CHAPTER 1: AUDIT OF CASH AND CASH EQUIVALENTS
 Where internal control over cash is weak, consider preparing a
Audit Procedures:
1. Conduct a cash count of undeposited collections, petty cash, and other
funds.
 Obtain custodian’s signature to acknowledge return of items
counted.
 Reconcile items counted with general ledger balances.
 Trace undeposited collections counted to bank reconciliation
 Follow up dispositions of items in cash counted:
 Undeposited collections should be traced to bank
deposits.
 Checks accommodated in petty cash should be
deposited after the count to establish their validity.
 IOUs in the petty cash should be confirmed and traced
to collections in the next payroll period.
 Expense vouchers should be traced to the succeeding
replenishment voucher.
 Coordinate cash count with count of marketable securities and
other negotiable assets of the client.
 Obtain confirmation of year-end fund balances of cash not
counted in branches or other offices.
2. Confirm bank balances by direct correspondence with all banks in which
the client has had deposits and loans during the year.
3. Obtain bank reconciliation.
 Check arithmetical accuracy of reconciliation
 Trace balance per book to the general ledger balance of cash
account
 Trace balance per bank to bank statement and compare with
amount confirmed by bank
 Establish authenticity of reconciling items by reference to their
respective sources, like:
 Bank debit or credit advices
 Duly approved journal vouchers
 Investigate checks outstanding for a long period of time.
 Consider adjustment, especially if the check is already
stale.
 Consider the possibility of an erroneous preparation of
the check.
 Investigate any unusual reconciling items.
proof of cash reconciliation.
4. Obtain cutoff bank statement showing the client’s transactions with the
bank at least one week after the reporting date, and:
 Trace year-end reconciling items, like:
 Deposit of the year-end undeposited collections.
 Completeness of year-end outstanding checks.
 Corrections of bank errors
 Examine supporting documents of year-end outstanding checks
that did not clear in the cutoff bank statement.
5. Obtain a list of interbank transfers of funds a few days before and after
the reporting date.
 Vouch supporting documents.
 Ascertain that the related receipts and disbursements were
booked by the client within the same day or at least within the
same month.
6. Test reasonableness of cutoff by:
 Comparing dates of checks returned with cutoff bank statement
to dates of recording in the cash disbursements register.
 Tracing receipts recorded a few days before the reporting date
to bank deposits.
7. Inspect savings account passbook and certificates of deposits.
 Reconcile with book balances
 Update interest earned posting on passbooks, if necessary.
 Compare balances with bank confirmation reply.
8. Determine any restrictions on availability of cash.
9. Determine property of financial statement presentation and adequacy
of disclosures.
PROBLEM 1 – 1: CASH AND CASH EQUIVALENTS What total amount of “cash and cash equivalents” should be reported in the
current asset section of the 2014 statement of financial position?
Presented below are unrelated situations.
A. P3,055,200 C. P2,955,200
1. The following information has been extracted from the accounting B. P2,455,200 D. P2,355,200
records of the HAZELNUT COMPANY at December 31, 2014:
3. The controller of the OTO COMPANY is in the process of preparing the
Cash on hand (undeposited sales receipts) P 40,800
company’s December 31, 2014 financial statements. He is trying to
Certificate of time deposit with maturity of 3 months 1,000,000
determine the correct balance of cash and cash equivalents to be
Customer’s note receivable 40,000
reported as a current asset in the statement of financial position. The
Reconciled balance in AA Bank checking account (14,000)
following items are being considered:
Reconciled balance in BB Bank checking account 374,000
Balance in CC savings account 342,400
 Savings account of P900,000 and a checking account balance of
Customer’s postdated check 54,000
P1,200,000 are held at Manila Bank.
Employee travel advances 64,000
 Money market placement with maturity of 3 months,
Cash in bond sinking fund 48,000
P7,500,000.
Bond sinking fund investments 323,600
 Currency and coins on hand amounted to P11,550.
Postage stamps 17,200
 Travel advances of P270,000 for the first quarter of next year
What total amount should Hazelnut Company report as “cash” at December 31, (employee reimbursement will be through salary deduction).
2014?  Oto Company has purchased P3,150,000 of commercial paper of
A. P805,200 C. P743,200 Mendez Corp. which is due in 60 days.
B. P757,200 D. P703,200  A separate cash fund amounting to P2,250,000 is restricted for
the retirement of long-term debt.
2. The controller of the LYRIC CO. is trying to determine the amount of  Petty cash fund of P1,500.
cash and cash equivalents to be reported on its December 31, 2014,  An IOU from an employee of Oto Company in the amount
statement of financial position. The following information is provided: P2,000.
 Two certificates of deposit, each totaling P500,000. These CDs
 Balances in the company’s accounts at the Monte Bank: have a maturity of 120 days.
 Checking account – P540,000  Oto Company has received a check from a customer in the
 Savings account – P884,000 amount of P187,500 dated January 15, 2015.
 Undeposited customer checks of P208,000  Oto Company has agreed to maintain a cash balance of P50,000
 Currency and coins on hand of P23,200 at all times at Manila Bank to ensure future credit availability.
 Savings account at the Naic Bank with a balance of P350,000.  On January 1, 2014, Oto Company purchased marketable equity
This account is being used to accumulate cash for future plant securities to be held as “trading” for P3,000,000. On December
expansion (in 2016). 31, 2014, its market value is P4,300,000.
 P800,000 balance in a checking account at the Naic Bank. In What amount should be reported as cash and cash equivalents on December 31,
exchange for a line credit, Lyric Co. has agreed to maintain a 2014?
minimum balance of P100,000 in this account. A. P13,763,050 C. P12,751,500
 Treasury bills; 30-day maturity bills totaling P600,000 and 180- B. P12,575,550 D. P12,763,050
day bills totaling P800,000.
PROBLEM 1-2: CASH AND CASH EQUIVALENTS PROBLEM 1-3: CASH AND CASH EQUIVALENTS

