
INTRODUCTION TO AUDIT OF CASH

Cash is a legal tender that can be used to exchange goods, debt, or services. It is one of the most important
assets of a business. Almost all the entity's transactions ultimately result in either receipt or payment of
cash. Cash usually includes cash in bank, cash on hand, and cash equivalents. Cash equivalents (CE) are
short-term, highly liquid instruments that are both easily convertible to a known amount of cash.
Examples of cash and cash equivalents include, but not limited to, petty cash fund, payroll fund, money
orders, cashier's checks, treasury bills, and others. (Asuncion, Ngina, & Escala, 2018)

Generally, cash has a higher degree of inherent risk, which results in more audit time devoted to the audit
of the account than its peso amount. The amount flowing in and out of cash is frequently larger than any
other account in the financial statement. In addition, the susceptibility of cash to defalcation is greater
than any other type of assets because other assets must be converted to cash first to make them usable.

Cash and Cash Equivalents

Cash Cash Equivalents

Cash on Cash in Cash

Hand Bank Fund

Figure 1. Cash and cash equivalents

Included as Cash Excluded as Cash

Cash on Hand
1. Currencies and coins ✓
2. Money order ✓
3. Bank drafts ✓
4. Checks
a. Cashier’s check ✓
b. Certified check ✓
c. Customer’s check ✓
d. Manager’s check ✓
e. Personal check ✓
f. Traveler’s check ✓
g. Customer’s postdated check ✓
h. Customer’s NSF/DAIF check ✓
i. Customer’s stale check ✓
j. Company’s unreleased check ✓
k. Company’s postdated check ✓
l. Company’s stale check ✓

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Cash in Bank
1. Checking Account ✓
2. Savings Account ✓
3. Time Deposit ✓ (part of CE)
4. Compensating balance
a. Legally restricted ✓
b. Not legally restricted ✓
5. Deposit in Foreign Bank
a. Legally restricted ✓
b. Not legally restricted ✓
c. Silent ✓
6. Deposit in Closed bank ✓
7. Bank Overdraft
a. Different Bank ✓
b. Same Bank ✓
c. Silent ✓
Cash Fund
1. Cash fund for operation
a. Petty cash fund ✓
b. Revolving fund ✓
c. Change fund ✓
d. Payroll fund ✓
e. Tax fund ✓
f. Interest fund ✓
g. Dividend fund ✓
h. Travel fund ✓
2. Cash fund not for the operation
✓ (if disbursement is ✓ (if disbursement is
a. Sinking fund
w/in 12 months) beyond 12 months)
✓ (if disbursement is ✓ (if disbursement is
b. Pension fund
w/in 12 months) beyond 12 months)
c. Preference share redemption ✓ (if disbursement is ✓ (if disbursement is
fund w/in 12 months) beyond 12 months)
d. Plant acquisition fund ✓
e. Depreciation fund ✓
f. Contingency fund ✓
g. Insurance fund ✓

Included as CE Excluded as CE
Cash Equivalents (CE)
1. Time deposit ✓ (within 3 months) ✓ (beyond 3 months)
2. Money order ✓ (within 3 months) ✓ (beyond 3 months)
3. Treasury shares ✓ (within 3 months) ✓ (beyond 3 months)
4. Investment in preference share with
✓ (within 3 months) ✓ (beyond 3 months)
redemption date

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Three-month rule test – The counting of three (3) months is from the date of acquisition of cash
equivalents to the date of maturity of cash equivalents. (StuDocu, n.d.)

