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The audit program for cash contains a statement of the audit objectives, the complete and
detailed procedures, and a conclusion.
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The audit objectives are
a. Cash exists and is owned by the client
b. Cash balances reflect a proper cut-off of receipts and disbursements
c. Cash balances as presented in the balance sheet properly reflect all cash and cash
items on hand, in transit, or on deposit with third parties
d. Cash balances are properly classified in the financial statements, and any restrictions on
the availability of funds are properly disclosed
Basic procedures
1. Using the standard bank confirmation form, request confirmation as of the audit date for bank
accounts selected. Also request confirmation of material cash in savings institutions, certificates
of deposit, and compensating balances. Documents items selected for confirmation and retain
returned confirmations. Mail second requests, if necessary.
2. Obtain copies of each account's bank reconciliation for the work papers
a. Trace the bank balance on the reconciliation to the standard bank confirmation received from
the bank
b. Trace the reconciled book balance to the general ledger, trial balance or lead schedule as
applicable
2. Make timely deposits – Cash and checks received at a business should be deposited
daily to decrease the chance of the money being stolen.
3. Review check signing authority – Review the records with the bank to ensure that the
appropriate person have check signing authority. Consider requiring more than one
signature for checks above a certain threshold.
4. Control access to check stock, accounting systems, and cash – Unused check
stock should be locked up. Access to computer systems or banking systems where
checks can be generated should require strong passwords. Cash and checks waiting for
deposit should be securely stored in a safe.
6. Reconcile the bank accounts – All bank accounts should be reconciled on at least a
monthly basis. Ideally, a person uninvolved in the day to day accounting activities for
cash receives an unopened bank statement with cancelled check copies to reconcile the
bank account from so that the statement activity and cancelled checks can be reviewed
for irregularities. If there are not enough team members for this to happen, it is important
that an owner, manager, or board member obtain the bank statement and review for
irregularities prior to the regular bookkeeper preparing the reconciliation.
Of these assertions, existence, accuracy, and cut-off are most important. The audit client is
asserting that the cash balance exists, that it’s accurate, and that only transactions within the
period are included.
Classification is normally not a relevant assertion. Cash is almost always a current asset. But
when bank overdrafts occur, classification can be in play. The negative cash balance can
be presented as cash or as a payable depending on the circumstances.
Cash Walkthrough
As we perform walkthroughs of cash, we normally look for ways that cash might be overstated
(though it can also be understated as well), whether intentionally or by mistake.
As we ask questions, we also inspect documents (e.g., bank reconciliations) and make
observations (who is doing what?).
If controls weaknesses exist, we create audit procedures to address them. For example, if
during the walkthrough we review three monthly bank reconciliations and they all have obvious
errors, we will perform more substantive work to prove the year-end bank reconciliation. For
example, we might vouch every outstanding deposit and disbursement.
The directional risk for cash is overstatement. So, in performing your audit procedures, perform
procedures such as testing the bank reconciliation to ensure that cash is not overstated.
The assertions that an auditor concern the most are existence, accuracy, and cut off. So RMM
for these assertions is usually moderate to high.
The auditor should send confirmations directly to the bank. Some individuals create false bank
statements to cover up theft. Those same persons provide false confirmation addresses. Then
the confirmation is sent to an individual (the fraudster) rather than a bank. Once received, the
fraudster replies to the confirmation as though the bank is doing so.
Agree the confirmed bank balance to the period-end bank reconciliation (e.g., December 31,
20X7). Then, agree the reconciling items on the bank reconciliation to the bank statement
subsequent to the period-end. For example, examine the January 20X8 bank statement activity
when clearing the December 20X7 reconciling items. Finally, agree the reconciled balance to
the general ledger cash balance for the period-end (e.g., December 31, 20X7).
