PrE2 CHAPTER 2 Audit of Cash PDF

 

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS Learning Objectives:   Understand the internal control procedures over cash receipt.   Identify misstatements which may not be discovered as a part of the audit

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of the bank reconciliation.   Design and perform audit tests of the general cash account.   Design and perform audit tests of the imprest fund system.   Know and apply the auditor’s principal objectives in the audit of cash.  cash.  

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2.1 Introduction For financial statement purposes, purposes , the account title “Cash” refers only to  to   cash items that are unrestricted and immediately available for use in current operations. In a properly classified statement of financial position, “Cash” is normally presented as the first in the current assets section. Although cash may not represent a significant amount compared to total assets in the statement of financial position, more audit time is devoted to the examination of cash balances because cash has a high degree of inherent risk. Furthermore, most financial statement items flow through the cash count.

2.2 Audit Objectiv Objectives es In the audit of cash, the auditor’s principal objectives are to:  to:  

  Obtain an understanding of internal control procedures adopted by the company to safeguard cash;   Establish the existence of the recorded amount of cash;   Establish the completeness of recorded cash;   Determine that the client has rights to recorded cash; o f cash is appropriate. appropriate.   Establish that the presentation and disclosure of

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2.3 Internal Control Over Cash The auditor should consider control over cash transactions to determine the extent of audit procedures to be performed. An important element of cash control is the segregation of the custodian function from the record keeping function. In addition, restricting the number of individuals involved in cash transactions and limiting the duties handled by the person in charge of cash transactions limit the fraudulent activities involving cash.

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Control over cash receipts should provide assurance that cash which should have been received was in fact received, recorded correctly and deposited promptly. The basic principle is that no one person should be allowed to collect, handle or transport and deposit cash without additional control feature to ensure that all funds are accounted for. Internal control procedures over cash receipts include the following: a.  No one person should be assigned the function of cash handling and record keeping. b.  Official receipts must be pre-numbered and sequentially used. c.  Deposit each day’s day’s cash receipts intact.  intact.  d.  Deposits should be matched with official receipts. e.  Deposits should be reconciled with the recorded cash receipts. The person making the reconciliation should not be the same person making the deposit. f.  Cash sales should be recorded at the point of sale (point of sale system). g.  The function of cash handling should be segregated from the record keeping. h.  Cash register totals and credit card machines should be balanced daily. Any resulting cash shortage or overage should be monitored. Control over cash disbursement should provide assurance that disbursements are made only for authorized business purposes and are properly recorded. Internal control procedures for cash disbursements include the following: a.  All disbursements must be properly authorized and accompanied by adequate documentation. The adoption of the vouchers system, which requires review of supporting documents as support for disbursements, is highly recommended. b.  Payments must be made by checks, electronic fund transfer, or from petty cash fund. c.  Issued checks must be sequentially numbered. d.  Checks should be signed by at least two persons to prevent fictitious disbursements. e.  The check signing must be vested in persons at appropriately high levels in the organization. f.  Check issued must be payable to specific entities (company or person) and must not be made payable to “Cash”.  “Cash”. 

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g.  Bank statements and canceled checks received must be reconciled by a person independent of the authorization and check signing function. To see to it that all deposit and disbursement are properly made and recorded, a bank reconciliation must be made, at least once a month. The reconciliation also monitors received and checks paid. the correctness of the bank’s record of deposits

2.4 Audit Procedure  The auditor has to trace the opening balance of cash to prior year’s   financial statements, or for repeat engagement, prior year’s working papers. For first time audit, the auditor may need to obtain copies of the bank reconciliations at the close of the prior year. Reconciling items listed should be traced to bank statements for the subsequent months. The auditor’s tests of control of cash receipts help determine that cash payment intended for the company are received, are properly and promptly recor ded, ded, and are promptly and properly deposited in the company’s bank account. Test of controls related to cash receipts include a.  Footing cash receipts records; b.  Testing the postings of cash receipts to ledgers; c.  Comparing recorded receipts with bank statements; d.  Comparing deposit slips with recorded receipts; and e.  Comparing recorded receipts with the details in the official receipts. Details in the official receipts for cash collections from customers must be matched with the credit postings to the customers’ subsidiary sub sidiary ledgers. Such detailed tracing may uncover lapping, a fraud referring to misappropriation of collections from customers, delaying its recording and posting the subsequent collections to the account of the customer who previously made the payment. (example: Collection from customer A is misappropriation by the cashier, subsequent collection from customer B is posted to Customer A, and part or full collection from customer C is credited to the account of Customer B, and so on.) lapping is most likely to occur when an employee receiving collections from customers has access to the accounts receivable records. The auditor’s test of control related to cash disbursements helps the auditor determine that all cash disbursements are properly authorized and made only for goods and services that are actually received. These tests include:

