Big Picture

Week 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

A. Explain the relationship between tests of controls and substantive tests.

B. Explain the relationship of financial assertions to audit objectives and audit procedures.
C. Describe the following audit procedures: inspection, observation, inquiry and external
confirmation.
D. Describe the sources and nature of cash.
E. Identify the auditor’s objectives in the audit of cash
F. Identify substantive tests of cash receipts that auditors perform to detect whether cash
receipts recorded by bank are recorded on the books and whether lapping are occurring.
G. Explain when an auditor should prepare proof of cash, and describe what it proves.
H. Identify the auditor’s objective when examining an interbank transfer schedule and describe
the process.
I. Identify the major substantive tests of balances that auditors perform related to cash for each
financial statement assertion.

Substantive Test: Cash and Cash Equivalents

Big Picture

ULO A: Explain the relationship between tests of controls and substantive tests.

ULO B: Explain the relationship of financial assertions to audit objectives and audit
procedures.

ULO C: Describe the following audit procedures: inspection, observation, inquiry and external
confirmation.

ULO D: Describe the sources and nature of cash.

ULO E: Identify the auditor’s objectives in the audit of cash

ULO F: Identify substantive tests of cash receipts that auditors perform to detect whether cash
receipts recorded by bank are recorded on the books and whether lapping are occurring.

ULO G: Explain when an auditor should prepare proof of cash, and describe what it proves.

ULO H: Identify the auditor’s objective when examining an interbank transfer schedule and
describe the process.

ULO I: Identify the major substantive tests of balances that auditors perform related to cash for
each financial statement assertion.

Metalanguage

1
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.

Audit procedures a – the methods or acts that auditors use to gather evidence to determine the
fairness or validity of financial statement assertions.

Substantive procedure – An audit procedure designed to detect material misstatements at the

assertion level. Substantive procedures comprise:

I. Tests of details (of classes of transactions, account balances, and disclosures), and
II. Substantive analytical procedures.

Test of controls – An audit procedure designed to evaluate the operating effectiveness of

controls in preventing, or detecting and correcting, material misstatements at the assertion
level.

Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.

Introduction

Much of the auditor’s work in during a financial statement audit consists of obtaining and
evaluating evidence about the assertions as embodied within the entity’s financial statements.
This chapter will discuss how each of the financial statements assertions – existence or
occurrence, completeness, accuracy, rights and obligation, presentation and disclosure,
classification, and valuation or allocation – is tested for audit of cash, accounts receivables and
sales.

After completing the tests of controls and assessing the level of control risk for an audit
engagement, auditors will perform substantive tests, which primarily test whether material
amount of errors or disclosure misstatement exist in the financial statements. Substantive tests
include tests of transactions, tests of details of account balances, and analytical procedures.

Test of Transactions
When performing substantive tests of transactions, auditors examine documents that were
created at the time of the initial processing of a transaction. Test of controls and substantive
test both use the same documents but for a different objectives. For example, a sales invoice
is used in a test of controls to determine whether it was signed or initiated by the person
designated to check the invoice prices against the current price list. In a substantive test of
transactions, an auditor determines whether the price on the sales invoice is accurate according
to the price list effective at the time of the sale. Auditors normally use tests of transaction for
testing of controls. When the result indicates that the control is effective, auditor may choose
not to perform substantive test of transaction.

Test of Details of Balances

Auditors use tests of details of balances to detect material misstatements in account balances.
These tests provide direct evidence about an account balance or a component of it. For
example, confirming a cash balance with the bank provides direct evidence of the cash account.

Analytical Procedures –

2
This may be effective and efficient tests for assertions for which detailed evidence is not
available, or for which examination of detailed evidence will not detect misstatements. For
example, verifying individual sales invoices in the sales account may not identify an
understatement of sales. However, comparing average sales per day per store may suggest that
sales are understated.

Remember that financial statement assertions, together with the assessment of audit risk and
materiality, have a significant impact on the design of substantive tests. In planning substantive
tests, auditors consider the nature, timing, and extend of procedures to test financial statement
assertions.

Financial Statement Assertions as it relates to Audit Objectives

and Audit Procedures

PSA 500 (Redrafted), Audit Evidence, provides that 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. The auditor uses assertions in assessing risks by considering the
different types of potential misstatements that may occur, and thereby designing audit
procedures that are responsive to the assessed risks.

The auditor’s primary objective when performing substantive tests of cash receipts transactions
is to obtain evidence that assertions relating to cash receipts are valid.

Completeness
Completeness assertion addresses whether cash transaction that should be presented in the
financial statements actually are presented. Completeness is generally tested by examining
documentation and by applying analytical procedures, such as making comparisons among
related accounts. For cash, completeness is tested by performing analyses of accounts
(reconstruction of accounts) and by testing cut-off, which determines whether transactions are
recorded in the proper accounting period. Auditors test completeness for cash balances by
examining cut-off bank statements to assure that all receipts and disbursements are recorded in
the proper period, and by examining bank reconciliations (proof of cash) and records of
intercompany and interbank transfers.

Assertions are expressed or implied representations by management that are reflected in the financial statement
components.

Existence or Occurrence
Existence means that assets, liabilities, and equity interests exist while occurrence means that
transactions and events that have been recorded have occurred and pertain to the entity.
Existence is normally tested by physical observation or confirmation with outside parties.
The existence of cash deposit is tested by confirming bank balances with banks, and the
existence of cash on hand can be observed physically and counted. Also, auditors use cut-off
testing to determine whether recorded transactions are recorded in the proper period. Cutoff is
related to both the existence or occurrence and the completeness assertions and is concerned
with whether transactions executed near at end of the accounting period are recorded in the
proper period.

3
Rights and Obligations
Rights and obligations state that the entity holds or controls the rights to assets, and liabilities
are the obligations of the entity. Auditor tests rights by examining documentation and through
confirmation and inquiries. Rights to cash are tested primarily by conforming balances and
deposit terms with banks. This term may be the compensating balance of the demand deposit.

Valuation or Allocation
Valuation or allocation means that assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded. Auditors test valuation by examining documentation,
confirming, observing, performing mechanical tests, and making inquiries. Recorded values
for cash are tested by confirming balances with banks, by verifying the mathematical accuracy
of recorded cash balances, and by examining the details within cut-off bank statements.

Presentation and Disclosure

Presentation and disclosure means that financial information is appropriately presented and
described, and disclosures are clearly expressed. Auditor addresses this assertion by comparing
an entity’s financial statements presentation and disclosures with those required by Philippine
Accounting Standards issued by the Financial Reporting Standards Council.

Audit Procedures

Audit procedures are the methods or acts that auditors use to gather evidence to determine the
fairness or validity of financial statement assertions. PSA 500 (Redrafted), Audit Evidence,
states that The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.

“Audit evidence” is all the information used by the auditor in arriving at the conclusions on
which the audit opinion is based, and includes the following:

a. information contained in the accounting records underlying the financial statements; and
b. other information.

Accounting records generally include

• the records of initial entries and supporting records, such as checks and records of electronic
fund transfers;
• invoices;
• contracts;
• the general and subsidiary ledgers, journal entries and other adjustments to the financial
statements that are not reflected in formal journal entries; and
• records such as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.

Other information that the auditor may use as audit evidence includes
• minutes of meetings;
• confirmations from third parties;

4
 • analysts’ reports;
• comparable data about competitors (benchmarking);
• controls manuals;
• information obtained by the auditor from such audit procedures as inquiry, observation, and
inspection; and
• other information developed by, or available to, the auditor that permits the auditor to reach
conclusions through valid reasoning.

Inspection
Inspection consists of examining records or documents, whether internal or external, in paper
form, electronic form, or other media. Inspection of records and documents provides audit
evidence of varying degrees of reliability, depending on their nature and source and, in the case
of internal records and documents, on the effectiveness of the controls over their production.
An example of inspection used as a test of controls is inspection of records or documents for
evidence of authorization.

According to Kiger and Scheiner (1997), auditors apply four different inspection techniques:
physical examination of assets, examination of documents and records, mechanical accuracy
tests, and analytical procedures.