Definition of Terms
• Currencies and coins are money in the form of paper or coins, usually issued by a government and
generally accepted at its face value as a method of payment.
• Money order is a certificate usually issued by governments and banking institutions, that allows the
stated payee to receive cash-on-demand.
• Bank drafts refers to a negotiable instrument that can be used as payment that is guaranteed by the
issuing bank. The total amount of the draft is drawn from the requesting payer's account—their bank
account balance decreases by the money withdrawn from the account—and is usually held in a
general ledger account until the draft is cashed by the payee.
• Cashier’s check is a secure way to make large payments. The check itself is written by a financial
institution such as a bank or credit union against its own funds.
• Certified check is a type of check for which the issuing bank guarantees that there will be enough cash
available in the holder's account when the recipient decides to use the check.
• Manager’s check a check drawn by the bank’s manager upon the bank itself and accepted in advance
by the bank by the act of its issuance. It is really the bank’s own check and may be treated as a
promissory note with the bank as its maker.
• Personal check a check that is drawn against funds deposited in your personal checking account.
• Traveler’s check is a product typically is used by people on vacation in foreign countries. It offers a
safe way to travel overseas without cash. The issuing party, usually a bank, provides security against
lost or stolen checks.
• Customer’s postdated check is a check on which the customer has stated a date later than the current
date.
• Customer’s not sufficient funds (NSF)/drawn against insufficient funds (DAIF) check is a check that
was not honored by the bank of the entity issuing the check, on the grounds that the customer's bank
account does not contain sufficient funds. This situation may also arise when a bank account has been
closed.
• Customer’s stale check is a check that is presented at the paying bank after a certain period (typically
six months) of its payment date. A stale check is not an invalid check, but it may be deemed an
'irregular' bill of exchange.
• Company’s unreleased check or company's undelivered are company's check drawn and recorded
but are not actually issued or delivered to the payees as of reporting date.
• Company’s postdated check is a check on which the issuer has stated a date later than the current
date. Postdated checks are still considered as accounts receivable.
• Company’s stale check is the same with customer's stale check.
• Checking Account is a deposit account held at a financial institution that allows withdrawals and
deposits. Also called demand accounts or transactional accounts, checking accounts are very liquid
and can be accessed using checks, automated teller machines, and electronic debits, among other
methods.

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• Savings Account is an interest-bearing deposit account held at a bank or other financial institution.
Though these accounts typically pay a modest interest rate, their safety and reliability make them a
great option for parking cash you want available for short-term needs.
• Time Deposit is an interest-bearing bank account that has a pre-set date of maturity. Time deposits
generally pay a slightly higher rate of interest than a regular savings account. The longer the time to
maturity, the higher the interest payment will be.
• Compensating balance is a minimum deposit that must be maintained in a bank account by a
borrower.
• Bank Overdraft happens when an individual's bank account balance goes down to below zero,
resulting in a negative balance.
• Petty cash fund is a small amount of cash kept on hand to pay for minor expenses, such as office
supplies or reimbursements.
• Revolving fund is a fund that is continually replenished as withdrawals are made such as a working
capital fund.
• Change fund is a set amount of money used to make change for customers who pay for purchases
with cash.
• Payroll fund is a set amount of money to be used for company's payroll expenses.
• Tax fund is a set amount of money to be used for company's tax liability.
• Interest fund is a set amount of money to be used for company's interest expenses.
• Dividend fund is a set amount of money to be used for company's dividend expenses.
• Travel fund is a set amount of money to be used for company's travel expenses.
• Sinking fund is a fund containing money set aside or saved to pay off a debt or bond. A company that
issues debt will need to pay that debt off in the future, and the sinking fund helps to soften the
hardship of a large outlay of revenue.
• Pension fund is established by employers to facilitate and organize the investment of employees'
retirement funds.
• Preference share redemption fund is a fund to ensure the eventual redemption of preferred stock.
• Plant acquisition fund is used for the construction, renovation, and acquisition of capital assets.
• Depreciation fund is an amount of money that a company invested to buy new assets. It comes from
the investment of a sum equal to the depreciation allowance for its existing assets. As depreciation
charges are incurred to reflect the asset's falling value, a matching amount of cash is invested.
• Contingency fund is fund used to meet obligations that may arise from contingencies like pending
lawsuits.

Illustrative Example 1:
The following information has been extracted from the accounting records of EXO COMPANY on
December 31, 201A. What total amount should EXO COMPANY report as “cash” on December 31, 201A?