The accountant of SANTIAGO COMPANY is in the process of preparing the Your audit of the December 31, 2014, financial statements of DIONSIO CORP.
company’s financial statements for the year ended December 31, 2014. He is reveals the following:
trying to determine the correct balance of cash and cash equivalents to be
reported as a current asset on the statement of financial position. The following Current account at Prime Bank P (30,000)
items are being considered: Current account at Prudent Bank 135,000
Treasury bills (acquired 3 months before maturity) 300,000
 Balances in the company’s accounts at the Metropolitan Bank: Treasury bills (maturity date is Dec. 31, 2015) 1,500,000
 Current account P81,000 Payroll account 390,000
 Savings account P132,600 Foreign Bank account – restricted (translated
 Undeposited customer checks of P22,200 (including a customer check using the Dec 31, 2014, exchange rate) 2,000,000
dated January 2, 2015 for P3,000). Postage stamps 1,250
 Currency and coins on hand of P3,480. Employee’s postdate check 4,500
 Savings account at the Northern Philippines Bank with a balance of IOU from the vice-president 8,000
P2,400,000. This account is being used to accumulate cash for future Credit memo from a supplier for a purchase return 8,100
plant expansion (in 2015). Traveler’s check 21,000
 Petty cash of P4,000 (currency of P1,200 and unreplenished vouchers Money order 12,900
for P2,800). Petty cash fund (P3,000 in currency and expense
 P120,000 in a current account at the Northern Philippines Bank. This receipts for P12,000) 15,000

represents a 20% compensating balance for P600,000 loan with a bank.

Santiago Company is legally restricted to withdraw the funds until the What amount would be reported as “cash and cash equivalents” in the
loan is due in 2017. statement of financial position on December 31, 2014?
 Treasury bills: A. P840,050 C. P849,400
Two-month maturity bills P90,000 B. P873,900 D. P861,900
Seven-month bills 120,000
 Time deposit P100,000

What is the correct balance of cash and cash equivalents to be reported in the
current assets section of the statement of financial position?
A. P547,480 C. P430,280
B. P427,480 D. P327,480
 1. The company maintains its current account with Tsunami Bank. The
bank statement on December 31, 2014 showed a balance of P638,340.
PROBLEM 1-4: COMPUTATION OF CORRECT CASH BALANCE
Your audit of the company’s account with Tsunami Bank disclosed the following:
The Cash account of the BEA CORPORATION as of December 31, 2014 was  A check for P22,500 received from a customer whose account is current
composed of the following: had been deposited and then returned by the bank on December 28,
2014. No entry was made for the return of this check. The customer
On deposit in current account with the Bank of PI P 900,000 replaced the check on January 15, 2015.
Cash collection not yet deposited to the bank 350,000 
A customer’s check returned by the bank for
insufficient fund 150,000
A check drawn by the Vice-President of the
company dated January 15, 2015 70,000
A check drawn by a supplier dated December 28,
2014 for goods returned by the company 60,000
A check dated May 31, 2014 drawn by the company
against the Bank of Manila in payment of customs duties.
Since the importation did not materialize, the check was
returned by the customs broker. This check was an
outstanding check in the reconciliation of the Bank of
Manila. 410,000
Petty cash fun of which P10,000 is in currency, P7,200 in
form of employees’ IOUs; and P2,800 is supported by
approved petty cash vouchers for expenses all dated prior
to closing of the books on December 31, 2014 20,000
Total P1, 960,000
Less: Overdraft with the Bank of Manila secured by a
chattel mortgage on the inventories 300,000
Cash balance per ledger P1,660,000

What is the amount of cash to be reported in the December 31, 2014 statement
of financial position of Bea company?

PROBLEM 1-5: CASH AND CASH EQUIVALENTS

In connection with your audit of the financial statements of ONOR COMPANY

for the year ended December 31, 2014, you gathered the following information.