Physical Examination: An auditor physically examines a tangible asset to directly verify its
existence, physical condition, quality, propriety of its description, and quality. Counting is one
type of physical examination. For example, auditor counts petty cash fund to determine the
amount on hand at a particular time, gaining evidence about the existence of that cash.

Examination of Documents and Records: The auditor follows a trail of transaction based on an
entity’s accounting system in gathering evidence from documents and records. This is what
we called audit trail. Vouching and tracing are two commonly performed procedures that
involve examination of documents and records. Vouching is examining the documents that
served as a basis for recording the transaction (existence). It usually starts with a recorded
transaction and works back to the documents. For example, inspecting the cancelled check,
the vendor’s invoice, the receiving report, and the purchase order for a cash payment recorded
in the cash disbursement journal. In doing so, an auditor will be alerted of missing documents.
If the auditor cannot find a shipping document to support a sale recorded in the sales journal,
the transaction may be fictitious.

Tracing is examining whether source documents have been properly recorded in the accounting
records (completeness). Tracing is performed by selecting a shipping document and following
it to the appropriate sales invoice, to the entry in the sales journal, and finally to a subsidiary
accounts receivable accounting. When tracing transaction, an auditor should be alerted for
unrecorded transactions. If auditor finds a customer order, sales invoice and shipping
document but does not find a transaction recorded in the sales journal, the record is incomplete.

Mechanical Accuracy Test (also called reperformance procedures): Footing, cross-footing, and
checking extensions are examples of this test. These are checks of work performed by others,
such as verifying client computations and checking the transfer of data.

Analytical Procedures: This is based on the premise that plausible data relationships can be
expected to continue unless specific conditions cause changes in them. This was discussed in
the previous chapter.

5
Observation
Observation consists of looking at a process or procedure being performed by others, for
example, the auditor’s observation of inventory counting by the entity’s personnel, or of the
performance of control activities. Observation provides audit evidence about the performance
of a process or procedure, but is limited to the point in time at which the observation takes
place, and by the fact that the act of being observed may affect how the process or procedure
is performed.

Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity. Inquiry is used extensively throughout the
audit in addition to other audit procedures. Inquiries may range from formal written inquiries
to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry
process.

External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party. External confirmation procedures frequently are
relevant when addressing assertions associated with certain account balances and their
elements. However, external confirmations need not be restricted to account balances only.
For example, the auditor may request confirmations of the terms of agreements or transactions
an entity has with third parties; the confirmation request may be designed to ask if any
modifications have been made to the agreement and if so, what the relevant details are.

External confirmation procedures also are used to obtain audit evidence about the absence of
certain conditions, for example, the absence of a “side agreement” that may influence revenue
recognition.

Footing – rechecking of the addition of a column; Cross-footing – rechecking of totals of a set of self-balancing
columns. Checking extensions – rechecking of multiplication, such as the calculation of price times quantity on
a sample invoice.

Audit of Cash and Cash Equivalents

Big Picture

ULO D: Describe the sources and nature of cash.

ULO E: Identify the auditor’s objectives in the audit of cash

ULO F: Identify substantive tests of cash receipts that auditors perform to detect whether cash
receipts recorded by bank are recorded on the books and whether lapping are occurring.

ULO G: Explain when an auditor should prepare proof of cash, and describe what it proves.

ULO H: Identify the auditor’s objective when examining an interbank transfer schedule and
describe the process.

6
ULO I: Identify the major substantive tests of balances that auditors perform related to cash for
each financial statement assertion.

Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.

Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.

Audit Program for Cash and Cash Equivalents

The following are the typical steps performed by auditor in the audit of cash. Selection of the
most appropriate procedures for a particular audit will depend on the nature of the controls that
have been implemented by the company and by the result of the auditor’s risk assessment
process.

A. Use of the understanding of the client and its environment to consider inherent risks related to
cash.
B. Obtain understanding of internal control over cash.
C. Assess the risks of material misstatement and design further audit procedures.
D. Perform further audit procedures – tests of controls.
1. Tests the accounting records and reconciliations by reperformance.
2. Compare the details of a sample of cash receipts listings to the cash receipts journal, accounts
receivable postings, and authenticate deposit slips.
3. Compare the details of a sample of recorded disbursements in the cash payments journal to
accounts payable postings, purchase orders, receiving reports, invoices, and paid checks.
E. If necessary, revise the risk of material misstatement based on the results of the tests of controls.
F. Perform further audit procedures – substantive procedures for cash transactions and balances
1. Obtain analyses of cash balances and reconcile them to the general ledger.
2. Send standard confirmation forms to financial institution to verify amounts on deposit.
3. Obtain or prepare reconciliations of bank account as of the balance sheet date and consider
the need to reconcile bank activity for additional months.
4. Obtain cut-off bank statement containing transactions of at least seven business days
subsequent to balance sheet date.
5. Count and list cash on hand.
6. Verify the client’s cut-off of each receipts and cash disbursements.
7. Analyze bank transfers for the last week of audit year and the first week of following year.
8. Investigate any checks representing large or unusual payments to related parties.
9. Evaluate proper financial statement presentation and disclosure of cash.

Internal Control Over Cash Transactions

In developing the most efficient control procedures, it is necessary to make a detailed study of
the operating routines of the individual business. But it is also necessary to note that there are
some generally guidelines to good cash-handling practices in all types of business. These
universal rules for achieving internal control over cash may be summarized as follows:

7
1. Do not permit any one employee to handle a transaction from beginning to end.
2. Separate cash handling from record keeping.
3. Centralize receiving of cash as much as possible.
4. Record cash receipts immediately.
5. Encourage customers to obtain receipts and observe cash registrer totals.
6. Deposit each day’s cash receipts intact.
7. Make all disbursements by check, with the exception of small expenditures from petty cash.
8. Have monthly bank reconciliation prepared by employees not responsible for the issuance
of checks or custody of cash. The completed reconciliation should be reviewed promptly
by an appropriate official.

This chapter will deal only on substantive procedures for cash transactions and balances.
Discussion on risk assessment procedures and internal control for cash were already discussed
in the previous chapters.

Obtain Analyses of Cash Balances and Reconcile them to the General Ledger

The auditor will obtain a schedule (lead schedule) that lists all of the client’s cash accounts.
This schedule will typically list the bank, the account number and other relevant information,
and the year-end balance per books. This list will also include cash on hand and the sources of
this cash on hand. The auditor will trace and reconcile all accounts to the general ledger as
necessary.

Send Standard Confirmation Forms to Financial Institution to Verify Amounts on Deposit.

One of the objectives of the auditor’s work on cash is to substantiate the existence of the amount
of cash as shown on the statement of financial position. A direct approach to this objective is
to confirm mounts on deposit and obtain or prepare reconciliations between bank statements
and the accounting records.

The auditors confirm cash deposits and other related transactions as of the year-end with banks
in a manner similar to that used to confirm accounts receivable. A standard bank confirmation
form is presented in figure 3-1. Information identifying accounts and loans and their balances
is normally included on the form to assist the financial institution in completing it. Thus, this
form is primarily used to corroborate the existence of recorded information.

However, auditors generally send a confirmation request to all bank (not just a sample of it)
with which the client has dealt during the period even if the account has been closed. This
practice provides the auditor with evidence regarding the completeness assertion of cash. The
standard bank confirmation also provides the auditor information on bank loans or lines of
credit with a bank that require borrowers to maintain compensating balance or a collateral or
lien for a loan. This procedure addresses several assertions like rights and obligation and
presentation and disclosure.

