MODULE – 3 AUDIT OF CASH

Audit Program for Cash: Objectives and Procedures

The audit program for cash contains a statement of the audit objectives, the complete and
detailed procedures, and a conclusion.
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The audit objectives are
a. Cash exists and is owned by the client
b. Cash balances reflect a proper cut-off of receipts and disbursements
c. Cash balances as presented in the balance sheet properly reflect all cash and cash
items on hand, in transit, or on deposit with third parties
d. Cash balances are properly classified in the financial statements, and any restrictions on
the availability of funds are properly disclosed

Basic procedures
1. Using the standard bank confirmation form, request confirmation as of the audit date for bank
accounts selected. Also request confirmation of material cash in savings institutions, certificates
of deposit, and compensating balances. Documents items selected for confirmation and retain
returned confirmations. Mail second requests, if necessary.

2. Obtain copies of each account's bank reconciliation for the work papers
a. Trace the bank balance on the reconciliation to the standard bank confirmation received from
the bank
b. Trace the reconciled book balance to the general ledger, trial balance or lead schedule as
applicable

Cash Management: Internal Controls Checklist

Research has shown that the most common item stolen was cash. Here is a checklist of internal
controls your business should have in place to protect your business from internal employee
theft and external theft:
1. Segregation of duties – On the accounts receivable side, ensure that the same person
who is receiving cash, is not also depositing it and recording it in the accounting records.
For accounts payable, ensure that the same person approving payments is not also
writing the checks and reconciling the bank account.

2. Make timely deposits – Cash and checks received at a business should be deposited
daily to decrease the chance of the money being stolen.

3. Review check signing authority – Review the records with the bank to ensure that the
appropriate person have check signing authority. Consider requiring more than one
signature for checks above a certain threshold.
 4. Control access to check stock, accounting systems, and cash – Unused check
stock should be locked up. Access to computer systems or banking systems where
checks can be generated should require strong passwords. Cash and checks waiting for
deposit should be securely stored in a safe.

5. Discourage management override of controls – Management override of existing

controls should be strongly discouraged as it sets a poor example to employees about
the importance of internal controls, and because external thieves are targeting
businesses this way. We have seen thieves pretending to email as the company CEO
requesting funds be wired, and the accounting employees follow those instructions
without following the normal process and controls for purchases resulting in payments
made to cybercriminals.

6. Reconcile the bank accounts – All bank accounts should be reconciled on at least a
monthly basis. Ideally, a person uninvolved in the day to day accounting activities for
cash receives an unopened bank statement with cancelled check copies to reconcile the
bank account from so that the statement activity and cancelled checks can be reviewed
for irregularities. If there are not enough team members for this to happen, it is important
that an owner, manager, or board member obtain the bank statement and review for
irregularities prior to the regular bookkeeper preparing the reconciliation.

How to Audit Cash

The following are procedures in the audit of cash:
● Primary cash assertions
● Cash walkthrough
● Directional risk for cash
● Primary risks for cash
● Common cash control deficiencies
● Risk of material misstatement for cash
● Substantive procedures for cash
● Common cash work papers

Primary Cash Assertions

The primary relevant cash assertions are:
● Existence
● Completeness
● Rights
● Accuracy
● Cut off

Of these assertions, existence, accuracy, and cut-off are most important. The audit client is
asserting that the cash balance exists, that it’s accurate, and that only transactions within the
period are included.
Classification is normally not a relevant assertion. Cash is almost always a current asset. But
when bank overdrafts occur, classification can be in play. The negative cash balance can
be presented as cash or as a payable depending on the circumstances.

Cash Walkthrough
As we perform walkthroughs of cash, we normally look for ways that cash might be overstated
(though it can also be understated as well), whether intentionally or by mistake.

In performing cash walkthroughs, ask questions such as:

● Are timely bank reconciliations performed by competent personnel?
● Are all bank accounts reconciled?
● Are the bank reconciliations reviewed by a second person?
● Are all bank accounts on the general ledger?
● Are transactions appropriately cut off at period-end (with no subsequent period transactions
appearing in the current year)?
● Is there appropriate segregation between persons handling cash, recording cash, making
payments, and reconciling the bank statements
● What bank accounts were opened in the period?
● What bank accounts were closed in the period?
● Are there any restrictions on the bank accounts?
● What persons are on the bank signature cards?
● Who has the authority to open and/or close bank accounts?
● What is the nature of each bank account (e.g., payroll bank account)?
● Are there any cash equivalents (e.g., investments of less than three months)
● Were there any held checks (checks written but unreleased) at period-end?

As we ask questions, we also inspect documents (e.g., bank reconciliations) and make
observations (who is doing what?).

If controls weaknesses exist, we create audit procedures to address them. For example, if
during the walkthrough we review three monthly bank reconciliations and they all have obvious
errors, we will perform more substantive work to prove the year-end bank reconciliation. For
example, we might vouch every outstanding deposit and disbursement.

Directional Risk for Cash

What is directional risk? It’s the potential bias that a client has regarding an account balance. A
client might desire an overstatement of assets and an understatement of liabilities since each
makes the balance sheet appear healthier.

The directional risk for cash is overstatement. So, in performing your audit procedures, perform
procedures such as testing the bank reconciliation to ensure that cash is not overstated.

