ACREV 426 – AUDIT OF CASH AND CASH EQUIVALENT AP-02

INTERNAL CONTROL OVER CASH TRANSACTIONS

1. Centralize receiving of cash as much as possible.
2. Separate cash handling from record keeping.
3. Do not permit any one employee to handle a cash transaction from beginning to end.
4. Record cash receipts immediately.
5. Official receipts, sales invoices, and other forms should be serially numbered by the printer and kept in safe
custody.
6. Encourage customers to obtain receipts and observe cash register totals.
7. Deposit each day’s cash receipts intact.
8. Make all disbursements, with the exception of small expenditures from petty cash.
9. The imprest fund method of petty cash fund should be used.
10. Have monthly bank reconciliations 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.

AUDIT WORKING PAPERS FOR CASH

1. Lead schedule
2. Bank reconciliation
3. Proof of cash
4. Cash count sheets
5. Bank confirmations

Figure 1: Lead Schedule

ACREV 426 Corporation

Cash and Cash Equivalents
12.31.23

Particulars WP Per Books Debit Per Audit Prior Year’s

Ref 12.31.23 (Credit) Adj 12.31.23 Balance
Petty Cash Fund A1 10,000 (500) 9,500 7,200
Revolving Fund A2 50,000 - 50,000 48,000
Cash in Bank – BPI A3 300,000 (15,000) 285,000 150,000
Current
Cash in Bank – BPI A4 200,000 - 200,000 220,000
Payroll
560,000 (15,500) 544,500 425,200

To WBS

Prepared by: LQB 1/15/23

Reviewed by: AFS 1/20/23 A

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ACREV 426 – AUDIT OF CASH AND CASH EQUIVALENT AP-02
AUDIT PROCEDURES FOR CASH
Auditor ordinarily will desire high level of assurance in relation to cash
Auditor will generally use a test of balances approach
A. Existence and Occurrence
 Count all cash on hand simultaneously
 Follow up the subsequent dispositions of items included in the count.
 Obtain or prepare bank reconciliations as of balance sheet date.
 Trace all bank transfers for the last week of the audit year and first week of the following year.
 Confirm bank deposits and loan balances and other arrangements with bank.
B. Rights and Obligations
 Investigate any checks representing large or unusual payments to related parties or checks made to cash or
bearer.
C. Completeness
 Prepare a proof of cash.
 Verify cash receipts and deposits during the test period.
 Verify cash disbursements during the test period.
 Obtain a cut-off bank statement directly from the bank.
D. Valuation
 Verify existence of cash in banks under receivership, cash subject to court’s restraining order, in foreign
banks and in foreign currency.
E. Presentation and Disclosure
 Evaluate proper financial statement presentation and disclosure of cash.

MULTIPLE CHOICE – THEORY

1. The general cash account is considered a significant account in almost all audits:
A. Where the ending balance is material
B. Even when the ending balance is immaterial
C. Except those of not-for profit organization
D. Where either the beginning or ending balance is material
2. The primary audit objective for cash is to establish that the balance is properly stated. This involves determining:

A B C D
That cash in hand is shown in the general ledger is represented by
currency and coins on hand Yes Yes Yes Yes
Ownership and proper accountabilities No Yes No Yes
That cash balances are available without restrictions No Yes Yes No

3. An auditor for a large service company is performing an audit of the company’s cash balance. The auditor is
considering the most appropriate audit procedure to use to ensure that the amount of cash is accurately
recorded on the company’s financial statements. The most appropriate audit procedures for the objective are:
A. Examine bank reconciliations, confirm bank balances, and verify cut off of receipts and disbursements,
foot totals of reconciliations and compare to cash balances
B. Review collections procedures and perform an analytical review of accounts receivable; confirm
balances of accounts receivable; and verify the existence of appropriate procedures and facilities