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a.  Proving the footings of cash disbursements journal or check register; b.  Tracing the totals to the general ledger; c.  Comparing checks returned with the entries in the cash disbursements  journal or check register; and d.  Reconciling recorded disbursements with bank statements. Ledger posting of cash receipts and cash disbursements must be reviewed to spot unusual entries that may require special investigation. Using a standard bank confirmation form, the auditor must request confirmation for each bank account. Bank confirmation provides evidence in respect of existence, ownership, and accuracy of cash balances. The bank confirmation request must be in the auditor’s letterhead and an d must be sent to all banks where the client has dealings. The request should be clear and concise. The request must include confirmation of demand deposits, saving deposits, certificate of deposits and information on compensating balances. The following types of information may also be sought from the confirmation: bank balances with corresponding account numbers, description of currency, loans from the bank, collateral provided on loans, maturity and interest rates on loans, terms and repayment conditions of loans, contingent liabilities such as guarantees and endorsements. Copies of the bank confirmations must be retained in the working papers. The replies should be sent direct to the auditor who should enclose a selfaddressed prepaid envelope. If the financing institution failed to reply in the first confirmation request, a second confirmation request must be mailed, if necessary. In instances when the amount indicated in the confirmation request returned by the bank does not agree with the ledger balance or when repeated non-responses are obtained from the financing institution, the auditor shall obtain copies of the bank reconciliation prepared by the client. The auditor has to test the clerical accuracy of the reconciliation and the details of the supporting schedules. The extent and nature of the reconciling items must be reviewed for reasonableness. Reconciling items listed in the bank reconciliation must be verified by obtaining cutoff bank statements. Deposits in transit and outstanding checks must be traced in the cutoff c utoff bank statement noting reasonableness of the time period between book recording and bank recording. Cancelled checks returned with the cutoff bank statement must be traced to the list of outstanding checks. Large or unusual outstanding checks must be investigated.

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The auditor shall consider preparing a proof of cash when there is reason to believe that a client’s employee or officer perpetrates misappropriation. A proof of cash is a reconciliation of the beginning and ending balances of cash, cash receipts and cash disbursements during a specific period. The purpose is to obtain an understanding of how the client and the bank recorded the transactions affecting cash balance during the period. If the client maintains cash accounts with at least two separate banks, a bank transfer schedule shall be prepared showing transfer of cash balances from one bank to another, specially towards the end of the reporting period. Manipulation causing an amount of cash to be included simultaneously in the balance of two or more bank accounts is referred to as kiting. Kiting is an attempt to temporarily conceal a cash shortage at month end by issuing a check from one bank and depositing it to another. another. The deposit deposit is reflected reflected in the latter latter account, but the withdrawal may not be reflected yet in the first bank account due to clearing cutoff. For example, a fund transfer to Bank B at December 31 should be reflected as a withdrawal from say, Bank A on the same date. A fund transfer posted as a deposit to Bank B, without reflecting it as a disbursement from Bank A may indicate that kiting may have occurred. To validate existence of cash on hand, the auditor shall conduct a cash count. The count must be conducted in the presence of the cash custodian. The custodian must be present throughout the count. The auditor must obtain the signature of the custodians certifying that the fund was returned intact. The count of the cash on hand balances and the count of other highly liquid instruments must be made simultaneously to avoid any transfer of funds to temporarily conceal cash shortage. The auditor has to determine whether cash balances are appropriately presented on the face of the financial statements and all other relevant information relating to cash is disclosed in the notes to the financial statements. Any liens on cash balances, restrictions as to withdrawal and required compensating balances must be considered in determining whether the presentation of cash in the financial statements and the disclosures in the notes are appropriate.

