Auditing Problems # 001

Audit of Cash and Cash Equivalents

Problem

Your client, a successful small business, has never given much attention to a sound internal control. In
its employ is Alex Coopit, the company’s cashier bookkeeper. Alex handles cash receipts, makes small
disbursements from the cash receipts, maintains accounting records, and prepares the monthly bank
reconciliation.

The bank statement for the month ended March 31, 2018 shows a cash balance of P590,000. The
following checks are outstanding as of March 31:

No. 7163 P18,623

No. 7284 P17,320
No. 7285 P10,612
No. 8722 P16,322
No. 8724 P12,280
No. 8733 P16,200

The company’s general ledger shows a cash balance of P696,499 on March 31, 2018.

Realizing that being the cashier-accountant of the company he can easily misappropriate collections
and conceal it, Alex removed all the cash on hand in excess of P127,301, and then prepared the following
reconciliation in an effort to conceal this theft.

Bank Reconciliation
Balance per accounting records P696,499
Add: Outstanding checks
No. 8722 P16,322
No. 8724 P12,280
No. 8733 P16,200 P620,802
Total P717,301
Deduct: Cash on hand P127,301
Balance per bank statement, March 31 P590,000

1. How much was taken by the cashier-accountant?

a. P030,355
b. P157,856
c. P004,000
d. P026,555

2. What is the amount of cash that should be on hand at November 15, 2018?

a. P127,301
b. P131,301
c. P157,856
d. P030,555

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Auditing Problems # 001
Solution

Book Bank
Unadjusted balance P696,499.00 P590,000.00)
Deposit in transit 157,856.00)
Outstanding checks (8,623.00)
(7,320.00)
(10,612.00)
(6,322.00)
(12,280.00)
(6,200.00)
Adjusted balance P696,499.00 P696,499.00)

1. Expected deposit in transit or cash on hand P(157,856

Cash on hand reported P(127,301)
Cash shortage P(030,555

2. Cash that should be on hand P(157,856

Further Analysis

The problem was solved by using recalculation which one of the procedures in obtaining audit evidence.
It can be noted that there are no book reconciling items given on the problem and that is why the unadjusted
book balance is deemed equal to the adjusted balance – P696,499. The same balance is treated as the adjusted
balance for the bank side. From there, the correct deposit in transit should there be no misappropriation of
assets was computed (squeezed). This “should be” amount was then compared to the reported amount to
compute the cash shortage.

Putting an emphasis on segregation of duties, the following responsibilities or functions should be

assigned to different persons:
a. Authorization
b. Recording
c. Custody
d. Reconciliation
Conversely, Alex Coopit was in charge of the handling of cash receipts (custody), making of small
disbursements (authorization and custody), maintenance of accounting records (recording) and the
preparation of monthly bank reconciliation.