UNIT 2

AUDIT OF CASH AND CASH TRANSACTIONS

Estimated Time: 6.0 HOURS

Discussion questions 2-1

1. Describe the following cash-related terms. Show pro-forma schedules or examples to

the class.
a. Cash count sheet
b. Bank reconciliation
c. Standard bank confirmation
d. Proof of cash
e. Kiting
f. Lapping
g. Window dressing
2. What should be considered in classifying cash items? What are those items that
should be accounted for as cash and cash equivalents? How should we account for
those items that are not cash?

Discussion questions 2-2

1. Why is it difficult to detect the withholding of cash receipts?

2. Identify three ways an employee might misappropriate cash receipts.

Discussion questions 2-3 Substantive audit procedures on cash and cash equivalents
For each financial statement assertion listed below, identify the appropriate audit
substantive audit procedures.
1. All cash received is recorded (Lapping is not occurring).
2. Cash recorded as received was actually received.
3. Cash is not counted twice by using float.

Discussion questions 2-4

1. During the first few months of the year, Alger Tang, the cashier in a small company,
was engaged in lapping operations. However, he was able to restore the amount of
cash borrowed by March 31, and he refrained from any fraudulent acts after that
date. Will the year-end audit probably lead to the discovery of his lapping activities?
Explain.
2. Although the primary objective of an independent audit is not the discovery of fraud,
the auditors in their work on cash take into consideration the high relative risk
associated with this asset. One evidence of this attitude is evidence by the CPAs
alertness for signs of lapping.
Required: (a) Define lapping; (b) Explain the audit procedures that CPAs must
utilize to uncover lapping.

Problem 2-1 Analysis and classification of cash balances

The cash and cash equivalents account in the ledger of Aeson Company had a balance
of P5,935,000 at December 31, 2014. An examination of the account, however,
disclosed the following.

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Current account at May Bank

Current account at DBP
Payroll Account
Savings Account in Rural Bank (Note A)
Treasury warrants
Treasury note, due November 30, 2015
Change fund
Credit memo from a vendor for a purchase return
Travellers check
Customers check returned by the bank marked DAIF
Money order
Petty cash fund (Note B)
Treasury note, due 2/28/15 (Note C)
Treasury bills, due 1/31/15 (Note D)
Cash Sinking Fund
Preferred redemption fund

2,000,000
(100,000)
500,000
1,000,000
200,000
400,000
10,000
20,000
50,000
15,000
30,000
10,000
200,000
300,000
500,000
800,000

Audit Notes:
A. Rural bank was closed two years ago. The company expects to recover only
P0.60 for every peso deposited.
B. This amount includes unreplenished vouchers totalling P 7,000 as of December
31, 2014.
C. This is a two-year treasury note acquired on December 31, 2014.
D. This is a 180-day treasury bill acquired on July 31, 2014.
Required:
How much should Aeson Company report as cash and cash equivalent on its December
31, 2014 balance sheet?

Problem 2-2 Analysis and classification of cash balances

For each of the items listed in the table below, place an X in the column indicating the
correct classification for balance sheet purposes.
Cash

Cash
Equivalent

ST
Investment

Other

Checking account
Savings account
Rare coins kept for long-term speculation
Postdated checks received
Money orders received
Petty cash fund
Treasury bills purchased when two months remain in the term
Compensating balance for a short-term loan
Sinking fund to retire a bond in five years
Certificate of deposit (six-month term)
Short-term investment in marketable equity securities

Problem 2-3 Cash fund count

The auditor for Gennie Company examined the office cash working fund immediately
after the close of the business June 30, 2014, the end of the companys fiscal year. The
following fund composition was arrived at:
Currency
P972
Unreplenished vouchers:
Supplies
388
Transportation
240
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Repairs
170
Advances to employee
400
Check drawn by Gennie payable to Philip, cash custodian
1,100
A check prepared by an employee payable to Gennie
230
A sheet of paper bearing the signatures of several employees,
together with their contributions (total P500) for a gift to a
departing employee. Attached to the paper is currency of
500
The cash working fund has an imprest balance of P4,000. All unreplenished vouchers are
dated prior June 30, 2014.
REQUIRED:
Case 1
1. Based on the information above, compute the amount of cash shortage or overage.
2. Adjusting journal entries on June 30, 2014.
3. What is the balance of the cash working fund as of June 30, 2014.
Case 2
1. Assuming that the count was performed on July 5, 2014 and the repairs and
advances to employees were dated July 2 and 3, 2014, respectively, what would be
the amount of cash shortage or overage?
2. Prepare the adjusting journal entries.
3. What is the balance of the cash working fund as of June 30, 2014.
Case 3
1. Assuming that all information given in case 1 is the same except that the contribution
to the departing employee is not attached to the sheet of paper, what would be the
amount of cash shortage or overage?
2. Prepare the adjusting journal entries.
3. What is the balance of the cash working fund as of June 30, 2014.