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2.5: Illustrative Illustrative Problem: Cash Count The following were found in the petty cash box upon conducting a cash count of the petty cash fund at 9:00 am on January 4, 2020: Bills and Coins Denomination Number of pieces P1,000.00 500.00 100.00 20.00 5.00 1.00 Checks: Date 12/20/19 12/29/19 12/29/19 01/15/20

5 2 4 3 2 8

Drawer Jose, employee X Company, customer Juan, employee Jose, employee, cashed January 3, 2020

IOU representing loans to A. Bautista, an employee Vouchers: Date 12/15/2019 12/18/2019 12/27/2019 01/03/2020 01/04/2020

Voucher No. 88 89 90 91 92

Amount 1,200 8,000 2,000 4,800 3,000

Particulars Office supplies Transportation Freight on merchandise sold Transportation Representation

4,050 2,065 2,250 450 670

Unused office supplies, estimated at

1,200

Unsigned pay envelope payable to Dante Sison, an employee on leave, previously recorded as disbursed. (opened with no money inside)

2,000

The check from X Company represents an unrecorded collection on account. It was turned over by Cristina Sanchez, the petty cashier, to the general cashier on January 5, 2020.

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The petty cash fund has an imprest balance of P25,000. Required: a.  Prepare a cash count sheet for ABC Company as of January 4, 2020. b.  Prepare all the necessary audit adjusting entries as a result of the foregoing. Solutions: ABC Company Cash Count Sheet January 4, 2020 Bills and Coins Denomination P1,000.00 500.00 100.00 20.00 5.00 1.00 Checks: Date: 12/20/19 12/29/19 12/29/19 01/15/20

Number of pieces 5 2 4 3 2 8

Drawer Jose, employee X Company, customer Juan, employee Jose, employee, cashed December 12, 2020

IOU representing loans to A. Bautista, an employee Paid Petty Cash Vouchers: Date: Voucher Particulars No. 12/15/2019 88 Office supplies 12/18/2019 89 Transportation 12/27/2019 90 Freight on merchandise sold 01/03/2020 91 Transportation 01/04/2020 92 Representation

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Amount P5,000.00 1,000.00 400.00 60.00 10.00 8.00

P6,478.00

Amount P1,200 8,000 2,000 4,800

16,000.00 3,000.00

Amount P4,050 2,065 2,250 450 670

9,485.00

 

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Unused office supplies, estimated at Total per count

1,200.00 P36,163.00

Cashier’s accountability accountability Petty cash fund Collection on account, X Company

P25,000.00 8,000.00

Unused office supplies Unreleased payroll

1,200.00 2,000.00

Cash Shortage

36,200.00 P37.00

I hereby certify that the above funds in the amount of thirty thir ty six thousand one hundred sixty three pesos were counted in my presence by (name of audit staff0, representative of (name of accounting firm) and were returned to me intact. There are no funds for which I am accountable to ABC Company, except as noted above. Signed Cristina Sanchez

Audit Adjusting Entries: a. Miscellaneous Receivables Receivables –   –  employees Office supplies expense Transportation expense Freight out Cash shortage Petty cash fund

7,800 4,050 2,065 2,250 37

b. Unused supplies

1,200

16,202

Supplies expense

1,200

c. Cash in bank Accounts receivable

8,000

d. Cash in bank Salaries payable

2,000

8,000

2,000

Important Notes:   The cash count must be conducted all throughout in the presence of the cash custodian. The auditor has to obtain certification from the custodian that the •

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funds were counted in his/her presence and they were returned to him/her intact.

  Items listed as counted shall consist of (a) bills and coins representing undisbursed funds or other funds and collections received (b) checks representing disbursements from petty cash funds for which no vouchers were

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approved signed such by the payees; (c)from checks representing handled byand the cashier, as collections customers; (d) paidother pettyfunds cash vouchers with appropriate invoices evidencing payment out of the petty cash fund; (e) IOUs with no supporting approved petty cash vouchers and (f) any unconsumed items for which payments were evidenced by petty cash vouchers.

  Included in the cashier’s accountability are (a) petty cash fund (at the imprest balance); (b) other funds for which the cashier is accountable; and (c) any unused items, payment of which is evidenced by counted petty cash vouches. The unused supplies are included in the count to serve as basis for the adjustment for prepaid expenses. As such, unused supplies are also included in

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the cashier’s accountability, to offset its double inclusion in the in  the count. c ashier’s r’s accountability in cash overage. ov erage.   An excess of items counted over the cashie Any deficiency is cash shortage. Based on the client’s policy, the cash shortage is reclassified either as a receivable from the custodian or other operating expenses. Any unaccounted cash overage is miscellaneous income. Preferably, the bills and coins equal to the amount of the cash overage have to be taken out of the fund. The auditor may suggest that such be deposited to the general cash account of the company. This procedure will bring the actual cash and other disbursed items to the imprest balance in the petty cash fund and will provide a basis for documenting the cash overage.

