lOMoARcPSD|18969566

AP Audit of Cash Balance

Accountancy (University of the Philippines System)

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FEU - DILIMAN

AUDITING PROBLEMS
ReSA REVIEW SCHOOL

RECEIPT & DISBURSMENT CYCLES:

AUDIT OF CASH BALANCE
PROBLEM 1:

1. Cash is the most inherently risky among assets in the perspective of the auditor. This is mostly
associated to the fact that cash has the highest risk of misappropriation either from within or outside the
entity. 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 remittance advice
d. A bank lockbox system

2. Which of the following is not consistent with the requirements of imprest system with regard protecting
receipts from possible cash loss due to misappropriation?
a. Requiring customers, where possible, to pay through checks.
b. Requiring the company’s personnel who receives the check first to automatically restrictively
endorse check collections.
c. Requiring the treasury department to prepare monthly bank reconciliation statements to
reconcile bank records against the company’s books.
d. Requesting customers, where possible, to remit payments directly to the bank.

3. Which of the following is not a universal rule for achieving strong internal control over cash receipts?
a. Separate the cash handling function, record keeping function and regular bank reconciliation
functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days’ cash receipts by the end of the day.
d. Where collections are made through cash and not through checks, cash receipts should be
reconciled with the prenumbered official receipt at the end of the operating day.

4. As payments are received, one mailroom employee is assigned the responsibility of prelisting check
receipts and preparing the deposit slip prior to forwarding the check 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.

5. Which of the following would the auditor consider to be an incompatible operation for a cashier if the
cashier receives remittances from the mailroom?
a. Posting the receipts to the accounts receivable subsidiary ledger cards.
b. Making the daily deposit at the local bank.
c. Preparing the daily deposit.
d. Endorsing the checks.

6. Which of the following is not consistent with the requirement of the imprest system with regard internal
control measures in handing and processing disbursements?
a. All disbursements, without exception, should be made through checks.
b. For very minute disbursements, the company may be allowed to use undeposited collections.
c. Documents in the voucher package (e.g. sales invoice, purchase order, receiving reports)
should be automatically cancelled once disbursement checks are signed.
d. Checks should be issued immediately to the payee, preferably by the one who signed the
checks last.

7. 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.

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8. 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

9. 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.

10. 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 cash withdrawals from checking accounts.
d. Low average balance compared to high level deposits.

11. 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.

12. 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.

13. 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

14. 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.

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

a. Accountability is equal to valid cash and non-cash items.
b. Accountability is higher than valid cash and non-cash items.
c. Accountability is lower than valid cash and non-cash items.
d. Accountability is zero.

16. Which of the following is correct regarding cash counts?

a. Where the accountability is petty cash fund, accommodated checks are considered not valid
support if NSF, post-dated or stale as of the count date.
b. Where the accountability is undeposited collections, customer collection checks are
considered valid support even if they are NSF, post-dated or stale as of the count date.
c. Where the accountability is petty cash fund, any evidence to claim that cash was used to pay
certain disbursements (e.g. postage stamps) shall be considered valid support.
d. Where the accountability is undeposited collections, any evidence to claim that collection was
used to pay certain disbursements (e.g. postage stamps) shall be considered valid support.

17. 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.

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18. 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.

19. 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.

20. 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.

21. 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 and 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.

PROBLEM 2:
You were assigned to audit the cash and cash equivalents account of your audit client, Luzon Corp. for the
period ended December 31, 2020. As a result of your investigations, you were able to gather the following
from the Corp.’s trial balance:

Petty cash fund 25,000

Cash on hand – undeposited collections 1,250,000
Cash in bank – BPI Current Account No. 2099 3,780,000
Cash in bank – BDO Current Account No. 22013 (160,000)
Cash in bank – UCPB Savings Account No. 02312 3,500,000
Other Items 2,000,000

Audit notes:
1. The petty cash fund consisted of the following items as of December 31, 2020 (count date):
Currency and coins P3,800
Employees’ vales/IOUs duly supported by promissory notes
signed by employees concerned. 2,500
Currencies/money in an envelope marked “collections for
Christmas Party” with names attached 5,200
Unreplenished petty cash expense vouchers 3,250
Check drawn by Luzon Corp., payable to the petty cashier 11,200
Unused postage stamps 900
Personal check of Aljun Li, officer, payable to the account of
the Luzon Corp. 3,000

