CHAPTER 1

Audit of Cash and 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 item in 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 statement.

Audit Procedures:
1. Conduct a cash count of undeposited collections, petty cash, and other funds.
● Obtain custodian’s signature to acknowledge return of item counted.
● Reconcile item counted with general ledger balances.
● Trace undeposited collections counted to bank reconciliation.
● Follow up dispositions of item in cash counted:
1. Undeposited collections should be traced to bank deposits.
2. Checks accommodated in petty cash should be deposited after the count to establish their validity.
3. IOUs in the petty cash should be confirmed and traced to collections in the next payroll period.
4. Expense vouchers should be traced to the succeeding replenishment voucher.
● Coordinate cash count with count of marketable securities and other negotiable asset to 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 which the client has had deposits and loans
during the year.

3. Obtain banks reconciliation.

● Check arithmetical accuracy of reconciliation.
● 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:
1. Bank debit or credit advices.
2. Duly approved journal vouchers.
● Investigate checks outstanding for a long period of time.
1. Consider adjustment, especially if the check is already stale.
2. 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 transaction with the bank at least one week after the
reporting date, and:
● Trace year-end reconciling items, like:
1. Deposit of the year-end undeposited collections.
2. Completeness of year-end outstanding checks.
3. Corrections of bank errors.
● Examine supporting documents of year-end outstanding checks the did not clear in the cutoff bank
statement.

5. Obtain a list of interbank transfer of funds a few days before and after 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 check 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 balance.
● 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 disclosure.

PROBLEM 1: CORRECT BALANCE OF CASH AND CASH EQUIVALENTS

The accountant of SANTIAGO COMPANY is in the process of preparing the company’s financial statement for the
year ended December 31, 2016. He is trying to determine the correct balance of cash and cash equivalents to be
reported as a current asset on the statement of financial position. The following items are being considered.
● Balance in the company’s account at the Metropolitan Bank.
⮚ Current account P81,000
⮚ Savings account P132,600
● Undeposited costumer checks of P22,200 (including a costumer check dated January 2, 2017 , 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 2017).
● Petty cash of P4,000 (currency of P1,200 and unreplenished vouchers for P2,800)
● P120,000 in a current account at the North Philippines Bank. This represents a 20% compensating balance
for P600,000 loan with the bank. Santiago Company is legally restricted to withdraw the funds until the loan
is du in 2019.
● Treasury bills:
Two-month maturity bills P90,000
Seven-month bills 120,000
● Time deposit (placement term is 2 months) P100,000

What is the correct balance of cash and cash equivalents to be reported in the current assets section of the
statement of financial position?
A. P547,480 C. P430,280
B. P427,480 D. P327,480

PROBLEM 2: CORRECT BALANCE OF CASH AND CASH EQUIVALENTS

The following information has been extracted from the accounting records of the URSULA COMPANY at December
31, 2016:
a. Cash on hand (see note below) P230,000
b. Impukan Bank savings account (the required minimum Monthly
Average Daily Balance (MDAB) is P10,000 9,500
c. 364-day treasury bills purchased March 1, 2016 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, 2016 30 days 30,000
Oct. 31, 2016 90 days 40,000
Nov. 30, 2016 10 days 25,000
 g. Employee travel advances 7,000
h. Cash in bond sinking fund 500,000
i. Customer’s note receivable 45,000
j. Postage stamps 2,400
The following are included in cash on hand:
● A customer check for P43,000 returned by the bank on December 28, 2016. It was redeposited and
cleared the bank on January 2, 2017.
● A customer check to P75,000 dated January 3, 2017, received December 27, 2016.
● PHILPost 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 of your loved one.” 1,500
P 20,000
The following information pertains to Tipid Bank current account:
● A check for P13,000 was dated and recorded on December 29, 2016, but was delivered to payee on
January 5, 2017.
● A check for P5,000 dated January 10, 2017, payable to a supplier was recorded and released to
payee on December 19, 2016. Tipid Bank requires current account depositors to maintain a monthly
average daily balance of P50,000