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non-cash items in the petty cash fund are reclassified and charged to   All appropriate expense or receivable accounts. Examples are IOUs and postdated checks from customers, which are reclassified as receivables, and paid petty cash vouchers, which are charged c harged to the appropriate expense and other accounts. Paid petty cash vouchers that are dated subsequent to the end of the reporting period are still cash items as of the balance sheet date, as disbursement are made subsequent to the balance sheet date.

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  Any unrecorded collections require adjustments to reflect the collections int eh year under audit (entry c). Likewise, any unreleased payment, for which entries were previously made, shall be reverted to the cash balance (entry d).

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In the foregoing illustration, the correct Petty Cash Fund at December 31, 2019 is P8,798 (which is P25,000 minus P16,202). This balance is composed of the following cash items counted: Bills and coins as of January 4 Checks dated December 2019

P6,478 11,200

Petty cash vouchers dated January 2020 (undisbursed as of December 31) Total cash items Collections from customers (for deposit) Unreleased salaries (must be returned to payroll envelope) Petty cash fund, per audit

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1,120 P18,798 (8,000) (2,000) P8,798

 

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

2.6 Illustrative Problem: Audit of Cash and Related Accounts using the Bank Reconciliation Statement  The following example illustrates the preparation of a bank reconciliation and the required adjusting entries for the Bulacan Corporation for the month ended June 30, 2020. The unadjusted cash balances are as follows: Cash balances per bank statement, June 30, 2020 Cash balance per company records, June 30, 2020

P249,223.00 248,758.80

The bank statement disclosed the following information: 1.  A customer note for P24,000 plus P240 interest was collected on June 30, 2020. 2.  A customer check for P2,762.80 was returned because of insufficient funds (NSF checks). 3.  The month service charge was P300. A review of the company records disclosed the following: 1.  A deposit for P22,857.40 mailed to the bank on June 29, 2020 did not appear on the bank statement. 2.  Customer checks totaling P6,548.00 were on hand at the end of June awaiting deposit. 3.  The following company checks were outstanding at the end of June: #862 P1,923.80 #864 2,943.60 #865 5,265.00 4.  Check #843 written for P1,824.00 in payment of creditor account and included with the cancelled checks in the bank statement has been erroneously recorded ad P384.00 in the company records. Required: a.  Illustrate a bank reconciliation based on the foregoing data. Solutions: BANK RECONCILIATION BULACAN CORPORATION BANK RECONCILIATION JUNE 30, 2020 Balance per bank statement Add: Deposit in transit Check on hand

P249,223.00 P22,857.40 6,548.00

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29,504.40 P278,628.40

 

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

Deduct:

Outstanding checks #862 #864 #865 Adjusted cash balance

1,923.80 2,943.60 5,265.00

Balance per company records Add: Note collected by bank Interest on note

10,132.40 P268,496.00

P248,758.8 24,000.00 240.00

Deduct:

Bank service charge NSF check returned Error in recording check #843 Adjusted cash balance

P300.00 2,762.80 1,440.00

24,240.00 272,998.80

4,502.80 P268,496.00

Upon completion of the reconciliation, adjusting entries must be prepared to record those items not previously included in the company records. The following adjusting entries should be prepared: 1.

Cash

24,240.00 Note receivable (note collected) Interest revenue (interest collected)

2.

Miscellaneous expense (bank service charge) Accounts receivable (NSF check) Accounts payable (error) Cash

24,000.00 240.00 300.00 2,762.80 1,440.00 4,502.80

These entries adjust the cash amount to P268,496.00, the amount that would appear as the Cash Balance (along with any petty cash) on the June 30, 2020 statement of financial position.

