Lecture Notes

Acctg 416-Applied Auditing

Audit of Cash and Cash Equivalents

Objectives: To determine that:
1. Cash balances represent cash items on hand, in transit or in depository banks at the end of the reporting period.
2. Cash transactions have been properly recorded, described, classified and adequate disclosures are made in the financial
statements.

Procedures:
1. Conduct a cash count undeposited cash collections, petty cash fun and other funds.
2. Confirm bank balance by direct correspondence with all banks in which client has had deposits and loans during the year.
3. Obtain bank reconciliation.
4. Obtain cutoff bank statement showing the client’s transactions with the bank at least one week after the reporting date.
5. Obtain a list of interbank transfers of funds few days before and after the reporting date.
6. Test reasonableness of cutoff by tracing receipts recorded a few days before the reporting date to bank deposits.
7. Inspect savings account passbook and certificates of deposits.
8. Determine any restrictions on availability of cash.
9. Determine propriety of financial statement presentation and adequacy of disclosures.

Presented below are independent cases for audit of cash.

PROBLEM 1
The following information has been extracted from the accounting records of the H CO. at December 31, 2016:
1. Cash on hand (undeposited sales receipts) P 40,800
2. Certificate of time deposit with maturity of 3 months 1,000,000
3. Customers note receivable 40,000
4. Reconciled balance in AA Bank checking account (14,000)
5. Reconciled balance in BB Bank checking account 374,000
6. Balance in CC saving account 342,400
7. Customer’s postdated check 54,000
8. Employee travel advances 64,000
9. Cash In bond sinking fund 48,000
10. Bond sinking fund investments 323,600
11. Postage stamps 17,200
What total amount should H CO report as CASH at December 31, 2016?

PROBLEM 2
The controller of the L CO. is trying to determine the amount of cash and cash equivalents to be reported on its December 31,
2016, statement of financial position. The following information is provided:
1. Balance in the company’s accounts at the M Bank:
Checking account- P540,000
Savings account- P884,000
2. Undeposited customer checks of P208, 000
3. Currency and coins on hand of P23, 200
4. Saving account at the Naic bank with a balance of P350, 000. This account is being used to accumulate cash for future plant
expansion (in 2018).
5. P800, 000 balance in a checking account at the N Bank. In exchange for a line of credit, L CO. has agreed to maintain a
minimum balance of P100, 000 in this account.
6. Treasury bills; 30-day maturity bills totaling P600, 000, and 180-day bills totaling PP800, 000.

What total amount “cash and cash equivalents” should be reported in the current asset section of the 2016 statement of
financial position?

PROBLEM 3
The controller of the O CO. is it the process of preparing the company’s December 31, 2016 financial statements. He is trying to
determine the correct balance of cash and cash equivalents to be reported as a current asset in the statement of financial
position.
The following items are being considered:
1. Savings account of P900, 000 and checking account balance if P1, 200, 000 are held at M Bank.
2. Money market placement, with maturity of 3 months, P7, 500,000.
3. Currency and coins on hand amounted to P11, 550.
4. Travel advances of P270, 000 for the first quarter of next year (employee reimbursement will be through salary deduction).
5. O CO has purchased P3, 150,000 of commercial paper of M Corp. which is due in 60 days.
6. A separate cash fund amounting to P2, 250,000 is restricted for the retirement of long-term debt.
7. Petty cash fund of P1, 500.
8. An IOU from an employee of O CO. in the amount of P2, 000.
9. Two certificates of deposit, each totaling P500, 000 These CDs have a maturity of 120 days.
10. O CO. have receive a check from a customer in the amount of P187, 500 dated January 15, 2017.
11. O CO. has agreed to maintain a cash balance of P50, 000 at all times at M Bank to ensure future credit availability.
12. On January 1, 2016, O CO purchased marketable equity securities to be held as “trading” for P3, 000,000. On December 31,
2016, its market value is P4, 300,000.
What amount should be reported as cash and cash equivalents on December 31, 2016?

PROBLEM 4
The accountant of SAGO COMPANY is in the process of preparing the company’s financial statement for the year ended
December 31, 2016. He is trying to determine the correct balance of cash and cash equivalents to be reported as a current asset
on the statement of financial position. The following items are being considered:
 Balance in the company’s accounts at the Metro Bank:
Current account P81, 000
Saving account P132, 600
 Undeposited customer checks of P22, 200 (including a customer check dated January 2, 2017 for P3,000)
 Currency and coins on hand of P3, 480.
 Savings account at the Northern Philippines Bank with a balance of P2,400, 000. This account is being used to
accumulate cash for future plant expansion (in 2017)
 Petty cash of P4,000 (currency of P1, 200 and unreplenished vouchers for P2, 800).
 P120, 000 in a current account at the Northern Philippines Bank. This represents a 20% compensating balance for
P600, 000 loan with the bank. Sago Company is legally restricted to withdraw the funds until the loan is due in 2019.
 Treasury bills:
Two-month maturity bills P90, 000
Seven-month bills 120, 000
 Time deposit P100, 000

What is the correct balance of cash and cash equivalents to be reported in the current assets section of the statement of
financial position?

PROBLEM 5
Your audit of the December 31, 2016, financial statement of D CORP. reveals the following:
Current account at Prime Bank P(30, 000)
Current account at Prudent Bank 135, 000
Treasury bills (acquired 3 months before maturity) 300, 000
Treasury bills (maturity date is Dec. 31, 2017) 1, 500, 000
Payroll account 390, 000
Foreign bank account- restricted (translated using
the December 31, 2016, exchange rate) 2, 000, 000
Postage stamps 1, 250
Employee’s postdated check 4, 500
IOU from the vice-president 8, 000
Credit memo from a supplier for a return 8, 100
Traveler’s check 21, 000
Money order 12, 900
Petty cash fund (P3, 000 in currency and expense receipts for P12, 000) 15, 000

What amount would be reported as “cash and cash equivalent “ in the statement of financial position on December 31, 2016?

Problem 6

In connection with your audit of the financial statements of O Company for the year ended December 31, 2016,
you gathered the following:

1. The company maintains its current account with Tsunami Bank. The bank statement on December 31, 2016
showed a balance of 638,340.

Your audit of the company’s account with Tsunami Bank disclosed the following:
 A check for 22,500 received from a customer whose account is current had been deposited and then
returned by the bank on December 28, 2016. No entry was made for the return of this check. The
customer replaced the check on January 15, 2017.
 A check for 5,720 was cleared by the bank as 7,520. The bank made the correction on January 2, 2017.
 A check for 3,500 representing payment of an employee advance was received and deposited on
December 27, 2016, but was not recorded until January 3, 2017.
 Postdated checks totaling 67,300 were included in the deposits in transit. These represent collections of
current accounts receivable from customers. The checks were actually deposited on January 5, 2017.
 Various debit memos for drafts purchased for payment of importation of equipment totaling 230,000 were
not yet recorded. These purchases were previously set up as accounts payable. Said equipment arrived in
December 2016.
 Interest earned on the bank balance for the 4th quarter of 2016, amounting to 1,950 was not recorded.
 Bank service charges totaling 1,260 were not recorded.
 Deposit in transit and outstanding checks at December 31, 2016 totaled 136,250 and 276,380
2. Various expenses from the company’s imprest petty cash fund dated December 2016 totaled 16,250, while those
dated January 2017 amounted to 5,903. Another disbursement from the fund dated December 2016 was a cash
advance to an employee amounting to 3,500. A replenishment of petty cash fund was made on January 8, 2017.

3. The company’s trial balance on December 31, 2016 includes the following accounts:
Cash in bank – Tsunami Bank 748,320
Cash in bank- Earthquake bank (restricted account for
Plant expansion, expected to be disbursed in 2017) 700,000
Petty cash fund 30,000
Time deposit, placed December 20, 2016 and due
March 20, 2017 1,000,000
Money market placement – Prudential bank 4,000,000

1. What is the adjusted petty cash fund balance on December 31, 2016?
2. The petty cash shortage on December 31, 2016?
3. What is the adjusted Tsunami Bank - cash in bank on December 31, 2016?
4. The entry to adjust the Cash in bank-Tsunami bank
5. Cash and cash equivalents December 31, 2016