Obtain or Prepare Reconciliations of Bank Account as of the year-end and Consider the Need
to Reconcile Bank activity for Additional Months.
Reconciliation of the balance per bank statement with the balance per the company’s
accounting records is required to determine the company’s cash position at the close of the
accounting period. If the client has made the year-end reconciliation, there is no need for
duplicating the work. However, the auditors should examine the reconciliation in detail to

8
satisfy themselves that it has been properly prepared. Below are the typical steps in obtaining
or preparing reconciliation:

1. Check arithmetical accuracy of reconciliation

2. Trace balance per book to the general ledger balance or cash account.
3. Trace balance per bank to bank statement and compare with amount confirmed by bank.
4. Establish authenticity of reconciling items by reference to their respective sources like bank
debit/credit memorandum and duly approved journal vouchers.
5. Investigate check outstanding for a long period of time:
a. Consider adjustment, specially if the check is already stale.
b. Consider the possibility of an erroneous preparation of the check.
6. Investigate any unusual reconciling item.
7. Where internal control is weak over cash, consider preparing a proof of cash reconciliation

Figure 3-1: Standard Bank Confirmation Request

BANK CONFIRMATION REQUEST
XYZ & Company, CPAs
Davao City

1. We hereby report that at the close of business on _____________________, our records showed the
following balances to the credit of _______________________.
AMOUNT DESCRIPTION OF INTEREST RESTRICTED ON WITHDRAWAL OF
ACCOUNT RATE PAID ACCOUNT AND OTHER REMARKS
UP TO
Regular Checking
Account
Savings Deposits

Time Deposits

Others (Specify)

2. We further report that the above mentioned client was directly liable to us by way of loans, acceptances,
over-drafts, etc. at the close of business on that date as follows:
AMOUNT DESCRIPTION DATE DUE INTEREST DESCRIPTON OF
OF LIABILITY GRANTED DATE RATE PAID COLLATERALS,
UP TO LIENS,
ENDORSERS, ETC.
OTHER REMARKS

Overdrafts

Loans

Acceptances

Trust Receipts

Others (specify)

3. Contingent Liabilities

9
 AMOUNT DESCRIPTION OF NAME OF DATE DUE DATE REMARKS
ACCOUNT MAKER OF
NOTE
Endorsers of Notes
Discounted
Guarantor of Notes

Others (Specify)

4. Details of total unused letters of credit of said bank on that date were

ACCOUNT AMOUNT
FOREIGN PESO
CURRENCY
Import Letters of Credit
Domestic Letters of Credit
Marginal Deposit

5. Other accounts with the bank client as at the above mentioned date were as (details attached)
a. Securities held for safekeeping
b. Items held for collection
c. Trust account
d. Others (specify)
________________________________________

Except as stated above, according to our records, said client had no other account with us.
Yours truly,
(Bank)
By: _________________________

Obtain Cut-off Bank Statement Containing Transactions of at Least Seven Business Days
Subsequent to Year-end
A cut-off statement is a bank statement for the first 7-10 business days after year-end. Its
primary purpose is to help auditors to verify reconciling items on the year-end bank
reconciliation. Tests performed using a cut-off statement include verifying that outstanding
checks have been completely and accurately recorded as of year-end, and that deposits in transit
have cleared within a reasonable period. The statement is sent directly by the bank to the
auditor.

The test of cash cut-off addresses the existence and completeness assertions, and questions
whether recorded transactions are recorded in the proper accounting period. This test
reconciles internal documents created by the client (i.e., cash journals, general ledger, and
bank reconciliations) with external documents created by the banks (i.e., year-end bank
statements, cut-off bank statements, and returned bank confirmations).

Below are auditor’s typical procedures:

Obtain cut-off bank statement showing the client’s transactions, with the bank at least one week
after year-end and

10
 a. Trace year-end reconciling items like:
i. Deposit of the year-end undeposited collections.
ii. Completeness of year-end outstanding checks
iii. Corrections of bank errors.
b. Examine supporting documents of year-end outstanding checks that did not clear in the cut-
off bank statement.
c. Consider necessity of preparing a proof of cash.

Count and List Cash on Hand

Cash on hand consists of undeposited cash receipts, change funds, and petty cash fund. Cash
count provides direct evidence about existence of cash on hand balances at year-end.
Whenever auditors make a cash count, they should insist that the custodian of the funds be
present throughout the count. At the completion of the count, the auditors should obtain from
the custodian a signed and dated acknowledgement that the funds were counted in the
custodian’s presence and were returned intact by the auditors. This prevents the custodian from
accusing the auditor of being responsible for any shortage that is identified. Figure 3-2 presents
a sample of cash count sheet.

The following are the typical activity during cash count:

Conduct a cash count of undeposited collections, petty cash fund and other funds on hand.
a. Obtain custodian’s signature to acknowledged return of items counted.
b. Reconcile items counted with general ledger balances.
c. Trace undeposited collections counted to bank reconciliation.
d. Follow up disposition of items in cash counted:
i. Undeposited collection should be traced to bank deposits.
ii. Checks accommodated in petty cash should be deposited after the count to establish its
validity.
iii. IOUs in the petty cash fund should be confirmed and traced to collections in the next
payroll period.
iv. Expense vouchers should be traced in the 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 branches or other
offices.

Surprise Element
The cash count should be on a surprise basis. The custodian should not be given an idea as to
when a cash count is to be conducted. This procedure may uncover defalcation and will keep
the custodian on-guard in exercising their functions, thus, contributing to the efficiency of the
company’s operations.

Verify the Client’s Cutoff of Cash Receipts and Cash Disbursements

An accurate cut-off of cash receipts and cash disbursements at year-end is essential to a proper
statement of cash. The statement of financial position figure for cash should include all cash
received on the final day of the year and none received subsequently. Since it is impossible for
the auditor to visit every client’s place of business on the last day of the year, nor is their
presence at this time normally essential to a satisfactory verification of cash, auditors can verify
the cut-off of cash receipts by determining that deposits in transit as shown on the year-end
bank reconciliation appear as credits on the bank statement on the first business day of the
following year.

11
The auditors should be aware of possible window dressing related to cash transactions. For
example, if the cash receipts are not deposited daily, cash received for a few days after the close
of the year may be included in a deposit dated as of year-end, thus overstating the cash balance
at year-end.

Analyze Bank Transfer for the Last Week of the Audit Year and the First Week of the Following
Year
The purpose of this procedure is to disclose overstatement of cash balances resulting from
kiting. Kiting, in which cash is counted twice by using the float in the banking system, is
possible only when an entity has more than one bank account and one employee is responsible
to issue checks and record disbursement.

Auditors can detect manipulations of this type by preparing a schedule of bank transfer for a
few days before and after the year-end. Illustration 3-2 presents a typical bank transfer
schedule. This working paper lists all bank transfers and shows the dates that the receipts and
disbursement of cash were recorded in the cash journals and on the bank statements. Consider
the following illustrations.

Figure 3-2: Cash Count Sheet

CASH COUNT SHEET
Company: ______________________
Name of Fund: ______________________
Cash Count Date: ______________________
Denomination Quantity Amount TOTAL
BILLS: P 1,000.00 __________ ____________
500.00 __________ ____________
200.00 __________ ____________
100.00 __________ ____________
50.00 __________ ____________
20.00 __________ ____________ P ____________
COINS: P 10.00 __________ ____________
5.00 __________ ____________
1.00 __________ ____________
0.25 __________ ____________
0.10 __________ ____________
0.05 __________ ____________ ____________
CASH ITEMS:
Checks and PMOs for deposit ____________
Postdated checks ____________
Disbursement not yet reimbursed ____________
Advances or IOUs ____________
Others ____________ _____________

AMOUNT OF FUNDS PER COUNT P ___________

AMOUNT OF FUNDS PER BOOKS OR RECEIPTS ___________
CASH SHORT OR OVER P ___________

I hereby acknowledged that the above fund of P ____________ was counted in my presence by
_______________, representing of XYZ Co., CPAs on _______________, from _________ to _________
A.M./P.M. and was returned to me intact. There are no other funds in my possession for which I am
accountable to ____________________ or funds left in my custody by other parties except as noted below:

Other Funds: (Simultaneously controlled or counted)

Name Amount
________________________________ _______________

12
 ________________________________ _______________

CUSTODIAN: _______________________
Signature Over Printed Name

Illustration 3-1:
1. On December 28, the general ledger of cash and bank balances are as follows:
Company Records Bank Records
BDO PNB BOD PNB
December 28 balance 200,000 40,000 200,000 40,000

2. On December 29, the following took place:

a. Collection from Customer A for P15,000. This collection was not deposited and the cash was
abstracted.
b. A request was approved to transfer P15,000 from the BDO account to PNB account.
c. A BDO check was drawn and deposited to PNB on December 29 at 5:00 pm.
d. Through connivance or manipulation, the bank transfer was not recorded.
e. No other transaction occurred on December 29 and the rest of the month were declared
holidays.