What is the correct amount of cash and cash equivalents that Ursula Company should report on its
December 31, 2016, statement of financial position?
A. P383,000 C. P378,000
B. P373,500 D. P408,000

PROBLEM 3: CORRECT BALANCE OF CASH AND CASH EQUIVALENTS

The controller of the LYRIC CO. is trying to determine the amount of cash and cash equivalents to be reported on
its December 31, 2016, statement of financial position. The following information is provided:
1. Balances in the company’s account at the Monte Bank:
● Checking account – P540,000
● Saving 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 2018).
5. P800,000 balance in a checking account at the Naic Bank.
6. Treasury bills; 30-days maturity bills totaling P600,000, and 180-day bills totaling P800,000.

What total amount of “cash and cash equivalents” should be reported in the current asset section of the
2016 statement of financial position?
A. P3,055,200 C. P2,955,200
B. P2,455,200 D. P2,355,200

PROBLEM 4: CORRECT BALANCE OF CASH

The cash account to the BEA CORPORATION as of December 31, 2016, 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, 2017 70,000
A check drawn by a supplier dated December 2, 2016, for goods
returned by the company. 60,000
A checked dated May 31, 2016, drawn by the company against the Bank
of Manila in payment for 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 P10,000 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, 2016 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, 2016, statement of financial position of Bea
Company? _______________

PROBLEM 5: PETTY CASH

In connection with your audit of the financial statement of ONOR COMPANY for the year ended December 31,
2016, you gathered the following information.
1. The company maintains its current account with Tsunami Bank. The bank statement on December 31,
2016, showed a balance of P368,340.

Your audit of the company’s 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, 2016. No entry was made for the return of this check,
the customer replaced the check on January 15, 2017.
● A check for P5,720 was cleared by the bank as P7,520. The bank made the correction on January 2,
2017.
● A check for P3,500 representing payment of an employee advance was received and deposited on
December 27, 2016, but was not recorded until January 3, 2017.
● 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, 2017.
● Various debit memos for drafts purchased for payment of importation of equipment totaling P230,000
were not yet recorded. These purchase were previously set up as accounts payable. Said equipment
arrived in December 2016.
● Interest earned on the bank balance for the 4th quarter of 2016, amounting to P1,950 was not
recorded.
● Bank service charges totaling P1,260 were not recorded.
● Deposit in transit and outstanding checks at December 31, 2016, totaled P136,250 and P276,380,
respectively.
2. Various expenses from the company’s imprest petty cash fund dated December 2016, totaled P16,250,
while those dated January 2017, amounted to P5,903. Another disbursement from the fund dated December
2016 was a cash advance to an employee amounting to P3,500. A replenishment of the petty cash fund was
made on January 8, 2017.

3. The company’s trial balance on December 31, 2016, includes the following accounts:
Cash in bank – Tsunami Bank P748,320
Cash in bank – Earthquake bank (restricted account for plant
expansion, expected to be disbursed in 2017) 700,000
 Petty cash fund 30,000
Time deposit, placed December 20, 2016, and due March 20, 2017 1,000,000
Money market placement – Prudential Bank 4,000,000

1) What is the adjusted petty cash fund balance on December 31, 2016?
a. P4,347 c. P30,000
b. P10,250 d. P24, 097

2) The petty cash shortage on December 31, 2016 is

a. P 0 c. P3,500
b. P5,903 d. P4,347

3) What is the adjusted Cash in bank – Tsunami Bank balance on December 31, 2016?
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, 2016, statement of financial position should show “Cash and cash equivalents” at
a. P6,142,960 c. P4,442,960
b. P5,439,360 d. P5,442,960

