MODULE 5: CASH AND CASH EQUIVALENTS

I. Description
This module discusses the audit of cash and cash equivalents, its objectives and procedures as
well as management assertions on cash.

II. Objectives
After completing the module, the students are expected to:
 Identify what items are included in Cash and Cash Equivalents
 Calculate Petty Cash balances
 Identify Bank and Book reconciling items
 Prepare Bank Reconciliation and Proof of Cash

III. Duration
Start: Week 4
End: Week 4

IV. Learning Contents

A. DEFINITION

Cash includes money and other negotiable instruments that is payable in money and
acceptable by the bank for deposit and immediate credit. It includes cash on hand, demand
deposits and other assets that are unrestricted for use in the current operations.

Cash on Hand
Customer’s checks for
deposit
Undeposited cash collections
Travelers’ check Traveler’s checks are paper documents that can be used like standard
paper checks and cash. Traditionally, travelers carried these checks to get cash in
local currency and pay merchants. Issuers print checks in varying denominations,
and checks can be replaced quickly if lost or stolen
Cashier’s/official/Treasurer’s/ These are checks issued and guaranteed by the bank.
Manager’ check
Postal money order Written order for the payment of a sum of money, to a named payee, obtainable and
payable at a post office
Bank drafts The term bank draft refers to a negotiable instrument that can be used as payment
just like a check. Unlike a check, though, a bank draft is guaranteed by the issuing
bank. The total amount of the draft is drawn from the requesting payer's account—
their bank account balance decreases by the money withdrawn from the account—
and is usually held in a general ledger account until the draft is cashed by the payee.
Bank drafts provide the payee with a secure form of payment.

AUDITING AND ASSURANCE PRINCIPLES, CONCEPTS, AND APPLICATIONS

Ms. Desiree D. Cemefrania, CPA 1
Cash in Bank
Current account/ checking account/demand Issued with ATM, passbook and Checks.
deposit/ commercial account Withdrawable by checks
Savings deposit Issued with ATM or passbook account.
Withdrawable by ATM or over the counter

Cash Fund for current operations

Change fund
Payroll fund
Purchasing fund For purchasing of inventories, etc.
Revolving fund Fund for limited purpose set by the management
Interest fund
Petty Cash Fund
Dividend fund
Travel fund
Tax fund

Cash items used for use other than for current operations, presented as “Other non-current
financial assets”.

Cash Fund for non-current operations

Pension fund Non-current investment. If the portion of the liability
is current, that part is included in the cash.
Preferred redemption fund Non-current investment, except if mandatory
redemption and if redeemable within one year or
three months
Acquisition of PPE Always non-current
Contingent fund Non-current investment
Insurance fund Non-current investment
Sinking fund Non-current investment, but if the related bonds is
current, will be part of cash.

CASH EQUIVALENTS

Cash equivalents are short-term and highly liquid investments that are readily convertible to
cash and so near their maturity that they present insignificant risk of changes in value because
of changes in interest rates.

Time Deposit
Money market instrument or commercial paper
Treasury bills, notes and bonds
Redeemable preference shares with mandatory redemption period

AUDITING AND ASSURANCE PRINCIPLES, CONCEPTS, AND APPLICATIONS

Ms. Desiree D. Cemefrania, CPA 2
  If the above list are originally acquired for more than three (3) months and the maturity
is three (3) months or less – SHORT TERM INVESTMENT
 If the above list are originally acquired for more than three (3) months and the
remaining term is more than one (1) year– LONG TERM INVESTMENT
 If the above list are originally acquired for less than three (3) months or less before
maturity – CASH EQUIVALENTS

Measurement
Cash Face value
Cash in foreign currency Must be translated to Php using the closing
rate or spot rate at the reporting period
Deposit in foreign bank Restricted – NC Assets under Receivables
Unrestricted – Cash
Bank overdraft Negative Balance on cash

If maintaining multiple bank accounts in diff.

banks
 CURRENT LIABILITY if Material.
 If part of cash management may be
netted against other banks

If maintaining multiple accounts with the same

bank
 Maybe netted on other accounts, except
if restricted.
Compensating balance Minimum amount to be maintained in
connection with a borrowing agreement from
the bank