1. Cash on hand P 40,800

2. Time deposit placed December 20, 201A and due March 20, 201B 1,000,000
3. Customer’s note receivable 40,000
4. Balance in ABC Bank checking account (14,000)
5. Balance in DEF Bank checking account 374,000

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6. Balance in GHI savings account 342,400

7. Customer’s postdated check 54,000
8. Employee travel advances 64,000
9. Cash in bond sinking fund 48,000
10. Bond sinking fund investments 323,600
11. Postage money orders 17,200

Solution:
Cash on hand P 40,800
Reconciled balance in DEF bank checking account 374,000
Balance in GHI savings account 342,400
Total cash P757,200

MANAGEMENT ASSERTIONS
When auditing an account balance, the auditor should use assertions for classes of transactions, account
balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks
of material misstatement and the design and performance of further audit procedures.
Assertions used by the auditor fall into the following three (3) broad categories:
1. Assertions about classes of transactions and events for the period under audit:
a. Occurrence – Transactions and events that have been recorded have occurred and pertain
to the entity.
b. Completeness – All transactions and events that should have been recorded have been
recorded.
c. Accuracy – Amounts and other data relating to recorded transactions and events have
been recorded appropriately.
d. Cutoff – Transactions and events have been recorded in the correct accounting period.
e. Classification – Transactions and events have been recorded in the proper accounts.
2. Assertions about account balances at the period end:
a. Existence – Assets, liabilities, and equity interests exist
b. Rights and obligations – The entity holds or controls the rights to assets, and liabilities are
the obligations of the entity.
c. Completeness – All assets, liabilities, and equity interests that should have been recorded
have been recorded.
d. Valuation and Allocation – Assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
3. Assertions about presentation and disclosure:
a. Occurrence and rights and obligations – Disclosed events, transactions, and other matters
have occurred and pertain to the entity.
b. Completeness – All disclosures that should have been included in the financial statements
have been included.

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c. Classification and understandability – Financial information is appropriately presented

and described, and disclosures are clearly expressed.
d. Accuracy and valuation – Financial and other information are disclosed fairly and at
appropriate amounts.
Assertions about classes of transactions and events for the period under audit pertains to assertions in
the statement of comprehensive income while assertions about account balances at the period end
pertain to assertions in the statement of financial position. Assertions about presentation and disclosure
can be found in all the components of the complete set of financial statements.
However, the following assertions are at times used interchangeably for both income statement items
and balance sheet items because essentially, they have the same objective.
For example, the cut-off assertion addresses the issue that transactions and events should have been
recorded in the correct accounting period, however, it also addresses:
• The existence or occurrence assertion when the transactions of the subsequent period were
recorded in the current period; and
• The completeness assertion when transactions for the current period were recorded in the
subsequent period.
Valuation vs. Allocation
Although these two (2) assertions are considered similar and both relate to the account balances at period
end, these can be distinguished as follows:
• Valuation applies to both initial and subsequent measurement of an asset or liability (e.g., initial
valuation of financial assets, subsequent valuation of inventories, etc.)
• Allocation relates more to subsequent measurement of prepayments (deferrals), precollection,
an intangible asset subject to amortization, wasting assets subject to depletion, and depreciable
asset. (Asuncion, Ngina, & Escala, 2018)

AUDIT OBJECTIVES & PROCEDURES

Audit Objectives
An audit program of representative year-end substantive testing procedures in the examination of cash:

Assertions Audit Objectives Audit Procedures

Existence or A. All cash on the statement of
Occurrence financial position at a given date is
held by the entity or by others (e.g.,
a bank) for the entity.
Completeness B. All cash owned by the entity at the
reporting date is included in the
statement of financial position.
1. Analysis of cash balance and
reconcile to the general ledger.
2. Bank confirmation.
3. Cash count procedures for cash
on hand.
4. Test on bank reconciliation.
5. Tracing bank transfers.
6. Cutoff bank statement.
7. Prepare proof of cash.
8. Cash cutoff tests.