Cut-off bank statements (e.g., January 20, 20X8 bank statement) may be used to test the
outstanding items. Such statements, similar to bank confirmations, are mailed directly to the
auditor. Alternatively, the auditor might examine the reconciling items by viewing online bank
statements. (Read-only rights can be given to the auditor.)
Petty cash, also known as imprest cash, is a fund established for making small payments that
are impractical to pay by check. Examples include postage due, reimbursement to employees
for small purchases of office supplies, and numerous similar items. The establishment of a petty
cash system begins by making out a check to cash, cashing it, and placing the cash in a petty
cash box:
A petty cash custodian should be designated to safeguard and make payments from this fund.
At the time the fund is established, the following journal entry is needed. This journal entry, in
essence, subdivides the petty cash portion of available funds into a separate account.
Policies should be established regarding appropriate expenditures that can be paid from petty
cash. When a disbursement is made from the fund, a receipt should be placed in the petty cash
box. The receipt should set forth the amount and nature of expenditure. The receipts are known
as petty cash vouchers. At any point in time, the receipts plus the remaining cash should equal
the balance of the petty cash fund (i.e., the amount of cash originally placed in the fund).
An examination on the morning of January 2, 2021 by the auditor for Joseph Company
discloses the following items in the petty cash drawer:
Solutions:
Accountability:
Set-Up P 10,500
Other Funds 350
Prepayments 220 11,070.00
Cash Shortage P 308.40
Bank Reconciliation
One of the most common cash control procedures is the bank reconciliation. In business, every
bank statement should be promptly reconciled by a person not otherwise involved in the cash
receipts and disbursements functions. The reconciliation is needed to identify errors,
irregularities, and adjustments for the Cash account. Having an independent person prepare the
reconciliation helps establish separation of duties and deters fraud by requiring collusion for
unauthorized actions.
To obtain desired control objectives, a company can vary the number and location of banks and
the types of accounts.
► General checking account
► Demand deposit
► Savings deposit
Bank Reconciliation
Schedule explaining any differences between the bank’s and the company’s records of cash.
Credit memos – are additions made by the bank not representing deposits made by the
depositor (book), and not yet recorded by the depositor.
Debit memos – are deductions by the bank not representing checks issued by the depositor.
Book errors – errors committed by the depositor (e.g., erroneous recording in the books).
Deposit in transit – sometimes called undeposited collection, recognize as deposit by the book
but not yet credited by the bank. Deposit in transit often occur when deposits are mailed to the
bank, deposits place in a night depository, or deposit made after the bank cut-off.
Outstanding checks – are checks issued and released to the payee but not yet encashed with
the bank.
You receive a bank statement, typically at the end of each month, from the bank. The
statement itemizes the cash and other deposits made into the checking account of the
business. The statement also includes bank charges such as for account servicing fees.
Once you’ve received it, follow these steps to reconcile a bank statement:
Match the deposits in the business records with those in the bank statement. Compare the
amount of each deposit recorded in the debit side of the bank column of the cashbook with
credit side of the bank statement and credit side of the bank column with the debit side of
the bank statement. Mark the items appearing in both the records.
Adjust the balance on the bank statements to the corrected balance. For doing this, you
must add deposits in transit, deduct outstanding checks and add/deduct bank errors.
• Deposits in transit are amounts that are received and recorded by the business
but are not yet recorded by the bank. They must be added to the bank statement.
• Outstanding checks are those that have been written and recorded in cash
account of the business but have not yet cleared the bank account. They need
to be deducted from the bank balance. This often happens when the checks
are written in the last few days of the month.
• Bank errors are mistakes made by the bank while creating the bank
statement. Common errors include entering an incorrect amount or omitting an
amount from the bank statement. Compare the cash account’s general ledger
to the bank statement to spot the errors.
The next step is to adjust the cash balance in the business account.
Adjust the cash balances in the business account by adding interest or deducting monthly
charges and overdraft fees.
To do this, businesses need to take into account the bank charges, NSF checks and
errors in accounting.