 Not legally restricted – CASH

 Legally restricted – if loan is:
o Short term – Current Receivable
o Long Term – NC Receivable

Undelivered/unreleased check Reverted back to cash

Stale checks Reverted back to cash
Postdated checks – Issued by the entity Reverted to cash
Postdated checks – received by the entity Receivables
IOUs (I owe you) Receivables
Equity Securities Not classified as cash because it has no
maturity date, except for redeemable
preference shares
Redeemable preference shares  If acquired 3 months before maturity
– CASH EQUIVALENTS
 If acquired more than 3 months

AUDITING AND ASSURANCE PRINCIPLES, CONCEPTS, AND APPLICATIONS

Ms. Desiree D. Cemefrania, CPA 3
 before maturity – CURRENT
INVESTMENT
Callable Preference Shares Not as cash. Part of shareholders equity
(issuer) and long term investment (holder)
NSF/DAUD/DAIF Reverted as part of receivables
Expense Advances Receivables/ prepaid expense
Temporary shares of stocks investments FVTPL or FVTOCI but never as cash
Unused credit line Difference bet. Credit line approved and
actual borrowed.
Disclosed in the notes.
Treasury Warrants Drawn against a public Treasury. Part of
Cash
Escrow deposit Held in trust for another party.
Dr. Current or NC Asset
Cr. Liability
Unrecorded disbursement Record to appropriate expense account
Dr. Expense
Cr. Cash
Unrecorded cash collection Record the collection
Dr. Cash
Cr.AR or appropriate account
Certificate of Time Deposit (TD) Invested 3 months before maturity – Cash
equivalent

Invested more than 3 months before maturity

– Short of long term investment
Postage Stamp on hand Office supplies/ prepaid expense

PETTY CASH FUND

It is impractical for a company to make all payments thru check. A petty cash fund is established
to cover small and miscellaneous expenditures. Two methods of Petty cash fund may be used:

1. Imprest Fund System

2. Fluctuating System

Imprest Fluctuating
Set up of Fund/ Increase in Dr. Petty Cash Fund Dr. Petty Cash Fund
fund Cr. Cash in Bank Cr. Cash in Bank
Payment of Expenses **Memo entry in PCF Journal** Dr. Expenses
Cr. Petty Cash Fund
Replenishment Dr. Expenses Dr. Petty Cash Fund
Cr. Cash in Bank Cr. Cash in Bank

AUDITING AND ASSURANCE PRINCIPLES, CONCEPTS, AND APPLICATIONS

Ms. Desiree D. Cemefrania, CPA 4
BANK RECONCILIATION

A schedule prepared that accounts for differences between cash balances per book and per
bank statement. It is prepared monthly because the bank provides the depositor with monthly
bank statement.

Forms of Bank Reconciliation:

1. Adjusted Balance Method

2. Book to Bank method
3. Bank to Book method

Different Reconciling Items:

1. Book Reconciling Items

a. Credit Memos – collections or deposit to the entity that are not recorded in the
books.
Collection by the bank on behalf of the entity
Proceeds of bank loan
Interest income on deposit

b. Debit Memos – deductions made by the bank that are not recorded by the entity.
Bank charges
NSF/DAUD/DAIF checks
Loan payment
FWT on interest income

c. Errors

2. Bank Reconciling Items

a. Deposit in Transit – deposited already in the current period but is taken up by the
bank in the next period

b. Outstanding Checks – checks written and released to payees and already

recorded in the cash disbursement but not yet presented for encashment or
deposit by the payee.

c. Errors

V. References
 Auditing and Assurance Concepts and Applications by Darrell Joe O. Asuncion, Mark
Alyson B. Ngina and Raymund Francis A. Escala

AUDITING AND ASSURANCE PRINCIPLES, CONCEPTS, AND APPLICATIONS

Ms. Desiree D. Cemefrania, CPA 5
  Auditing and Assurance, Concepts and Applications by Ma. Elenita Balatbat Cabrera
and Gilbert Anthony B. Cabrera

AUDITING AND ASSURANCE PRINCIPLES, CONCEPTS, AND APPLICATIONS

Ms. Desiree D. Cemefrania, CPA 6