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LECTURE NOTES - Aud Prob
LECTURE NOTES - Aud Prob
LECTURE NOTES - Aud Prob
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
One must know which items (trial balance accounts) are included or which are excluded as
cash. To simplify cash and cash equivalent is divided in two (2) groups; cash is divided into
three (3) sub-group illustrated below:
Cash On hand
Cash and Cash
Equivalents
In Bank
Cash
Equivalents
Funds
Cash on Hand:
1. Currencies and coins Checks drawn by the company
2. Money order Included as Cash
3. Bank drafts 1. Company’s unreleased check Add
4. Checks 2. Company’s postdated check back
3. Company’s stale check to cash
a. Cashier’s Check
b. Certified Check
c. Customer’s Check Included as Cash
d. Manager’s Check
e. Personal Check
f. Traveler’s Check
g. Customer’s postdated check
h. Customer’s NSF/DAIF check Excluded as Cash
i. Customer’s stale check
It is assumed that the journal entry for payment is already made when the check was drawn. But
because the check (cash) is still in your control as of reporting date, the entry for payment should
be reversed.
Assumed entry when drawn: Entry to reverse since the check is still in your
control:
Accounts Payable xx Cash xx
Cash xx Accounts Payable xx
Cash in Bank:
1. Checking account - Included as Cash
2. Savings Account - Included as Cash
3. Time Deposit - Excluded from cash (treated as cash equivalents)
If the question is:
How much is Cash? EXCLUDE
How much is Cash & CE? INCLUDE
Cash in Fund:
1. Sub divided into two (2) categories: (1) cash fund for operations and (2) cash fund not for
operation:
The counting of three months is from date of acquisition of CE to the date of maturity of CE.
Answer:
2. Disbursement No entry -
Answer:
Accountability Accounted
1 Imprest balance of PCF x x Currencies and coins 1
2 Undeposited collection currencies x x Undeposited collection from customer 2
from customer
3 Undeposited collection check from x x Paid vouchers (regardless of date) 3
customer
4 Unclaimed salaries x x Replenishment check 4
5 Excess of advance of travel x x IOUs 5
6 Employee contributions (always) x x Accommodation check (all) 6
x Employee contribution (only if closed) 7
Total X X Total
What is the adjusted petty cash fund at the end of the year?
Answer:
Currencies and coins at the date of count xx
Add: Disbursements after December 31 xx
Less: Receipts after December 31 xx
Currencies and coins at December 31 xx
Answer:
What is the unadjusted balance of Cash in Bank per book or per bank statement?
Answer:
Per book Per bank
Unadjusted balance per ledger x Unadjusted balance per bank statement x
Add: Credit memos Add: Deposit in transit x
1. Note collected by bank in behalf x
2. Interest earned by bank deposit x
3. Loan proceeds directly credited x
Less: Outstanding checks (x)
Less: Debit memos (excluding certified check)
1. NSF check from customer (x)
2. Bank service charge (x)
3. Auto debit agreement (x)
Add: Errors
Add: Errors 1. Overstated disbursements x
1. Overstated disbursements x 2. Understated receipts x
2. Understated receipts x
First, compute the adjust balance of either book or bank depending on which unadjusted
balance is given.
Second, whatever the adjusted of one that will also be the adjusted balance or the other
one. Last, from the adjusted balance copied from one record work back the unadjusted
balance.
What is the amount of the missing reconciling item?
Answer:
Per book Per bank
Unadjusted balance per ledger x Unadjusted balance per bank statement x
Add: Credit memos Add: Deposit in transit x
4. Note collected by bank in behalf x
5. Interest earned by bank deposit x
6. Loan proceeds directly credited x
Less: Outstanding checks squeeze
Less: Debit memos (excluding certified check)
4. NSF check from customer (x)
5. Bank service charge (x)
6. Auto debit agreement (x)
Add: Errors
Add: Errors 3. Overstated disbursements x
4. Overstated disbursements x 4. Understated receipts x
5. Understated receipts x
The missing reconciling item can be squeezed from the two records as shown above (for example the
missing reconciling item is outstanding check
Proof of Cash
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Expected Questions:
1. What is the adjusted or unadjusted balance of cash in the previous month?
2. What is the adjusted or unadjusted receipt?
3. What is the adjusted or unadjusted disbursements?
4. What is the adjusted or unadjusted balance of cash in the current month?
5. What is the amount of the missing reconciling item?
Cash in Bank
Collections from customer x x Check drawn
Credit memo of prior month x x Debit memo of prior Month
Correction of error x x Correction of error
Cash in Bank
Check encashed x x Deposit received
Debit memo of current month x x Credit memo of current month
Correction of error x x Correction of error
ntsDisburseme
MonthCurrent
Receipts
Transactions
Unadjusted balance
Deposits in transit, prior month + -
Deposits in transit, current month + +
Outstanding check prior month - -
Outstanding check, current month + -
Overstated disbursement, prior month, corrected at current month + -
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month - -
Overstated receipt, prior month, not yet corrected at current month - -
Overstated disbursement, current month, corrected at current month - -
Overstated disbursement, current month, not yet corrected at current month - +
Overstated receipt, current month, corrected at current month - -
Overstated receipt, current month, not yet corrected at current month - -
Understated disbursement, prior month, corrected at current month - -
Understated disbursement, prior month, not yet corrected at current month - -
Understated receipt, prior month, corrected at current month + -
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + -
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + -
Adjusted balance xx xx xx xx
How to proof of cash the book balance?
MonthPrevious
ntsDisburseme
MonthCurrent
Receipts
Transactions
Unadjusted balance
Credit memo, prior month + -
Credit memo, current month + +
Debit memo, prior month - -
Debit memo, current month + -
Overstated disbursement, prior month, corrected at current month + -
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month - -
Overstated receipt, prior month, not yet corrected at current month - -
Overstated disbursement, current month, corrected at current month - -
Overstated disbursement, current month, not yet corrected at current month - +
Overstated receipt, current month, corrected at current month - -
Overstated receipt, current month, not yet corrected at current month - -
Understated disbursement, prior month, corrected at current month - -
Understated disbursement, prior month, not yet corrected at current month - -
Understated receipt, prior month, corrected at current month + -
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + -
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + -
Adjusted balance xx xx xx xx
Trade Receivables and Allowances
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Expected Questions:
1. What is the balance of A/R at year-end?
2. What is the balance of Allowance for Bad Debts at year-end?
3. What is the amount of bad debt expense for the year?
4. What is the net realizable value (NRV) of A/R at year-end?
Accounts Receivable
Beginning balance x
Gross Sales x x Collections
Recoveries x x Collection of Recoveries
x Write Offs
x Discounts taken during the period
x Sales actually returned
x Other forms of payment
x
Ending Balance x
Unadjusted balance x
Add: Reversal of customer’s postdated NSF check x
Add: Adding back of customer’s credit balance that was assumed “netted” x
Less: Unrecorded sales returns by the customers x
Less: Recorded sales without transfer of title (e.g. FOB Destination) x
Add: Unrecorded sales with transfer of title (e.g. FOB Shipping point) x
Adjusted balance x
Second, solve for the bad debt expense by squeezing it in the T-account of allowance:
x Ending Balance
__________________________________________________________________________________________________
METHOD 2: Using Percentage of Sales method
Sales x
Multiply by: Percentage of uncollectibility x%
Bad debt expense x
Second, solve for the allowance by using T-account as follows:
x Ending Balance
__________________________________________________________________________________________________
METHOD 3: Using Aging of A/R method
Second, solve for the bad debt expense by squeezing it in the T-account of allowance:
x Ending Balance
Answer:
Accounts receivable balance, ending balance x
Less: Allowance for doubtful accounts (x)
Allowance for sales discount (x)
Allowance for sales returns (x)
Net realizable value of A/R x
What is the initial measurement (fair value) of the notes receivable at the date received?
What is the revenue or sales when the consideration given is in a form of notes receivable?
2. Non-interest-bearing -none-
Answer: If note is a term note (principal is payable one time, the whole NR will be classified as
current if the principal is payable within one year. If the principal will be paid beyond 1 year, the
whole NR will be classified as non-current asset.
If the note is a serial note, it is both current and non-current and can be computed as follows:
What is the initial measurement (fair value) of the notes receivable at the date received?
Receivable Financing
AUDITING PROBLEMS
INTEGRATED REVIEW II | ERLINDA G. BIALNO, CPA
Expected Questions:
1. Assignment
a. What is the balance of AR assigned?
b. What is the balance of loans payable?
c. What is the equity to be disclosed in the notes to financial statement?
2. Factoring
a. What is the net proceeds from factoring of receivable?
b. What is the cost of factoring?
3. Discounting
a. What is the net proceeds from discounting of NR?
b. What is the gain or loss from discounting of NR?
c. What is the journal entry for discounting of NR?
Ending balance x
Maturity value x
Times: Discount rate x%
Times: Remaining term/12 mos. x/12
Discount charge x