• Bank charges are service charges and fees deducted for the bank’s
processing of the business’ checking account activity. This can include
monthly charges or charges from overdrawing your account. They must be
deducted from your cash account. If you’ve earned any interest on your
bank account balance, they must be added to the cash account.
• An NSF (not sufficient funds) check is a check that has not been honored by the
bank due to insufficient funds in the entity’s bank accounts. This means that the
check amount has not been deposited in your bank account and hence needs to be
deducted from your cash account records.
• Errors in the cash account result in an incorrect amount being entered or an amount
being omitted from the records. The correction of the error will increase or decrease
the cash account in the books.
After adjusting the balances as per the bank and as per the books, the adjusted amounts
should be the same. If they are still not equal, you will have to repeat the process of
reconciliation again.
Once the balances are equal, businesses need to prepare journal entries for the
adjustments to the balance per books.
The books of JP's Service, Inc. disclosed a cash balance of P687,570 on December 31, 2020.
The bank statement as of December 31 showed a balance of P547,800. Additional information
that might be useful in reconciling the two balances follows:
(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.
(b) A customer's note dated September 25 was discounted on October 12. The note was
dishonored on December 29 (maturity date). The bank charged JP's account for P142,650,
including a protest fee of P2,650.
(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a
deposit of P27,000.
(e) There were bank service charges for December of P2,100 not yet recorded on the books.
(f) JP's account had been charged on December 26 for a customer's NSF check for P12,960.
(g) JP properly deposited P6,000 on December 3 that was not recorded by the bank.
(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.
(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been
collected on December 27, and the bank charged a P360 collection fee.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Solution:
Question No. 1
Question No. 2
Proof of Cash
Many businesses prepare a reconciliation just like that illustrated. However, this approach
leaves one gaping hole in the control process. What if the bank statement included a 5,000
check to an employee near the beginning of the month, and a 5,000 deposit by that employee
near the end of the month (and these amounts were not recorded on the company records)? In
other words, the employee took out an unauthorized “loan” for a while. The reconciliation would
not reveal this unauthorized activity because the ending balances are correct and in agreement.
To overcome this deficiency, some companies will reconcile not only the beginning and ending
balances, but also the total checks per the bank statement to the total disbursements per the
company records, and the total deposits per the bank statement to the total receipts on the
company accounts. If a problem exists, the totals on the bank statement will exceed the totals
per the company records for both receipts and disbursements. This added reconciliation
technique is termed a proof of cash. It is highly recommended where the volume of
transactions and amount of money involved is very large.
Also illegal is “kiting” which occurs when one opens numerous bank accounts at various
locations and then proceeds to write checks on one account and deposit them to another. In
turn, checks are written on that account, and deposited to yet another bank. And, over and over
and over. Each of the bank accounts may appear to have money; but, it is illusionary, because
there are numerous checks “floating” about that will hit and reduce the accounts. Somewhere in
the process the perpetrator makes a cash withdrawal and then vanishes. That is why one will
often see bank notices that deposited funds cannot be withdrawn for several days. Such
restrictions are intended to make sure that a deposit clears the bank on which it is drawn before
releasing those funds. Kiting is complex and illegal. Enhanced electronic clearing procedures
adopted by banks have made kiting far more difficult to accomplish.