PROBLEM 6: PETTY CASH

On January 1 TANYA CO. establishes a petty cash account and designates Orly Reyes as petty cash custodians.
The original amount included in the petty cash fund is P10,000. 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 check to the petty cash custodian, rather than
cash.
C. To determine that the fund is being accounted for satisfactorily, surprise counts of the fund are made from
time to time by the internal auditor or other responsible official.
D. Each individual to whom petty cash is paid is required to present signed receipts to the petty cash
custodian.
3. the entry to replenish the fund is
A. Office supplies expense 3,460
Postage expense 2,240
Entertainment expense 840
Cash 6,540

B. Office supplies expense 3,460

Postage expense 2,240
Entertainment expense 840
Cash over and short 260
Petty cash 6,800

C. Office supplies expense 3,460

Postage expense 2,240
Entertainment expense 840
Cash over and short 260
Cash 6,800

D. Office supplies expense 3,460

Postage expense 2,240
Entertainment expense 840
Petty Cash 6,540

4. the objective of establishing a petty cash fund is to

A. Cash checks for employees
B. Account for all cash receipts and disbursements
C. Account for cash sales
D. Facilitate payment of small, miscellaneous items.

5. What is the effect of not replenishing the petty cash at year-end and not making the appropriate
adjusting entry?
A. A detailed audit is essential
B. The petty cash custodian should turn over the petty cash to general cahier
C. Cash will be overstated and expenses understated
D. Expenses will be overstated and cash will be understated.

PROBLEM 7: PETTY CASH

Count of Petty Cash Fund and Undeposited Collections
In connection with your audit of the financial statement of BENJAMIN CORP. for the year ended December 31,
2026, you conducted a surprise count of the company’s petty cash fund and undeposited collections at 8:20 a.m. on
January 3, 2017. Your count disclosed the following:

Bills and coins

Bills Coins
P100.00 5 pieces 5.00 18 pieces
50.00 40 pieces 1.00 206 pieces
20.00 48 pieces 0.25 32 pieces
Postage stamps (unused) – P365
Checks
Date Payee Maker Amount
Dec. 30 Cash Custodian P 1,200
Dec. 30 Benjamin Corp. SLV, Inc. 14,000
Dec. 31 Benjamin Corp. Mariano Lansang,
 Sales manager 1,680
Dec. 31 Benjamin Corp. MSU Corp. 17,800
Dec. 31 Benjamin Corp. Ateneo Inc. 8,300
Dec. 31 Taiwan Corp. Benjamin Corp. 27,000

Unreimbursed vouchers
Date Payee Description Amount
Dec. 23 Mario Lansang, Advance for trip to P 20,000
sales manager Tagaytay City
28 Central Post Office Postage stamps 1,620
29 Messenger Transportation 150
29 Byte, Inc. Computer repair 800
Other items found inside the cash box:
❖ Unclaimed pay envelope of juan McDonut. Indicated on the pay slip is his net salary of P7,500. Your inquiry
revealed that juan’s salary is mingled with the petty cash fund.
❖ The sales manager’s liquidation report for his Tagaytay City trip.
Cash advance received on Dec. 23 P20,000
Less: Hotel accommodation, meals, etc. P16,000
Bus fare for two 1,200
Cash given to Pablo, salesman 1,000
Balance P 1,800

Accounted for as follows

Cash returned by Pablo to the sales manager P 120
Personal check of the sales manager 1,680
Total P1,800
Additional information
a) The custodian is not authorized to cash checks.
b) The last official receipts include in the deposit on December 30 is No.4351 and last
official receipt issued for the current year is No. 4355. The following official receipts are all
dated December 31, 2016.
OR No. Amount Form of Payment
4352 P13,600 Cash
4353 17,800 Check
4354 3,600 Cash
4355 8,300 Check
c) The petty cash balance per general ledger is P25,000. The last replenishment of the fund
was made on December 22, 2016.