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Rights and C. The entity owns, or has a legal right 9. Review bank statements and
Obligations to, and has unrestricted use on all replies to bank confirmation
the cash on the statement of letters.
financial position at the reporting
date.
Valuation or D. Cash, including bank balances, is 10. Existence of cash in banks under
Allocation stated at realizable value and receivership, cash subject to a
agrees with supporting schedules. court restraining order, in
foreign currency.
Presentation and E. Cash, including bank balances, is 11. Checks with large or unusual
Disclosure properly classified, described, and payments to related parties.
disclosed in the financial 12. Proper financial statement
statements, including notes, in presentation and disclosure of
accordance with PFRS. cash.
F. Lines of credit, loan guarantees,
compensating balance agreements,
and other restrictions (liens) on
cash balances are appropriately
identified and disclosed.
Discussion of Audit Procedures for Cash
Audit procedures presented in this handout merely illustrate typical audit procedures for audits of
merchandising and manufacturing entities. It is also designed for audits of a corporation, and some
discussions are made for partnership and sole proprietorship businesses. However, in actual practice,
audit programs must be tailored to each client's risk and internal control. The audit procedures comprising
audit programs may substantially vary from engagement to the next.
1. Analysis of cash balance and reconcile to the general ledger.
Prepare a schedule that lists all the banks, the account numbers, account types (current, savings, time
deposit), and the year-end balance per books. Trace and reconcile the balances on the list to the general
ledger as necessary.
2. Bank confirmation.
Primary Audit Objectives: Existence, Valuation, Rights and obligations & Presentation and disclosure
The primary procedure when testing the existence and rights and obligations in relation to the reported
cash in the bank is through the confirmation of the balances of the company's accounts with banks or
financial institutions. Exhibit 1 (page 7) illustrates an example of standard bank confirmation.
The following information is ordinarily included in the confirmation request:
1. Balances due to or from the bank, the letter may give the account number, description, and
currency, and should request information on nil balances and accounts closed during the period;
2. Terms and repayments conditions of loan and overdrafts;
3. Collateral given, maturity and interest terms, unused facilities, lines of credit, and any rights of
offset or other rights;
4. Assets held in safe custody and any encumbrances over them;
5. Asset repurchase and resale agreements and options;

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6. Contingent liabilities such as bills, acceptance, guarantees, and endorsements;

7. Listings of authorized account signers; and
8. Standby contracts, forward currency, and other such arrangements.
Bank confirmation request should be (a) sent to all banks in which the client has an account, (b) signed by
the client, (c) mailed by the auditor, and returned directly to the auditor.
3. Cash count procedures for cash on hand.
Primary Audit Objectives: Existence, Valuation, and Rights
Cash on hand ordinarily consists of undeposited cash receipts, petty cash funds, and change funds. Cash
counts should be conducted through the year and should cover all branches and, if possible, all tellers or
cash custodian. Exhibit 2 (page 8) illustrates a cash count sheet that the auditor may use.
The auditor should plan to count all cash and should consider the following:
1. Surprise cash count. Cash counts must be performed without the custodian being informed in
advance (i.e., on a surprise basis);
2. Control all cash funds, including marketable securities and other negotiable assets to prevent any
'transfers' or 'substitution' of floats to hide discrepancies, until the completion of the count;
3. Count in the presence of the custodian to ensure the auditors cannot be blamed for any shortage;
4. List each item in the fund showing the denominations of notes and coins;
5. The custodian should sign the record as evidence of the return of all funds; and
6. Agree the total to the cash book balance and investigate any differences.

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Exhibit 1: Standard Bank Confirmation (Asuncion, Ngina, & Escala, 2018)

Attn: Janet Nafoolish, Senior Manager

Bank of the Baguio Islands
Lower Session Rd., Baguio City

NCPAR.INC
We have provided to our auditors the following information as of the close of business on
December 31, 2018, regarding our deposit and loan balances. Please confirm the accuracy of
the information, noting any exceptions to the information provided. If the balances have been
left blank, please complete this form by furnishing the balance in the appropriate space below.
Although we do not request nor expect you to conduct a comprehensive, detailed search of
your records, if, during the process of completing this confirmation, additional information
about other deposit and loan accounts we may have with you comes to your attention, please
include such information below. Please use the enclosed envelope to return the original directly
to our auditors, Asuncion, Ngina, Escala & Co.
1. At the close of business on the date listed above, our records indicated the following
deposit balance(s):

Account Name Account No. Type of Account Interest Rate Balance*

Payroll account 12345678 Checking Account 2% P15,765,523
General account 23456789 Checking Account None 1,324,434