3. On December 31, the cash general ledger and bank balances will appear as follows:
Company Records Bank Records
BDO PNB BOD PNB
Dec. 28 balance 200,000 40,000 200,000 40,000
Dec. 29 –
Collection recorded 15,000
Fund transfer not recorded 15,000
Dec. 31 – the BOD check is still
Outstanding _______ ______ _______ ______
Dec. 31 balance 200,000 55,000 200,000 55,000

Illustration 3-2:
ABC Company Prepared by: ________ Date: _______
Bank Transfer Schedule Reviewed by: ________ Date: _______
December 31, 2013
Bank Account Check Disburse Receipt Disb. Receipt Disb.
ment date
From To Number Date per Per book Date per Date per Date per
book book bank book
BDO PNB 324 P10,000 1-01-14 a 1-02-14 b 1-02-14 c 1-04-14 e
BPI PNB 927 8,000 1-01-14 a 1-02-14 b 13-31-13 c 1-02-14 e
PNB MBT 631 12,000 13-31-13 12-31-13 12-31-13 c 1-02-14 e
C ad b
MBT BDO 582 5,000 1-02-14 a 12-31-13 12-31-13 c 1-02-14 e
C b

a – Per cash disbursements journal c – Traced to deposit on bank statement

b – Per cash receipt journal d – Traced to outstanding check list on reconciliation
e – Examined check clearing on cut-off bank statement

13
Check 324 in the illustration above was recorded on the books as a receipt and a disbursement
in the following year, and the bank received it and cleared it in the following year. There is no
error in this case since disbursement and receipt are recorded on both sets of books and the
check was processed by the bank during the same year.

Check 927 hides a cash shortage since it did not increase total cash during the year under audit.
Although the bank received the check during the year under audit, it was not recorded on the
books as a receipt or as a disbursement until the following year. This situation is the same in
illustration 3-1.

Check 631 was recorded as a disbursement and as a receipt on the books in the year under
audit. However, because of float, check 631 did not clear the account until the following year.
Check 631 should be reported on PNB’s reconciliation as an outstanding check.

Check 582 was deposited an cleared the BDO account during December but was not recorded
as a disbursement by MBTC until the following year – evidence of kiting because the P5,000
cash is counted twice.

The following are the procedure to detect kiting:

1. Prepare a schedule of interbank fund transfer a week before and after year-end. Ascertain
whether fund transfers were recorded in the proper period. Use the format in illustration 3-
2.
2. Examine fund transfer checks returned with the cut-off bank statement. Trace date of check
and date of negotiation to date the fund transfer was recorded in the cash receipts and cash
disbursements register.

Investigate Any Checks Representing Large or Unusual Payments to Related Parties

Any large or unusual checks payable to directors, officers, employees, and affiliates should be
carefully reviewed by the auditors to determine whether the transactions were properly
authorized and recorded and are adequately disclosed in the financial statements. To provide
assurance that cash disbursements to related parties were authorized transactions and were
properly recorded, the auditors should determine that such transaction has been charged to the
proper account, is supported by adequate vouchers or other documents, and was specifically
approved in advance by an officer other than the one receiving the funds.

Evaluate Proper Financial Statement Presentation and Disclosure of Cash

The statement of financial position figure for cash should include only those amounts that are
available for use in current operations. A bank deposit that is restricted in use should not be
included in cash. Maintaining a compensating balance should be disclosed.

Accounting Concepts: Cash and Cash Equivalents

ü Cash consists of
o Currency, coin, and available fund on deposit at the bank (i.e. payroll fund, dividend fund) or
on hand (i.e. petty cash fund, change fund).
o Negotiable asset such as money orders, customers’ certified checks, manager’s check and
alike.
o Bank drafts.

14
ü Cash Equivalents are short-term, highly liquid investments that are both (a) readily convertible to
know amounts of cash, and (b) so near their maturity that they present insignificant risk of changes
in interest rates. Generally only investments in debt securites with original maturity of 3 months
or less before its maturity qualify under this definition.

ü For items be classified as cash, the following requisites must present:

a. The item must be readily available for the payment of current obligation or for the day-
to-day operation of the company; and
b. It must be free from any contractual restriction that limits its use in satisfying debts.

ü Funds are cash set aside for a particular purpose. These are used to handle more expeditiously
the payment of certain obligation, to maintain better control over such expenditures and to earn
revenue on the fund invested.

ü Two General Types of Funds:

a. Those in which cash set aside to met specific current obligations (classify as cash), and
b. Those that are not directly related to current operations and therefore in the nature of
long-term investments.

PETTY CASH FUND

Determination of Cash Short/Over

Total Cash Accounted for
Less: Cash Accountabilities
Cash Short/Over

What is Total Cash Accounted For? What it comprises?

Total Cash Accounted for are items found in the petty cash box during the time of cash count.

BANK RECONCILIATION

Steps to follow in Reconciliation

1. Determine the balance per bank statement as of the end of the reconciling period. This is
the last figure under the balance column of the bank statement. If this balance is nor readily
available, it is computed by adding the beginning balance per bank statement and all bank
credits, and deducting all the bank debits from the total thereof.

2. Determine the balance per deposit’s books as of the reconciling period. This is arrived at
by adding the beginning balance of the cash in bank account and cash receipts, and
deducting the cash disbursements from the total thereof.

3. Compare the receipts or debits per cash receipts journal with the deposits or credits per
bank statement.

4. Compare the disbursements or credits per check register with the checks encashed and
cleared or debits per bank statement.

15
5. Note and analyze all the discrepancies discovered during the comparisons made in steps 3
and 4 above. These discrepancies are reconciling items resulting from timing difference or
errors.

Four Timing Differences:

1. Items credited in the bank statement but not yet debited in the depositor’s books.
Examples are: a. Collections made by the bank fro the account of the depositor.
b. Loans granted by the bank.
c. Interest income

2. Items debited in the bank statement but not yet credited in the depositor’s books.
Examples are: a. Service charges
b. Repayment of loans
c. Checks returned by the bank

3. Items debited in the depositor’s books but not yet credited in the bank statement.
Examples are: a. Unrecorded deposits.
b. Undeposited collections

4. Items credited in the depositor’s books but not yet debited in the bank statement.
Examples are: a. Outstanding checks

Reconciling Items Resulting from Errors

In analyzing errors, determined:

1. Who committed the error? If the error was committed by the bank, show the error as a
reconciling item under the balance per bank, if the error was committed by the depositor;
show it as reconciling item under the balance per books.
2. What is the effect of the error on the balance? If the error overstated the balance, subtract
the net effect of the error from the overstated balance. If the error understates the balance,
add the net effect of the error to the understated balance.

Missing Reconciling Items

To determine the missing amounts in the reconciliation, the following computations or

formulas are given:
Computation of Book Balance:
Beginning balance xxx
Add: Book debits or Cash receipts xxx
Total xxx
Less: Book credits or Cash disbursements xxx
Ending balance xxx

Computation of Bank balance:

Beginning balance xxx
Add: Bank credits or deposits xxx
Total xxx
Less: bank debits or withdrawals xxx
Ending balance xxx

16
 Computation of Deposits in Transits:
Beginning balance xxx
Add: Book Debits or Cash receipts xxx
Total xxx
Less: Bank Credits excluding CMs xxx
Ending balance xxx

Computation of outstanding checks:

Beginning balance xxx
Add: Book Credits or Cash disbursement xxx
Total xxx
Less: Bank debits excluding DMs xxx
Ending Balance xxx

Self-Help: You can also refer to the following sources to help you further
understand the lesson.

Eilifsen, et. al., Auditing and Assurance Services International Edition 2007, McGrawHil

Kiger and Scheiner (1997), Auditing. 2nd Edition. Houghton Mifflin Company. Boston.