1. What is the amount of shortage due from the sales manager?

A. P2 40 C. P 120
B. P 1,800 D. P 0

2. What is the amount of undeposited collections on December 31, 2016?

A. P 44,300 C. P 57,300
B. P 84,300 D. P 41,000

3. The adjusting entries on December 31, 2016, should include a net debit to Travel expenses of
A. P 17,320 C. P 18,200
B. P 18,320 D. P 18,080

4. The cash count should include total checks of

A. P 69,980 C. P 41,780
 B. P 42,980 D. P 41,300

5. What is the total cash shortage?

A. P 22,166 C. P 22,406
B. P 8,166 D. P 20,486

PROBLEM 8
Presented below are a series of unrelated situations. Answer the question at the end of each situation.
1. The accountant of NARCISA CO. provided the following data in reconciling the April 30 cash in bank
balance.

Balance per bank, April 30 P130,350

Balance per books, April 30 85,000
Bank service charge 2,000
Deposit in transit 49,000
Outstanding checks 17,650
Note collected by bank including P11,200
interest (Narcisa Co. not yet informed) 136,000
Check drawn by XYZ Co. erroneously
charged by bank to Narcisa’s account 54,600

A transposition error was made in recording a sale and deposit in the sale journal and cash receipts journal in April.
Correct amount P13,658
Record as P16,358

What is the adjusted balance on April 30? ___________________

2. The following information is include in EMIL CORPORATION’s bank statement for the month of March:

A customer’s check has been marked “NSF”

by the bank and returned P13,000
Bank service charge for March 1,200

In comparing the bank statement to the company’s cash records, you found:

Outstanding checks on March 31 P184,000

Deposits made but are not yet shown in the
April bank statement 14,000

The deposits in transit and outstanding checks have been correctly taken up in the company’s books. You also
found a customer’s check for P17,400 that had not yet been deposited and had not been recorded in Emil’s books.
Your client’s book show a cash balance of P36,420.

What is the Emil Corporation’s correct cash balance at March 31?______________________

3. The following information pertains to a checking account of a company at June 30, 2016.

Balance per bank statement P200,000

Interest earned for the second quarter 500
Outstanding checks 15,000
Customer’s check return for his insufficient funds 5,000
Deposit in transit 25,000
 What is the adjusted cash balance at June 30, 2016? ___________________

4. A company is reconciling its bank statement with internal records. The cash balance per the company’s
books is P45,000. There are P5,000 of bank charges not yet recorded, P7,500 of outstanding checks,
P12,500 of deposit in transit, and P15,000 of bank credits and collections not yet taken up in the company’s
book.
What is the cash balance per bank? ___________________

5. A company shows a cash balance of P175,000 on its bank statement dated June 30. As of June 30, there
are P55,000 of outstanding checks and P37,500 of deposit in transit.

What is the correct cash balance on the company books as of June 30? ________________

6. The Cash account shows a balance of P225,000 before reconciliation. The bank statement does not include
a deposit of P11,500 made on the last day of the month. The bank statement shows a collection by the bank
of P4,700 and a customer’s check for P1,600 was returned because it was NSF. A customer’s check for
P2,250 was recorded on the books as P2,700, and a check written for P395 was recorded as P485.

What should be the correct balance? ___________________

7. On July 5, 2016, EMILIA CORP. received its bank statement for the month ending June 30. The statement
showed a P209,500 balance while the cash account balance on June 30 was P35,000. In reconciling the
balances, the auditor discovered that:
⮚ The June 30 collections of P176,000 were recorded on the books but were not deposited
until July.
⮚ The bank service charges for the month of June totaled P3,000.
⮚ A paid check for P24,300 was entered incorrectly in the cash payments journal as P34,200.

