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AP.M-1402 (AUDIT OF CASH) MULTIPLE CHOICE QUESTIONS-THEORY 1. Which of the following is not an audit objective related to cash? a. Reported cash exists b. The client has ownership rights in the reported cash. c. Compensating cash balances are reported as other assets. d. The reported cash balance includes all cash transaction that should have been recorded. 2. The process of transferring money from one bank account to another and improperly recording the transaction a. Lapping b. Embezzling c. Kiting d. Defalcation 3. An auditor who is engaged to examine the financial statements of a business enterprise will request a cut-off bank statement primarily in order to a. Verify the cash balance reported on the bank confirmation inquiry form. b. Verify reconciling items on the client’s bank reconciliation. c. Detect lapping d. Detect kiting 4. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except a. cut-off bank statement b. bank confirmation c. year-end bank statement d. general ledger 5. The auditor should ordinarily mail confirmation requests to all banks which the client has conducted any business during the year, regardless of the year-end balance, since a. The confirmation form also seeks information about indebtedness to the bank. b. This procedure will detect kiting activities which would otherwise not be detected. c. The mailing confirmation forms to all such banks are required by PSA. d. Tis procedure relieves the auditor of any responsibility with respect to non-detection of forged checks. 6. 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. Inventory on consignments and contingent liabilities. d. Accounts receivable and accrued interest receivable

7. In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and credit to miscellaneous revenue. Select the most effective method for detecting this type of error. a. Foot the cash receipts journal for October b. Send a bank confirmation as of the year-end c. Prepare bank reconciliation as of the year-end. d. Prepare a bank transfer schedule as of the year-end 8. Which of the following error will be discovered as a result of the audit of the bank reconciliation? a. Failure to record bank deposits b. Billing customer for an improper amount c. Payment for raw materials that were not received d. Payment of interest to an affiliate for an amount in excess of the existing rate 9. An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to a. Provide the data necessary to prepare a proof of cash b. Request that cut-off bank statement and related checks be sent to the auditor. c. Detect kiting activities that may otherwise no bet discovered. d. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation 10. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? a. The confirmation request was signed by the treasurer b. Sending the request was meaningless because the account was closed before the yearend c. The request was mailed by assistant treasurer. d. The CPA did not sign the confirmation request before it was mailed. 11. The auditors’ count of cash should be coordinated with the: a. Consideration of the internal controls with respect to cash. b. Close business on the balance sheet date c. Count of marketable securities d. Count of inventories 12. The receipt of the completed standard bank confirmation form would provide the auditor with all of the following items except a. The balances in all bank accounts with that bank b. Any restrictions on withdrawals c. The adjusted cash balances d. Loan balances with that bank

13. An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether a. The cash receipts journal was held open for a few days after year-end. b. The last checks recorded before the year-end were actually mailed by the year-end c. Cash balances were overstated because of kiting. d. Any unusual payments to or receipts from related parties occurred.

***The information below was taken from the bank transfer schedule prepared during the audit of BAY Co.’s financial statement for the year ended December 31, 2013. Assume all checks are dated and issued on December 30, 2013.

Check no. 101 202 303 404

From National Country Federal State

To Federal State American Republic

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 Dec.30 Dec.30 Jan.2 Jan.2

Per bank Jan. 3 Dec.31 Jan. 2 Dec.31

14. Which of the above checks might indicate kiting? a. #101 and #303 b. #202 and #404 c. #101 and #404 d. #202 and #303 15. 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 reconciliations c. simultaneous verifications d. simultaneous surprise cash count. 16. When negotiable instrument securities are of considerable volume, planning by the auditor is necessary to guard against a. Unauthorized negotiation of the securities before they are counted. b. Unrecorded sales of securities after they are counted. c. Substitution of securities already counted for other securities which should be on hand but are not. d. Substitution of authentic securities with counterfeit securities. 17. A client has large and active investment portfolio that kept in bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will a. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance sheet date.