Pratt, M.J. and Dilton-Hill, K. (1982), The Elements of Audit Risk. The South African Chartered
Accountant

PSA 500 (Redrafted), Audit Evidence

Ricchiute, David (2009), Auditing. 8th Edition. Cengage Learning Asia Pte Ltd

Whittington & Pany, Principles of Auditing and Other Assurance Services 15th Edition,
McGraw-Hill/Irwin

Let’s Check
EXERCISE 1:
The following are examples of audit procedures that might be undertaken on an engagement.

1. Stand by the payroll time clock to determine whether an employee clocks in just once.
2. Compare the gross profit percentage for the current year with the historical trend.
3. Examine duplicate sales invoices to determine whether an appropriate employee checked prices
and extensions and initiated the work as required by company.
4. Read the minutes of board meetings of the past year.
5. Obtain a letter from management stating that it made all books and records available to the
auditor.
6. Total the accounts receivable subsidiary ledger to determine whether it agrees with the general
ledger.
7. Inspect the year-end bank reconciliation to determine whether the internal auditor prepared it.
8. Confirm an accounts receivable balance.

17
Required: Identify the audit procedures performed.

EXERCISE 2
(AICPA adapted)
The information below was taken from the bank transfer schedule prepared during the audit of
Fox Co.’s financial statements for the year ended December 31, 2013. Assume all checks are
dated and issued on December 30, 2013.

Required:
1. Which of the following checks might indicate kiting?
2. Which of the following checks illustrate deposits/ transfers in transit at December 31, 2005

Let’s Analyze
MULTIPLE CHOICE

1. The most important general ledger account included in and affecting several cycles is the
a. Cash account. c. Retained earnings account.
b. Inventory account. d. Income tax expense and liability accounts.

2. Which of the following is one of the better auditing techniques that might be used by an auditor to detect
kitting between intercompany banks?
a. Review subsequent bank statements.
b. Prepare a year-end bank reconciliation.
c. Prepare a schedule of the bank transfers.
d. Review composition of authenticated deposit slips.

3. Cut-off misstatements can occur for all but which of the following in the sales and collection cycle?
a. Cash payments. c. Sales on account
b. Cash receipts. d. Sales returns and allowances

4. The CPA learns that collections of accounts receivable during the first ten days of January were entered as
debits to cash and credits to accounts receivable as of December 31. The effect generally will be to
a. Overstate both working capital and current ratio at December 31.
b. Overstate the current ratio with no effect on working capital at December 31.
c. Overstate working capital with no effect on the current ratio at December 31.
d. Leave both working capital and the current ratio unchanged at December 31.

5. Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of
cash accounts by a competent individual otherwise independent of the cash function might make the
likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation
may be referred to as what type of control?
a. Compensating. c. Adjustive.
b. Preventive. d. Nonroutine

6. Which of the following procedures would an auditor most likely perform to test controls relating to
management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?
a. Observe the consistency of the employees’ use of cash registers and tapes.

18
 b. Inquire about employees’ access to recorded but undeposited cash.
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger.
d. Compare the cash balance in the general ledger with the bank confirmation request.

7. 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. Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.

8. Which of the following controls most likely would reduce the risk of diversion of customer receipts by an
entity’s employees?
a. A bank lockbox system.
b. Prenumbered remittance advices.
c. Monthly bank reconciliations.
d. Daily deposit of cash receipts.

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 checks are deposited per bank statements with the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually
recorded.

10. Upon receipt of customers’ checks in the mailroom, a responsible employee should prepare a remittance
listing that is forwarded to the cashier. A copy of the listing should be sent to the
a. Internal auditor to investigate the listing for unusual transactions.
b. Treasurer to compare the listing with the monthly bank statement.
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
d. Entity’s bank to compare the listing with the cashier’s deposit slip.

11. Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of
employing dishonest individuals and
a. Protect employees who make unintentional misstatements from possible monetary damages resulting
from their misstatements.
b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute
dishonest acts.
c. Facilitate an independent monitoring of the receiving and depositing of cash receipts.
d. Force employees in positions of trust to take periodic vacations and rotate their assigned duties.

12. During the consideration of a small business client’s internal control, the auditor discovered that the
accounts receivable clerk approves credit memos and has access to cash. Which of the following controls
would be most effective in offsetting this weakness?
a. The owner reviews errors in billings to customers and postings to the subsidiary ledger.
b. The controller receives the monthly bank statement directly and reconciles the checking accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in
the ledger.

13. Which of the following sets of information does an auditor usually confirm on one form?
a. Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans.
c. Inventory on consignment and contingent liabilities.
d. Accounts receivable and accrued interest receivable.

19
14. 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 party.
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.

15. An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed
as low for the occurrence assertion concerning sales transactions and the auditor has already gathered
evidence supporting
a. Opening and closing inventory balances.
b. Cash receipts and accounts receivable.
c. Shipping and receiving activities.
d. Cutoffs of sales and purchases.

PROBLEM SOLVING

Problem 1
The “CASH” account of Edmark Corporation’s ledger on December 31, 2019 showed the following:

a. Petty cash fund (including P7,500 unreplenished voucher of which P2,400 is dated
January 3, 2020) 15,000
b. Redemption Fund Account – PNB 500,000
c. Traveler’s check 100,000
d. Money order 10,000
e. Treasury bill, purchased December 1, 2019 (due on Feb. 1, 2020) 50,000
f. Time deposit due on March 31, 2020 50,000
g. 180-day Treasury bill, due March 15, 2020 120,000
h. Note receivable in the possession of a collecting agency 20,000
i. PNB – Checking Account #211-009-091 325,900
j. Cash on hand, including customer postdated check of P15,000 23,000
k. Savings deposit, earmarked for acquisition of equipment 210,000
l. A check payable to San Ignacio Incorporated, dated January 5, 2020, that was included
in the December 31 PNB Checking Account #211-009-091
50,000
l. Bond Sinking Fund (used to finance the maturing long-term obligation on March 31, 2020) 150,000
n. Overdraft in PNB Checking Account #211-099-085 ( 50,000)
o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2019
not mailed until January 5, 2020 20,000
p. Advances to Officers/Employees for Seminars (no liquidation is required) 80,000
q. Money market placement (due June 30, 2020) 600,000
r. Listed stock held as temporary investment 100,000
s. Check #789 in payment to Suppliers, dated January 5, 2020 and recorded
December 31, 2019 35,000
t. Customers’ certified checks 10,000
u. Pension Fund 150,000
TOTAL 2,568,900

Required:
1. Prepare the necessary adjusting journal entries to adjust the Cash account at year-end.
2. What is the correct balance of Cash at year-end?
3. Cash at year-end is overstated or understated by how much?

20
Problem 2
Your audit of Cash at December 31, 2019, financial statements of Bryan Corporation reveals the following:

1. Current account at PBCom P (35,000)

2. Current account at PNB 65,000
3. Treasury bills (acquired 3 months before maturity) 200,000
4. Treasury bills (maturity date is 12/31/20) 500,000
5. Payroll account 175,000
6. Foreign bank account - restricted (translated using the 12/31/19 exchange rate) 900,000
7. Postage stamps 600
8. Employees’ checks marked “DAIF” 10,000
9. IOU from the vice-president 50,000
10. Credit memo from a supplier for a purchase returns 25,000
11. Traveler’s check 60,000
12. Money order 10,000
13. Company’s check dated 12/30/19 but not mailed at year-end 30,000
14. Petty cash fund (P4,000 in currency and expense receipts for (P6,000) 10,000

Required:
1. Prepare the necessary adjusting journal entries to adjust the Cash account at year-end.
2. What is the company’s adjusted balance of Cash at year-end?

Problem 3
Present journal entries to record the following transactions in the books of Hero Corporation, which uses a
calendar year as accounting period. Assume that the company is using the imprest method in accounting for
petty cash fund:

a. A petty cash fund was set up on November 1, 2019 in the amount of P2,400.

b. On November 29, 2019, a check was issued to replenish the fund, the composition of which was as follows:
Currency – bills and coins 166
Vouchers showing expenditures for:
Office supplies 270
Charges from purchased of supplies 124
Repairs and maintenance 350
Wages paid to casual employees 950
Charges from purchased of goods to be sold 400

c. On December 18, 2019, the fund was replenished and correspondingly increased to P3,000; its composition
included the following:
Currency – bills and coins 158
Vouchers showing expenditures for:
Store supplies 304
Accounts payable 914
Charges from purchased of goods to be sold 242
Miscellaneous expenses 782

d. An examination on December 31, 2019, disclosed the following composition of the fund, although it was
not replenished on this date:
Currency – bills and coins 958
Check of office manager, dated January 5, 2020 1,000
Vouchers showing expenditures for:
Office supplies 126
Miscellaneous expenses 90
Accounts payable 800

21
e. On January 5, 2020, the check of office manager was cashed and the proceeds were added to the petty cash
fund.

f. On January 6, 2020, replenished disbursement from December 18, 2019 to January 5, 2020.

Problem 4
In connection with your audit of the financial statements of Sheila Corporation for the year ended December 31,
2019, you conducted a surprise count of the company’s petty cash and undeposited collections at 9:10 am on
January 3, 2020. You count disclosed the following:

Bills and counts

Bills Coins
P100.00 5 pieces P1.00 205 pieces
50.00 40 pieces 0.50 162 pieces
20.00 35 pieces 0.25 32 pieces
10.00 27 pieces

Postage stamps (unused) - P365

Checks
Date Payee Maker Amount
Dec. 30 Cash Custodian P 1,200
Dec. 30 Sheila Corp. Joerald, Inc. 14,000
Dec. 31 Sheila Corp. Hazel, sales manager 1,680
Dec. 31 Sheila Corp. Mae Corp. 17,800
Dec. 31 Sheila Corp. Ma. Michelle, Inc. 8,300
Dec. 31 Merry Corp. Sheila Corp. (not endorsed) 27,000

Unreimbursed vouchers
Date Payee Description Amount
Dec. 23 Hazel, sales mgr. Advance for trip P 7,000
Dec. 28 Post Office Postage stamps 1,620
Dec. 29 Messengers Transportation 150
Dec. 29 Ace, Inc. Computer repair 800

Other items found inside the cash box:

1. Unclaimed pay envelope of Jeanette. Indicated on the pay slip is his net salary of P7,500. Your inquiry
revealed that Jeanette’s salary is mingled with the petty cash fund.

2. The sales manager’s liquidation report for this Baguio Trip.

Cash Advance received on Dec. 23 P 7,000
Less: Hotel accommodation, meals, etc.P 4,500
Bus fare for two 400
Cash given to Carlo, salesman 300 5,200
Balance P 1,800
Accounted for as follows:
Cash returned by Carlo to the sales manager P 120
Personal check of the sales manager 1,680
Total P 1,800

Additional information:

1. The custodian is not authorized to cash checks.

2. The last official receipt included in the deposit on December 30 is No. 4351 and the last official receipt issued
for the current year is No. 4355. The following official receipts are all dated December 31, 2019.
OR No. Amount Form of Payment
4352 P 13,600 Cash
4353 17,800 Check

22
 4354 3,600 Cash
4355 8,300 Check

3. The petty cash balance per general ledger is P10,000. The last replenishment of the fund was made on
December 22, 2019.

Required:
1. Prepare cash count.
2. How much is the cash short or over at year-end.
3. Prepare the necessary adjusting journal entries to correct the petty cash fund at year-end.

Problem 5
Gellie is the cashier of Ann Corporation. As representative of the Zarate and Associates, CPAs, you were assigned
to verify her cash on hand in the morning of January 3, 2020. You began to count at 9:00 AM in the presence of
Gellie. In the course of your counting, you found currencies in paper bills and coins together with checks,
vouchers, and other items, which are mentioned below:

Bills: (2) P500; (8) P100; (12) P50; (5) P20

Coins: P 5.00 11 loose

1.00 24 loose
0.25 5 rolls and 32 loose (50 pieces to a roll)
0.10 10 rolls and 15 loose (50 pieces to a roll)
0.05 14 rolls and 20 loose (40 pieces to a roll)

Checks:
Date Maker Payee Amount
12/22/19 Vivian, Asst. Mgr Ann Corp. P 6,000
12/26/19 Gellie, cashier Ann Corp. 4,000

IOUs:
Date Maker Amount
12/20/19 Yap, Janitor P 500
12/22/19 Felix, clerk 750
12/24/19 Ablay, bookkeeper 500

PETTY CASH VOUCHERS FOR REPLENISHMENT

Date Payee Accounts Charged Amount
12/16/19 John, messenger Advances to employees P1,000.00
12/17/19 Kirstie and Co. Supplies 545.00
12/18/19 Joyce Liner Freight in 982.50
12/18/19 Posts Office Supplies 300.00
12/20/19 Alejandre, carpenter Repairs 2,950.00
12/21/19 Violan Miscellaneous expense 554.00

Your investigation also disclosed the following:

1. The balance of petty cash fund per books is P20,000.00.

2. Cash sale of January 2, 2020 amounted to P8,650 per sales records, while cash receipts book and bank
deposit slip showed that only P7,650 was deposited in the bank on January 3, 2020.

3. The following employees’ pay envelopes had been opened and the money removed. Each envelope
was marked “Unclaimed” - Ernesto, P332.50; Secinando, P447.50.

Required:
1. Prepare cash count.

23
2. How much is the cash short or over at year-end.
3. Prepare the necessary adjusting journal entries to correct the petty cash fund at year-end.

Problem 6
In your year-end audit of Hydee Corp., the cashier showed a cash accountability of P1,100,000 as at December
31, 2020. The following transactions were extracted in the books of the company, in summary form:

Accounts receivable, beginning P 275,000

Accounts receivable, end 385,000
Sales (80% on credit) 1,850,000
Accounts written-off 25,000
Recovery of accounts written-off, included in the collection of account receivable 15,000
Depreciation of fixed assets 150,000
Inventory, end 185,000
Inventory, beg 203,000
Cost of sales 960,000
Income tax accrued 18,500
Payment of bank loan 200,000
Subscription receivable 250,000
Subscribed capital stock 950,000
Purchases of fixed assets 320,000
Proceeds from short-term bank loan 300,000
Accounts payable, end 425,000
Accounts payable, beg. 200,000

Required:
1. How much is the cashier’s total cash accountability at December 31, 2020?
2. What is the company’s adjusted balance of cash at December 31, 2020?

Problem 7
The following data pertaining to the cash transactions and bank account of Charles Company for May 2020 are
available to you:

Cash balance, per accounting records, May 31, 2020 P 51,582

Cash balance, per bank statement, May 31, 2020 95,874
Bank service charge for May 327
Debit memo for the cost of printed checks delivered by the bank;
the charge has not been recorded in the accounting records 375
Outstanding checks, May 31, 2020 20,184
Deposit of May 30 not recorded by bank until June 1 14,610
Proceeds of bank loan on May 30, not recorded in the accounting
records, net of interest of P900 17,100
Proceeds from a customer’s promissory note; principal amount P24,000,
collected by the bank, taken up in the books with interest 24,300
Check No. 1086 issued to a supplier entered in the accounting records
as P6,300 but deducted in the bank statement at an erroneous amount of 3,600
Stolen check lacking an authorized signature, deducted from Charles’s
account by the bank in error 2,400
Customer’s checks returned by the bank marked NSF, indicating that the
customer’s balance was not adequate to cover the checks; no entry has
been made in the accounting records to record the returned check 2,280

Required:
1. Prepare bank reconciliation at May 31, 2020.
2. How much is the understatement or overstatement of cash at May 3, 2020?
3. Prepare the necessary adjusting entries to correct the cash account at May 31, 2020?