What is the total outstanding checks at June 30, 2016? ___________________

PROBLEM 9: BANK RECON

The bank statement for the current account of IAN Co. showed a December 31, 2016, balance of P585,284.
Information that might be useful in preparing a bank reconciliation is as follows:
a) Outstanding checks were P52,810.
b) Th December 31, 2016 cash receipts of 23,000 were not deposited in the bank until January 2, 2017.
c) One check written in payment or rent P8,940 was correctly recorded by the bank but was recorded by Ian
Co. as a P9,840 disbursement.
d) In accordance with prior authorization, the bank withdrew P18,000 directly from the current account as
payment on a mortgage note payable. The interest portion of that payment was P14,000. Ian Co. has made
no entry to record the automatic payment.
e) Bank service charges of P740 were listed on the bank statement.
f) A deposit Of P35,000 was recorded by the bank on December 12, but it did not belong to Ian Co.
g) The bank statement included a charge of P3,400 for a not-sufficient-fund check. The company will seek
payment from the customer.
h) Ian Co. maintains an P8,000 petty cash fund that was appropriately reimbursed at the end of December.
i) According to instructions from Ian Co. on December 30, the bank withdrew P400,000 from the account and
purchased treasury bills for Ian Co. The company recorded the transactions in its books on December 31
when it received notice from the bank. Half of the treasury bills mature in three months and the other half in
six months.

1) What is the cash in bank place per books on December 31, 2016?
a. P549,714 c. P534,914
 b. P543,514 d. P541,714

2) What is the adjusted cash in bank balance on December 31, 2016?

a. P520,474 c. P518,674
b. P527,274 d. P520,154

3) What amount would Ian Co. report as cash equivalents in the current assets section of the
December 31, 2016, statement of financial position?
a. P928,474 c. P720,474
b. P728,474 d. P735,274

PROBLEM 10: PROOF OF CASH

The following information pertains to FLINT CORP.:
Flint Corp
BANK RECONCILIATION
November 30, 2016

Balance per bank statement P435,000

Less: Outstanding checks
No. 4321 P 6,000
4329 15,000
4340 1,700
4341 4,675
27,375
P407,625
Add: Deposit in transit 16,200
Balance Per books P423,825

CHECK REGISTER
December 2016

Date Payee No. Payable Discount Cash

Dec. 1 San Beda, Inc. 4342 P 10,000 P500 P 9,500
3 Miriam Corp. 4343 4,200 - 4,200
7 UE Enterprise 4344 3,755 - 3,755
12 PSBA Corp. 4345 12,000 120 11,880
15 Payroll 4346 96,000 - 96,000
16 BU, Inc. 4347 6,300 - 6,300
18 New Era Co. 4348 14,200 142 14,058
21 UST, Inc. 4349 7,000 - 7,000
22 Petty cash fund 4350 10,000 - 10,000
28 Payroll 4351 98,000 - 98,000
P261,455 P762 P260,693

BANK STATEMENT

BANKABLE BANK
PERIOD: NOVEMBER 30, 2014 – DECEMBER 31, 2016
NO.: 001-43-44

Date Description Check Number Debit Credit Balance

Balance last statement P435,000
Dec. 1 Cash deposit P16,200 451,200
 1 Check issued 4329 P15,000 436,200
4 Check issued 4342 9,500 426,700
4 Check issued 4341 4,675 422,025
5 Check deposit 49,000 471,025
6 Check issued 4343 4,200 466,825
8 Check deposit 14,000 480,825
10 Check issued 4344 3,755 477,070
15 Encashment 4346 96,000 381,070
22 Encashment 4350 10,000 371,070
28 Encashment 4351 98,000 273,070
29 Debit memo-
service charge 1,000 272,070
29 Credit memo-
Interest 1,550 273,620

Deposits in transit at December 31 totaled P49,000.

1. What is the total book receipts for December?

A. P112,550
B. P80,750
C. P63,000
D. P112,000

2. What is the cash balance per books in December 31, 2016?

A. P275,132
B. P226,132
C. P291,332
D. P274,370

3. What is the total outstanding checks on December 31, 2016?

A. P68,313
B. P39,238
C. P46,938
D. P40,938

4. What is the adjusted cash balance on November 30, 2016?

A. P446,375
B. P417,825
C. P423,825
D. P435,000

5. What is the adjusted cash balance on December 31, 2016?

A. P281,682
B. P275,682
C. P226,682
D. P274,920