Auditing and Assurance Principles

Pre-Test
Theories
1. Cash equivalents:
A. Are illegal in some states.
B. Are highly liquid investments.
C. Will be converted to cash within one year.
D. Are only available to large companies.
2. A minimum cash balance required by a bank is called:
A. Cash in the bank
B. Cash equivalent
C. EFT
D. Compensating balance
3. An adjusting entry is required for
A. Outstanding checks
B. Deposits in transit
C. Bank errors
D. NSF checks
4. Journal entries are not required for reconciling items are related to the bank because:
A. The depositor cannot make entries on the bank’s books.
B. The amounts cannot be determined.
C. Journal entries are never required for these items.
D. The bank does not make errors.

5. It is a two-date reconciliation that considers adjusting the receipts and disbursement for a
certain period.
A. Bank reconciliation.
B. Proof of cash
 C. Bank statement
D. Cash vouchers
6. As contemplated in accounting, cash includes
A. Money only
B. Money and any negotiable instrument
C. Any negotiable instrument
D. Money and any negotiable instrument that is payable in money and acceptable by the
bank for deposit and immediate credit.
7. To be reported as “cash and cash equivalent”, the cash and cash equivalent must be
A. Unrestricted in use for current operations
B. Available for the purchase of PPE
C. Set aside for the liquidation of long-term debt
D. Deposited in the bank
8. Which is false concerning measurement of cash and cash equivalents?
A. Cash is measured at face value
B. Cash in foreign currency is measured at the current exchange rate
C. If a bank or financial institution holding the funds of the company is in bankruptcy or
financial difficulty, cash should be written down to estimated realizable value.
D. Cash equivalents should be measured at maturity value, meaning face value plus
interest.
9. A bank reconciliation is
A. A formal financial statement that lists all of the bank account balances of an
enterprise.
B. A merger of two banks that previously were competitors.
C.A statement sends by the bank to depositor on a monthly basis.
D. A schedule that accounts for the differences between and enterprise’s cash balance as
shown on its bank statement and the cash balance shown in its general ledger.
10. Which is not considered as a cash equivalent?
A. A three-year treasury note maturing on May 30 of the current year purchased by the
entity on April 15 of the current year.
 B. A three-year treasury note maturing on May 30 of the current year purchased by the
entity on January 15 of the current year.
C. A 90-day T-bill
D. A 6-day money market placement
Problems
1. Mr. Tomas Y. Lang, a businessman friend, has requested your help in explaining and solving
the following problems that confront his company, the T.Y. Lang Corp. A cash count on
January 2, 2021 showed the following items in the petty cash box:

Currency and coins counted P 12.56

Envelope containing contributions to employees party 90.00
Petty cash vouchers approved 14.50
Employees’ IOUs 180.00
Company check for fund replenishment 92.00

The petty cash fund was established for an amount of P300.00.

What is the correct amount of petty cash for the balance sheet as of the end of the year?
December 31, 2021?

A. P300 C. P104.56
B. P12.56 D. Some other answer.
Solution:
Currency and coins counted 12.56
Add: Company check for fund replenishment 92.00
Petty Cash Fund` 104.56
2. Account of the petty cash fund of XYZ Company showed its composition as follows:
Coins and currency 3,300
Paid vouchers:
Transportation 600
Gasoline 400
Office supplies 500
Postage stamps 300
Due from employees 1,200 3,000
Manager’s check returned by the bank marked “NSF” 1,000
Check drawn by company to the order of petty cash custodian 2,700

What is the amount of the petty cash fund for balance sheet purposes?
A. 10,000 C. 6,000
B. 7,000 D. 9,000
Solution:
Coins and currency 3,300
Add: Check drawn by company to the order of petty cash custodian 2,700
Petty Cash Fund 6,000

3. The Ruby Company’s ledger showed a balance in its cash account at December 31, 2012 of
P682,250, which was determined to consist of the following:
Petty cash fund P 3,600
Checking account in Metrobank (check of P6,000
is still outstanding) 336,750
Notes receivable in the possession of a collecting agency 25,000
Undeposited receipts, including a postdated check for P10,500
and Traveler’s check for P10,000 178,000
Bond sinking fund – cash 127,500
IOUs signed by employees 4,950
Paid vouchers, not yet recorded 6,450
Total P682,250

At what amount should “Cash on hand and in bank” be reported on Ruby Company’s
statement of financial position?

A. P501,850 C. P629,350
B. P507,850 D. P662,250

4. The following data pertaining to the cash transactions and bank account of Mandirigma
Company for the month of May are available to you:

Cash balance, per records, May 31 P17,194

Cash balance, per bank statement, 5/31 31,948
Bank service charge for May 109
Debit memo for the cost of printed checks delivered by the bank 125
Outstanding checks, May 31 6,728
Deposit of May 30 not recorded by bank until June 1 4,880
Proceeds of a bank loan of May 30, net of interest of P300 5,700
Proceeds from a customer's promissory note,
including interest of P100 8,100
Check No. 2772 issued to a supplier entered in the
accounting records at P2,100 but deducted in
the bank statement at an erroneous amount of 1,200
Stolen check lacking an authorized signature, deducted
from Mandirigma's account by the bank in error 800
Customer's check returned by the bank marked NSF;
 no entry has been made in the accounting records
to record the returned check 760

What is the correct cash balance at May 31?