Problem 2-4 Cash fund count

The following cash count sheet and additional information pertain to the accounts of
HERMINIA Corporation for the year ended December 31, 2014.
Cash Count Date: December 16, 2014.
Currency Details omitted
Unreplenished petty cash vouchers
Voucher Date
11/20/2014
12/04/2014
12/12/2014
12/15/2014
Advances all properly approved
Total amount counted
Accountability:
Petty cash fund
Undeposited collections
Shortage

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P4,800
Explanation
Postage stamps
Repair of typewriter
Transportation Messenger
Office Supplies

Amount
100
150
60
90

1,000
4,900

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400
500
5,750
5,900
150

Additional information:
1. The last replenishment of the fund was made on December 14, 2014 covering the
period from December 1 to 14, 2014.
2. Found inside the cash box were two pay envelopes which had been opened and the
contents aggregating P240 removed. The face of the envelope bore the notation
unclaimed.
REQUIRED: Compute the amount of cash shortage.

Problem 2-5 Cash fund count (Working Paper Preparation)

You are examining the accounts of Tang Beauty Salon. Your count of the imprest cash
fund, made at 9:00 a.m. on January 2, 2015, in the presence of Alloy Paril, petty cashier,
revealed:
Quantity
Coins
Bills

Checks:
Date
December 27
December 30
December 30

Payee
Cash
Tang Beauty Salon
Tang Beauty Salon

Unused stamps:
Vouchers:
Date
December 15
December 16
December 17
December 28
January 2
January 2

Denomination
32
40
4
3
10
15

P1.00
0.25
500
100
20
10

Maker
Alger, Beautician
Rachel, Hairdresser
Mec, customer

Amount
P5,000
6,100
6,500
P80

Nature
Transportation
Office supplies
Photocopy fees
Postage
Newspaper
Freight charges

Amount
P65
70
80
150
10
50

IOUs:
Date
Maker
Amount
December 20
Brixen, employee
P50
December 23
Brian, salesman
100
The balance of the Petty Cash account, December 31, 2014, was P 5,000. Sales
invoices (for cash sales, all in cash, no checks)
Invoice No.
Date
Amount
2007
December 30
P4,000
2008
December 31
5,100
2009
January 2
3,050
REQUIRED:
Prepare an audit cash count sheet.
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Problem 2-6 Auditing a clients bank reconciliation

Me-ann companys cash ledger on June 30, 2014 showed a balance of P936,000 which
include total deposits of P490,000.
Your audit of the cash account revealed the following:
I.
Outstanding checks amounted to P29,000 while deposit in transit totalled
P98,000.
II.
NSF checks of P56,000 had been returned by the bank and were not yet
reflected in the books of the company.
III.
Total debits in the bank statement for June amounted to P398,000 which
included the NSF checks in letter II above, and service fees of P10,000. The
services were recorded in the companys books in the succeeding month.
IV.
Sandy Companys check of P15,000 was charged by the bank to Charlene
companys account.
V.
A check of P90,000 is issued by Charlene company was recorded in its books as
P120,000.
Me-ann companys cash ledger on June 30, 2014 showed a balance of P936,000 which
include total deposits of P490,000.
Required: Based on the results of your audit, determine the following:
1. What is the adjusted cash balance on June 30, 2014?
2. What is the cash balance per bank statement on June 30, 2014?
3. What is the correct total debit in the reconciliation for the bank side on June 30,
2014?
4. What is the net adjustment on the Companys cash records on June 30, 2014?

Problem 2-7 Manipulated bank reconciliation

The Lising Company did not exercise adequate internal control over its cash transactions.
During an audit, you found the following data concerning the cash position as of June 30,
2014. On the companys records the balance of cash on hand and in bank was P 34,700.
A credit of P 500 for a note collected by the bank does not appear on the companys
records. The bank statement balance is P 27,000. Outstanding checks are as follows:
Number
Amount
1972
P1,040
1973
720
1974
816
1975
692
The cashier prepared the following reconciliation:
Balance per bank statement
P27,000
Deduct: Outstanding checks:
No. 1973
P720
No. 1974
816
No. 1975
692
2,028
24,972
Add: Cash on hand (this count is correct)
9,228
Collected note
500
9,728
Cash per company records, June 30, 2014
P34,700
Required:
1. What is the amount of the shortage?
2. How did the cashier attempt to conceal the shortage?
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Problem 2-8 Bank reconciliation

