MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts

And Application 1
Teacher’s Guide Week No. 3-4

Overview of Independent
Financial Audit
Sustainable Development Goals:

Ensure inclusive and equitable quality education

and promote lifelong learning opportunities for all.

Learning Objectives:

After the lesson the learners will be able to explain and

define:

After the lesson, the students can be able to:

After the lesson, the students can be able to:

1. Refresh on the Generally Accepted Accounting

Principles and the Philippine Financial Reporting
Standards relating to cash and cash equivalent.
Learning Materials
2. Identify and explain the audit objectives on cash and
cash equivalent. Laptop, pen, calculator, & book
3. Perform audit procedures and solve auditing
problems on cash and cash equivalent.
4. Prepare audit working papers on cash and cash
equivalent.

Lesson Preview/Review

Audit of Cash and Cash Equivalents: Internal Control Measures and Substantive Audit
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

Internal Control Measures for Cash

1. Cash receipts should be deposited intact — that is, in the same amount and form as they are
received.
2. All disbursements should be authorized and made by check except those involving small
amounts which should be paid from petty cash fund.
3. Both receipts and disbursements should be properly accounted for in the records.
4. There should be separation of personnel duties for
a. receiving cash
b. recording receipts
c. depositing cash collections
d. reconciling bank account
e. authorizing disbursement
f. disbursing cash
5. Bank reconciliation statement should be prepared monthly.
6. Provide physical protection for cash.
7. Minimize cash on hand in the office.
8. Cash actually present in the office — petty cash, change fund and undepos ted receipts can be
periodically counted and compared with the company records.
9. Adopt imprest fund system for petty cash.

Substantive Audit Procedures for Cash Cash Balances

Existence: Cash recorded on the books exist
1. Count cash on hand.
2. Confirm bank balances.
3. Examine interbank transfers.
4. Perform analytical procedures.

Completeness: All of the entity's cash is included

5. Perform cash cutoff test.
6. Prepare proof of cash.
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

Rights and obligations: Any restrictions on cash have been identified

7.Examine standard bank confirmations and read the minutes of the board of directors' meetings
to determine whether any restrictions have been placed on cash.

Valuation and allocation: Cash is correctly valued

8. Obtain bank cutoff statements directly from the bank and use them to test the bank
reconciliation as of the balance sheet date.

Presentation and disclosure: Cash is presented and disclosed properly

9. Review financial statements and perform analytical procedures to determine whether accounts
are classified and disclosed in accordance with GAAP.

Cash Collections

Completeness: All receipts of cash and checks are recorded

1. For a sample of days, verify that all cash receipts are recorded by reconciling daily listing(s) of
cash receipts and validated deposit ticket to cash receipts journal.

Occurrence: Recorded receipts represent actual collections of cash from customers

2. For a sample of entries in cash receipts journal, trace to the prelisting of cash receipts and to
remittance advice. For a sample of entries, reconcile daily deposit to validated deposit ticket.

Classification: Cash receipts transactions have been recorded in the proper accounts

3. Review account coding for a sample of entries in the cash receipts journal.
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

Accuracy (Valuation): Debits to cash and credits to accounts receivable are valued at amounts
received

4. For a sample of entries in cash receipts journal, examine remittance advice and verify that
discount taken was appropriate. Foot accounts receivable subsidiary ledger and reconcile to
general ledger.

Cash Payments

Completeness: All cash payments made are recorded

1. Reconcile cash payments per books with cash payments per bank. Prepare or test bank
reconciliation.

Occurrence: Recorded cash payments occurred

2. Examine paid checks for appropriate endorsements. Examine documents underlying payments.

Classification: Cash payments transactions have been recorded in the proper accounts

3. Check accuracy of accounts on invoices by reference to chart of accounts.

Accuracy (Valuation): Debits to various accounts and credits to cash are valued at proper amounts

4. Recalculate invoices paid.

 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

Theory

1. Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an
entity's employees?
A. A bank lockbox system
B. Prenumbered remittance advices
C. Monthly bank reconciliations
D. Daily deposit of cash receipts

2. The least crucial element of internal control over cash is

A. Separation of cash record-keeping from custody of cash
B. Preparation of the monthly bank reconciliation
C. Batch processing of checks
D. Separation of cash receipts from cash disbursements

3. Which of the following audit procedures is the most appropriate when internal control over cash is weak or when
a client requests an investigation of cash transactions?
A. Proof of cash
B. Bank reconciliation
C. Cash confirmation
D. Evaluate ratio of cash to current liabilities

4. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when
the
A. Check register for the last month is reviewed
B. Cutoff bank statement is reconciled
C. Bank confirmation is reviewed
D. Search for unrecorded liabilities is performed

5. Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting
between intercompany banks?
A. Review the composition of authenticated deposit slips
B. Review subsequent bank statements received directly from the banks
C. Prepare a schedule of bank transfers
D. Prepare year-end bank reconciliations
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

6. An interbank transfer schedule

A. Is another name for the proof of cash
B. Helps the auditor test for kiting
C. Is on a standard bank confirmation
D. Is used to examine client bank reconciliations

7. If fraud is suspected, auditors may complete all of the following procedures except
A. Testing for kiting
B. Footing the bank reconciliation and the outstanding check listing
C. Performing a proof of cash
D. Performing extended bank reconciliation procedures, including detailed examination of reconciling items

8. Of the following, which is the most efficient audit procedure for verification of interest earned on bond
investments?
A. Tracing interest declarations to an independent record book
B. Recomputing interest earned using the interest rate and bond amount
C. Confirming the interest rate with the issuer of the bonds
D. Vouching the receipt and deposit of interest checks

9. An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary
audit evidence to support the reasonableness of the
A. Valuation of marketable equity securities
B. Classification of gains and losses on the disposal of securities
C. Completeness of recorded investment income
D. Existence and ownership of investments

10. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor
most likely would
A. Inspect the stock certificates evidencing the investment
B. Examine the audited financial statements of the investee company
C. Review the broker's advice or canceled check for the investment's acquisition
D. Obtain market quotations from financial newspapers or periodicals
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

11. An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by
computing the amounts that should have been received by referring to
A. Dividend record books produced by investment advisory services
B. Stock indentures published by corporate transfer agents
C. Stock ledgers maintained by independent registrars
D. Annual audited financial statements issued by the investee companies

12. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
A. Notes receivable and interest income
B. Accrued interest receivable and accrued interest payable
C. Notes payable and notes receivable
D. Interest income and interest expense

13. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities
in the client's name, an auditor most likely gathers evidence in support of management's financial statement
assertions regarding
A. Existence
B. Rights and obligations
C. Completeness
D. All of the above

14. All of the following can assist the auditor in testing the existence assertion for investment securities except
A. Physical examination
B. Comparing fair value to cost
C. Confirmation with the issuer
D. Confirmation with the custodian

15. An imprest cash account is

A. Used for investing in marketable securities
B. The principal cash account for an entity
C. One that contains a stipulated amount of money and is used for limited purposes
D. The principal checking account for a branch of an entity
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

16. An auditor ordinarily should send a standard confirmation request to all banks with which the client has done
business during the year under audit, regardless of the year-end balance, because this procedure
A. Provides for confirmation regarding compensating balance arrangements
B. Detects kiting activities that may not otherwise be discovered
C. Seeks information about indebtedness to the bank
D. Verifies securities held by the bank in safekeeping

17. Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following
assertions for cash?
A. Occurrence
B. Completeness
C. Authorization
D. Cutoff

18. Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for
cash?
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy

19. The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31
from a local bank by cashing, but not recording, a check drawn on the Company's out-of-town bank. How would the
auditor discover this manipulation?
A. Confirming all December 31 bank balances
B. Counting the cash working fund at the close of business on December 31
C. Preparing independent bank reconciliations as of December 31
D. Preparing and detail testing a bank transfer schedule

20. The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any
business during the year, regardless of the year-end balance, since
A. The confirmation form also seeks information about indebtedness to the bank
B. This procedure will detect kiting activities which would otherwise not be detected
C. The mailing of confirmation forms to all such banks is required by generally accepted auditing standards
D. This procedure relieves the auditor of any responsibility with respect to nondetection of forged checks
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

Computation
Proof of cash

Problem 1

You obtained the following information on the current account of Yoyo Company during your examination of its
financial statements for the year ended December 31, 2021.

The bank statement on November 30,2021 showed a balance of 306,000. Among the bank credits in November was
customer’s note for 100,000 collected for the account of the company which the company recognized in December
among its receipts. Included in the bank debits were cost of checkbooks amounting to 1,200 and a 30,000 check
which was charged by the bank in error against Yoyo Company account. Also in November, you ascertained that
there were deposit in transit amounting to 80,000 and outstanding checks totaling 180,000.

The bank statement for the month of December showed total credits of 416,000 and total charges of 204,000. The
company’ books for December showed a total debits of 735,600, total credits of 407,200 and a balance of 465,600.
Bank debit memo for December were: No. 121 for service charges, P1,600 and No. 122 on a customer’s returned
checked marked “ Refer to Drawer” for 24,000.

On December 31, 2021, the company placed with the bank a customer’s promissory note with a face value of
120,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on
the note only in January 2018.

A check for 3,960 was recorded in the company cash payments books in December as 39,600.

Determine the following:

1. Deposit in Transit, December 31, 2021

2. Outstanding Checks, December 31, 2021
3. Adjusted Cash Balance, November 30, 2021
4. Adjusted Cash Balance, December 31, 2021

Problem 2
You obtained the following information on the current account of Bonifacio Company during your examination of its
financial statements for the year ended December 31, 2021.

The bank statement on November 30, 2021 showed a balance of P114,750. Among the bank credits in November
was customer’s note for P37,500 collected for the account of the company which the company recognized in
December among its receipts. Included in the bank debits were cost of checkbooks amounting to P450 and a
P15,000 check which was charged by the bank in error against Bonifacio Co. account. Also in November you
ascertained that there were deposits in transit amounting to P30,000 and outstanding checks totaling P63,750.

The bank statement for the month of December showed total credits of P156,000 and total charges of P76,500. The
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

company’s books for December showed total receipts of P275,850, disbursements of P152,700 and a balance of
P182,100. Bank debit memos for December were: No. 245 for service charges, P600 and No. 246 on a customer’s
returned check marked “DAIF” for P9,000.

On December 31, 2021 the company placed with the bank a customer’s promissory note with a face value of P45,000
for collection. The company treated this note as part of its receipts although the bank was able to collect on the note
only in January, 2022.

A check for P1,485 was recorded in the company cash payments books in December as P14,850.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data, you are to
provide the answers to the following:

1. How much is the undeposited collections as of December 31, 2021?

a. P127,350 b. P67,350 c. P82,350 d. P52,350

2. How much is the outstanding checks as of December 31, 2021?

a. P71,985 b. P135,735 c. P149,100 d. P136,185

3. How much is the adjusted bank receipts for December?

a. P238,350 b. P178,350 c. P163,350 d. P193,350

4. How much is the adjusted book disbursements for December?

a. P84,735 b. P148,485 c. P161,850 d. P148,935

5. How much is the adjusted cash balance as of December 31, 2021?

a. P234,615 b. P82,500 c. P140,865 d. P73,365

On January 10, 2022, you started the audit of the financial records of the Del Pilar Company for the year
ended December 31, 2021. From your investigation, you discovered the following:
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

1. The bookkeeper also acts as the cashier. On December 31, 2021, the bookkeeper’s year-end cash
reconciliation contains the following items.

Cash per ledger, 12-31-06 P736,800

Cash per bank, 12-31-06 778,200
Outstanding checks 62,640
Joe Co. check charge by bank in error
12-20-06; corrected by bank on 1-5-07
1,800
Cash in transit, credited by bank on 1-2-07 8,640

2. The cash account balances per ledger as of 12-31-06 were: Cash - P736,800; petty cash - P1,800

3. The count of the cash on hand at the close of business on January 10, 2022, including the petty cash,
was as follows:
Currency and coin P4,620
Expense vouchers 240
Employees’ IOU’s dated 1-5-07 660
Customers’ checks in payment of account 3,480
P9,000

4. From January 2, 2022, to January 10, 2022, the date of your cash count, total cash receipts appearing in
the cash records were P103,200. According to the bank statement for the period from January 2, 2022
to January 10, 2022, total deposits were P91,200.

5. On July 5, 2021, cash of P4,800 was received from an account customer; the Allowance for Doubtful
Accounts was charged and Accounts Receivable credited.

6. On December 5, 2021, cash of P3,600 was received from an account customer; Inventory was charged
and Accounts Receivable credited.
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

7. Cash of P8,760 received during 2021 was not recorded.

8. Checks received from customers from January 2, 2022 to January 10, 2022, totaling P5,040, were not
recorded but were deposited in bank.

9. On July 1, 2021, the bank refunded interest of P240 because a note of the Del Pilar Company was paid
before maturity. No entry had been made for the refund.

10. In the cashier’s petty cash, there were receipts for collections from customers on January 9, 2022, totaling
P10,200; these were unrecorded and undeposited.

11. In the outstanding checks, there is one for P600 made payable to a trade creditor; investigation shows
that this check had been returned by the creditor on June 14, 2021 and a new check for P1,200 was
issued in its place; the original check for P600 was made in error as to amount.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The correct bank balance as of December 31, 2021 is

2. The cash shortage as of December 31, 2021 is

3. The cash shortage for the period January 1 to 10, 2022 is

4. Which of the following internal control procedures will most likely prevent the concealment of a cash
shortage resulting from improper write-off of a trade account receivable?
a. Write-offs must be approved by a responsible officer after review of credit department
recommendations and supporting evidence.
b. Write-offs must be supported by an aging schedule showing that only receivables overdue for
several months have been written off.
c. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in
fact, been collected.
d. Write-offs must be authorized by company field sales employees who are in a position to determine
the financial standing of the customers.
 MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4

5. As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and
disbursement procedures. Which of the following deficiencies alone should cause you the least
concern?
a. Checks are signed by only one person.
b. Signed checks are distributed by the controller to approved payees.
c. The treasurer fails to establish bona fide names and addresses of check payees.
d. Cash disbursements are made directly out of cash receipts.

References

• Ngina, M. A. B., & Escala, R. F. A. (2018). Applied Auditing (2018th ed., Vol. 1). Real Excellence
Publishing.
• CPA REVIEW SCHOOL OF THE PHILIPPINES Manila (AUDITING PROBLEM- Cash and Cash Equivalent)
• Auditing Assurance Services A Systematic Approach Messier 7th Edition Test BankChapter 16 -
Auditing the Financing/Investing Process: Cash and Investments

OFFICIAL MCC TEACHER’S GUIDE DISCLAIMER

It is not the intention of the author/s nor the publisher of this teacher’s guide to have monetary gain in
using the textual information, imageries, and other references used in its production. This guide is only for the
exclusive use of a bona fide student of Mabalacat City College.

In addition, this teacher’s guide or no part of it thereof may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, electronic, mechanical, photocopying, and/or otherwise, without
the prior permission of Mabalacat City College.

Compiled/Prepared by: Recommending Approval: Approved by:

Pauline R. Dela Cruz, CPA

MABALACAT CITY COLLEGE AUD 02| Auditing And Assurance Concepts
And Application 1
Teacher’s Guide Week No. 3-4