24
Problem 8
In connection with an audit, you are given the following bank reconciliation.

BANK RECONCILIATION
December 31, 2020
Balance per ledger, 12/31/20 P 34,349.72
Add: Collections received on the last day of
December and charged to “Cash in Bank”
on books but not deposited 5,324.50
Debit memo for customer’s checks returned
unpaid (check is on hand but no entry has been
made on the books) 4,000.00
Debit memo for bank service charge for December 1,000.00
P 46,674.22
Deduct:
Outstanding checks P 18,625
(see details below)
Credit memo for proceeds of a note receivable
which had been left at the bank for collection
but which has not been recorded as collected 8,000
Check for an account payable entered on books
as P12,625 but drawn and paid by bank as
16,225 3,600 32,225.00
Computed balance P 14,449.22
Unlocated difference 36,601.00
Balance per bank (check to confirmation) P 51,050.22

LIST OF OUTSTANDING CHECKS

December 31, 2020
Check No. Amount
14344 P 5,820
14358 1,295
14367 3,543
14399 2,001
14401 4,892
14407 5,074
P 18,625
Required:
1. Prepare bank reconciliation at December 31, 2020.
2. What is the adjusted cash balance at December 31, 2020?
3. How much is the understatement or overstatement of cash at year-end?
4. Prepare the necessary adjusting entries to correct the cash account at December 31, 2020?

Problem 9
The bank portion of the bank reconciliation for Kimberly Company at October 31, 2020 was as follows:

Kimberly Company
Bank Reconciliation
October 31, 2020
Cash Balance per Bank P 12,367.90
Add: Deposit in transit 1,530.20
P 13,898.10
Less: Outstanding checks
Check Number Check Amount
2451 P 1,260.40
2470 720.10
2471 844.50
2472 426.80
2474 1,050.00 4,301.80
Adjusted cash balance per bank P 9,596.30

25
The adjusted cash balance per bank agreed with the cash balance per books at October 31.

The November bank statement showed the following checks and deposits.

Bank Statement
Checks Deposits
Date Number Amount Date Amount
11-1 2470 720.10 11-1 1,530.20
11-2 2471 844.50 11-4 1,211.60
11-5 2474 1,050.00 11-8 990.10
11-4 2475 1,640.70 11-13 2,575.00
11-8 2476 2,830.00 11-18 1,472.70
11-10 2477 600.00 11-21 2,945.00
11-15 2479 1,750.00 11-25 2,567.30
11-18 2480 1,330.00 11-28 1,650.00
11-27 2481 695.40 11-30 1,186.00
11-30 2483 575.50 Total 16,127.90
11-29 2486 900.00
Total 12,936.20

The cash records per books for November showed the following:

Cash Receipts
Cash Payments Journal Journal____
Date Number Amount Date Number Amount Date Amount
11-1 2475 1,640.70 11-20 2483 575.50 11-3 1,211.60
11-2 2476 2,830.00 11-22 2484 829.50 11-7 990.10
11-2 2477 600.00 11-23 2485 974.80 11-12 2,575.00
11-4 2478 538.20 11-24 2486 900.00 11-17 1,472.70
11-8 2479 1,570.00 11-29 2487 398.00 11-20 2,954.00
11-10 2480 1,330.00 11-30 2488 800.00 11-24 2,567.30
11-15 2481 695.40 Total 14,294.10 11-27 1,650.00
11-18 2482 612.00 11-29 1,186.00
11-30 1,225.00
Total 15,831.70

The bank statement contained two bank memoranda:

1. A credit of P2,105.00 for the collection of a P2,000 note for Kimberly Company plus interest of P120 and
less a collection fee of P15. Kimberly company has not accrued any interest on the note.

2. A debit for the printing of additional company checks, P50.

At November 30, the cash balance per books was P11,123.90, and the cash balance per the bank statement was
P17,604.60. The bank did not make any errors, but Kimberly Company made two errors.

Note: The correction of any errors pertaining to recording checks should be made to Accounts Payable. The
correction of any errors relating to recording cash receipts should be made to Accounts Receivable

Required:
1. Prepare bank reconciliation for the month of November.
2. How much is the outstanding check on November 30, 2020?
3. How much is the deposit in transit on November 30, 2020?
4. What is the adjusted cash balance of the company on November 30, 2020?
5. How much is the understatement or overstatement of cash at year-end?

Problem 10
The following information pertains to the cash of Ruth Company:

26
 Nov 31 Dec. 31
Balance shown on bank statement P 27,380 P 26,960
Balance shown in general ledger before
reconciling the bank account 25,780 25,000
Outstanding checks 8,630 10,150
Deposits in transit 6,850 12,450

For Dec.
Deposits shown in bank statement P 55,880
Charges shown on bank statement 56,300
Cash receipts shown in company’s books 53,980
Cash payments shown in company’s books 54,760

The bank service charge was P180 in November (recorded by the company during December) and P240 in
December (not yet recorded by the company).

Included with the December bank statement was a check for P5,000 that had been received on December 25 from
a customer on account. The returned check marked “NSF” by the bank, has not yet been recorded on the
company’s books.

During December the bank collected P7,500 of bond interest for the company and credited the proceeds to the
company’s account. The company earned the interest during the current accounting period but has not yet
recorded it.

During December the company issued a check for P6,960 for equipment. The check, which cleared the bank
during December, was incorrectly recorded by the company for P8,960.

Required:
1. Prepare proof of cash.
2. What is the adjusted cash receipt for the month of December?
3. What is the adjusted cash disbursement for the month of December?
4. What is the company’s adjusted cash balance at December 31?
5. Prepare the necessary adjusting entries to correct the cash account at December 31?

Problem 11
SITTIE ’s check register shows the following entries for the month of December

Date Checks Deposits Balance

2013
Dec 1 Beginning Balance P 83,900
5 Deposit P 65,000
7 Check # 14344 32,500 120,800
11 Check # 14345 14,000 106,800
26 Deposit 49,000
29 Check #14346 8,600 147,200

SITTIE ’s bank reconciliation for November revealed one outstanding check (No.14343) for P12,000 (written on
November 28), and one deposit in transit for P5,550 (made November 29).

The following is from Sittie ’s bank statement for December 2013:

Date Checks Deposits Balance

2013
Dec. 1 Beginning balance P 95,970
1 Deposit P 5,550 101,300
4 Check No. 14344 P 32,500 68,800
5 Deposit 56,000 124,800
14 Check No. 14345 14,000 110,800

27
 15 Loan Proceeds 500,000 610,800
20 NSF check 7,600 603,200
29 Service charge 1,000 602,200
31 Interest 3,600 605,800

Note: All errors noted in this problem were committed by the Sittie , not the bank. It is also noted that the
company failed to record one deposit in the book.

Required:
1. Prepare proof of cash.
2. Compute the adjusted cash receipts per ledger of the company for the month of December.
3. How much is the overstatement or understatement of cash disbursement for the month of December.
4. Prepare the necessary adjusting journal entry to correct cash account at December 31.

Problem 12
Reden Company maintains a checking account at the Davao Bank. At July 31, selected data from the ledger
balance and the bank statement are as follows:
Cash in Bank
Per Books Per Bank

Balance, July 1 P 17,600 P 19,200

July Receipts 82,000
July Credits 80,070
July Disbursement 76,900
July Debits . 74,740
P 22,700 P 24,530

Analysis of the bank data reveals that the credits consist of P78,000 of July deposits and a credit memorandum of
P2,070 for collection of a P2,000 note plus interest revenue of P70. The July debits per bank consist of checks
cleared, P74,700 and a debit memorandum of P40 for printing additional company checks.

You also discover the following errors involving July checks: (1) a check for P230 to a creditor on account that
cleared the bank in July was journalized and posted as P320, and (2) a salary check to an employee for P255 was
recorded by the bank for P155.

The June 30 bank reconciliation contained only two reconciling items: deposits in transit, P1,000 and outstanding
checks, P2,600.

Assume that the interest on the note has been accrued.

Required:
1. Prepare bank reconciliation.
2. Compute the following balances at July 31:
a. Deposit in transit
b. Outstanding checks
3. How much is the adjusted cash balance at end of July?