The accountant for the Joshtine Company assembled the following data:
June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10,
returned by bank on July 16 marked NSF,
and redeposited immediately; no entry made
on books for return or redeposit 8,250
Collection by bank of company's 71,815 80,900
notes receivable
The bank statements and the company's cash records show these totals:
QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:
Joshtine Company
Reconciliation of Receipts, Disbursements, and Bank Balance
For the month ended July 31
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. The “CASH” account of Angel Corporation’s ledger on December 31, 2020 showed the
following:
a. Petty cash fund (including 7,500 unreplenished
voucher of which 2,400 is dated January 3, 2021) 15,000 5,100
b. Redemption Fund Account – PNB 500,000
c. Traveler’s check 100,000
d. Money order 10,000
e. Treasury bill, purchased December 1, 2020 (due on Feb. 1, 2021) 50,000
f. Time deposit acquired December 31 due on March 31, 2021 50,000
g. 180-day Treasury bill, due March 15, 2021 120,000
h. Note receivable in the possession of a collecting agency 20,000
i. PNB – Checking Account #211-009-091 325,900
j. Cash on hand, including customer postdated check of P15,000 23,000
k. Savings deposit, earmarked for acquisition of equipment 210,000
l. A check payable to San Ignacio Incorporated, dated January 5, 2021,
that was deducted in the December 31 PNB Checking Account
#211-009-091 50,000
m. Bond Sinking Fund (used to finance the maturing long-term obligation
on March 31, 2021) 150,000
n. Overdraft in PNB Checking Account #211-099-085 ( 50,000)
o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2020
not mailed until January 5, 2021 20,000
p. Advances to Officers/Employees for Seminars (no liquidation is
required) 80,000
q. Money market placement (due June 30, 2021) 600,000
r. Listed stock held as temporary investment 100,000
s. Check #789 in payment to Suppliers, dated January 5, 2021 and
recorded December 31, 2020. 35,000
t. Customers’ certified checks 10,000
u. Pension Fund 150,000
TOTAL 2,568,900
What Angel Corporation’s adjusted cash and cash equivalents balance at December 31, 2020
is:
a. 618,800 b.767,900 c. 673,800 d. 723,800 e. 768,800
2. The cash account of the Cristine Corporation as of December 31, 2020 consists of the following:
At what amount will the account “Cash” appear on the December 31, 2020 balance sheet?
a) 1,315,000
b) 1,495,000
c) 1,425,000
d) 1,725,000
3. An examination on the morning of January 2, 2021 by the auditor for the Kaila Company
discloses the following items in the petty cash drawer:
2. How much petty cash fund shall be shown as part of "Cash" balance as of December 31,
2020?
a. P 10,761.60 c. P 4,606.60
b. P 1,156.60 d. P 5,141.60
4. You are making an audit of the St. John Company for the year ended December 31, 2020. The
balance of the petty cash account on December 31, 2020 was P15,000. Your count of the
imprest cash fund, made at 9:00 a.m. on January 3, 2021, in the presence of Ms. D. Kumukupit
revealed:
Bills and Coins:
Denomination Quantity
1,000 2
500 4
100 14
50 16
20 10
10 19
5 17
1 25
0.50 21
0.25 28
Checks:
Date Maker Bank Amount
12-28-2020 Urquiola, employee PNB ?3,000-
12-29-2020 Sta. Maria, employee Security Bank 1,500-
12-31-2020 L. Chua, customer Asia Trust 2,500-
Vouchers:
Date Voucher No. Particulars Amount
12-13-2020 151 Freight out P 500-
12-28-2020 183 Supplies 300-
12-29-2020 184 Freight In 394.20
12-31-2020 189 Freight on cabinet 741.10
01-02-2021 001 Freight in 244.70
IOUs:
12-21-2020 S. Dechavez, employee 300-
(As a general rule, the petty cashier turn over the proceeds of cash sales to the general cashier
every Friday. Proceeds on these sales were recorded and deposited by the general cashier.)
How much the petty cash fund will present in the Balance sheet?
5. You are making an audit of the Khai Corporation for the past calendar year. The balance of the
Petty Cash account at December 31, 2021 was P1,300. Your count of the imprest cash count
made at 8:30 am on January 3, 2022, in the presence of the petty cash custodian, revealed:
Checks:
Date Maker Bank
12/28/2021 Macky, vice-president PNB 360.00
12/29/2021 Andy, employee DBP 60.00
12/31/2021 Bobot, customer RCBC 153.80
01/02/2022 Neil, customer PNB 121.36
01/10/2022 Jeff, employee PNB 60.00
(check received Dec. 29)
(These checks were all considered good when deposited after dates shown on the
checks. The first four checks were actually deposited Jan. 3; the last check was
deposited Jan. 11; all five checks proved to be good.)