2. We were directly liable to the financial institution for loans at the close of business on the
date listed above as follows:
Date through
Account No./ Interest Description of
Balance* Date Due which Interest
Description Rate Collateral
is Paid
Delivery
143-444 P1,321,432 3/2/2023 11.50% 12/31/2018 Equipment

Juan Dela Cruz, Manager January 14, 2019

(Customer's Authorized Signature) (Date)

**************** To be filled by the bank's authorized personnel ****************

The information presented above by the customer is in agreement with our records. Although
we have not conducted a comprehensive, detailed search of our records, no other deposit or
loan accounts have come to our attention except as noted below.

John Doe, Finance Director January 14, 2019

(Financial Institution Authorized Signature) (Date)

Please return this form directly to our auditors:

Asuncion, Escala, Ngina & Co.
P.O. Box 14344, 2600 Baguio City

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Exhibit 2: Cash Count Sheet (Asuncion, Ngina, & Escala, 2018)

Cash Count Sheet

Madami Cash on Hand Co. 21-Dec-18 4-Jan-19

Client Audit Date Date

Petty Cash Fund Josefa Munda 9:05 AM

Name of Fund Counted By Time

Denomination Quantity Amount Total

Bills: P 1,000.00 1 P 1,000.00
500.00 3 1,500.00
200.00 1 200.00
100.00 16 1,600.00
50.00 20 1,000.00
20.00 40 800.00 6,100.00

Coins: 10.00 50 500.00

5.00 100 500.00
1.00 100 100.00 1,100.00

Checks: None - - -
Vouchers: Taxi Fare 400.00 400.00
Others: None - - -

Total P7,600.00

The above-listed cash items in the amount of P7,600 were returned to me after count by a representative
of Asuncion, Escala, Ngina & Co. All cash and cash items for which I am accountable to have been
presented for inspection and count

4-Jan-19 Pretty Custodian

Date Signature of Custodian
4. Test on bank reconciliation.
Primary Audit Objectives: Existence, Valuation, Completeness & Rights
Bank reconciliation is customarily prepared monthly by the client as part of its internal control over cash.
When auditing bank reconciliations, the auditor would obtain a copy of the bank reconciliation prepared
by the client. After obtaining a copy of bank reconciliation prepared by the client, the auditor should:
a. Verify the cash balance used in the bank reconciliation:
1. Trace balance per books in the ledger, cash receipts, and cash disbursement journal.
2. Trace balance per bank in the balance per bank statement, reply to bank confirmation,
and cutoff bank statement.
b. Check the accuracy of the footing in the bank reconciliation. (Asuncion, Ngina, & Escala, 2018)
A cash shortage may be concealed by omitting a check from the outstanding checks or by purposely
making an error in addition to the reconciliation, thus, a careful review of the client’s reconciliation is very
important.

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Exhibits 3, 4, and 5 illustrate the forms of bank reconciliation. The forms most frequently used by auditors
are those shown in Exhibit 3 (Bank to Books) and Exhibit 5 (Adjusted Balances).
Exhibit 3: Bank Reconciliation Statement (Bank Balance to Book Balance Method)

SM Company
Bank Reconciliation Statement
December 31, 2019

Balance per bank statement Pxx

Add: Book debits not yet credited to the bank Pxx
Bank debits not yet credited by the company xx xx
Total xx
Less: Book credits not yet debited by the bank xx
Bank credits not yet debited by the company xx xx
Balance per books Pxx

Exhibit 4: Bank Reconciliation Statement (Book Balance to Bank Balance Method)

JYP Company
Bank Reconciliation Statement
December 31, 2019

Balance per bank statement Pxx

Add: Book credits not yet debited to the bank Pxx
Bank credits not yet debited by the company xx xx
Total xx
Less: Book debits not yet credited by the bank xx
Bank debits not yet credited by the company xx xx
Balance per books Pxx

Exhibit 5: Bank Reconciliation Statement (Adjusted Balances Method)

YG Company
Bank Reconciliation Statement
December 31, 2019

Unadjusted balance per bank Pxx

Add: Book debits not yet credited by the bank xx
Less: Book credits not yet debited by the bank ( xx)
Adjusted bank balance xx
Unadjusted balance per books
Add: Bank credits not yet debited by the company xx
Less: Bank debits not yet credited by the company ( xx)
Adjusted book balance Pxx

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5. Tracing bank transfers.

Primary Audit Objectives: Existence, Completeness, and Rights
Tracing bank transfers is an effective procedure to disclose the overstatement of cash balances resulting
from kiting. Kiting is an irregularity involving the transfer of cash between banks. A check drawn on one
bank is deposited in another, several days (called the float period) usually pass before the check clears the
bank on which it is drawn. During this period, the amount of the check is included in the balance on deposit
at both banks, thereby causing overstatement of cash balances. Due to this effect of the clearing period,
an employee may take advantage of this period and manipulate bank transfers to conceal cash shortage.
To be able to detect this fraudulent scheme, the auditor ordinarily performs the following procedures:
a. Obtain a bank cutoff statement directly from the bank;
b. Prepare a schedule of bank transfers showing all transfers between the client's bank accounts
during the last week of the audit period and the first week of the subsequent period. The schedule
should be prepared using cash receipts and payments journals, year-end reconciliation, year-end
bank statement, and cutoff bank statement;
c. Trace all checks, deposits, and other cash changes from the cutoff statement to cash receipts and
disbursements records, particular attention to dates, and amounts.
The following rules should be observed by the auditor when tracing bank transfers:
a. Book entries for receiving and disbursing should have been made within the same month;
b. Book entries compared with the bank entries may be made in an earlier month but not in a later
month; and
c. The receiving per bank should not be at an earlier date than the disbursement per book.

Illustrative Example 2:
The information below was taken from the bank transfer schedule prepared during the audit of TWICE
Company’s financial statements for the year ended December 31, 201A. Assume all checks are dated and
issued on December 30, 201A. Which of the following might indicate kiting?

Disbursements Receipts
No. From To
Per Books Per Bank Per Books Per Bank
101 BDO Landbank 12/30 1/4 12/30 1/3
102 BPI Metrobank 1/3 1/2 12/30 12/31
103 Landbank PNB 12/31 1/3 1/2 1/2
104 Metrobank Pbcom 1/2 1/2 1/2 12/31
Answer: Check Numbers 102 and 104

6. Cutoff bank statement.

A bank cutoff statement is normally prepared 8 – 10 business days after the reporting date. Most items
that were outstanding at year-end would have cleared when the cutoff statement is prepared
(outstanding checks and deposits in transit) (Asuncion, Ngina, & Escala, 2018).
This statement should be sent directly by the bank to the auditor. Upon receipt of the statement, the
auditor should:
a. Trace all prior year dated checks to the outstanding checks listed on the bank reconciliation.
b. Trace deposits in transit on the bank reconciliation to deposits on the cutoff statement.

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7. Prepare proof of cash.

Based on the understanding of the auditor on internal controls, the auditor may assess internal control
over cash receipts and cash disbursements as weak or ineffective. In such cases, the auditor may consider
preparing proof of cash as an additional audit procedure aside from testing bank reconciliation. Proof of
cash, which is also called four-column bank reconciliation or two (2) date bank reconciliation, is prepared
to reconcile not only the account balance but also the account transactions occurring during a specified
period. Specifically, proof of cash is used to identify:
a. Cash receipts and disbursements recorded in the accounting records, but not on the bank
statement;
b. Cash deposits and disbursements recorded on the bank statement, but not on the accounting
records; and
c. Cash receipts and disbursement are recorded at different amounts by the bank than in the
accounting records.
A proof of cash is essentially a fraud detection procedure that may be used by the auditor and the client,
for any months during the year. (Asuncion, Ngina, & Escala, 2018)
8. Cash cutoff tests.
Primary Audit Objectives: Existence, Rights, and Completeness
The auditor should perform cutoff procedures on cash receipts, disbursements, and transfers to
determine if these transactions are reflected in the proper period. Normally, the desire to show a more
favorable current ratio may cause some entities to record cash disbursed in the first few days of a new
accounting period as disbursements of the preceding period or to record cash receipts of the first few
days of the subsequent period as receipts of the preceding period. This scheme is called window dressing.
When testing cutoff of cash receipts and cash disbursements at the reporting date, the audit procedure
might include:
a. Comparing deposits on the bank statements immediately before and after the reporting date with
entries in the cash receipts journal to establish the reasonableness of the deposits in transit at the
reporting date; and
b. Comparing the dates of the disbursement and receipt of intercompany payments or interbank
transfers immediately before and after the reporting date to establish that both receipts and
disbursements were recorded in the proper periods. (Asuncion, Ngina, & Escala, 2018)
9. Review bank statements and replies to bank confirmation letters.
The auditor should review any bank overdrafts (arises when bank balances are overdrawn) and note the
existence of any funds that may be subject to withdrawal restrictions in order to determine the effect(s)
on financial statement presentation.
Bank overdrafts should be reported as current liabilities and should not be netted to other bank accounts
with a positive balance unless it is part of the company's cash management or the amount involved is
immaterial.
When verifying bank overdrafts, the auditor performs the same procedure when verifying cash balances,
which is performing bank confirmations. On receipt, the auditor should review the returned bank
confirmations for details of security, guarantees, and restrictions over the entity's use of its cash, and
agree on details of all such items with the entity. The auditor should review documents such as minutes
and agreements, during an audit to establish the existence of any restrictions over the entity's use of its
cash.

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10. Existence of cash in a bank under receivership, cash in foreign banks, or foreign currency.
Verifying the existence of cash in a bank under receivership, cash in foreign banks, or foreign currency can
be done through examination of minutes, loan agreements, and confirmations.
Some companies may maintain their bank account in foreign currencies for some business purposes. If
the bank account being reconciled is in a foreign currency, the auditor should test the conversion of the
cash balance to the presentation currency (e.g., Philippine peso) to determine whether cash is stated at
its realizable value. The auditor ordinarily should:
a. Obtain the period-end foreign exchange rate from an independent source;
b. Re-perform the conversion of the cash balance into the currency using this rate; and
c. Compare the resultant amount to the account balance in the general ledger and accounting for
any differences. (Asuncion, Ngina, & Escala, 2018)
11. Checks with large or unusual payments to related parties.
Any large or unusual transactions especially checks payable to directors, officers, employees, affiliated
companies, or cash should be carefully reviewed by the auditors to determine whether the transactions
were properly authorized, recorded, and are adequately disclosed in the financial statements as required
by PAS 24 Related Party Transactions.
12. Proper financial statement presentation and disclosure of cash.
The auditor should review financial statements to make sure that:
a. Cash restricted to certain uses and compensating balances are adequately disclosed,
b. Cash pledged as security loans are properly disclosed in the notes to financial statements; and
c. Bank overdrafts are included as current liabilities.
Illustrative Example 3: (CPA Review School of the Philippines; Auditing Problems, 2020)
The bank statement for the checking account of MSU, INC. showed a December 31, 201A, the balance of
P1,463,212, Information that might be useful in preparing a bank reconciliation is as follows.
a. Outstanding checks were P132,025.
b. December 31, 2021A cash receipts of 57,500 were not deposited in the bank until January 2, 201B.
c. One check written in payment of rent for P24,600 was correctly recorded by the bank but was
recorded by MSU as P26,400 disbursement.
d. In accordance with prior authorization, the bank withdrew P45,000 directly from the checking
account as payment on a mortgage note payable. The interest portion of that payment was
P35,000. MSU has made no entry to record the automatic payment.
e. Bank service charges of P1,400 were listed on the bank statement.
f. A deposit of P87,500 was recorded by the bank on December 13, but it did not belong to MSU.
The deposit should have been made to the checking account of SUM, Inc.
g. The bank statement included a charge of P8,500 for an NSF check. The check was returned with
the bank statement and the company will seek payment from the customer.
h. MSU maintains a P20,000 petty cash fund that was appropriately reimbursed at the end of
December.
i. According to instruction for MSU on December 30, the bank withdrew P1,000,000 from the
account and purchased Treasury Bills for MSU. MSU recorded the transaction in its books on

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December 31 when it received notice from the bank. Half of the treasury bills mature in two
months and the other half in six months.
Questions:
1. What is the cash in bank balance per books on December 31, 201A?

