UNIT 2

AUDIT OF CASH AND CASH TRANSACTIONS

Estimated Time: 6.0 HOURS
*Use Louwers 4th edition

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 Controls over the receipt and disbursement of cash
Refer to Louwers 6-9 and 6-10.
Discussion Questions 2-3 Substantive audit procedures for the audit of cash
Refer to Louwers 6-15, 6-16, 6-17, and 6-18.
Problem 2-1 Analysis and classification of cash balances
The valuation of cash shown on the balance sheet as of end of 2013 was P3,264,400.
Your examination of cash showed the breakdown to be:
Coins and currency
Checks received from customers
Certificate of deposit, term: 2 months
Petty cash fund
Postage stamps
BDO, checking account balance
Post-dated check, customer
Post-dated check, employee
Money order from customer
Cash in savings account
Bank draft from customer
Utility deposit to gas company, refundable
Cash advance received from customer
NSF check, customer
Cash advance to company executive,
collectible on demand
MBTC, checking account, overdraft (OD)
IOUs from employees
Total
DLSU RVRCOB
Department of Accountancy

P60,000
560,000
245,000
6,000
400
2,000,100
12,000
8,000
15,000
117,000
45,000
5,000
8,000
20,000
180,000
(25,000)
7,900
3,204,400
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Compute for the correct amount of cash and cash equivalents and its composition as of
December 31, 2013.
Problem 2-2 Analysis and classification of cash balances
Alistair Schulz, the controller for Germany Company, determined P10,542,700 as the amount of
cash and cash equivalents that would be reported on its December 31, 2013 financial
statements (FS). As per your audit, the following was the breakdown of Alistairs schedule of
cash and cash equivalents:
a. Commercial savings account of P1,200,000 and commercial checking account balances
of P1,800,000 held at JP MORGAN CHASE.
b. Travel advances of 360,000 for executive travel for the first quarter of next year
(employee to reimburse through salary deduction).
c. A separate cash fund in the amount of P3,000,000 restricted for the retirement of longterm debt.
d. Petty cash fund of P10,000 (inclusive of unreplenished vouchers in the amount of
P4,560).
e. An IOU from a company supervisor in the amount of P190,000.
f. A bank overdraft of P250,000 which occurred at one of the banks the company uses to
deposit its cash receipts. The company had no deposits at this bank and the Alistair had
this amount deducted from cash and cash equivalents in his schedule.
g. Two certificates of deposit, each totaling P1,000,000. These certificates of deposit had a
maturity of 90 days from the FS date. Date of purchase: December 30, 2013.
h. A check dated January 12, 2014 in the amount of P125,000.
i. A cash balance of P400,000 at all times at JP MORGAN CHASE to ensure future credit
availability (already included in item A). Found out to be not legally restricted as to
withdrawal.
j. P2,100,000 commercial paper of VERIZON Co. which is due in 190 days.
k. Currency and coins on hand amounting to P7,700.
The 2013 financial statements of Germany should include (compute for the amounts
or provide the journal entries, as applicable):
1. Cash on hand.
2. Cash in bank.
3. Adjusting entry for item G.
4. Adjusting entry for item H.
5. Cash and cash equivalents.

Problem 2-3 Cash fund count

You conducted a surprise cash count of the imprest petty cash fund of Patrick Jose Corporation
on January 5, 2014. The ledger balance for petty cash is P5,000.00 with Gina Balbaira as the
petty cash custodian. Result of your examination revealed the cashiers drawer to contain the
following:
Bills
P1,350.00
Coins
874.75
Petty cash vouchers (PCV):
Delivery charges (12.14.2013)
420.00
Computer repairs (12.18.2013)
700.00
DLSU RVRCOB
Department of Accountancy

Workbook in Auditing Practice 1st Term AY 2014-2015

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Messengers fare (12.23.2013)

Advances to employees (12.27.2013)
Checks (including Check 30108)
Sales invoices
Envelope tagged as employees contribution

120.00
900.00
2,600.00
1,400.00
760.00

Additional information:
1. Check 30108, issued by Mr. A, an employee, amounting to P1,200.00 was returned by
the bank as NSF check.
2. The envelope tagged as employees contribution has not been opened and still intact.
Case 1
1. How much is the total unreplenished vouchers counted in the petty cash fund?
2. How much is the total items counted in the petty cash fund?
3. How much is the total accountability of the cashier?
4. How much is the cash shortage/overage?
5. How much is the petty cash fund as of December 31, 2013?
Case 2
In addition to information given above, you found another PCV dated January 3, 2014 spent for
photocopying amounting to P24.50. Moreover, you found out that the envelope tagged as
employees contribution has been opened and the money removed.
6. How much is the total unreplenished vouchers counted in the petty cash fund?
7. How much is the total items counted in the petty cash fund?
8. How much is the total accountability of the cashier?
9. How much is the cash shortage/overage?
10. How much is the petty cash fund as of December 31, 2013?

Problem 2-4 Cash fund count

As an associate member of the team that audits Stratton Oakmont Incorporated for the
year ended December 31, 2013, when the United States (US) dollar ($) to Philippine
peso is $1=P41.50, you were assigned to conduct a surprise cash count in the morning
of January 5, 2014. You found the following items inside the petty cash drawer of Pretty,
the cash custodian:
Petty cash vouchers:
Overtime meal for the Christmas Party 12.19.2013
P725.00
Additional expenses Christmas Party 12.21.2013
965.00
Purchase of hand sanitizer 12.21.2013
96.25
Transportation 12.22.2013
34.00
Purchase of printer ink and folders 12.26.2013
375.00
Gasoline for the van 12.27.2013
690.00
Meals of maintenance left during New Years Day 01.01.2014
460.00
Protective lotion used by the person who collected the contribution
for Mulanay dengue patients 01.03.2014
25.00
Floorwax and Lysol 01.03.2014
175.00
Checks:
No. 00692 12.28.2013 from Australian Bazaar, customer
1,400.75
DLSU RVRCOB
Department of Accountancy

Workbook in Auditing Practice 1st Term AY 2014-2015

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No. 12300 12.29.2013 from Red Eye, employee

No. 10236 01.02.2014 from Delia Dy, customer
No. 45201 01.03.2014 from France Co., customer
No. 78090 01.04.2014 from Stella L., an employee

Paper bills:
2 pcs, P1,000; 3 pcs, P500; 2 pcs, P100; 14 pcs, P20; 1 pc, $5.50
Coins:
6 loose, P10; 34 loose, P5; 17 loose, P1
Envelope containing contributions for the dengue patients of
Lourdes Clinic, amount indicated P1,400) but per count is P1,375.
Inside the envelope was an official receipt named to the company
amounting to P25 for the protective lotion bought by an employee
who passed around the envelope around the offices.

1,493.50
3,150.60
3,700.45
1,000.10

?
?

Additional information:
1. The client maintains an imprest petty cash balance of P10,000.
2. Further investigation also disclosed that the official receipts from December 28 to
January 3 totaled P8,251.80. These were already recorded in the cash receipts journal.
3. Check No. 78090 was encashed before year-end.
1. Prepare a cash count sheet indicating any overage or shortage.
2. Determine the adjusted balance of petty cash fund as of December 31, 2013 supported by a
proof.
Problem 2-5 Procedures for auditing a clients bank reconciliation
Refer to Louwers 6-47.
Problem 2-6 Manipulated bank reconciliation
Refer to Louwers 6-50.
Problem 2-7 Bank reconciliation
Top Cat Corporation had poor internal control over its cash transactions. Data pertaining to its
cash position at October 31, 2013 were as follows:
The cash book showed a balance of P76,634.77, which included undeposit receipts. A credit of
P950 on the bank records for a deposit made did not appear on the books of the company.
The bank statement had a balance of P68,835.99. The outstanding checks were as follows:
No.
0210667
P 462.80
0210671
490.00
0210693
1,053.00
0210734
789.94
0210737
1,648.20
0210749
643.15
The cashier misappropriated all undeposited receipts in excess of P10,880.07 and prepared the
following reconciliation:
DLSU RVRCOB
Department of Accountancy

Workbook in Auditing Practice 1st Term AY 2014-2015

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Balance per books, October 31, 2013

Add: Outstanding checks
No. 0210734
No. 0210737
No. 0210749

P76,634.77
P789.94
1,648.20
643.15

Less: Undeposited receipts

Balance per bank, October 31, 2013
Unrecorded credit
Correct cash balance, October 31, 2013

3,081.29
P78,966.06
10,880.07
P68,835.99
950.00
P67,885.99

How much did the cashier misappropriate and explain how did it happen?
Problem 2-8 Bank reconciliation
You are auditing the general cash for Daisy Duck Company for the fiscal year ended July 31,
2013. The client has not prepared the July 31 bank reconciliation. After a brief discussion with
the owner, you agree to prepare the reconciliation, with assistance from one of Daisy Ducks
clerks. You obtained the following information:

Beginning balance
Deposits
Cash receipts journal
Checks cleared
Cash disbursements journal
July bank service charge
Note paid directly
NSF check
Ending balance

General
Ledger
P49,610

Bank
Statement
P61,030
250,560

254,560
(236,150)
(218,110)

P86,060

(870)
(61,000)
(3,110)
P10,460

June 30 Bank Reconciliation

Information in General Ledger and Bank Statement
Balance per bank
Deposits in transit
Outstanding checks
Balance per books

P57,530
6,000
17,420
46,110

Additional information obtained:

a. Checks clearing that were outstanding on June 30 totalled P16,920.
b. Checks clearing that were recorded in the July disbursements journal totaled P204,670.
c. A check for P10,600 cleared the bank, but had not been recorded in the cash
disbursements journal. It was for an acquisition of inventory. Daisy Duck uses the
periodic inventory method.
DLSU RVRCOB
Department of Accountancy

Workbook in Auditing Practice 1st Term AY 2014-2015

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d. A check for P3,960 was charged to Daisy Duck Company but had been written on a
different companys bank account.
e. Deposits included P6,000 from June and P244,560 for July.
f. The bank charged Daisy Duck Companys account for a non-sufficient check with a total
amount of P3,110. The credit manager concluded that the customer intentionally closed
its account and the owner left the city. The check was turned over to a collection agency.
g. A note for P58,000, plus interest, was paid directly to the bank under an agreement
signed four months ago. The note payable was recorded at P58,000 on Daisy Duck
Companys books.
1. Compute the amount of checks outstanding on July 31.
2. How much is the deposits in transit on July 31?
3. How much is the adjusted cash balance on July 31?
Problem 2-9 Interbank transfers schedule
Refer to Louwers 6-49.
Problem 2-10 Proof of cash
Refer to Louwers 6-48.
Problem 2-11 Proof of cash
While performing an opinion audit of the financial statements of ILOVEYOU Company as of
December 31, 2013, you have extracted the following data regarding the cash account:
November 30
December 31
a. Balances per books
P619,304
P670,392
b. Balances per bank
742,800
774,696
c. Outstanding checks
254,096
320,184*
*A check of P20,000 was certified by the bank.

d. The cash receipts book showed a total of P9,341,780 while the bank statement for the
month of December showed total credits of P5,401,800.
e. ILOVEYOU records NSF checks as reduction of cash receipts. However, NSF checks
which are later redeposited are then recorded as regular receipts. The data about the
NSF checks are as follows:
1. Returned by the bank in December and recorded by the company in January 2012,
P9,200.
2. Returned by the bank in December and recorded by the company in December,
P25,000.
3. Returned by the bank in November and recorded by the company in December,
P1,000.
f. A bank credit memo dated December 27, 2013 was received by ILOVEYOU stating that
the companys account was credited for the net proceeds of a note for P8,060. This is
not yet recorded in the books.
g. A check of OLIVIA Company amounting to P9,292 was charged to the company account
by the bank in error on December 30.
h. The company has hypothecated its accounts receivable with the bank under an
agreement whereby the bank lends the company 80% of the hypothecated accounts
DLSU RVRCOB
Department of Accountancy

Workbook in Auditing Practice 1st Term AY 2014-2015

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i.

j.

receivable. The company performs accounting and collection of the accounts.

Adjustments of the loan are made from daily sales reports and deposits.
The bank credits the company account and increases the amount of the loan for 80% of
the reported sales. The loan agreement states specifically states that the sales report
must be accepted by the bank before the company is credited. Sales reports are
forwarded by the company to the bank on the first day following the date of sales. The
bank allocates each deposit 80% to the payment of the loan, and 20% to the company
account. Thus, only 80% of each days sales and 20% of each collection deposits are
entered in the bank statement. The company accountant records the hypothecation of
new accounts receivable (80% of sales) as a debit to Cash and a credit to the Bank
Loan as of the date of sales. One hundred percent of the collection on accounts
receivable is recorded as cash receipt; 80% of the collection is recorded in the cash
disbursements books as a payment on the loan. In addition with the hypothecation, the
following information were discovered:
1. Collection on accounts receivable deposited in December, other than deposits in
transit, totaled to P4,800,000.
2. Included in the undeposited collections is cash from the hypothecation of
accounts receivable. Sales were P162,000 on November 30, and P169,000 on
December 31, the balance was made up from collections of P128,440 which was
entered in the books in the manner indicated above.
For the month of December, the interest on the bank loan amounting to P24,560 was
charged by the bank against the account of ILOVEYOU. This was not recorded in the
books.

Prepare a four-column proof of cash of the cash receipts and cash disbursements recorded on
the bank statement and on the companys books for the month of December 2013. The
reconciliation should agree with the cash figure that will appear in the companys financial
statements. Thereafter, determine the following:
1. Cash balance as of November 30.
2. Cash balance as of December 31.
3. Book receipts for December 31.
4. Book disbursements for December 31.
5. Cash shortage at December 31, if theres any.
Problem 2-12 Comprehensive problem
You were able to gather the following from the December 31, 2013 trial balance of Godzilla
Corporation in connection with your audit of the company:
Cash on hand
Petty cash fund
Gold Keeper Bank current account
Diamond Bank current account no. 01
Diamond Bank current account no. 02
Bronze Bank savings account
Bronze Bank time deposit (three-month)

P530,000
10,450
1,230,000
1,080,000
(80,000)
1,200,000
500,000

Cash on hand includes the following items:

DLSU RVRCOB
Department of Accountancy

Workbook in Auditing Practice 1st Term AY 2014-2015

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a. Customers check for P40,000 returned by bank on December 26, 2013 due to
insufficient fund but subsequently re-deposited and cleared by the bank on January 8,
2014.
b. Customers check for P20,000 dated January 2, 2014, received on December 29, 2013.
c. Postal money orders received from customers, P30,000.
The petty cash fund consisted of the following items as of December 31, 2013.
Currency and coins
P 2,350
Unreplenished petty cash vouchers
1,300
Currency in an envelope marked
collections for charity with names attached 1,200
Employees vales
1,600
Check drawn by Godzilla Corporation,
payable to the petty cashier
4,000
Total
P 10,450
Included among the checks drawn by Godzilla Corporation against the Gold Keeper current
account and recorded in December 2013 are the following:
a. Check written and dated December 29, 2013 and delivered to payee on January 2,
2014, P80,000.
b. Check written on December 27, 2013, dated January 2, 2014, delivered to payee on
December 29, 2013, P40,000.
The credit balance in the Diamond Bank current account No. 2 represents checks drawn in
excess of the deposit balance. These checks were still outstanding at December 31, 2013.
The savings account deposit in Bronze Bank has been set aside by the board of directors for
acquisition of new equipment. This account is expected to be disbursed in the next four months
from the balance sheet date.
Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2013:
1. Cash on hand.
2. Petty cash fund.
3. Gold Keeper Bank current account.
4. Cash and cash equivalents.

DLSU RVRCOB
Department of Accountancy

Workbook in Auditing Practice 1st Term AY 2014-2015

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