Primary Risks for Cash

The primary risks are:
1. Cash is stolen
2. Cash is intentionally overstated to cover up theft
3. Not all cash accounts are on the general ledger
4. Cash is misstated due to errors in the bank reconciliation
5. Cash is misstated due to improper cut off

Common Cash Control Deficiencies

In smaller entities, it is common to have the following control deficiencies:
● One person receipts and/or disburses monies, records those transactions in the general
ledger, and reconciles the related bank accounts
● The person performing the bank reconciliation does not possess the skill to perform the duty
● Bank reconciliations are not timely performed

Risk of Material Misstatement for Cash

Assess control risk at high for each assertion. If control risk is assessed at less than high, then
controls must be tested to support the lower risk assessment. Assessing risks at high is usually
more efficient than testing controls.

When control risk is assessed at high, inherent risk becomes the driver of the risk of material
misstatement (control risk X inherent risk = risk of material misstatement). For example, if
control risk is high and inherent risk is moderate, then my RMM is moderate.

The assertions that an auditor concern the most are existence, accuracy, and cut off. So RMM
for these assertions is usually moderate to high.

Response to higher risk assessments is to perform certain substantive procedures: namely,

bank confirmations and testing of the bank reconciliations. As RMM increases I examine more
of the period-end bank reconciliations and more of the outstanding reconciling items.

Substantive Procedures for Cash

Customary audit tests are as follows:
1. Confirm cash balances
2. Vouch reconciling items to the subsequent month’s bank statement
3. Ask if all bank accounts are included on the general ledger
4. Inspect final deposits and disbursements for proper cutoff

The auditor should send confirmations directly to the bank. Some individuals create false bank
statements to cover up theft. Those same persons provide false confirmation addresses. Then
the confirmation is sent to an individual (the fraudster) rather than a bank. Once received, the
fraudster replies to the confirmation as though the bank is doing so.

Agree the confirmed bank balance to the period-end bank reconciliation (e.g., December 31,
20X7). Then, agree the reconciling items on the bank reconciliation to the bank statement
subsequent to the period-end. For example, examine the January 20X8 bank statement activity
when clearing the December 20X7 reconciling items. Finally, agree the reconciled balance to
the general ledger cash balance for the period-end (e.g., December 31, 20X7).
Cut-off bank statements (e.g., January 20, 20X8 bank statement) may be used to test the
outstanding items. Such statements, similar to bank confirmations, are mailed directly to the
auditor. Alternatively, the auditor might examine the reconciling items by viewing online bank
statements. (Read-only rights can be given to the auditor.)

Common Cash Working Papers

Cash working papers normally include the following:
● An understanding of cash-related internal controls
● Risk assessment of cash assertions at the assertion level
 ● Documentation of any control deficiencies
● Cash audit program
● Bank reconciliations for each significant account
● Bank confirmations

The Imprest Petty Cash System

Petty cash, also known as imprest cash, is a fund established for making small payments that
are impractical to pay by check. Examples include postage due, reimbursement to employees
for small purchases of office supplies, and numerous similar items. The establishment of a petty
cash system begins by making out a check to cash, cashing it, and placing the cash in a petty
cash box:
A petty cash custodian should be designated to safeguard and make payments from this fund.
At the time the fund is established, the following journal entry is needed. This journal entry, in
essence, subdivides the petty cash portion of available funds into a separate account.
Policies should be established regarding appropriate expenditures that can be paid from petty
cash. When a disbursement is made from the fund, a receipt should be placed in the petty cash
box. The receipt should set forth the amount and nature of expenditure. The receipts are known
as petty cash vouchers. At any point in time, the receipts plus the remaining cash should equal
the balance of the petty cash fund (i.e., the amount of cash originally placed in the fund).

Replenish Petty Cash

As expenditures occur, cash in the box will be depleted. Eventually the fund will require
replenishment. A check for cash is prepared in an amount to bring the fund back up to the
original level. The check is cashed and the proceeds are placed in the petty cash box. At the
same time, receipts are removed from the petty cash box and formally recorded as expenses.
The journal entry for this action involves debits to appropriate expense accounts as represented
by the receipts, and a credit to Cash for the amount of the replenishment. Notice that the Petty
Cash account is not impacted — it was originally established as a base amount, and its balance
has not been changed by virtue of this activity.

Cash Short and Over

Occasional errors may cause the petty cash fund to be out of balance. The sum of the cash and
receipts will differ from the correct Petty Cash balance. This might be the result of simple
mistakes, such as math errors in making change, or perhaps someone failed to provide a
receipt for an appropriate expenditure. Whatever the cause, the available cash must be brought
back to the appropriate level.
The Cash Short (Over) account is an income statement type account. It is also applicable to
situations other than petty cash. For example, a retailer will compare daily cash sales to the
actual cash found in the cash register drawers. If a surplus or shortage is discovered, the
difference will be recorded in Cash Short (Over); a debit balance indicates a shortage
(expense), while a credit represents an overage (revenue).
 Increasing the Base Fund
As a company grows, it may find a need to increase the base size of its petty cash fund. The
entry to increase the fund would be identical to the first entry illustrated; that is, the amount
added to the base amount of the fund would be debited to Petty Cash and credited to Cash.
Otherwise, take note that the only entry to the Petty Cash account occurred when the fund was
established.

Illustrative Problem: Audit of Petty Cash

An examination on the morning of January 2, 2024 by the auditor for Joseph Company
discloses the following items in the petty cash drawer:

Postage stamps P 220.00

Currency and coins 1,156.60
IOUS from members of the office staff 1,210.00
An envelope containing collections for a gift for a departing
employee, with office names attached 350.00
Petty cash vouchers for miscellaneous expenses (including a
PCV for stamps purchased for 450.00) 985.00
Employee's check postdated January 15, 2024 1,500.00
Employee's check marked "DAIF" 1,890.00
Check drawn by Joseph Company to Petty Cash 3,450.00
P 10,761.60

The ledger account discloses a P10,500 balance for Petty Cash.

1. How much is the cash shortage or overage as of December 31, 2023?

2. How much petty cash fund shall be shown as part of "Cash" balance as of December
31, 2023?

Solutions:

1. Per Count P 10,761.60

Accountability:
Set-Up P 10,500
Other Funds 350
Prepayments 220 11,070.00
Cash Shortage P 308.40

2. Currency and Coins P 1,156.60

Check drawn by Luz 3,450.00

Total Cash P 4,606.60

Bank Reconciliation

One of the most common cash control procedures is the bank reconciliation. In business, every
bank statement should be promptly reconciled by a person not otherwise involved in the cash
receipts and disbursements functions. The reconciliation is needed to identify errors,
irregularities, and adjustments for the Cash account. Having an independent person prepare the
reconciliation helps establish separation of duties and deters fraud by requiring collusion for
unauthorized actions.

Using Bank Accounts

To obtain desired control objectives, a company can vary the number and location of banks and
the types of accounts.
► General checking account
► Demand deposit
► Savings deposit

Bank Reconciliation

Schedule explaining any differences between the bank’s and the company’s records of cash.

Purpose of Bank Reconciliation

The bank reconciliation process offers several advantages including:

⮚ Detecting errors such as double payments, missed payments, calculation errors etc.

⮚ Tracking and adding bank fees and penalties in the books

⮚ Spot fraudulent transactions and theft

⮚ Keeping track of accounts payable and receivables of the business

Pro forma bank reconciliation statement

Angel Co.
Bank Reconciliation
For the Month Ended Aug. 31, 2024
Balance per books, end P xx Balance per bank statement, end P xx
Add: Credit memos (CM) xx Add: Deposit in transit (DIT) xx
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/Less: Book errors xx Add/Less: Banks errors xx
Adjusted Balance P xx Adjusted balance P xx

Book - Reconciling Items:

Credit memos – are additions made by the bank not representing deposits made by the
depositor (book), and not yet recorded by the depositor.

Examples of credit memos include:

• Collections made by the bank on behalf of the depositor.
• Interest income earned by the depositor.
• Proceed from loan directly credited or added by the bank to the depositor’s account.
• Unrolled-over matured time deposits transferred by the bank to the depositor’s account.

Debit memos – are deductions by the bank not representing checks issued by the depositor.

Examples of debit memos include:

 • Bank service charges representing bank charges for fees, interest, penalties, and
surcharges.
• No sufficient funds checks (NSF) – these are checks deposited and already added by
the bank to the account, but subsequent returned because of insufficient funds by the
drawer to pay for the check.
• Automatic debits, such as when the depositor and the bank agree that the bank will
make automatic payments of bills on behalf of the depositor.
• Payment of loans which the entity (depositor) agreed to be made out directly from its
bank account.

Book errors – errors committed by the depositor (e.g., erroneous recording in the books).

Bank – Reconciling Items:

Deposit in transit – sometimes called undeposited collection, recognize as deposit by the book
but not yet credited by the bank. Deposit in transit often occur when deposits are mailed to the
bank, deposits place in a night depository, or deposit made after the bank cut-off.

Outstanding checks – are checks issued and released to the payee but not yet encashed with
the bank.

Outstanding checks exclude the following:

Certified checks – the bank when certifying a checks, automatically debits the depositors
accounts.
Stale checks – checks that remains outstanding for a relatively long period of time, are reverted
back to cash, and are excluded from the from outstanding checks.

Bank errors – errors committed by the bank.

Credit memos, debit memos and book errors are referred to as book reconciling items. The
depositors should make reconciling entries for those items.
Deposit in transit, outstanding checks and book errors are referred to as bank reconciling items.
The depositors does not make reconciling entries for these items.

Bank Reconciliation: A Step-by-Step Guide

You receive a bank statement, typically at the end of each month, from the bank. The
statement itemizes the cash and other deposits made into the checking account of the
business. The statement also includes bank charges such as for account servicing fees.
Once you’ve received it, follow these steps to reconcile a bank statement:

1. COMPARE THE DEPOSITS

Match the deposits in the business records with those in the bank statement. Compare the
amount of each deposit recorded in the debit side of the bank column of the cashbook with
credit side of the bank statement and credit side of the bank column with the debit side of
the bank statement. Mark the items appearing in both the records.

2. ADJUST THE BANK STATEMENTS

 Adjust the balance on the bank statements to the corrected balance. For doing this, you
must add deposits in transit, deduct outstanding checks and add/deduct bank errors.

• Deposits in transit are amounts that are received and recorded by the business
but are not yet recorded by the bank. They must be added to the bank statement.

• Outstanding checks are those that have been written and recorded in cash
account of the business but have not yet cleared the bank account. They need
to be deducted from the bank balance. This often happens when the checks
are written in the last few days of the month.

• Bank errors are mistakes made by the bank while creating the bank
statement. Common errors include entering an incorrect amount or omitting an
amount from the bank statement. Compare the cash account’s general ledger
to the bank statement to spot the errors.

3. ADJUST THE CASH ACCOUNT

The next step is to adjust the cash balance in the business account.
Adjust the cash balances in the business account by adding interest or deducting monthly
charges and overdraft fees.

To do this, businesses need to take into account the bank charges, NSF checks and
errors in accounting.

• Bank charges are service charges and fees deducted for the bank’s
processing of the business’ checking account activity. This can include
monthly charges or charges from overdrawing your account. They must be
deducted from your cash account. If you’ve earned any interest on your
bank account balance, they must be added to the cash account.

• An NSF (not sufficient funds) check is a check that has not been honored by the
bank due to insufficient funds in the entity’s bank accounts. This means that the
check amount has not been deposited in your bank account and hence needs to be
deducted from your cash account records.

• Errors in the cash account result in an incorrect amount being entered or an amount
being omitted from the records. The correction of the error will increase or decrease
the cash account in the books.

4. COMPARE THE BALANCES

After adjusting the balances as per the bank and as per the books, the adjusted amounts
should be the same. If they are still not equal, you will have to repeat the process of
reconciliation again.
 Once the balances are equal, businesses need to prepare journal entries for the
adjustments to the balance per books.

Illustrative Problem: Bank reconciliation; Computation of adjusted cash in bank balance

The books of JP's Service, Inc. disclosed a cash balance of P687,570 on December 31, 2023.
The bank statement as of December 31 showed a balance of P547,800. Additional information
that might be useful in reconciling the two balances follows:

(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.

(b) A customer's note dated September 25 was discounted on October 12. The note was
dishonored on December 29 (maturity date). The bank charged JP's account for P142,650,
including a protest fee of P2,650.

(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a
deposit of P27,000.

(d) Outstanding checks totaled P98,850 as of December 31.

(e) There were bank service charges for December of P2,100 not yet recorded on the books.

(f) JP's account had been charged on December 26 for a customer's NSF check for P12,960.

(g) JP properly deposited P6,000 on December 3 that was not recorded by the bank.

(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.

(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been
collected on December 27, and the bank charged a P360 collection fee.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Adjusted cash in bank balance

2. Net adjustment to cash as of December 31, 2023

Solution:

Question No. 1

Balance per bank statement, P547,800

12/31/2023
P134,25
Add: Deposits in transit 0
6,00
Bank error-deposit not recorded 0 140,250
Total 688,050
Less: Outstanding checks 98,850
Adjusted bank balance, 12/31/2023 P589,200

Balance per books, 12/31/2023 P687,570

 Add: Book error - Check No. 748 P15,000
Customer note collected by bank 46,290 61,290
Total 748,860

Less: Dishonored note 142,650

Book error-improperly recorded deposit 1,950
NSF check 12,960
Bank service charges 2,100 159,660
Adjusted book balance, 12/31/2023 P589,200

Question No. 2

Unadjusted balance per books, 12/31/2023 P687,570

Adjusted book balance, 12/31/2023 589,200
Net adjustment to cash – credit P 98,370

Proof of Cash
Many businesses prepare a reconciliation just like that illustrated. However, this approach
leaves one gaping hole in the control process. What if the bank statement included a 5,000
check to an employee near the beginning of the month, and a 5,000 deposit by that employee
near the end of the month (and these amounts were not recorded on the company records)? In
other words, the employee took out an unauthorized “loan” for a while. The reconciliation would
not reveal this unauthorized activity because the ending balances are correct and in agreement.
To overcome this deficiency, some companies will reconcile not only the beginning and ending
balances, but also the total checks per the bank statement to the total disbursements per the
company records, and the total deposits per the bank statement to the total receipts on the
company accounts. If a problem exists, the totals on the bank statement will exceed the totals
per the company records for both receipts and disbursements. This added reconciliation
technique is termed a proof of cash. It is highly recommended where the volume of
transactions and amount of money involved is very large.
Also illegal is “kiting” which occurs when one opens numerous bank accounts at various
locations and then proceeds to write checks on one account and deposit them to another. In
turn, checks are written on that account, and deposited to yet another bank. And, over and over
and over. Each of the bank accounts may appear to have money; but, it is illusionary, because
there are numerous checks “floating” about that will hit and reduce the accounts. Somewhere in
the process the perpetrator makes a cash withdrawal and then vanishes. That is why one will
often see bank notices that deposited funds cannot be withdrawn for several days. Such
restrictions are intended to make sure that a deposit clears the bank on which it is drawn before
releasing those funds. Kiting is complex and illegal. Enhanced electronic clearing procedures
adopted by banks have made kiting far more difficult to accomplish.

Illustrative Problem: Proof of cash; Computation of adjusted balances

The accountant for the Joshtine Company assembled the following data:

June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10,
 returned by bank on July 16 marked NSF,
and redeposited immediately; no entry made
on books for return or redeposit 8,250
Collection by bank of company's 71,815 80,900
notes receivable

The bank statements and the company's cash records show these totals:

Disbursements in July per bank statement P218,373

Cash receipts in July per Joshtine's books 236,452

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:

1. How much is the adjusted cash balance as of June 30?

2. How much is the adjusted bank receipts for July?
3. How much is the adjusted book disbursements for July?
4. How much is the adjusted cash balance as of July 31?
5. How much is the cash shortage as of July 31?
Solution:

Joshtine Company
Reconciliation of Receipts, Disbursements, and Bank Balance
For the month ended July 31

Beginning Receipts Disb. Ending

June 30 July July 31

Balance per bank

statement P107,082 P249,108a P218,373 P137,817
Deposits in transit:
June 30 8,201 (8,201)
July 31 12,880 12,880
Outstanding
checks:
June 30 (27,718) (27,718)
July 31 30,112 (30,112)
NSF check
redeposited (8,250) (8,250)
Adjusted bank
balance P 87,565 P245,537 P212,517 P120,585

Balance per books P 15,822 P236,452 P212,529b P 39,745

Bank service
charge:
June (72) (72)
July 60 (60)
Collection of notes
receivable:
June 71,815 (71,815)
July 80,900 80,900
Adjusted book
balance P 87,565 P245,537 P212,517 P120,585
a
(P137,817 + P218,373 – P107,082)
b
(P15,822 + 236,452 – P39,745)

MODULE # 3 Post-test
APPLIED AUDITING
AUDIT OF CASH & CASH EQUIVALENTS
 PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. The “CASH” account of Angel Corporation’s ledger on December 31, 2023 showed the
following:
a. Petty cash fund (including 7,500 unreplenished
voucher of which 2,400 is dated January 3, 2024) 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, 2023 (due on Feb. 1, 2024) 50,000
f. Time deposit acquired December 31 due on March 31, 2024 50,000
g. 180-day Treasury bill, due March 15, 2024 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, 2024,
that was deducted in the December 31 PNB Checking Account
#211-009-091 50,000
m. Bond Sinking Fund (used to finance the maturing long-term obligation
on March 31, 2024) 150,000
n. Overdraft in PNB Checking Account #211-099-085 ( 50,000)
o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2023
not mailed until January 5, 2024 20,000
p. Advances to Officers/Employees for Seminars (no liquidation is
required) 80,000
q. Money market placement (due June 30, 2024) 600,000

r. Listed stock held as temporary investment 100,000

s. Check #789 in payment to Suppliers, dated January 5, 2024 and
recorded December 31, 2023. 35,000
t. Customers’ certified checks 10,000
u. Pension Fund 150,000
TOTAL 2,568,900
What is Angel Corporation’s adjusted cash and cash equivalents balance at December 31, 2023
is:
a. 618,800 b.767,900 c. 673,800 d. 723,800 e. 768,800

2. The cash account of the Cristine Corporation as of December 31, 2023 consists of the following:

On deposit in current account with Real Bank 900,000

Cash collection not yet deposited to the bank 350,000
 A customer’s check returned by the bank for insufficient fund 150,000
A check drawn by the Vice-President of the
Corporation dated January 15, 2024 70,000
A check drawn by a supplier dated December 28, 2023
for goods returned by the Corporation 60,000
A check dated May 31, 2023 drawn by the Corporation against the
Piggy Bank in payment of customs duties. Since the importation
did not materialize, the check was returned by the customs
broker. This check was an outstanding check in the reconciliation
of the Piggy Bank account 410,000
Petty Cash fund of which P5,000
is in currency; P3,600
in form of employees’ I.O.U. s; and P1,400 is supported
by approved petty cash vouchers for expenses all dated
prior to closing of the books on December 31, 2023 10,000
Total 1,950,000
Less: Overdraft with Piggy Bank secured by a Chattel
mortgage on the inventories 300,000
Balance per ledger 1,650,000

At what amount will the account “Cash” appear on the December 31, 2023 balance sheet?
a) 1,315,000
b) 1,495,000
c) 1,425,000
d) 1,725,000

3. An examination on the morning of January 2, 2024 by the auditor for the Kaila Company
discloses the following items in the petty cash drawer:

Postage stamps P 220.00

Currency and coins 1,156.60
IOUS from members of the office staff 1,210.00
An envelope containing collections for a gift for a departing
employee, with office names attached 350.00
Petty cash vouchers for miscellaneous expenses (including a
PCV for stamps purchased for 450.00) 985.00
Employee's check postdated January 15, 2024 1,500.00
Employee's check marked "DAIF" 1,890.00
Check drawn by Kaila Company to Petty Cash 3,450.00
P 10,761.60
The ledger account discloses a P10,500 balance for Petty Cash.

1. How much is the cash shortage or overage as of December 31, 2023?

a. P 308.40 c. P 88.40
b. P 41.60 d. P 658.40

2. How much petty cash fund shall be shown as part of "Cash" balance as of December 31,
2023?
a. P 10,761.60 c. P 4,606.60
b. P 1,156.60 d. P 5,141.60

4. You are making an audit of the St. John Company for the year ended December 31, 2023. The
balance of the petty cash account on December 31, 2023 was P15,000. Your count of the
imprest cash fund, made at 9:00 a.m. on January 3, 2024, in the presence of Ms. D. Kumukupit
revealed:
Bills and Coins:
Denomination Quantity
1,000 2
500 4
100 14
50 16
20 10
10 19
5 17
1 25
0.50 21
0.25 28

Checks:
Date Maker Bank Amount
12-28-2023 Urquiola, employee PNB 3,000-
12-29-2023 Sta. Maria, employee Security Bank 1,500-
12-31-2023 L. Chua, customer Asia Trust 2,500-

01-02-2024 A. Bobadilla, customer FEBTC 3,200-

01-12-2024 C. German, employee Union Bank
(check received 12-28-2023) 1,500-
(These checks were all considered good when deposited after dates shown on the checks. The
first four checks were actually deposited January 3; the German check was deposited January
13; all five checks proved to be good.)

Vouchers:
Date Voucher No. Particulars Amount
12-13-2023 151 Freight out P 500-
12-28-2023 183 Supplies 300-
12-29-2023 184 Freight In 394.20
12-31-2023 189 Freight on cabinet 741.10
01-02-2024 001 Freight in 244.70

IOUs:
12-21-2023 S. Dechavez, employee 300-

Sales Invoices (for cash sales; collections handled by Ms. D. Kumukupit)

Inv. # 118 December 30 1,000.40
# 129 December 31 2,500-
# 133 January 2 3,200-

(As a general rule, the petty cashier turn over the proceeds of cash sales to the general cashier
every Friday. Proceeds on these sales were recorded and deposited by the general cashier.)

Unused office supplies 40-

1. What is the cash shortage?

a. 750.40 b. 802.90 c. 910.40 d. 850.90
2. Adjusting entries for the petty cash fund includes a credit to:
a. Cash Shortage 802.90 b. Petty Cash Fund 4,738.20
c. Petty Cash Fund 4,538.20 d. Cash Shortage 850.90
 5. You are making an audit of the Khai Corporation for the past calendar year. The
balance of the Petty Cash account at December 31, 2024 was P1,300. Your count of
the imprest cash count made at 8:30 am on January 3, 2025, in the presence of the
petty cash custodian, revealed:

Currency and coins 571.38

Checks:
Date Maker Bank
12/28/2024 Macky, vice-president PNB 360.00
12/29/2024 Andy, employee DBP 60.00
12/31/2024 Bobot, customer RCBC 153.80
01/02/2025 Neil, customer PNB 121.36
01/10/2025 Jeff, employee PNB 60.00
(check received Dec. 29)
(These checks were all considered good when deposited after dates shown on the
checks. The first four checks were actually deposited Jan. 3; the last check was
deposited Jan. 11; all five checks proved to be good.)

Vouchers:
Dec. 11 #261 Richard, shipping clerk – temporary advance for the use of the
receiving department. Your count of Mr. Richard’s fund revealed:
currency – P28.80;
merchandise freight bills, P31.20. P 60.00
Dec. 28 # 301 Postage 12.00
Dec. 29 # 302 Freight bill on merchandise purchases 47.30
Dec. 31 # 305 Freight bill on office supplies 88.93
Jan. 2 # 500 Freight bill on merchandise purchases 29.36

IOU Dec. 21 Mabel, employee 36.00

Sales Invoices (for cash sales, collections handled by the petty cashier):
Invoice # 315 Dec. 30 P 120.00
328 Dec. 31 153.80
334 Jan. 2 121.36
(As a general rule, the petty cashier turn over the proceeds of cash sales to the
general cashier on the 10th, 20th and last days of each month. Proceeds on these
sales were recorded and deposited by the general cashier.)

Postage Stamps:
Three one-peso stamps. The petty cashier handled postage stamps. These stamps
represent the unused stamps purchased on Voucher # 301.

1. How much is the petty cash fund shortage at December 31, 2024?
a. P 216.39 b. P 123.83 c. P 98.03 d. P 95.03
2. The adjusted petty cash fund balance of Khai Corporation at December 31, 2024 is:
a. P 900.74 b. P 960.74 c. P 1,174.54 d. P 1,234.54
3. What is the amount of operating expenses found in the petty cash fund of Khai
Corporation?
a. P 208.23 b. P 205.75 c. P 174.03 d. P 97.93
4. Excluding petty cash fund, the cash account of Candy Corporation is understated at
December 31, 2024 by:
a. P 395.16 b. P 273.80 c. P 153.80 d. P 120.00
6. The cash in bank account of Happy Company disclosed a balance of P201, 000 as of
December 31. The bank statement as of December 31 showed a balance of P106,000. Upon
comparing the bank statement with cash records, the following facts were developed.

a. The company’s account was charged on December 26 for a customer’s uncollectible

check amounting to P30,000.
b. A two-month, 17% P60,000 customer’s note dated October 25, discounted on November
25, was dishonored on December 25, and the bank charged the company P62,000,
which included a protest fee of P2,000.
c. A customer’s check for P15, 400 was entered as P14,500 by both the depositor and the
bank but was later corrected by the bank.
d. Check No. 1 142 for P12,425 was entered in the cash disbursement journal at P12,245
and check no. 156 for P3,290 was entered as P32,900.
e. Bank service charges of P1,830 for December were not yet recorded on the books.
f. A bank memo stated that a customer’s note for P25,000 and interest of P1,000 had been
collected on December 28; and the bank charged P500. (No entry was made on the
books when the note was sent to the bank for collection).
g. Receipts on December 31 for P24,000 were deposited on January 2
h. The following checks were outstanding on Dec. 31:
No 123 P3,000 No 154 P4,000
143 2,000 157 6,000
144 7,000 159 7,000
147 3,000 169 5,000
i. A deposit of P20,000 was recorded by the bank on December 5, but it should have been
recorded for Happee Company rather than Happy Company
j. Petty cash of P10,000 was included in the Cash in Bank balance.
k. Proceed from cash sales of P60,000 for December 18 were stolen. The company
expects to recover this amount from the insurance company. The cash receipts were
recorded in the books, but no entry was made for the loss.
l. The December 21 deposit included a check for P20,000 that had been returned on
December 15 marked NSF. Happy Company had made no entry upon return of the
check. The redeposit of the check on December 21 was recorded in the cash receipts
journal of Happy Company as a collection on account.

What is the total amount of cash should Happy Company report at year-end?
a. P73,000
b. P93, 000
c. P42, 670
d. P83, 000
7. Joshtin Company had a weak internal control structure over its cash transactions. Facts about
its cash position at November 30, 2023 were as follows:

The cash books showed a balance of P 1,890,162, which included undeposited receipts. A
credit memo of P 10,000 on the bank’s records did not appear on the books of the company.
The balance per bank statement was P 1,555,000. Outstanding checks were No. 62 for P
11,625, No. 183 for P 15,000, No. 284 for P25,325, No. 8621 for P19,071, No. 8622 for
P20,680, and No. 8632 for P14,528.

The cashier stole all undeposited receipts in excess of P 379,441 and prepared the following
reconciliation:

Balance per books, November 30, 2023 P 1,890,162

Add: outstanding checks
8621 P 19,071
8622 20,680
8632 14,528 44,279
P 1,934,441
Less: Undeposited receipts 379,441
Balance per bank, November 30, 2023 P 1,555,000
Deduct: Unrecorded credit memo 10,000
True cash, November 30, 2023 P 1,545,000

Questions:

1. How much did the cashier steal?

a. 81,590 b. 71,950 c. 61,950 d. 71,590

2. What is the correct amount of cash to be shown on the statement of financial position
on November 30, 2023?
a. 1,828,212 b. 1,448,771 c. 1,900,162 d. 1,934,441
8. Sunshine Corporation engaged your services to audit its accounts. In your examination of cash,
you find that the Cash account represents both cash on hand and cash in bank. You further
noted that there is very poor internal control over cash.
Your audit covers the period ended December 31, 2023. You made a cash count on January
15, 2024, and cash on hand on this date was determined to be P52,000. Examination of the
cashbooks and other evidences of transaction disclosed the following:
1. January 1 through 15, 2024 collections per duplicate receipts, P199,000.
2. Total of duplicate deposit slips, all dated January 2 through 15, P110,000, includes a
deposit representing collections of December 31.
3. Cash book balance on December 31, 2023 is P465,000, representing both cash on hand
and cash in bank.
4. Bank statement for December shows a balance of P424,000.
5. Outstanding checks at December 31:
November checks: Number 183 P 4,500
198 12,500
December check: Number 252 6,000
254 4,000
280 52,000
301 9,000
319 25,000
6. Undeposited collections at December 31, P48,000.
7. An amount of P19,000 representing proceeds of a customer’s note was credited by
bank, but is not yet taken up in the company’s books.
8. Bank service charge for December, P1,500.
The company cashier presented to you the following reconciliation statement at December
2023, which he prepared:
Balance per books, December 31, 2023 456,000
Add: outstanding checks Number 252 6,000
254 4,000
280 25,000
301 900
319 15,000 50,900
Total P 506,900
Bank charges (1,500)
Undeposited collections (51,000)
Balance per bank P 454,400
1. How much is the amount of Cash shortage as of December 31, 2023?
a) 121,500 b) 123,500 c) 132,500 d) none of the above
2. How much is the additional shortage in January 2024?
a) 102,400 b) 85,000 c) 58,000 d) none of the above
3. Which is to be included in the audit adjusting entries at December 31, 2023?
a) Dr: Cash 1,600 b) Cr: Cash 106,000 c) Dr: Loss 123,500 d) none of the above
9. Your client, Ozz Company, presented you with the following data:

Bank balances
November 30 P 2,500,000
December 31 3,100,000

Bank receipts in December 2,300,000

Book balances
November 30 P 2,390,000
December 31 3,047,000

Book receipts in December 2,206,000

Deposits in transit
November 30 58,000
December 31 47,000

Outstanding checks
November 30 97,000
December 31 46,000

NSF checks returned by bank (recorded by client in the

month following the return)
November 15,000
December 25,000

Bank service charges (recorded by client in the month following

the month the charge)
November 10,000
December 18,000

Note collected by bank (recorded by the client in the following month)

November 76,000
December 84,000

Erroneous bank charges (corrected by the bank in the following month)

November 30 25,000
December 31 37,000

Erroneous bank credits (corrected by the bank in the following month)

November 45,000
December 50,000

1) How much is the audit adjusted balance of receipts as of December 31?

a) 2,241,000 b) 2,214,000 c) 2,421,000 d) 2,124,000 e) none of the above

2) How much is the audit adjusted balance of disbursements as of December 31?

a) 1,576,000 b) 1,657,000 c) 1,765,000 d) 1,567,000 e) none of the above

3) Which is to be included in the audit adjusting entries for December 31?

a) Cr: Cash in Bank 19,000 b) Dr: Cash in Bank 83,000
c) Dr: Accounts Receivable 19,000 d) none of the above
10. Proof of cash; Computation of adjusted balances

The accountant for the Joshtine Company assembled the following data:

June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10,
returned by bank on July 16 marked NSF,
and redeposited immediately; no entry made
on books for return or redeposit 8,250
Collection by bank of company's 71,815 80,900
notes receivable

The bank statements and the company's cash records show these totals:

Disbursements in July per bank statement P218,373

Cash receipts in July per Joshtine's books 236,452

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:

1. How much is the adjusted cash balance as of June 30?

a. P87,565 c. P107,082
b. (P3,695) d. P 15,822

2. How much is the adjusted bank receipts for July?

a. P253,787 c. P245,537
b. P214,802 d. P232,881

3. How much is the adjusted book disbursements for July?

a. P220,767 c. P181,782
b. P212,517 d. P206,673

4. How much is the adjusted cash balance as of July 31?

a. P137,817 c. P22,513
b. P112,335 d. P120,585

5. How much is the cash shortage as of July 31?

a. P 8,250 c. P196,144
b. P71,815 d. P 0
11. You are auditing the cash in bank account of Pamela Manufacturing Company as of December
31, 2023.
Your examination revealed the following:

From the bank statement:

Balance, December 1, 2023 P 876,750
Deposits (20) 9,153,760
Check (64) plus debit memos (8,524,300)
Service charges for new checks ( 2,250)
Balance, December 31, 2023 P 1,503,960
From the company’s records:
CASH
Nov. 1 652,070 Nov. 30 CD 6,654,410
Nov. 30 CR 6,824,290 Dec. 1 – Bank reconciliation 38,400
Dec. 31 CR 9,198,720 Dec. 31 CD 8,574,610
CD – Cash disbursements
CR – Cash receipts

Your review of last month’s bank reconciliation and the current bank statement reveals the
following.
1. Outstanding checks: November 30, 2023 P254,720
December 31, 2023 335,610
2. Deposit in transit: November 30, 2023 164,220
December 31, 2023 209,180
3. Check no 359 for Office Repairs was written for P6,950 but recorded in the cash
disbursements journal as P9,650. The bank deducted the check as P6,950. The error happened
in November and is not yet recorded as of December 31.
4. A check written on the account of the Pamplona Company for P5,830 was deducted by the
bank from the Pamela’s account.
5. Included with the bank statement was debit memorandum dated December 31 for P24,750
for interest on a note(loans) taken out by the Pamela Manufacturing Company on November 30.
6. The service charge for the new checks has not been recorded.
7. The November 30 bank reconciliation showed as reconciling items a service charge of
P3,500 and a customer’s DAIF check for P34,900.

1. How much is the audit adjusted balance of Receipts as of December 31?

a) 9,198,720 b) 9,918,270 c) 9,891,720 d) 9,189,270 e) none of the above
2. How much is the audit adjusted balance of Disbursements as of December 31?
a) 8,601,610 b) 8,610,601 c) 8,601,601 d) 8,610,610 e) none of the above
3. Which is to be included in the audit adjusting entries?
a) Dr: Cash in Bank 2,700 b) Cr: Cash in bank 2,200 c) Dr: Interest expense 24,750
d) None of the above

12. Proof of cash; Identification of reconciling items and computation of adjusted balances

Your audit senior instructed you to prepare a four column proof of cash receipts and
disbursements for the month of December, 2023.

The bank reconciliation prepared by Joshtine Company at November 30 is reproduced below:

Unadjusted bank Unadjusted book

balance P96,800 balance P58,640
Add: CM - Note
Add: deposit in transit 18,000 collected 40,320
Total 114,800 Total 98,960
Less outstanding Less: DM bank
checks: charges 160
No. 276 P2,400
282 7,200
284 4,800
285 1,600 16,000 .
Adjusted balance P98,800 Adjusted balance P98,800
The December bank statement, which has a beginning balance of P96,800, is reproduced
below:

May Bank
Account Name: Joshtine Company
Date Debits Credits
December 01 P18,000
December 02 P7,200 40,000
December 04 24,000
December 06 48,000
December 08 400,000 CM83
December 10 40,000 DM97
December 11 56,000
December 16 20,000
December 18 64,000
December 21 72,400 *
December 28 36,000 80,000
December 31 4,000 DM98 64,000 CM84
Totals P131,200 P842,400
DM97 – Customer’s DAIF check CM83 – Note collected by the bank
DM98 – Service Charges CM84 – Account collected by the bank

The company’s cash receipts and cash disbursements journals for the month of December 2023
are provided below:

Cash Receipts Journal Cash Disbursements Journal

Date OR No. Amount Date Check No. Amount
Dec. 01 415 P40,000 Dec. 01 286 P16,000
05 416 48,000 03 287 24,000
10 417 56,000 10 288 32,000
17 418 64,000 14 289 20,000
20 419 72,000 20 290 28,000
27 420 80,000 23 291 36,000
31 421 88,800 26 292 40,000
28 293 44,000
. 31 294 48,000
Total P440,800 Total P304,000

The company’s Cash in Bank ledger appears below:

Cash in Bank
Balance P58,640 12/31/2023 CDJ P304,000
12/01/2023 GJ 40,320
12/17/2023 GJ 400,000
(CM83)
12/31/2023 CRJ 440,800

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:

1. How much is the outstanding checks as of December 31, 2023?

a. P208,000 c. P216,800
b. P232,800 d. P224,000
2. How much is the adjusted book receipts for December, 2023?
a. P913,200 c. P904,800
b. P985,200 d. P771,600

3. How much is the adjusted book disbursements for December, 2023?

a. P347,840 c. P348,000
b P332,000 d. P339,200

4. How much is the adjusted cash balance as of December 31, 2023

a. P664,000 c. P688,800
b. P680,000 d. P672,800

5. How much is the cash shortage as of December 31, 2023?

a. P24,240 c. P23,840
b. P15,840 d. P 0