Problem 13
You are asked to audit the cash of Von Corporation. Von Corporation carries its checking account with Mindanao
Bank. The following data are available:

a. Von Company Cash account for December:

Balance, November 30 P 20,900
Deposits during December 93,400
Checks written during December ( 83,000)
Balance, December 31 P 32,300

28
b. Bank statement for December:
Balance, November 30 P 20,000
Deposits during December 92,300
Checks cleared during December ( 82,150)
Funds transferred from foreign operations revenue
(in peso amount not yet recorded by Von Corp.) 25,000
NSF check, Customer Nelly ( 180)
Bank Service charge ( 70)
Balance, December 31 P 54,900

c. Additional data:
1. Balance in Petty Cash account, P200 (not included in Von Cash account).
2. The deposits of P93,400 by Von Company are overstated by P100; the bank recorded the correct amount.
3. The checks cleared by the bank of P82,150 erroneously included a P300 check drawn by Laity
Corporation; the bank has not yet corrected this error.
4. November 30: deposits outstanding, P2,000; and checks outstanding, P1,500.

Required:
1. Prepare bank reconciliation.
2. Compute the following balances at December 31:
c. Deposit in transit
d. Outstanding checks
3 How much is the adjusted cash balance at end of December?

Problem 14
Ryan Company is very profitable small business. It has not, however, given much consideration to internal
control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined
the jobs of cashier and bookkeeper. As a result, Maria handles all cash receipts, keeps the accounting records,
and prepares the monthly bank reconciliation.

The balance per bank statement on October 31, 2006, was P73,520. Outstanding checks were: No. 62 for P507,
No. 183 for P600, No. 284 for P1,103, No. 862 for P762.84, No. 863 for P907.20, No. 864 for P661.12. Included
with the statement was a credit memorandum of P800 indicating the collection of a note receivable for Ryan
Company by the bank on October 25. Ryan Company has not recorded this memorandum.

The company’s ledger showed one cash account with a balance of P87,570.88. The balance included undeposited
cash on hand. Because of the lack of internal control, Maria took for personal use all the undeposited receipts in
excess of P15,182.04. She then prepared the following bank reconciliation in an effort to conceal her theft of cash.

Cash balance per books, October 31 P 87,570.88

Add: Outstanding checks
No. 862 P 762.84
No. 863 907.20
No. 864 661.12 1,931.16
P 89,502.04
Less: Undeposited receipts 15,182.04
Unadjusted balance per bank, October 31 P 74,320.00
Less: Bank credit memorandum 800.00
Cash balance per bank statement, October 31 P 73,520.00

Required:
1. Prepare bank reconciliation.
2. Compute total cash shortage at October 31.
3. What is the adjusted cash balance at October 31.

Problem 15
On December 15 of the current year, Darwin, who owns Jasmin Corporation, asks you to investigate the cash-
handling activities in his firm. He thinks that an employee might be stealing funds. “I have no proof” he say,

29
“but I’m fairly certain that the November 30 undeposited receipts amounted to more than P6,000 although the
November 30 bank reconciliation prepared by the cashier shows only P3,619.20. Also, the November bank
reconciliation doesn’t show several checks that have been outstanding for a long time. The cashier told me that
these checks needn’t appear on the reconciliation because he has notified the bank to stop payment on them and
he had made the necessary payment on the books.

At your request, Darwin showed you the following November 30 bank reconciliation prepared by the cashier.

Bal. Per bank statement P 2,360.12 Bal. Per Books P 5,385.22

Deposit in transit 3,619.20 Bank Service charge ( 30.00)
Outstanding checks Unrecorded bank CM ( 600.00)
# 2351 550.10
2353 289.16
2354 484.84 ( 1,224.10) _______
Adjusted Balance P 4,755.22 Adjusted Balance P 4,755.22

You discover that the P600 unrecorded bank credit represents a note collected by the bank on Darwin’s behalf.
It appears in the deposits column of the November bank statement. Your investigation also reveals that the
October 31 bank reconciliation showed three checks that had been outstanding longer than 10 months: No.
1432 for P300, No. 1458 for P233.45, and No. 1512 for P126.55.

You also discover that these items were never added back into the cash account in the books. In confirming that
the checks shown on the cashier’s November 30 bank reconciliation were outstanding on that date, you discover
that check No. 2353 was actually a payment of P829.16 and had been recorded on the books for the amount.

To confirm the amount of undeposited receipts at November 30, you request a bank statement for December 1-12
(called a cut-off bank statement). This indeed shows a December 1 deposit of P3,619.20.

Required:
1. Compute the amount of fund stolen by the cashier.
2. How much is the adjusted cash balance at November 30.
3. Prepare the necessary adjusting journal entry to correct cash account at November 30.

In a Nutshell
ACTIVITY
Identify the assertion that each of the following auditing procedures would test.

a. Prepare a proof of cash.

b. Foot the client-prepared bank reconciliation.
c. Trace each of the outstanding checks on the year-end bank reconciliation to the cut-off bank
statement.
d. Count all cash on hand.
e. Prepare a schedule of interbank transfers.
f. Compare the date on checks dated on or shortly before year-end with the date of bank cancelled
the check.
g. Review minutes of the board of directors’ meetings for any restrictions placed on cash balances.
h. Investigate all material checks listed on the year-end reconciliation but not returned with the cut-
off bank statement.
i. Trace the balance on the bank reconciliation to the confirmation received directly from the bank.

Q&A LIST

Do you have any questions for clarification?

30
 Questions/Issues Answers

1. 1.

2. 2.

3. 3.

4. 4.

5. 5.

KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.

Analytical Procedures External Confirmation Proof of Cash

Audit Evidence Footing Rights and Obligations
Audit of Cash and Cash Funds Standard Bank Confirmation
Equivalents
Audit Procedures Inquiry Substantive Analytical
Procedures
Bank Reconciliation Inspection Substantive Procedures
Cash Kiting Test of Controls
Cash Count Mechanical Accuracy Test Tests of Details
Cash Equivalents Observation Tracing
Completeness Performance Procedures Valuation or Allocation
Cross-footing Petty Cash Fund Vouching
Cutoff Bank Statement Physical Examination
Existence or Occurrence Presentation and Disclosure

Course Schedule

This section calendars all the activities and exercises, including readings and lectures, as well
as time for making assignments and doing other requirements.

Activity Date Where to Submit

Let’s Analyze – Problems 1, BlackBoard LMS
2, 6
Let’s Analyze – Problems 3, BlackBoard LMS
4, 5,
Let’s Analyze – Problems 7, BlackBoard LMS
8, 9
Let’s Analyze – Problems BlackBoard LMS
10, 11, 12, 13
Let’s Analyze – Problems BlackBoard LMS
14, 15

31
 Let’s Check & Let’s BlackBoard LMS
Analyze (Multiple Choice
Questions)
In a Nutshell BlackBoard LMS
Q&A Anytime BlackBoard LMS
2nd Formative Assessment Feb. 12, 2021 BlackBoard LMS

Online Code of Conduct

1. Students are expected to abide by and honor code of conduct, and thus everyone and all are
exhorted to exercise self-management and self-regulation.
2. All students are guided by professional conduct as learners in attending On-Line Blended Delivery
(OBD) course. Any breach and violation shall be dealt with properly under existing guidelines,
specifically in Section 7 (Student Discipline) in the Student Handbook.
3. Professional conduct refers to the embodiment and exercise of the University’s Core Values,
specifically in the adherence to intellectual honesty and integrity; academic excellence by giving
due diligence in virtual class participation in all lectures and activities, as well as fidelity in doing
and submitting performance tasks and assignments; personal discipline in complying with all
deadlines; and observance of data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The University shall
institute monitoring mechanisms online to detect and penalize plagiarism.
5. Students shall independently and honestly take examinations and do assignments, unless
collaboration is clearly required or permitted. Students shall not resort to dishonesty to improve
the result of their assessments (e.g. examinations, assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students shall not
post or share their answers, assignment or examinations to others to further academic
fraudulence online.
7. By enrolling in OBD course, students agree and abide by all the provisions of the Online Code of
Conduct, as well as all the requirements and protocols in handling online courses.

32