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2.7 Illustrative Problem: Proof of Cash  To illustrate the preparation of the proof of cash, assume the following information for Pepe Corporation for the months of November and December 2019: Balance per company’s ledger   November 30 December 31

P520,000 700,000

Total debits to cash per company’s book (recorded receipts) during December

2,500,000

Total credits to cash per company’s book (recorded disbursements) during December

2,320,000

Bank balance November 30 December 31

537,400 678,200

December receipts recorded by bank during December

2,474,400

December disbursement recorded by bank during December

2,333,600

Deposits in transit November 30 December 31

160,000 225,000

November 30 December 31

143,000 118,000

Bank service charges (recorded by the depositor in the month following the month of charge) November December

1,200 800

Bank credit memo for customer’s note collected by bank in November (face value P60,000 plus interest of P600), recorded by the company only in December

60,600

Bank credit memo for proceeds of bank loan granted by the bank on December 31

100,000

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Customer’s DAIF check returned by the bank (recorded by the company for the following month) Returned in November Returned in December

25,000 14,000

Solution  –  Proof  Proof of Cash Pepe Corporation Proof of Cash November 30 –  30 –  December  December 31, 2019 December Nov. 30 Receipts Disbursement Unadjusted bank balance P537,400 P2,474,400 P2,333,600 Deposit in transit November 30 160,000 (160,000) December 31 225,000 Outstanding checks November 30 (143,000) (143,000) December 31 118,000

(118,000)

Adjusted balances, per bank

P554,400

P2,539,400

P2,308,600

P785,200

Unadjusted book balances Bank service charges November December Bank credit memo in November for customer’s note collected by bank Bank credit memo in December for proceeds of bank loan granted on December 31 Customers’ DAIF checks returned by bank: November December Adjusted balances, per book

P520,000

P2,500,000

P2,320,000

P700,000

(1,200) 800

(800)

(1,200)

60,600

225,000

(60,600)

100,000

(25,000) P554,400

Dec. 31 P678,200

P2,539,400

100,000

(25,000) 14,000 P2,308,600

(14,000) P785,200

Notice of the following in the proof of cash: a.  Deposits in transit at November 30 understate the November 30 bank balance. The bank recorded the same as receipts in December, so the December receipts were overstated. As such, November 30 deposits in transit are added to November 30 bank balance and deducted from December bank receipts.

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b.  The bank has not yet taken up deposit in transit at December 31, so the December recorded receipts and December 31 bank balance were both understated. To reconcile, these December 31 deposits in transit must be added to December receipts and to December 31 bank balance. c.  The bank recorded outstanding checks at November 30 only in December, overstating the November 30 balance and the December disbursements. These November 30 outstanding checks should, therefore, be deducted from both November 30 bank balance and December disbursement per bank. d.  The bank has not yet recorded outstanding checks at December 31, so the December disbursements were understated and the December 31 balance was overstated. Therefore, in the proof of cash, December 31 outstanding check must be added to December bank disbursements and deducted from December 31 bank balance. e.  The company recorded bank service charge in November and the customers’ DAIF checks returned by the bank in November as disbursement in December, overstating both the November 30 balance and the December disbursements per books. Both are, therefore, deducted from both November 30 book balance and December book disbursements. f.  The service charge in December and the customers’ DAIF checks returned in December have not yet been taken up by the company as of December 31, understating the book disbursements in December and overstating the December 31, book balance. Both should be added to the December book disbursements and deducted from the December 31 balance. g.  Bank credit memo in November was recorded by the company as a debit to cash account only in December, so it was a recorded December receipt, although the collection was actually made by the bank in November. This makes the November 30 balance per books understated and the December receipts overstated. Thus, the November 30 bank credit memo should be added to the November 30 book balance and should be deducted from the December receipts per books. h.  The bank credit memo on December 31 has not yet been taken up in the company’s book as of December 31, as the company may  may   not have been informed by the bank until later. The recorded receipts receipts per company’s books and the December 31 book balance are both understated. To reflect the correct transaction and December 31 balance, this December bank credit

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memo should be added both to the December receipts per books and to the December 31 book balance. The last column in the book reconciliation serves as the reference in preparing the adjusting entries to bring the Cash in Bank account to its correct balance. The following are the adjusting entries on December 31 to bring the Cash in Bank account of Pepe Corporation to its correct balance: Miscellaneous expenses (or bank charges) Cash in Bank December bank service charge

800

Cash in Bank Notes Payable –  Payable –  bank Bank loan granted by the bank

100,000

Accounts receivable Cash in bank

14,000

800

100,000

14,000

Customers’ DAIF checks returned in December

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Multiple Choice 1.

