WESLEYAN UNIVERSITY – PHILIPPINES

Brgy. 01, Maria Aurora, Aurora

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Module 1
AUDIT OF CASH AND CASH EQUIVALENTS

OVERVIEW

The audit of cash is considered an important part of an audit mainly due to two reasons:
(a) Almost all business transactions will be ultimately settled through the cash
accounts, the audit of cash accounts also assists in the verification of other asset
and liability accounts as well as revenue and expenses.
(b) Cash is the highly liquid asset in a company and it is an area of high inherent risk
since there is a relatively high risk of misappropriation.

LEARNING OUTCOMES: After successful completion of this unit, you should be able
to:
1. Understand the internal controls over custody of cash.
2. Design and perform audit tests of cash and bank balances.
3. Recognize the possible fraud and errors of cash and bank balances.
4. Recognize the extended audit procedures of the general cash account to test further
for material fraud.

COURSE MATERIAL:

Cash equivalents

PAS 7, paragraph 6, defines "cash equivalents" as short-term and highly liquid investments
that are readily convertible into cash and so near their maturity that they present
insignificant risk of changes in value because of changes in interest rates.

The standard further states that “only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents:

Examples of cash equivalents are:

a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper

Equity securities cannot qualify as cash equivalents because shares do not have a maturity
date.

However, preference shares with specified redemption date and acquired three- months
before redemption date can qualify as cash equivalents. Note that what is important is the
date of purchase which should be three months or less before maturity. Thus, a BSP treasury
bill that was purchased one year ago cannot qualify as cash equivalent even if the remaining
maturity is three months or less

Measurement of cash

Cash is measured at face value. Cash in foreign currency is measured at the current exchange
rate. If a bank or financial institution holding the funds of an entity is in bankruptcy or
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 WESLEYAN UNIVERSITY – PHILIPPINES
Brgy. 01, Maria Aurora, Aurora
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financial difficulty, cash should be written down to estimated realizable value if the amount
recoverable is estimated to be lower than the face value.

Unrestricted cash

There is no specific standard dealing guidance is found in PAS 1, paragraph 66, which
provides
with "cash". The only that "an entity shall classify an asset as current when the asset is cash or
a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at
least twelve months after the end of the reporting period.”

Accordingly, to be reported as "cash", an item must be unrestricted in use. This means that the
cash must be readily available in the payment of current obligations and not be subject to any
restrictions, contractual or otherwise.

The following cash items are included in "cash":

a. Cash on hand - This includes undeposited cash collections and other cash items awaiting
deposit such as customers' checks, cashiers or manager's checks, traveler's checks, bank drafts
and money orders.
b. Cash in bank - This includes demand deposit or checking account and saving deposit which
are unrestricted as to withdrawal
c. Cash fund - set aside for current purposes such as petty cash fund, payroll fund and
dividend fund.

Foreign currency

Cash in foreign currency should be translated to Philippine pesos using the current exchange
rate.

Deposits in foreign countries which are not subject to any foreign exchange restriction are
included in "cash”.

Cash fund for a certain purpose

If the cash fund is set aside for use in current operations or for the payment of current
obligation, it is a current asset. It is included as part of cash and cash equivalents.

On the other hand, if the cash fund is set aside for noncurrent purpose or payment of
noncurrent obligation, it is shown as long-term Investment.

Audit Objectives

To determine that:

1. Cash balances at the end of the reporting period represent cash and cash items on 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 statements.

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 WESLEYAN UNIVERSITY – PHILIPPINES
Brgy. 01, Maria Aurora, Aurora
_________________________________________________________________________________

Audit Procedures:

1. Conduct a cash count of undeposited collections, petty cash, and other funds:
 Obtain custodian's signature to acknowledge return of items counted
 Reconcile items counted with general ledger balances.
 Trace undeposited collections counted to bank reconciliation
 Follow up dispositions of items in cash counted:
 Undeposited collections should be traced to bank deposits
 Checks accommodated in petty cash should be deposited after the count to
establish their validity
 IOUs in the petty cash should be confirmed and traced to collections in the
next payroll period
 Expense vouchers should be traced to the succeeding replenishment voucher
 Coordinate cash count with count of marketable securities and other negotiable assets
of 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 in which the client has had
deposits and loans during the year.
3. Obtain bank 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:
 Bank debit or credit advices
 Duly approved journal vouchers
 Investigate checks outstanding for a long period of time
 Consider adjustment, especially if the check is already stale
 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 transactions with the bank at least one
week after the reporting date and:
 Trace year-end reconciling items, like:
 Deposit of the year-end undeposited collections
 Completeness of year-end outstanding checks
 Corrections of bank errors
 Examine supporting documents of year-end outstanding checks that did not clear in
the cutoff bank statement.
5. Obtain a list of interbank transfers of funds a few days before and after the reporting date.
 Vouch supporting document
 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:

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 WESLEYAN UNIVERSITY – PHILIPPINES
Brgy. 01, Maria Aurora, Aurora
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 Comparing dates of checks 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 balances
 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 disclosures

ACTIVITIES/ASSESSMENT:

Problem 1

In the course of your audit of Cash of Mapera Corporation as of and for the period ended
December 31, 2018, the following is a list that comprise the company’s Cash and cash
equivalent account:

Current account at Metrobank P 3,000,000

Savings Account at Rural Bank 2,000,000
Current account at BDO (240,000)
Undeposited checks, bank draft, and money orders on hand 987,000
Travel fund 50,000
Interest and Dividend fund 120,000
Payroll fund 400,000
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