Vouchers:
Dec. 11 #261 Richard, shipping clerk – temporary advance for the use of the
receiving department. Your count of Mr. Richard’s fund revealed:
currency – P28.80;
merchandise freight bills, P31.20. P 60.00
Dec. 28 # 301 Postage 12.00
Dec. 29 # 302 Freight bill on merchandise purchases 47.30
Dec. 31 # 305 Freight bill on office supplies 88.93
Jan. 2 # 500 Freight bill on merchandise purchases 29.36
Sales Invoices (for cash sales, collections handled by the petty cashier):
Invoice # 315 Dec. 30 P 120.00
328 Dec. 31 153.80
334 Jan. 2 121.36
(As a general rule, the petty cashier turn over the proceeds of cash sales to the
general cashier on the 10th, 20th and last days of each month. Proceeds on these
sales were recorded and de,posited by the general cashier.)
Postage Stamps:
Three one-peso stamps. The petty cashier handled postage stamps. These stamps
represent the unused stamps purchased on Voucher # 301.
1. How much is the petty cash fund shortage at December 31, 2021?
a. P 216.39 b. P 123.83 c. P 98.03 d. P 95.03
2. The adjusted petty cash fund balance of Khai Corporation at December 31, 2021 is:
a. P 900.74 b. P 960.74 c. P 1,174.54 d. P 1,234.54
3. What is the amount of operating expenses found in the petty cash fund of Khai
Corporation?
a. P 208.23 b. P 205.75 c. P 174.03 d. P 97.93
4. Excluding petty cash fund, the cash account of Candy Corporation is understated at
December 31, 2021 by:
a. P 395.16 b. P 273.80 c. P 153.80 d. P 120.00
6. The cash in bank account of Happy Company disclosed a balance of P201, 000 as of
December 31. The bank statement as of December 31 showed a balance of P106,000. Upon
comparing the bank statement with cash records, the following facts were developed.
What is the total amount of cash should Happy Company report at year-end?
a. P73,000
b. P93, 000
c. P42, 670
d. P83, 000
7. The Joshtin Company had a weak internal control structure over its cash transactions. Facts
about its cash position at November 30, 2020 were as follows:
The cash books showed a balance of P 1,890,162, which included undeposited receipts. A
credit memo of P 10,000 on the bank’s records did not appear on the books of the company.
The balance per bank statement was P 1,555,000. Outstanding checks were No. 62 for P
11,625, No. 183 for P 15,000, No. 284 for P25,325, No. 8621 for P19,071, No. 8622 for
P20,680, and No. 8632 for P14,528.
The cashier stole all undeposited receipts in excess of P 379,441 and prepared the following
reconciliation:
Questions:
2. What is the correct amount of cash to be shown on the statement of financial position
on November 30, 2020?
a. 1,828,212 b. 1,448,771 c. 1,900,162 d. 1,934,441
8. Sunshine Corporation engaged your services to audit its accounts. In your examination of cash,
you find that the Cash account represents both cash on hand and cash in bank. You further
noted that there is very poor internal control over cash.
Your audit covers the period ended December 31, 2020. You made a cash count on January
15, 2021, and cash on hand on this date was determined to be P52,000. Examination of the
cashbooks and other evidences of transaction disclosed the following:
1. January 1 through 15, 2021 collections per duplicate receipts, P199,000.
2. Total of duplicate deposit slips, all dated January 2 through 15, P110,000, includes a
deposit representing collections of December 31.
3. Cash book balance on December 31, 2020 is P465,000, representing both cash on hand
and cash in bank.