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ACREV 426 – AUDIT OF CASH AND CASH EQUIVALENT AP-02
C. Compare cash receipts lists with receipts journal and bank deposits slips; review the segregation of
duties, observe, and test cash receipts
D. Review the organizational structure and functional responsibilities; verify the existence and describe
protection procedures for unused checks, including security measures.
4. The starting point for the verification of the balance in the general bank account is to obtain:
A. A bank reconciliation from the client
B. A client’s cash account from the general ledger
C. A cutoff bank statement directly from the bank
D. The client’s year end bank statement
5. In most situations the petty cash fund is reimbursed just prior to the year end and an adjusting entry is made to
avoid
A. The understatement of cash with the appropriate statement of expenses
B. The misstatement of revenues
C. The understatement of cash and the overstatement of expenses
D. The overstatement of cash and the understatement of expenses
6. Cash on hands and in bank on the statement of financial position exclude
A. Checks drawn before the statement of financial position date but held for later delivery to creditors
B. Cashier’s check received from a customer
C. U.S. dollars deposited in foreign currency depository account.
D. Cash reserved for the acquisition of fixed assets.
7. The auditor’s count of the client’s cash should be coordinated to coincide with
A. Count of inventories
B. Count of marketable securities
C. Close of business at the end of business year
D. Study of internal control structure with respect to cash.
8. The primary evidence regarding year-end bank balances is documented in the
A. Bank reconciliations
B. Bank deposit lead schedule
C. Proof of cash
D. Bank confirmations
9. 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. Cash in bank and receivable from customers
D. Inventory on consignment and contingent liabilities
10. It is most likely that the auditors would detect an unrecorded check issued during the last week of the year
when
A. Bank confirmation is received
B. Search for unrecorded liabilities is performed
C. Cut-off bank statement is reconciled
D. Check register for the last month is reviewed

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ACREV 426 – AUDIT OF CASH AND CASH EQUIVALENT AP-02
PROBLEM SOLVING
PROBLEM 1:

The following data is an excerpt from the financial records of an entity on December 31, 2021:
Current account at PNB Bank P1,800,000
Current account at East West Bank (120,000)
Petty cash fund( 14,000 in currency and expense receipts of P11,000) 25,000
Pension fund 1,300,000
NSF check from customers 20,000
Money order 30,000
Customer check dated 1/1/2022 100,000
Time deposit-30 days 200,000
Money market placements(due 5/31/2022) 500,000
Treasury bills, due 3/31/2022( purchased 12/31/2021) 250,000
Treasury bills, due 1/31/2022( purchased 2/1/2021) 300,000
Payroll account 450,000
Foreign bank account (in equivalent pesos) 510,000
Savings deposit in a closed bank 200,000
Postage stamps 1,000
Employee’s post-dated check 4,500
IOU from employees 3,000
Credit memo from a vendor for a purchase returns 21,000
Traveler’s check 40,000
How much is the cash and cash equivalents to be reported in the December 31, 2021 statement of financial position?

Problem 2. Petty Cash Fund

Catriona Grey is the cashier of the Batangas Company. As representative of the Grey and Black, CPAs, you were assigned
to verify the cash on hand in the morning of January 4, 2023. You began to count at 9:00AM in the presence of Miss
Grey. 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: P1000 (1), P100 (9), P50 (12)

Coins: P5- 11 loose; P1 – 24 loose; P0.25- 5 rolls and 32 loose (50 pieces to a roll); P0.10- 10 rolls and 15 loose( 50 pieces
to a roll); P0.05 – 14 rolls and 20 loose (40 pieces to a roll)

Checks:

Date Maker Payee Amount

12-23-22 Celeste Chan, Asst. Manager Batangas Company P6,000
12-26-22 Catriona Grey, cashier Batangas Company 4,000

IOU’s
Date Maker Amount
12-23-22 David, salesman P500
12-22-22 Rey, clerk 750
12-24-22 Petra, accounting clerk 500

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ACREV 426 – AUDIT OF CASH AND CASH EQUIVALENT AP-02

Petty Cash Vouchers for replenishment:

Date Payee Accounts Charged Amount

12-16-22 Babao, messenger Advances to P1,000.00
employees
12-17-22 Caoayan and Co. Supplies 1,349.00
12-18-22 Victory Liner Freight in 982.50
12-18-22 Mario Repairs 3,000.00

Your investigation also disclosed the following

1. The balance of the petty cash fund per books is P20,000.

2. Cash sale of January 2, 2023 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, 2023.
3. Employee’s pay envelopes had been opened and the money removed. Each envelope was mark “unclaimed” for
a total amount of P 780.

Required:

a. Prepare working papers showing cash count.

b. Prepare adjusting journal entries as of December 31, 2022.

PROBLEM 3: Bank reconciliation

In connection with an audit, You are given the following bank reconciliation

BANK RECONCILIATION

December 31, 2022

Balance per Ledger, December 31, 2022 P103,050

Add: Collections received on the last day of December and charged to 15,975
“Cash in Bank” on books but not deposited
Debit memo for customer’s check returned unpaid (check is on 12,000
hand but no entry has been made on the books)
Debit memo for bank service charge for December 3,000
P140,025
Deduct:
Outstanding checks(see detailed list below) P55,875
Credit memo for proceed of a note receivable which had been left at
The bank for collection but which has not been recorded as collected 24,800
Check for an accounts payable entered on books as P38675 but drawn
and paid by bank as P48,675 10,000 96,675
Computed difference P43,350
Unlocated difference 111,400
Balance per bank. (checked to confirmation) P154,750

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ACREV 426 – AUDIT OF CASH AND CASH EQUIVALENT AP-02
LIST OF OUTSTANDING CHECKS , DEC. 31, 2022

CHECK NO AMOUNT
14344 P17,460
14358 3,885
14367 10,629
14399 6,003
14401 14,676
14407 15,222
P55,875
1. What is the correct amount of outstanding checks on December 31?

A. 55,875 B. 67,875 C. 52875 D. 64,875

2. The correct amount of “ unlocated difference” is

A. 99,400 B. 108,400 C. 111,400 D. 0

3. The cash in bank to be shown on the company’s December 31, 2022 statement of financial position is

A. 105,850 B. 113,650 C. 102,850 D. 114,850

PROBLEM 4: Bank Reconciliation

The following was obtained in connection with the audit of BLUE COMPANY’s cash account as of December 31,2022.

Outstanding checks, 11/30/2022 P48,750

Outstanding checks, 12/31/2022 37,500
Deposit in transit, 11/30/2022 37,500
Cash balance per General Ledger 12/31/2022 112,500
Actual company collections from customers during December 457.500
Company checks paid by bank in December 390,000
Bank service charge recorded on company books in December 7,500
Bank service charge per December bank statement 9,750
Deposits credited by bank during December 435,000
November bank service charge recorded on company books in December 4,500

The cash receipts book of December is underfooted by P7,500.

The bank erroneously charged the company’s account for a P11,250 check of another depositor. The bank error was
corrected in January 2023.

1. How much is the deposit in transit on December 31, 2022?

A. 15,000 B. 67,500 C. 52,500 D. 60,000

2. The total unrecorded bank service charge as of December 31, 2022 is

A. 6,750 B. 2,250 C. 5,250 D. 12,750

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ACREV 426 – AUDIT OF CASH AND CASH EQUIVALENT AP-02
3. What is the total book receipts in December?

A. 457,500 B. 465,000 C. 450,000 D. 442,500

4. What is the total amount of company checks in December?

A. 390,000 B. 378,750 C. 369,000 D. 401,250

5. What is the total disbursements in December?

A. 386,250 B. 371,250 C. 385,500 D. 378,750

6. What is the book balance on November 30, 2022?

A. 63,750 B. 48,750 C. 112,500 D. 105,000

7. What is the bank balance on November 30,2022?

A. 55,500 B. 69,000 C. 130,500 D. 48,750

8. What is the total Bank receipts on December?

A. 360,000 B. 420,000 C. 435,000 D. 450,000

9. What is the total bank disbursements in December?

A. 411,000 B. 463,500 C. 397,500 D. 388,500

10. What is the bank balance on December 31, 2022?

A. 64,500 B. 93,000 C. 99,750 D. 79,500

END OF HANDOUTS

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