The person responsible, at all time, for the amount of the petty cash fund is the a. Chairman of the Board of Directors b. President of the company c. Petty cash custodian d. General cashier

2.

The following are appropriate appropriate procedures for controlling the petty cash fund, except a. To monitor variations in different different types types of expenditures, the p petty etty cash custodian files petty cash vouchers by category of expenditure after replenishing the fund. b. To replenish replenish the fund, the general cashier issues a company check to the petty cash custodian, rather than cash. c. To determine determine that that the the fund fund is being accounted for satisfactorily, satisfactorily, surprise counts of the fund are made from time to time t ime by the internal auditor or other responsible official d. Each individual to whom petty cash is paid is required required to present signed receipts to the petty cash custodian.

3.

The objective of establishing a petty cash fund is to a. Cash checks for employees b. Account for all cash receipts and disbursements c. Account for cash sales d. Facilitate payment of small, miscellaneous items

4.

What is the effect of not replenishing the petty cash at year-end and not making the appropriate adjusting entry? a. A detailed audit is essential b. The petty cash custodian custodian should turn over the petty cash to the general cashier c. Cash will be overstated and expenses understated d. Expenses will be overstated and cash will be understated. understated.

5.

The auditor would perform the following procedures to verify the unrecorded check, except a. Obtain cutoff bank statement b. Examine checks returned returned with previous month bank bank statement. c. Trace check number number to absence in previous previous month cash disbursement journal and recording in current month.

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d. Examine supporting documentation. 6.

A proof of cash used by an auditor a. Provides that the client’s year -end -end balance of cash is fairly stated. b. Confirms that the client client has properly separated the custody function from the recording function with respect to cash. c. Validates that the client’s bank did not make an error during the period being examined. d. Determines whether any unauthorized disbursements or unrecorded deposits were made for the given time period.

7.

A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital? a. Simultaneous confirmations b. Simultaneous bank reconciliation c. Simultaneous verification d. Simultaneous surprise cash count

8.

In reimbursing the petty cash fund, which of the following is true? a. Cash is debited b. Petty cash debited c. Petty cash credited d. Expense account are debited

9.

The best evidence regarding year-end bank balances is documented in the a. bank reconciliation b. Interbank transfer schedule c. Cash in bank lead schedule d. Cutoff bank statement

10. When counting cash on hand, the auditor must exercise control over over cash and other negotiable assets to prevent a. Theft b. Deposit in transit c. Substitution d. Irregular endorsement

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Problem 2.1  Ganda Kho is the cashier of the Luzon Glass Company. As representative of the Santos Tan and Associates, CPAs, you were assigned to verify her cash on hand in the morning of January 4, 2020. You began to count at 9.00 am in the presence of Miss Kho. 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: 9 one hundreds, 25 fifties, 50 twenties, 120 tens Coins: P5.00 1.00 0.25 0.10 0.05 Checks: Maker

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4 rolls 8 rolls 2 rolls 3 rolls 2 roll

and and and and

5 loose 15 loose 2 loose 40 loose

(50 pieces to a roll) (100 pieces to a roll) (500 pieces to a roll) (500 pieces to a roll) (400 pieces to a roll)

Date

Payee

Rose Manalo, Asst. Mngr. 12/23/19 Miss L. Reyes, Cashier 12/26/19 IOUs A.  David, Janitor R. Tirao, Clerk Pedro Munar, Bokkeeper

Luzon Glass Co. Luzon Glass Co.

Amount P600 400

12/20/19 12/22/19 12/24/19

P350 250 150

Petty Cash Voucher for Replenishment Payee Date L. Cruz, Messenger 12/16/19 Rosario & Co. 12/18/19

Account Charged Amount Advances to Employees P100.00 Supplies 145.00

Victory Liner Bureau of Posts (stamps) A.  Vallo, Carpenter B.  Tello

12/18/19 12/18/19 12/20/19 12/21/19

Freight-in Supplies Repairs Miscellaneous Expense

182.50 300.00 450.00 154.00

Your investigation also disclosed the following: 1.  The balance of petty cash fund per books is P9,000. P 9,000. 2.  Cash sales of January 2, 2020 amounted to P8,650 P 8,650 per sales records, while cash receipts book and deposits slip showed that only P7,650 was deposited in the bank on January 3, 2020. 3.  The following employees’ pay envelopes have been opened and the money removed. Each envelope was marked “unclaimed”  “unclaimed” 

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N. Roy G. Gloria

P332.50 247.50

REQUIRED: Show your solution on space provided. 1.  Prepare working papers showing your cash count. 2.  Prepare necessary adjusting entries without explanation as of December 31, 2019. 3.  Determine the amount at which the Petty Cash Fund will be stated in the statement of financial position as of December 31, 2019.

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Problem 2.2  The following information has been extracted from the accounting records of the Oracle Corporation: 1. Cash on hand (undeposited sales receipts) P1,020 2. Certificates of deposit 25,000 3. Customer’s note receivable  receivable  1,000 4. Reconciled balance in First Standard Bank checking account (350) 5. Reconciled balance in Prime National Bank checking account 9,350 6. Balance in Rural Bank savings account 8,560 7. Customer’s postdated check   1,350 8. Employee travel advances 1,600 9. Cash in bond sinking fund 1,200 10. Bond sinking fund investments 8,090 11. Postage stamps 430 REQUIRED: Show your solution on space provided. 

Determine the balance in Oracle’s Cash account. account. 

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

Problem 2.3 Your audit of the Cash account of o f Leila Corporation reveals the following information: 1.

2.

Savings account of P1,500,000 and commercial checking account of P800,000 with Metropolitan Bank and Trust Company. balances were taken from Leila’s general ledger.  ledger.  Three certificates of deposit deposit with with Metro Metro Bank, Bank, each totaling P1,000,000, with maturity dates of 90 days and less.

3.

Money market placements placements with Axa Axa Group Group of Companies, not intended intended to be terminated until 2022, P3,000,000 face amount. Last value date was December 29, 2019; on which date, cumulative income earned on the instrument is P200,000.

4.

Checking account with Allied Bank for payroll fund, P1,200,000 and and another checking account for tax fund, P500,000.

5.

A check for P35,000 for salaries salaries of an employee on leave was recorded recorded as as disbursed on December 15; the employee has not claimed the check as of December 31.

6.

Savings account account with with Allied Allied Bank, P900,000 P900,000 as equipment acquisition fund, P480,000 of which was earmarked for an equipment to be delivered in March 2020. You were able to verify that this amount was actually disbursed in March 2020.

7.

Petty cash fund, with with imprest imprest balance balance of P20,000. Your count of the fund on January 4, 2020 revealed the following fund composition: Bills and coins, P12,000; paid petty cash vouchers, all dated December 2019, P6,800; IOUs from employees, with no supporting petty cash vouchers, P1,200; and a check drawn against MetroBank checking account in the amount of P5,300 covering Meralco bill for the period November 29 to December 29, 2019.

8.

Checks from customers in in settlement settlement of account, account, both on sales invoices for for the month of December 2019, totaling P85,000. The checks were verified to have been recorded in the December cash receipts journal, although one check for P25,000 was dated January 8, 2019. All the checks proved to be good when subsequently deposited.

Required: Show your solution on space provided  provided  a. Prepare all the necessary audit adjusting entries as a result of the foregoing. b.

Determine the amount that will be reported as “Cash and Cash Equivalents” on the December 31, 2019 statement of financial position.  position. 

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

Problem 2.4  In auditing the books of Sta. Monica, Inc. for 2019. You find that a petty cash fund of P20,000 is maintained on the imprest basis, but the company has failed to replenish the fund on December 31. Replenishment was made and recorded in January 15, 2020 when a check for P18,500 was drawn to petty cash for expenses paid. Your analysis discloses that P10,500 had been spent out of petty cash in 2019.   2019. Required: Show your solution on space provided.  a. What adjustment would you propose relating to the above? b. What amount of Petty Cash Fund Fund should be shown as as part part of Cash at December 31, 2019?

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

Problem 2.5  The December 31, 2019 bank statement for Gu-wa-poh Corporation showed a P2,049.25 balance. On this date the company’s Cash account reflected a P325.60 overdraft. In reconciling these amounts, the following information is discovered: 1.  Cash on hand for undeposited sales receipts, December 31, 2019, P130.25. P130.2 5. 2.  Customer NSF check returned with bank statement, P420.40. 3.  Cash sales of P640.25 for the week ended December 18, 2019 were recorded on the books. The cashier reports this amount missing and it was not deposited in the bank. 4.  Note receivable of P2,500 and interest of P25 collected by the bank and not recorded on the books. 5.  Deposit in transit December 31, 2019, P350.00 6.  A customer check for P290.40 in payment of its account was recorded on the books at P940.20 7.  Outstanding checks, P2,040.55. includes a duplicate check of P70.85 to G. Violet, who notified Gu-wa-poh that the original was lost. Gu-wa-poh stopped payment on the original check and has already adjusted the cash account in the accounting records for this amount. REQUIRED: Show your solution on space provided  provided  1.  Prepare a December 31, 2019 bank reconciliation for Gu-wa-poh Corporation. 2.  Prepare any journal entries necessary by Gu-wa-poh Corporation to record the information from Requirement 1.

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

Problem 2.6  The cash account of Kyut Mei Company shows the following activities: Date Debit Credit Balance Nov. 30 Balance P115,000 Dec. 2 November bank charges P50 114,950 4 November bank credit for notes receivable collected P10,000 124,950 15 NSF check 1,300 123,650 20 Loan proceeds 48,500 172,150 21 December bank charges 60 172,090 31 Cash receipts book 707,300 879,390 31 Cash disbursement book 408,000 471,390 CASH BOOK Date Dec 1 2 3 4 5 8 9 10 11 12 15 16 17 18 19 22 23 23 23 26 28 28 29 29 29 TOTALS

Receipts OR No. 110-120 121-136 137-150 151-165 166-190 191-210 211-232 233-250 251-275 276-300 301-309 310-350 351-390 391-420 421-480 481-500 501-525 526-555 556-611 612-630 -

Amount P11,000 21,300 20,000 56,000 39,000 66,000 88,000 77,000 21,000 30,000 55,000 8,000 19,000 9,000 17,000 21,000 32,000 74,000 5,000 38,000 707,300

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Payments date Check No. Amount 801 P2,000 802 3,000 803 1,000 804 3,000 805 12,000 806 19,000 807 26,000 808 30,000 809 61,000 810 7,000 811 8,000 812 16,000 813 20,000 814 22,000 816 36,000 817 11,000 818 50,000 819 7,000 820 4,000 821 3,000 822 12,000 823 13,000 824 29,000 825 2,000 826 11,000 P408,000

 

CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

Date Dec. 1 2 3 4

BANK STATEMENT Check No. Charges 792 P2,500 802 3,000 804 3,000

Credits P8,500 11,000 21,300 20,000

5 8 9 10 11 12 15 16 17 18 19 22

EC 805 CM 16 799 DM 57 808 803 809 DM 61 813 CM 20 815

81,000 12,000 7,050 1,300 30,000 1,000 61,000 60 20,000 6,000

81,000 95,000 12,000 154,000 77,000 21,000 85,000 8,000 19,000 48,500 -

23 23 23 26 28 28 29 29 29 TOTALS

816 811 801 814 818 DM 112 821 CM 36 820

36,000 8,000 2,000 22,000 50,000 120 3,000 4,000 P353,030

47,000 32,000 74,000 5,000 12,000 P831,300

Additional Information: a.  DMs 61 and 112 are for service s ervice charges. b.  EC is error corrected. c.  DM 57 is for an NSF check. d.  CM 20 is for loan proceeds, net of o f P150 interest charges for 90 days. e.  CM 16 is for the correction of an erroneous November bank charge. f.  CM 36 is for customers’ note no te collected by bank in December.  December.  g.  Bank balance on December 31 is P592,270. REQUIRED: Answer the following and show your solution. 1.  Prepare a proof of cash.

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

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CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS

Problem 2.7  In your year-end audit of Marikit Corp., the cashier showed a cash accountability of P12,000 as at December 31, 2019. Selected transactions of the corporation for 2019, in summary from follows: Accounts written off Depreciation of fixed assets Disbursement for cost and expenses Income tax accrued Payment of bank loan Subscription receivable Subscribed share capital Proceeds from short-term bank loan Purchases of fixed assets Sales (80% collected in 2017)

P 5,000 30,000 750,000 10,000 40,000 300,000 900,000 100,000 450,000 700,000

REQUIRED: Answer the following and show your solution. 1.  Determine the correct cash accountability at December 31, 2019.

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