AUD.2023-2.

Auditing and Assurance: Concepts and Applications

Topic: Substantive Tests of Cash, Prepaid Expenses, and Deferred Charges
Instructor(s): Leenuel M. Bernarte, CPA & Andrew John V. Dalisay, CPA

AUDIT CASE #1: PETTY CASH FUND AND UNDEPOSITED COLLECTIONS

Lina Reyes is the cashier of the Luzon Glass Company. As representative of the Santos, Than, and Associates, CPAs,
you were assigned to verify her cash on hand in the morning of January 4, 2023. You began to count at 9:00 A.M. in
the presence of Miss Reyes. In the course of your counting, you found currencies in paper bills and coins together with
checks, vouchers, and other items, which are mentioned below:

Bills
9 one hundreds, 25 fifties, 50 twenties, 120 tens

Coins
P5.00 – 4 rolls and 5 loose
P1.00 – 8 rolls and 15 loose
P0.25 – 2 rolls and 2 loose
P0.10 – 3 rolls and 40 loose
(50 pieces to a roll)
(100 pieces to a roll)
(500 pieces to a roll)
(500 pieces to a roll)

Checks
Maker Date Payee Amount
Rose Manalo, Asst. Manager 12/23/2022 Luzon Glass Co. P 600
Miss L. Reyes, Cashier 12/26/2022 Luzon Glass Co. 400

I.O.U.s
Maker Date Payee Amount
A. David, Janitor 12/20/2022 P 350
R. Tirao, Clerk 12/22/2022 250
Pedro Munar, Bookkeeper 12/24/2022 150

Petty Cash Vouchers for Replenishment

Payee Date Account Charged Amount
L. Cruz, Messenger 12/16/2022 Advances to employees P100.00
Rosario & Co. 12/18/2022 Supplies 145.00
Victory Liner 12/18/2022 Freight-in 182.50
Bureau of Posts (stamps) 12/18/2022 Supplies 300.00
A. Vallo, Carpenter 12/20/2022 Repairs 450.00
B. Tello 12/21/2022 Miscellaneous Expense 154.00

Your investigation also disclosed the following:

1. The balance of petty cash fund per books is P9,000.
2. Cash sales of January 2, 2023 amounted to P8,650 per sales records, while cash receipts book and deposit
slip showed that only P7,650 was deposited in the bank on January 3, 2023.
3. The following employees’ pay envelopes have been opened and the money removed. Each envelope was
marked "unclaimed”.
a. N. Roy – P332.50
b. G. Gloria – P247.50

REQUIRED:
1. Prepare working papers showing your cash count.
2. Prepare necessary adjusting journal entries as of December 31, 2022.
3. Determine the amount at which the Petty Cash Fund will be stated in the statement of financial position as of
December 31, 2022.

AUDIT CASE #2: AUDIT OF CASH AND RELATED ACCOUNTS USING THE BANK RECONCILIATION
STATEMENT AND PROOF OF CASH
The following are the transactions for the Bulacan Corporation for the month ended June 30, 2022. The unadjusted cash
balances are as follows:

Cash balances per bank statement, June 30, 2022, P 249,223.00

Cash balances per company records, June 30, 2022, P 248,758.80

The bank statement disclosed the following information:

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 1. A customer note for P24,000 plus P240 interest was collected on June 30, 2022.
2. A customer check for P2,762.80 was returned because of insufficient funds.
3. The month service charge was P300.

A review of the company records disclosed the following:

1. A deposit for P22,857.40 mailed to the bank on June 29, 2022 did not appear on the bank statement.
2. Customer checks totaling P6,548.00 were on hand at the end of June awaiting deposit.
3. The following company checks were outstanding at the end of June:
#862 P1,923.80
#864 P2,943.60
#865 P5,265.00
4. Check #843 written for P1,842.00 in payment of creditor account and included with the canceled checks in the
bank statement has been erroneously recorded as P384.00 in the company records.

The following must also be taken into account:

1. May 31, 2022 bank balance P 272,348.40
2. Deposit in transit received by the bank June 2, 2022 24,803.00
3. Total receipts recorded by bank during June, 2022 528,423.40
4. Total payments recorded by the bank during June, 2022 551,548.80
5. May 31, 2022 book balance 289,630.40
6. Outstanding checks on May 31, 2022
#781 3,263.00
#782 4,258.00
7. Total receipts per books during June, 2022 508,785.80
8. Total payments per books during June, 2022 549,657.40

REQUIRED:
Prepare a four-column reconciliation.

AUDIT CASE #3: CASH AND OTHER ITEMS

The following information has been extracted from the accounting records of the Oracle Corporation:
1. Cash on hand (undeposited sales receipts) P 1,020
2. Certificates of deposit 25,000
3. Customer’s note receivable 1,000
4. Reconciled balance in First Standard Bank checking account (350)
5. Reconciled balance in Prime National Bank checking account 9,350
6. Balance in Rural Bank savings account 8,560
7. Customer’s postdated check 1,350
8. Employee travel advances 1,600
9. Cash in bond sinking fund 1,200
10. Bond sinking fund investments 8,090
11. Postage stamps 430

REQUIRED:
Determine the balance in Oracle’s Cash account and discuss the statement of financial position treatment of any items
not included in Cash.

AUDIT CASE #4: RECONCILIATION OF BANK AND COMPANY CASH AMOUNTS

The December 31, 2022 bank statement for Miguel Corporation showed a P2,049.25 balance. On this date, the
company’s Cash account reflected a P352.60 overdraft. In reconciling these amounts, the following information is
discovered.
1. Cash on hand for undeposited sales receipts, December 31, 2022, is P130.25.
2. Customer NSF check returned with bank statement, P420.40.
3. Cash sales of P640.25 for the week ended December 18, 2022 were recorded on the books. The cashier reports
this amount missing, and it was not deposited in the bank.
4. Note receivable of P2,500 and interest of P25 collected by the bank and not recorded on the books.
5. Deposit in transit December 31, 2022, P350.00
6. A customer check for P290.40 in payment of its account was recorded on the books at P940.20.
7. Outstanding checks, P2,040.55. Included a duplicate check of P70.85

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REQUIRED:
1. Prepare a December 31, 2022 bank reconciliation for Miguel Corporation
2. Prepare any necessary journal entries

AUDIT CASE #5: DEPOSITS IN TRANSIT AND OUTSTANDING CHECKS

Data concerning the cash records of Lyndon Company for the months of September and October 2022 follow:
a. Unadjusted book balance on September 30 amounted to P2,258,000
b. Total receipts per book in October, P1,400,000
c. Total disbursements per book in October, P2,400,000
d. Unadjusted bank balance on September 30 amounted to P2,100,000
e. Total credits per bank in October amounted to P1,200,000
f. Total debits per bank in October amounted to P2,500,000
g. NSF checks on September 30 amounted to P60,000 while on October 31 amounted to P40,000
h. Collection of accounts receivable not recorded by the company on September 30, P30,000, and P50,000 on
October 31
i. Erroneous bank charge on September 30, P10,000 and P18,000 on October 31
j. Erroneous bank credit on September 30, P7,000 and P9,000 on October 31
k. Understatement of check in payment of rent payable on September 30, P90,000 and P120,000 on October 31
l. Deposit in transit on September 30, P130,000
m. Outstanding checks on October 31, P30,000

REQUIRED:
1. How much is the deposit in transit on October 31?
2. How much is the outstanding check on October 31?

AUDIT CASE #6: RECONCILING BANK STATEMENT WITH BOOK RECORDS

The Ayesa Company received a bank statement for February 2022, as follows:

From: Standard Bank, Manila

To: Ayesa Company, Legarda St., Manila

Date Checks Deposits Balance

Feb. 1 P 4,524.80
7 P 2,700.33 P 8,642.61
9 3,484.81
14 6.00 SC 460.00 CM
16 274.09
21 4,133.60 3,385.49
23 69.69 NSF
28 P 6,344.38
Legend:
SC=Service Charge
CM=Credit Memo
NSF=Check Returned
DM=Debit Memo

The receipt of P460 on February 14 was for a P445 note collected by the bank, plus P20 current interest, less a P5
service charge. The company’s accounting records contained the following information:

Cash disbursements Cash receipts

Check no. 155 P 2,700.33 Feb. 7 P 8,624.61
156 3,484.81 21 3,385.49
157 274.09 All receipts are verified and
158 589.02 correct.
159 4,133.60
160 2,742.63

REQUIRED:
1. Prepare bank reconciliation on February 28, 2022 for the Ayesa Company
2. Prepare the journal entries that the Ayesa Company should record as a result of the reconciliation.

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AUDIT CASE #7: AUDIT OF VARIOUS PREPAYMENTS AND DEFERRALS
You are examining the financial statements of the Atlas Retail Company for the year ended December 31, 2022. The
client’s accounting department presented you with an analysis of the Prepaid Expenses account at December 31, 2022,
as shown below:
ATLAS RETAIL COMPANY
Analysis of Prepaid Expenses Account
December 31, 2017
Description Balance as of Dec. 31, 2022
Unexpired fire insurance P 750
Unexpired liability insurance 4,900
Utility deposits 2,000
Loan to officer 500
Purchase of postage meter, one half of invoice price 400
Bond discount 3,000
Advertising of store opening 9,600
Amount due for overpayment on purchase of fixtures 700
Unsalable inventory – entered June 30, 2020 8,300
Book value of obsolete machinery held for resale 550
Funds delivered to New Stores with purchase offer 1,000

Additional information includes the following:

1. Insurance policy data:
Type Period covered Premium
Fire 12/31/2022 to 12/31/2023 P 1,000
Liability 6/30/2022 to 6/30/2023 9,500
2. The postage meter was delivered in November and the balance due was paid January. Unused postage of
P700 in the machine at Dec. 31, 2022, was recorded as expense at time of purchase.
3. Bond discount represents the unamortized portion applicable to bonds maturing 2023.
4. The P9,600 paid and recorded for advertising was for the cost of an advertisement to be run monthly magazine
for six-months, beginning in December, 2022. You examined an invoice received from the advertising agency
and extracted the following description: “Advertising services rendered for store opened in November 2022,
P6,900”.
5. Atlas has contracted to purchase New Stores and has been required to accompany its offer with a check for
P1,000 to be held in escrow as an indication of good faith. An examination of paid checks revealed the check
has not been returned from the bank through January 2023.

REQUIRED:
Assuming that you have examined acceptable underlying audit evidence, prepare a work sheet to show the necessary
adjustment, corrections, and reclassification of the items in the Prepaid Expense account.

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