4. Bank statement for December shows a balance of P424,000.
5. Outstanding checks at December 31:
November checks: Number 183 P 4,500
198 12,500
December check: Number 252 6,000
254 4,000
280 52,000
301 9,000
319 25,000
6. Undeposited collections at December 31, P48,000.
7. An amount of P19,000 representing proceeds of a customer’s note was credited by
bank, but is not yet taken up in the company’s books.
8. Bank service charge for December, P1,500.
The company cashier presented to you the following reconciliation statement at December
2020, which he prepared:
Balance per books, December 31, 2020 456,000
Add: outstanding checks Number 252 6,000
254 4,000
280 25,000
301 900
319 15,000 50,900
Total P 506,900
Bank charges (1,500)
Undeposited collections (51,000)
Balance per bank P 454,400
1. How much is the amount of Cash shortage as of December 31, 2020?
a) 121,500 b) 123,500 c) 132,500 d) none of the above
2. How much is the additional shortage in January 2021?
a) 102,400 b) 85,000 c) 58,000 d) none of the above
3. Which is to be included in the audit adjusting entries at December 31, 2020?
a) Dr: Cash 1,600 b) Cr: Cash 106,000 c) Dr: Loss 123,500 d) none of the above
9. Your client, Ozz Company, presented you with the following data:
Bank balances
November 30 P 2,500,000
December 31 3,100,000
Book balances
November 30 P 2,390,000
December 31 3,047,000
Book receipts in December 2,206,000
Deposits in transit
November 30 58,000
December 31 47,000
Outstanding checks
November 30 97,000
December 31 46,000
The accountant for the Joshtine Company assembled the following data:
June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10,
returned by bank on July 16 marked NSF,
and redeposited immediately; no entry made
on books for return or redeposit 8,250
Collection by bank of company's 71,815 80,900
notes receivable
The bank statements and the company's cash records show these totals:
QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:
11. You are auditing the cash in bank account of Pamela Manufacturing Company as of December
31, 2020.
Your examination revealed the following:
Your review of last month’s bank reconciliation and the current bank statement reveals the
following.
1. Outstanding checks: November 30, 2020 P254,720
December 31, 2020 335,610
2. Deposit in transit: November 30, 2020 164,220
December 31, 2020 209,180
3. Check no 359 for Office Repairs was written for P6,950 but recorded in the cash
disbursements journal as P9,650. The bank deducted the check as P6,950. The error happened
in November and is not yet recorded as of December 31.
4. A check written on the account of the Pamplona Company for P5,830 was deducted by the
bank from the Pamela’s account.
5. Included with the bank statement was debit memorandum dated December 31 for P24,750
for interest on a note(loans) taken out by the Pamela Manufacturing Company on November 30.
6. The service charge for the new checks has not been recorded.
7. The November 30 bank reconciliation showed as reconciling items a service charge of
P3,500 and a customer’s DAIF check for P34,900.
12. Proof of cash; Identification of reconciling items and computation of adjusted balances
Your audit senior instructed you to prepare a four-column proof of cash receipts and
disbursements for the month of December, 2020.
The December bank statement, which has a beginning balance of P96,800, is reproduced
below:
May Bank
Account Name: Joshtine Company
Date Debits Credits
December 01 P18,000
December 02 P7,200 40,000
December 04 24,000
December 06 48,000
December 08 400,000 CM83
December 10 40,000 DM97
December 11 56,000
December 16 20,000
December 18 64,000
December 21 72,400
December 28 36,000 80,000
December 31 4,000 DM98 64,000 CM84
Totals P131,200 P842,400
DM97 – Customer’s DAIF check CM83 – Note collected by the bank
DM98 – Service Charges CM84 – Account collected by the bank
The company’s cash receipts and cash disbursements journals for the month of December 2020
are provided below:
Cash in Bank
Balance P58,640 12/31/2020 CDJ P304,000
12/01/2020 GJ 40,320
12/17/2020 GJ 400,000
(CM83)
12/31/2020 CRJ 440,800
QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following: