422793146 Audit of Cash Roque 2018 1 PDF

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CHAPTER 1Audit of Cash & Cash EquivalentsAUDIT PROGRAM FOR CASHAudit Objectives:To determine that:1. Cash balances at the end of the reporting period represent cash and cash items onhand, in transit to, or in depository banks.2. Cash transactions have been properly recorded.3. Cash balances are ...

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CHAPTER 1 Audit of Cash & Cash Equivalents AUDIT PROGRAM FOR CASH Audit Objectives: To determine that: 1. Cash balances at the end of the reporting period represent cash and cash items on hand, in transit to, or in depository banks. 2. Cash transactions have been properly recorded. 3. Cash balances are properly described and classified, and adequate disclosures with respect to amounts restricted as to withdrawal are made in the financial statements. Audit Procedures: 1. Conduct a cash count of undeposited collections, petty cash, and other funds. • Obtain custodian's signature to acknowledge return of items counted. • Reconcile items counted with general ledger balances. • Trace undeposited collections counted to bank reconciliation. • Follow up dispositions of items in cash counted: ➢ Undeposited collections should be traced to bank deposits. ➢ Checks accommodated in petty cash should be deposited after the count to establish their validity. ➢ IOUs in the petty cash should be confirmed and traced to collections in the next payroll period. ➢ Expense vouchers should be traced to the succeeding replenishment voucher. • Coordinate cash count with count of marketable securities and other negotiable assets of the client. • Obtain confirmation of year-end fund balances of cash not counted in branches or other offices. 2. Confirm bank balance by direct correspondence with all banks in which the client has had deposits and loans during the year. 3. Obtain bank reconciliation.

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CHAPTER 1 AUDIT OF CASH AND CASH3 Trace balance per book to the general ledger balance of cash account. Trace balance per bank to bank statement and compare with amount confirmed by bank. Establish authenticity of reconciling items by reference to their respective sources, like: Bank debit or credit advices. Duly approved journal vouchers. Investigate checks outstanding for a long period of time. Consider adjustment, especially if the check is already stale. Consider the possibility of an erroneous preparation of the check.

• Investigate any unusual reconciling items. • Where internal control over cash is weak, consider preparing a proof of cash reconciliation. 4. Obtain cutoff bank statement showing the client's transactions. with the bank at least one week after the reporting date, and: • Trace year-end reconciling items, like: ➢ Deposit of the year-end undeposited collections. ➢ Completeness of year-end outstanding checks. ➢ Corrections of bank errors. • Examine supporting documents of year-encl outstanding checks that did not clear in the cutoff bank statement, 5. Obtain a list of interbank transfers of funds a few days before and after the reporting date. • Vouch supporting documents. • Ascertain that the related receipts and disbursements were booked by the client within the same day or at least within the same month. 6. Test reasonableness of cutoff by: • Comparing dates of checks returned with cutoff bank statement to dates of recording in the cash disbursements register. • Tracing receipts recorded a few days before the reporting date to bank deposits. 7. Inspect savings account passbook and certificates of deposits. • Reconcile with book balances. • Update interest earned posting on passbooks, if • necessary. • Compare balances with bank confirmation reply. 8. Determine any restrictions on availability of cash. 9. Determine propriety of financial statement presentation and adequacy of disclosures. Problem 1-1 Cash and Cash Equivalents The accountant of SANTIAGO COMPANY is in the process of preparing the company's financial statements for the year ended December 31, 2018. 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: • Balances in the company's accounts at the Metropolitan Bank: ➢ Current account P81,OOO ➢ Savings account P132,600 • Undeposited customer checks of P22,200 (including a custcmer check dated January 2, 2019, 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 2019). • Petty cash of P4,000 (currency of P1,200 and unreplenished vouchers for P2,800). • P 120,000 in a current account at the Northern Philippines Bank. This represents a 20% compensating balance P600,000 loan with the bank. Santiago Company is legally restricted to withdraw the funds until the loan is due in 2021. • Treasury bills: Two -month maturity bills P90,OOO Seven -month bills 120,000 Time deposit (placement term is 2 months) P100,000 What total amount of cash and cash equivalents should be reported under current assets? A. P547,480 C. P430,280 B. P427480 D. P327,480 SOLUTION 1-1 Savings and current accounts - Metropolitan Bank ("132,600 + P81,OOO) P213,600 Undeposited customer checks (P22,200 — P3,OOO) 19,200 Currency and coins on hand 3,480 Petty cash 1,200 Two-month treasury bills 90,000 Time deposit 100,000 Total cash and cash equivalents P427.480 Answer: B Notes: 1. The P3,000 postdated customer check will not be accepted by the bank when presented either for encashment or deposit. This should be reverted to accounts receivable. 2. The P2,400,000 cash balance at Northern Philippines Bank is being maintained for future plant expansion. Thus, it is unavailable for use in current operations or payment of current liabilities. The amount should be shown as part of investments in the noncurrent assets section of the statement of financial position. 3. The P120,000 in ä current account at the Northern Philippines Bank which represents a compensating balance is legally restricted and is being held against a long-term borrowing. Hence, this Should be classified as investment or other asset in the noncurrent assets section of the statement of financial position. 4. The 7-month treasury bills are not cash equivalents and should be shown as part of short-term investments in the current assets section of the statement of financial position. PAS 7 defines "cash equivalents" as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. These normally include short-term investments with maturities of three months or less from the date of acquisition. PROBLEM 1-2 The following information has been extracted from the accounting records of the URSULA COMPANY at December 31, 2018:

a. Cash on hand (see note below) P230,OOO b. Impukan Bank savings account (the required c. minimum Monthly Average Daily Balance is PIO,OOO) 9,500 c.364-day Treasury bills purchased March 1, 2018 400,000 d. Petty cash fund (see note below) 20,000 e. Tipid Bank current account (see note below) 160,000 f. Time deposit placements: Date Term Dec. 15, 2018 30 days 30,000 Oct. 31, 2018 90 days 40,000 Nov. 30, 2018 180 days 25,000 g. Employee travel advances 7,000 h. cash in bond sinking fund 500,000 i. customers note receivable 45,000 j. Postage stamps 2,400 The following are included in cash on hand: • A customer check for returned by the bank December 28, 2018. It was redeposited and cleared the batik on January 2, 2019. • A customer check for P75,000 dated January 3, 2019, receiv December 27, 2018. • PHLPost money orders received from customers, P30,000 The petty cash fund consists of the following: Currency and coins P13,500 IOUs from officers and employees 3,000 Unreplenished petty cash disbursements 1,500 Currency in envelope with the notation: "We were Bang Quay's coworkers. Words may not be adequate to express how sorry we feel. Please accept our heartfelt sympathies on the loss ofyour loved one." 1.500 P20.ooo The following information pertains to Tipid Bank current account: • A check for P13,000 was dated and recorded on December 29, 2018, but was delivered to payee on January 5, 2019. • A check for P5,000 dated January 10, 2019, payable to a supplier was recorded and released to payee on December 19, 2018. Tipid Bank requires current account depositors to maintain a monthly average daily balance of P50,000. What total amount should be recorded as cash and cash equivalents on December 31, 2018? A. P383,000 C. P378,OOO B. P373,500 D. P408,OOO Solution 1-2 Cash on hand (230,000-P43,000-P75,000) Impukan Bank savings account Petty cash fund Bank current account (P160,OOO + P13,OOO + PS,OOO) Time deposits:

P112,OOO 9,500 13,500 178,000

30 days 30,000 90 days 40,000 Total cash and cash equivalents P383,000 Answer: A PROBLEM 1-3 The controller of the LYRIC CO. is trying to determine the amount of cash and cash equivalents to be reported on its December 31, 2018, statement of financial position. The following information is provided: 1. Balances in the companys accounts at the Monte 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. Savings account at the Naic Bank with a balance of P350,000. This account is being used to accumulate cash for future plant expansion (in 2020). 5. P800,000 balance in a checking account at the Naic Bank. 6. Treasury bills; 30-day maturity bills totaling and 180day bills totaling P800,000.

on December 31, 2018, what amount should be reported as cash and cash equivalents? A. P3,055,200 C. P2,955,200 B. P2,455,200 D. P2,355,200 Solution 1-3 Balance in Monte Bank checking account P540,000 Balance in Monte Bank savings account 884,000 Undeposited customer checks 208,000 Currency and coins on hand 23,200 Checking account in Naic bank 800,000 Treasury bills with 30-day maturity 600,000 Total cash and cash equivalents P3,055,200 Answer: A PROBLEM 1-4 The following facts apply to OTO COMPANY during 2018: 1. Savings account of P900,000 and a checking account balance of PI,200,000 are held at Manila Bank. 2. Money market placement with maturity of 3 months, P7,500,000. 3. Currency and coins on hand amounted to PI 1,550. 4. Travel advances of P270,000 for the first quarter of next year (employee reimbursement will be through salary deduction). 5. Oto Company has purchased P3,150,000 of commercial paper of mendez 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 P 1,500. 8. An IOU from an employee of Oto Company in the ampunt of P2,OOO. 9. Two certificates of deposit, each totaling P500,000. These CDs have a maturity of 120 days. 10. Oto Company has received a check from a customer in the amount of P 187,500 dated January 15, 2019. 1l. On January 1, 2018, Oto Company purchased marketable equity securities to be held as "trading" for P3,000,000. On December 31, 2018, its market value is P4,300,000. What amount should be reported as cash and cash equivalents on December 31, 2018? A. P13,736,050 C. P12,751,500 B. P12,575,550 D. P12,763,050 SOLUTION 1-4 Savings account — Manila Bank P 900,000 Checking account — Manila Bank 1,200,000 Money market placement 7,500,000 Petty cash 1,500 Commercial paper 3, 150,000 Currency and coins on hand 11,550 Total cash and cash equivalents P12,763,050 Answer: D PROBLEM 1-5 Your audit of the December 31, 2018, financial statements of DIONISIO CORP. reveals the following: Current account at Prime Bank P(30,000) Current account at Prudent 135,000 Treasury bills (acquired 3 months before maturity) 300,000 Treasury bills (maturity date is Dec. 31, 2019) 1,500,000 Payroll account 390,000 Foreign bank account — restricted (translated using the December 31, 2018, 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 purchase 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 equivalents" in the statement of financial position on December 31, 2018?

A. P840,050 C. P849,400 B. P873,900 D. P861,900 SOLUT10N 1-5 Current account at Prudent Bank P 135,000 Treasury bills (acquired 3 months before maturity) 300,000 Payroll account 390,000 Travelers Check 21,000 Money order 12,900 Petty cash fund 3,000 Total cash and cash equivalents P861,900 Answer: D PROBLEM 1-6 Computation of Correct Cash Balance The Cash account of the BEA CORPORATION as of December 31, 2018, was composed of the following: On deposit in current account with the Bank of PI P900,000 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 company dated January 15, 2019 70,000 A check drawn by a supplier dated December 28, 2018, for goods returned by the company 60,000 A check dated May 31, 2018, drawn by the company against the Bank of Manila 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 Bank of Manila 410,000 Petty cash fund of which P 10,000 is in currency; P7,200 in form of employees' IOUs; and P2,800 is supported by approved petty cash vouchers for expenses all dated prior to closing of the books on December 31,2018 20 000 Total P1,960,000 Less: Overdraft with the Bank of Manila secured by a chattel mortgage on the inventories 300.000 Cash balance per ledger P1, 660,000 What is the amount of cash to be reported on the December 31, 2018, statement of financial position of Bea Company? SOLUTION 1-6 Current account — Bank of PI P900,OOO Undeposited collection 350,000

Supplier's check for goods returned by.the company 60,000 Petty cash fund 10,000 Bank of Manila (P410,OOO - P300,OOO) 110,000 Correct cash balance P1,430,000 PROBLEM 1-7 In connection with your audit of the financial statements of ONOR COMPANY for the year ended December 31, 2018, you gathered the following information. 1. The company maintains its current account with Tsunami Bank. The bank statement on December 31, 2018, showed a balance of P638,340. Your audit of the companys account with Tsunami Bank disclosed the following: • A check for P22,500 received from a customer whose account is current had been deposited and then returned by the bank on December 28, 2018. No entry was made for the return of this check. The customer replaced the check on January 15, 2019. • A check for P5,720 was cleared by the bank as P7,520. The bank made the correction on January 2, 2019. • A check for P3,500 representing payment of an employee advance was received and deposited on December 27, 2018, but was not recorded until January 3, 2019. • Postdated checks totaling P67,300 were included in the deposits in transit. These represent collections of current accounts receivable from customers. The checks were actually deposited on January 5, 2019. • Various debit memos for drafts purchased for payment of importation of equipment totaling P230,000 were not yet recorded. These purchases were previously set up as accounts payable. Said equipment arrived in December 2018. • Interest earned on the bank balance for the 4th quarter of 2018, amounting to P 1,950 was not recorded. • Bank service charges totaling P 1,260 were not recorded. • Deposit in transit and outstanding checks at December 31, 2018, totaled P 136,250 and P276,380, respectively. 2. Various expenses from the companys imprest petty cash fund dated December 2018, totaled P 16,250, while those dated January 2019, amounted to P5,903. Another disbursement from the fund dated December 2018 was a cash advance to an employee amounting to P3,500. A replenishment of the petty cash fund was made on January 8, 2019 3. The companys trial balance on December 31, 2018, includes the following accounts: Cash in bank - Tsunami Bank P 748,320 Cash in bank - Earthquake Bank (restricted account for plant expansion, expected to be disbursed in 2019) 700,000 Petty cash fund 30,000 Time deposit, placed December 20, 2018, and due March 20, 2019 1,000,000

Money market placement - Prudential Bank 4,000,000 1. What is the adjusted petty cash fund balance on December 31, 2018? A.P4,347 C. P30,OOO B.P1O,250 D. P24,097

2. The petty cash shortage on December C. P3ßOO31, 2018, is A.P0 C. P3,500 B.P5,903 D. P4,347 3. What is the adjusted Cash in bank—Tsunami Bank balance on December 31, 2018? A.P500,010 C. P432,710 B.P748,320 D. P429,110 4. The entry to adjust the Cash in bank - Tsunami Bank account should include a debit to A.Accounts receivable for P89,800. B. Accounts receivable for P86,300. C. Accounts payable for P228,200. D Interest expense for P1,950. 5. The December 31, 2018, statement of financial position should show "Cash and cash equivalents" at A. P 6,142,960 C. P4,442,960 B. P5,439,360 D. P5,442,960 SOLUTION 1-7 1. Petty cash fund per trial balance Various expenses dated December 2018 Employee cash advance Adjusted petty cash fund balance Answer: B

P30,OOO (16,250) (3,500) P10,250

2. petty cash shortage cannot be determined because of insufficient information. Answer: A 3. Unadjusted balances NSF check Bank error (P7,520 -- P5,720) Unrecorded cash receipt Postdated checks Deposits in transit (P136,250 — P67,300) Bank debit memos Interest earned Bank service charges Outstanding checks Adjusted balances Answer: C 4.Accounts receivable (P22,500 + P67,300) Accounts payable Bank service charges Cash in bank — Tsunami Bank

Book P748,320 (22,500)

Bank P638,340 1,800

3,500 (67,300) 68,950 (230,000) 1,950 (1,260) _______ P432,710

(276,380) P432,710

89,800 230,000 1,260 315,610

Advances to employees Interest income Answer: A

3,500 1,950

5. Cash in bank — Tsunami Bank Petty cash fund Time deposit Money market placement Cash and cash equivalents Answer: D

P432,710 10,250 1,000,000 4,000,000 P5,442,960

PROBLEM 1-8 The auditor for SAMANTHA, INC. examined the petty cash fund immediately after the close of business, July 31, 2018, the end of the company's natural business year. The petty cash custodian presented the following during the count: Currency Petty cash vouchers 420 Postage Office supplies expense Transportation expense Computer repairs Advances to office staff A check drawn by Samantha, Inc., payable to the petty cash custodian Postage stamps An employee's check, returned by bank, marked NSF An envelope containing currency of P 1,890 for a gift for a retiring employee

PI,650 420 900 340 800 1,500 7,200 300 1,000

1,890 P16,000 The general ledger shows an imprest petty cash fund balance of P16,OOO. 1. How much is the petty cash shortage or overage? A. P2,190 overage C. P 1,890 shortage B. P2,190 shortage D. P 1,890 overage 2. What is the adjusted balance of the petty cash fund at July 3 1' 2018? A. PIO,740 C. P7,200 B.P3,540 D. P8,850 Solution 1-8 1. Currency

PI,650

Petty cash vouchers (P420 + P900 + P340 + P800 + PI,500) 3,960 Replenishment check 7,200 Employee's NSF check 1,000 Petty cash accounted 13,810 Petty cash fund per ledger (custodian's accountability) 16,000 Petty cash shortage P2,190 Answer: B 2 .Currency PI,650 Replenishment check 7,200 Adjusted petty cash balance P8,850 Answer: D Problem 1-9 Petty Cash Fund On January 1, TANYA CO. establishes a petty cash account and designates Orly Reyes as petty cash custodian. The original amount included in the petty cash fund is P 10,000. The following disbursements are made from the fund: Office supplies P3,460 Postage 2,240 Entertainment 840 The balance in the petty cash box is P3,200. 1. The person responsible, at all times, 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 procedures for controlling the petty cash fund, except A. To monitor variations in different types of expenditures, the petty cash custodian files petty cash vouchers by category of expenditure after replenishing the fund. B To replenish the fund, the general cashier issues a company chec...