b. Examine supporting evidence for transactions occurring during the year. c. Count the securities at the subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date. d. Request the client to have the bank seal the safe deposit until the auditor can count the securities at a subsequent date. 18. By preparing a four-column reconciliation (“proof of cash”) for the last month of the year, an auditor will generally be able to detect: a. An unrecorded check written at the beginning of the month which was cashed during the period covered by the reconciliation. b. A cash sale which was not recorded on the books and was stolen by a bookkeeper c. An embezzlement of unrecorded cash receipts on receivables before they had been deposited into the bank. d. A credit sale which has been recorded twice in the sales journal. 19. Jones embezzled P10, 000 from his company’s account in Bank A. At year-end he did the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This an example of a. Lapping b. Effective cash management c. Kiting d. Related party transactions 20. Which of the following is most likely to be effective in detecting kiting? a. Bank confirmation b. Bank transfer schedule prepared using only the cash receipts and cash disbursements journals c. Comparison of bank cut-off statement to the cash receipts and disbursements records d. Receivable confirmation 21. Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? a. Understatement of outstanding checks b. Overstatement of outstanding checks c. Understatement of deposit in transit d. Overstatement of deposit in transit 22. The standard form to confirm account balances with Financial Institutions includes information on all of the following except: a. Date due of direct liability b. The principal amount paid on direct liability c. Description of collateral for direct liability d. The interest date of the direct liability 23. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? a. Review composition of authenticated deposit slips

b. Review subsequent bank statements and cancelled checks received directly from the banks c. Prepare a schedule of bank transfers d. Prepare year-end bank reconciliations 24. On receiving the bank cut-off statement, the auditor should trace: a. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal b. Checks dated prior to year end to the outstanding checks listed on the year-end reconciliation c. Deposits listed on the cut-off statement to deposits in the cash receipts journal d. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank reconciliation 25. Which of the following cash transfers result in a misstatement of cash at December 31, 2011?

A. B. C. D.

Disbursement Recorded in Paid by bank books 12/31/11 01/04/12 01/04/12 01/05/12 12/31/11 01/05/12 01/04/12 01/11/12

STRAIGHT PROBLEMS

Receipts Recorded in Received by books bank 12/31/11 12/31/11 12/31/11 12/31/11 12/31/11 01/04/12 01/04/12 01/04/12

PROBLEM 1 The cash and cash equivalents account in the ledger of Ajalon Company had a balance of P5, 935, 000 at December 31, 2014. An examination of the account, however, disclosed the following. 1. Current account at May bank 2. Current account at DBP 3. Payroll account 4. Saving account in rural bank 5. Treasury warrants 6. Treasury note, due November 30, 2015 7. Change fund 8. Credit memo from a vendor for purchase return 9. Traveller’s check 10. Customer’s checks returned by the bank marked “DAIF” 11. Money order 12. Petty cash fund 13. Treasury note, due 2/28/15 14. Treasury bills, due 1/31/15 15. Cash sinking fund 16. Preferred redemption

P 200, 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 P7, 000 as of December 31, 2014. c. This is a two-year treasury note acquired on December 31, 2014. d. This a 180-day treasury bill acquired on July 31, 2014.

Required: How much should Ajalon Company report as cash and cash equivalent on its December 31, 2014 balance sheet? P2, 993, 000

PROBLEM 2

The auditor for Diadem Jade Company examined the office cash working fund immediately after the close of the business June 30, 2014, the end of the company’s fiscal year. The following fund composition was arrived at: Currency

P972

Unreplenished vouchers: Supplies

338

Transportation

240

Repairs

170

Advances to office employee

400

Check drawn by Diadem Jade Co. payable to Jap, cash custodian

1, 100

A check prepared by an employee payable to Diadem Jade Co.

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 of P4, 000. Required: 1. Compute the amount of cash shortage. P500 2. Adjusting entries on June 30, 2014.  Supplies expense 388 Transportation expense 240 Repair expense 170 Advances of office employee 400 Cash in bank  Receivable- custodian Cash working fund  PROBLEM 3

Advances of office employee Cash working fund

1198 500 500 230 230

The following cash count sheet and additional information pertain to the accounts of Brewer Corporation for the year ended December 31, 2014. Cash count date: December 16, 2014 Currency- Details omitted

4, 800

Unreplenished petty cash vouchers Vouchers date

Explanation

11/20/2014

postage stamps

100

12/04/2014

repair of typewriter

150

12/12/2014

transportation-messenger

60

12/15/2014

office supplies

90

400

Advances – all properly approved

500

Total amount counted

5, 750

Accountability: Petty cash fund

1, 000

Undeposited collections

4, 900

Shortage

5, 900 150

Additional information: 1. The last replenishment of the fund was made on December 14, 2014 cocering 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. P750

PROBLEM 4 You are examining the accounts of Joash Beauty Salon. Your count of the imprest cash fund, made at 9:00 a.m. on January 2, 2014, in the presence of Joezer petty cashier, revealed: Coins Quantity

Bills

Denominations

Quantity

Denominations

32

P 1. 00

4

500

40

0.25

3

100

10

20

15

10

Checks: Date

Payee

Maker

Amount

Cash

Manso, Beautician

P 5, 000

30

Joezer’s

Raymund, Hairdresser

6, 100

30

Joezer’s

Andrew, customer

6, 500

December 27

Unpaid stamps: Various denomination

P 80

Vouchers: Date

Nature of Disbursements

December 15

transportation

65

16

office supplies

70

17

xerox fees

80

28

postage

150

2

newspaper

10

2

freight charges

50

January

IOUs Date

Maker

December 20

Monterola, employee

50

Escala, salesman

100

23

The balance of the petty cash account, December 31, 2013, was P 5, 000. Sales invoices (for cash sales, all in cash, no checks) Invoices #2007

December 30

4, 000

#2008

December 31

5, 100

#2009

January 2

3, 050

Required: Compute the amount of cash shortage. P2, 767

PROBLEM 5 Charlene Company’s 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. II. III.

IV. V.

Outstanding checks amounted to P29, 000 while deposit in transit totalled P98, 000. NSF checks of P56, 000 had been returned by the bank and were not yet reflected in the books of the company. 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 conpany’s books in the succeeding month. Sandy Company’s check of P15, 000 was charged by the bank to Charlene company’s account. A check of P90, 000 is issued by Charlene company was recorded in its books as P120, 000.

Charlene company’s 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. 2. 3. 4.

What is the adjusted cash balance on June 30, 2014? P900 What is the cash balance per bank statement on June 30, 2014? P816 What is the shortage or overage on June 30, 2014? 0 What is the correct total debit in the reconciliation for the bank side on June 30, 2014? P412, 00 5. What is the total credit adjustment on the Company’s cash records on June 30, 2014? P36, 000

PROBLEM 6 The Nano 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 company’s record the balance of cash on hand and in bank was P34, 700. A credit of P500 for a note collected by the bank does not appear on the company’s records. The bank statement balance is P27, 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

P 720

No. 1974

816

No. 1975

692

2,028

P24, 972

Add: Cash on hand (this count is correct) Collected note

P9, 228 500

Cash per company records, June 30, 2014

9,728 P34, 700

Required: 1. What is the amount of shortage? P2,240 2. How did the cashier attempt to conceal the shortage?  By understating the outstanding checks by 1, 240  Improper treatment of the CM (500*2) PROBLEM 7 You are engaged to audit the books of HEIDY ENTERPRISES. From the records of the company, you gathered the following information: HEIDY ENTERPRISES started operation on October 2, 2014 with HEIDY 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, 2014 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 totalled 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 totalled P180, 000; while merchandise purchases amounted to P250, 000. 6. The gross profit rate is 40%.

Required: Compute the cash shortage at December 31, 2014.

PROBLEM 8 Data for the ERNEL COMPANY are assembled as follows:

Cash account balance Bank statement balance Deposit in transit Checks outstanding BSC for month, not shown on the company books Bank charges for N.F checks, not shown on the company books Collections by bank from ERNEL company customers, not shown on the company’s books
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