2. Cash on hand represents undeposited collections as of December 31, 2020 and includes the following
items:
a. Customer’s check for P160,000 returned by bank on December 26, 2020 due to insufficient
fund but subsequently redeposited and cleared by the bank on December 30, 2020.
b. Another customer’s check for P125,000 returned by bank on December 28, 2020 due to
insufficient fund but subsequently redeposited and cleared by the bank on January 2, 2021.
c. Another customer’s check for P56,000 dated January 5, 2021, received on December 29, 2020.
d. A customer check for P99,000 dated June 1, 2020 received on the same date, still on hand and
yet to be deposited to the bank.
e. Postal money orders and bank drafts received from customers, P100,000.

3. Included among the checks drawn by Luzon Corp. against the BPI Current Account No. 2099 and
recorded in the cash disbursement journal in December 2020 are the following:
a. Check written on December 29, 2020 dated January 2, 2021, delivered to payee on December
29, 2020, P94,000.

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b. Check written and dated December 29, 2020 and delivered to payee on January 2, 2021,
P72,000.
c. Check dated April 1, 2020 amounting to P90,000 still outstanding by December 31, 2020 as per
the client-prepared December bank-reconciliation statement.

4. The credit balance in the BDO Current Account No. 22013 represents checks drawn in excess of the
deposit balance. These checks were still outstanding at December 31, 2020.

5. The UCPB Savings Account No. 02312 has been set by the board of directors for acquisition of new
computers. This account is expected to be disbursed in the next 3 months from the balance sheet
date.

6. Other items included:

a. P1.2M time deposit with BPI which was purchased on November 1, 2020 and shall mature on
November 1, 2021 (This deposit is not allowed to be pre-terminated as per the signed
agreement with the bank)
b. P500,000 money market placements purchased December 1, 2020 and shall Mature on March
1, 2021, and;
c. P200,000 investment in ordinary shares designated as FVPL, purchased on November 15, 2020,
expected to be sold by February 14, 2021.
d. P100,000 investment in redeemable preference shares purchased on October 31, 2020 with a
mandatory redemption date on January 31, 2021.

Determine the audited balances of the following:

1. Petty cash fund
2. Petty cash shortage/overage
3. Cash on hand – undeposited collections
4. Total cash in banks (excluding undeposited collections) to be included as cash and cash equivalents
in the current asset section of the balance sheet
5. Assuming that the company has a cash management policy of deliberately rendering current
accounts as “overdrawn” to take advantage of “check float”, what is the total cash in banks
(excluding undeposited collections) to be included as cash and cash equivalents?
6. Total Cash and cash equivalents to be reported in the 2020 balance sheet

PROBLEM 3:
You were asked by your audit manager to render a cash count on your audit client’s petty cash fund in line
with your audit of Visayas Inc.’s financial statements as of December 31, 2020. You failed to schedule the
cash count exactly on December 31 due to client-imposed constraints, thus you decided to schedule the
count on January 4, 2021, instead. The petty cash fund had an imprest balance of P10,000 as reflected in
the company’s general ledger. Jon A. Tan, the custodia, presented the following items in support to his
accountability on the said count date:

Coins and currency P 2,900

Paid vouchers:
12/27 Transportation P 550
12/27 Gasoline 420
12/28 Office supplies 590
12/29 Postage stamps 300
12/30 Employee IOU (with promissory note) 500
1/2 Office repairs 375
1/3 Representation expense 325 3,060
Officer’s check returned by bank marked “NSF” 1,000
Check drawn by company to the order of Jon A. Tan 3,000
Unused postage stamps 300
Petty cash receipt voucher (for a return of expense 500
advance, see note below)

Note: The company has no separate travel fund to defray official business trips expenses, instead, the
company uses petty cash fund to pay for travel expenses. Based on your further audit procedure after the
cash count, you were able to confirm that the P500 cash was subsequently deposited to the company’s
current account.

Requirements:
1. What is the petty cash shortage?
2. What is the correct/adjusted balance of the Petty Cash Fund account as of December 31, 2020?