You are engaged to audit the books of KEAN ENTERPRISES. From the records of the
company, you gathered the following information:
KEAN ENTERPRISES started operation on October 2, 2014 with KEAN investing P
150,000 cash. Monthly bank reconciliation statements have not been prepared; however,
bank statements for October, November, and December were made available to you.
The bank statement in December, 2014 showed an ending balance of P30,500.
Examination of the paid checks disclosed that checks totalling P4,500 were issued by
the company in December, 2014, and were presented for payment only in January, 2015.
Cash count of the cashier's accountability amounted to P8,500. You were told by the
cashier that P5,000 of these, in checks, were cash sales on December 29, 20114
deposited on January 3, 2015. The balance, in currency and coins, represents petty cash
fund.
Additional data:
1. Accounts receivable subsidiary ledgers had a total balance of P70,000 at December
31, 2014.
2. Supplier's unpaid invoices for merchandise amounted to P60,000.
3. The bank statement in October showed a bank credit for P98,000, dated October 2,
2014. Inquiry from the cashier disclosed that the amount represents proceeds of a
90-day, discounted bank note. P80,000 of this loan was paid by check in December,
2014.
4. Merchandise inventory at December 31, 2014 amounted to P30,000.
5. Operating expenses paid during the period amounted to P180,000; while
merchandise purchases amounted to P250,000.
6. The gross profit rate is 50%.
REQUIRED: Compute the cash shortage at December 31, 2014.

Problem 2-9 Proof of Cash

Data for the JAY-ANN COMPANY are assembled as follows:

Cash account balance
Bank statement balance
Deposit in transit
Checks outstanding
Bank service charges for month, not shown on the company books
Bank charges for N.S.F. checks, not shown on the company books
Collections by bank from ERNEL Company customers, not shown on
the Company books
Tapes for bank and company cash data offer the following totals:
Deposit and credit memos per bank statement
Cancelled checks and debit memos per bank statement
Cash receipts per cash book
Cash disbursement, per cash book

11/31/2014
P1,000
6,690
400
1,300
10
200
5,000

12/31/2014
P3,790
10,350
600
1,500
40
300
6,000

P13,800
P10,140
P 8,000
P10,000

REQUIRED: Prepare a reconciliation of receipts, disbursements, and bank balance for

December.
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Problem 2-10 Proof of cash

You have been instructed by your supervisor on an audit of GPB Company to prepare a
four-column proof of cash receipts and disbursements for the month of June, 2014. The
bank reconciliation statement prepared by the client in May is reproduced below:
May 2014 Reconciliation
Bank Balance

P32,600 Book Balance

Plus proceeds of notes
receivable collected by the
500 bank in May
33,100 Plus deposit made in bank
on
May 31 not recorded on
books until June
Total
Less May bank service
charges

Plus Undeposited Collections,

May 31
Total

Less Outstanding Checks

140
152
153
Adjusted Bank Balance

P500
400
100

1,000
P32,100 Adjusted Book Balance

Upon inquiry about the clients June 30 bank reconciliation, you were informed that it has
been lost and that the client is too busy at this time to prepare another. Your supervisor
tells you to get the June bank statement and paid checks and to prepare the June 30
reconciliation so that you may complete the June proof of cash. The June bank
statement is reproduced below:
Bank of the Philippine Island
Account Name: Robert Company
Date
Disbursements
June 1
400
June 7
100
June 10
700
June 15
200
June 20
600
June 27
900
June 29
(E) 100
June 30
(SC) 10
June 30
(DM) 150
SC Service Charges
EC Error Corrected

Receipts
500
1,000
2,800
(EC) 100

E - Error
DM Debit Memo

The Debit memo on June 30 represents customer NSF check returned by the bank. The
check was redeposited by the client in the bank on July 1.
Cash received for the period June 21 through June 30 of P 3,500 was deposited in the
bank on July 1.

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P28,540
3,500

100
32,140
40

P32,100

The paid checks accompanying this bank statement (all clearing in June) were:
No. 152
No. 153
No. 154
No. 155
No. 157
No. 158

P400
P100
P700
P200
P600
P900

The check register revealed that the last check in June was No. 159 for P250 and that
Check no. 156 was for P130.
REQUIRED:
a. Unadjusted Book Disbursements in June 30, 2014.
b. Unadjusted Book Receipts in June 30, 2014.
c. Unadjusted book balance as of June 30, 2014.

Problem 2-11 Interbank transfers schedule

The information below was taken from the bank transfer schedule prepared during the
audit of INDAY Co.s financial statements for the year ended December 31, 2014.
Assume all checks are dated and issued on December 30, 2014.
Check No.
101
202
303
404

From
BDO
PNB
BPI
RCBC

To
BPI
RCBC
HSBC
BOC

Disbursement Date
Per Books Per Bank
Dec. 30
Jan. 4
Jan. 3
Jan. 2
Dec. 31
Jan. 3
Jan. 2
Jan. 2

Receipt Date
Per Books Per Bank
Dec. 30
Jan. 3
Dec. 30
Dec. 31
Jan. 2
Jan. 2
Jan. 2
Dec. 31

Which of the above checks might indicate kiting?

Problem 2-12 Interbank transfers schedule

Which of the following cash transfers results in a misstatement of cash at December 31,
2014?
Check No.
123
223
323
423

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Disbursement
Recorded Paid by
In books
Bank
12/31/14
01/04/15
01/04/15
01/05/15
12/31/14
01/05/15
01/04/15
01/11/15

Receipt
Recorded Paid by
In books
Bank
12/31/14
12/31/14
12/31/14
12/31/14
12/31/14
01/04/15
01/04/15
01/04/15

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