Bank balance P 1,463,212

a. Outstanding check (132,025)
b. Deposit in transit 57,500
c. Book error (P26,400-P24,600) (1,800)
d. Unrecorded bank debit 45,000
e. Bank service charge 1,400
f. Bank error (87,500)
g. NSF check (8500)
Total cash in bank P 1,354,287
2. What is the corrected cash in bank balance on December 31, 201A?
Book Bank
Unadjusted Balance P1,354,287 1,463,212
a. Outstanding check (132,025)
b. Deposit in transit (57,500)
c. Book error 1,800
d. Unrecorded bank debit (45,000)
e. Bank service charge (1,400)
f. Bank error (87,500)
g. NSF check (8,500) .
Adjusted Balance P1,301,187 P1,301,187
3. What amount of cash and cash equivalents should be reported in the current asset section of the
balance sheet on December 31, 2020?
Adjusted cash P 1,301,187
a. Petty cash fund 20,000
b. Treasury bills 500,000
Total cash and cash equivalents P 1,821,187
Analytical Procedures on Cash
Aside from the substantive test of balances and transactions, the auditor may need to perform analytical
procedures to obtain evidence of the reasonableness of the cash reported in the financial statements. The
auditor may:
1. Compare the listing of cash accounts with those of prior periods and investigate any unexpected
changes (e.g., credit balances, unusual large balances, new accounts, closed accounts) or the
absence of expected changes;
2. Review interest received and/or paid in relation to the average cash balances and/or bank
overdrafts; and
3. Investigate any unusual fluctuations and significant differences.
It may be clarified that the foregoing is only an illustrative list of analytical review procedures which an
auditor may employ in carrying out an audit of cash and cash equivalents. The exact nature of analytical

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review procedures to be applied in a specific situation is a matter of professional judgment of the auditor.
(Asuncion, Ngina, & Escala, 2018)
Additional Audit Consideration: Cash deposits in a closed bank
In some cases, a company may also have bank deposits on banks that have closed during the fiscal period.
In considering the amounts to be reported in the statement of financial position, the auditor should
consider that deposits in a closed bank may be covered under the Philippine Deposits Insurance
Corporation (PDIC). Ordinarily, the auditor should also ensure that cash in closed banks should not be
included as part of cash and cash equivalents, rather it should be part of non-trade receivable. (Asuncion,
Ngina, & Escala, 2018)

Special Audit Consideration

1. Kiting. Kiting is an irregularity whereby an overstatement of cash is created by a cash transfer
between bank accounts. It is usually characterized by recording the transfer to the other bank as
cash receipts but the disbursement is not recorded. From an internal control point of view, kiting
occurs due to a lack of segregation of duties between accounting and cash custody. To detect
kiting the auditor may test the cutoff bank statement and trace bank transfers as discussed earlier
in this chapter.
2. Lapping. Lapping is done by misappropriating collections from one customer and concealing this
defalcation by applying a subsequent collection made from another customer. This scheme is
used to conceal the cash shortage. As discussed earlier in this chapter, lapping can be detected
by bank confirmation, surprise cash count, and comparing details of cash receipts journal entries
with the details of corresponding daily deposit slips.
3. Window dressing. Window dressing is any deliberate misstatement of the assets, liabilities,
equity, income, and expenses. It is usually accomplished by:
a. Recording as of the last day of the accounting period collections made after the close of
the period
b. Recording as of the last day of the accounting period payments of accounts made after
the close of the period.
To detect this scheme, the auditor will ordinarily verify the cash cutoff of cash receipts and disbursements
(please refer to discussion in the Cash Cut-off Tests).

References
Asuncion, D. J., Ngina, M. A., & Escala, R. F. (2018). Applied Auditing Book 1 of 2. Baguio: Real Excellence
Publishing.
CPA Review School of the Philippines; Auditing Problems. (2020). Manila.
StuDocu. (n.d.). Retrieved from https://www.studocu.com/ph.

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