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PROBLEM 4:
A count of the undeposited receipts under the custody of Gor G. Nyo, cashier of Macario Corp., on
September 30, showed the following composition:

Currency and coins P24,620

Unused postage and documentary stamps 220
Employee IOU’s (supported by promissory notes) 2,000
Other disbursement vouchers paid from cash receipts 1,600

Checks:
Date Payee Drawer
3-24-20 Macario Corp. Rita Co. (Customer) 2,000
9-20-20 Macario Corp. Tams Co. (Customer) 4,700
9-27-20 Macario Corp. Jonli Inc. (Customer) 3,920 **
9-30-20 MERALCO Macario Corp. 5,700
10-2-20 Macario Corp. X24E Co. (Customer) 1,500
Total per count P 44,760

**Marked NSF by the bank (replaced by the customer and redeposited on October 5)

Assuming the cashier’s accountability is P33,540 per the client’s records as of September 30:
1. What was the amount of shortage/overage on September 30?
2. What is the adjusted balance of undeposited collections as of September 30?

PROBLEM 5:
You obtained the following information on the current account of Park Shin Corp. During your examination of
its financial statements for the year ended December 31, 2020.

Audit notes:
a. November items:
• The bank statement on November 30, 2020 showed a balance of P1,872,000.
• Among the bank credits in November was customer’s note for P600,000 collected for the
account of the company which the company recorded in the cash receipts journal in
December.
• Included in the November bank debits were cost of checkbooks amounting to P7,200 and a
P240,000 check which was charged by the bank in error against Park Shin Corp.’s account.
Bank errors are usually automatically corrected the following month.
• November deposits in transit amounted to P480,000 and outstanding checks totaling
P1,050,000 (P30,000 of which has been certified by the bank in November).

•A P195,000 customer collection in November was recorded in the books at P159,000. This was
discovered and corrected in the cash receipt journal in December.
b. December items:
• The bank statement for the month of December showed total credits of P4,496,000 and total
charges of P1,724,000.
• The company’s books, on the other hand, showed total December debits of P4,413,600, total
credits of 2,443,200. The December cash balance per books was at P2,913,600.
• A December credit memo for bank loan proceeds amounted to P800,000 was among the year-
end bank credits.
• Bank debit memos for December were: No. 121 for service charges, P9,600 and No. 122 on a
customer’s returned check marked “NSF” for P144,000.
• A P95,000 collection check of Perk Shan Corp. was erroneously credited by the bank to the
company’s account in December.
• On December 31, 2020 the company authorized the bank to automatically settle a P360,000
note payable to a supplier. The note matures on January 5, 2021. The company treated this
note as part of its disbursements although the bank was able to settle the note only the
maturity date.

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• A check for P11,880 was recorded in the company cash payments books in December as
P118,800. This error was discovered by the company in December and has already made the
necessary correction in the December cash records.

Requirements:
1. How much is the undeposited collections as of December 31?
2. How much is the outstanding checks as of December 31?
3. How much is the adjusted cash balance as of November 30?
4. How much is the adjusted cash balance as of December 31?

PROBLEM 6:
The following information was provided by Spoon Corp. as of the fiscal year ended September 30, 2020:

August 31 September 30
Customers’ direct deposits credited by the 55,000 72,000
bank (recorded per books the following
month)
Bank loan and interest payments 120,000 80,000
Undeposited collections 89,000 ?
Outstanding checks 122,000 ?
Total credits per bank statement 1,819,000
Total debits per bank statement 1,618,000
Total debits per books 1,795,000
Total credits per books 1,800,000

Additional information:
a. A P25,000 customer check collection was erroneously recorded twice in the books in September, the
company discovered the error and corrected the same immediately in September.
b. A P30,000 disbursement check was recorded in the books as P3,000 in August. The correction was
made in September.
c. The bank erroneously charged the company P40,000 in August for a disbursement of Spin Corp. The
bank corrected the error in September.
d. A September customer collection check was correctly record in the books at P21,000. This was
erroneously credited by the bank at P12,000. The error was discovered and immediately corrected by
the bank also in September.
e. The unadjusted balance per book in August was at P683,000. 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?

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