A. P29,200 C. P30,300
B. P30,000 D. P30,900

5. Rudi Company keeps all its cash in a checking account. An examination of the company’s
accounting records and bank statement for the month ended June 30, 2021 revealed the following
information:
The cash balance per book on June 30 is P12,000,000

A deposit of P2,000,000 that was placed in the bank’s night depository on June 30 does not
appear on the bank statement.

The bank statement shows on June 30, the bank collected note for Rudi and credited the
proceeds of P1,400,000 to the company’s account. Checks outstanding on June 30 amount to
P500,000.

Rudi discovered that a check written in June for P200,000 in payment of an account payable,
had been recorded in the company’s records as P300,000

Included with the June bank statement was NSF check for P400,000 that Rudi had received
from a customer on June 26

The bank statement shows a P50,000 service charge for June

The cash in bank to be shown on the balance sheet on June 30, 2021 is

A. P11,500,000 C. P13,050,000
B. P12,850,000 D. P13,500,000

6. On October 31, of the current year, the bank statement for the checking account of D
Company shows a balance of 126,300, while the company’s records show a balance of
123,310. Information that might be useful in preparing a bank reconciliation is as
follows:
A. Outstanding checks are 14,300 which includes a certified check for 2,000.

B. The October 31 cash receipts of 7,850 are not deposited in the bank until November 2.

C. One check written in payment of utilities for 1,370 is correctly recorded by the bank but
recorded by the company as a disbursement of 1,730.
D. In accordance with prior authorization, the bank debited 6,500 directly from the checking
account as payment of interest amounting to 500 and the principal amounting to 6,000. D has not
yet recorded the direct withdrawal.

E. Bank service charges of 240 are listed on the bank statement.

F. A deposit of 5,670 is recorded by the bank on October 31, but it did not belong to D. the
deposit should have been made to the checking account of H, a separate company.
G. The bank statement includes a charge of 750 for an NSF. The check is returned with the bank
statement and the company will seek payment from the customer.

Prepare the bank reconciliation using the adjusted balance method for the month of October.

D Company
Bank Reconciliation
For the month ended October 31

Balance per books, end ₱123,310 Balance per bank statement, end ₱126,300
Add: credit memo 0 Add: deposit in transit 7,850
Less: debit memo 7,490 Less: outstanding check 12,300
Add: book error 360 Less: bank error 5,670
Adjusted balance ₱116,180 Adjusted balance ₱116,180

7. You have gathered the following data in the preparation of bank reconciliation on December
31, of the current year for A Company:
a. Balance per bank statement, 2,000,000.
b. Balance per book, 1,350,000.
c. Bank service charge, 5,000.
d. Outstanding checks, 300,000.
e. Deposit in transit, 237,500.
f. Proceeds of bank loan, December 1, discounted for 6 months at 12% not recorded on A
Company’s books, 470,000.
g. Customer NSF check charged back by bank, 25,000.
h. Check of J charged by the bank against A account, 75,000.
i. Customer’s note collected by bank in favor of A Company.
Face amount 200,000
Interest 20,000
Total 220,000
Service charge 2,500
Total 217,500
j. Deposit of 50,000 incorrectly recorded by bank as, 5,000.
k. Erroneously debit memo of December 28, to charge A account with settlement of bank
loan, 100,000.
l. Deposit of J Company credited to A account, 150,000.

Prepare the bank reconciliation as of December 31 of the current year.

 A Company
Bank Reconciliation
For the month ended December 31,2022

Balance per books, end ₱1,350,000 Balance per bank statement, end ₱2,000,000
Add: credit memo Add: deposit in transit 237,000
Less: debit memo Less: outstanding check 300,000
Add: book error Less: bank error 100,000
Adjusted balance Adjusted balance

8.

Prepare a four-column reconciliation showing adjusted balances.

30-Nov Receipts Disbursement 31-Dec

Balance per book 2,032,000 2,568,000 1,440,000 3,160,000
Add: CM

Less: DM -2,000 -2,000

4,000 4,000
Book error -200,000 200,000
-300,000 -300,000
Adjusted Balance per book 1,830,000 2,468,000 1,442,000 2,856,000

Balance per Bank 1,890,000 2,090,000 1,080,000 2,900,000

 Add: DIT 80,000 -80,000
498,000 498,000
Bank error 40,000 -40,000
-50,000 50,000
Less: OC -180,000 -180,000
592,000 -592,000
Adjusted Balance per bank 1,830,000 2,468,000 1,422,000 2,856,000

9.

30-Sep Receipts Disbursement 31-Oct

Balance per book 1,900,000 1,400,000 2,400,000 900,000
Add: CM

Less: DM -60,000 -60,000

40,000 -40,000
Book error 30,000 -30,000
50,000 50,000
90,000 -90,000
-120,000 120,000
Adjusted Balance per book 1,960,000 1,330,000 2,260,000 1,030,000

Balance per Bank 2,100,000 1,200,000 2,500,000 800,000

Add: DIT 130,000 -130,000
260,000 260,000
Less: OC -270,000 -270,000
30,000 -30,000
Adjusted Balance per bank 1,960,000 1,330,000 2,260,000 1,030,000