AUDITING & ASSURANCE: CONCEPTS & APPLICATIONS SCORE

QUIZ # 3
TOPIC(s) COVERED: AP 03 – AUDIT OF CASH AND CASH EQUIVALENTS

NAME:__________________________ YEAR & SECTION:__________ DATE:____________

INSTRUCTIONS: FROM THE FOLLOWING MULTIPLE CHOICE QUESTIONS BELOW, CHOOSE THE LETTER OF
THE BEST ANSWER BY SHADING IT TO A SEPARATE ANSWER SHEET PROVIDED.

TRANSACTION CYCLES, TEST OF CONTROLS AND SUBSTANTIVE PROCEDURES

1. Which of the following items is not requested on a standard bank account balance
confirmation form?
A. Description of the collateral security given.
B. The listing of authorized account signers.
C. Balances of the account from the bank.
D. The amount of principal repayment made on the loan.

2. Upon receipt of customers' checks in the mailroom, a responsible employee should

prepare a remittance listing that is forwarded to the cashier. A copy of the listing
should be sent to the:
A. Internal auditor to investigate the listing for unusual transactions.
B. Treasurer to compare the listing with the monthly bank statement.
C. Accounts receivable bookkeeper to update the subsidiary accounts receivable
records.
D. Entity's bank to compare the listing with the cashier's deposit slip.

3. An auditor suspects that a client's cashier is misappropriating cash receipts for

personal use by lapping customer checks received in the mail. In attempting to
uncover this embezzlement scheme, the auditor most likely would compare the:
A. Dates checks are deposited per bank statements with the dates remittance credits
are recorded.
B. Daily cash summaries with the sums of the cash receipts journal entries.
C. Individual bank deposit slips with the details of the monthly bank statements.
D. Dates uncollectible accounts are authorized to be written off with the dates
the write-offs are actually recorded

4. Which of the following is not a proper internal control over cash?

A. Segregation of the cash handling function from cash recording function.
B. Every collection made from the customers should be deposited intact and
immediately.
C. Cash disbursements shall be made through checks without any exception.
D. The bank reconciliation shall be made by a person who do not handle cash.

5. Among the choices below, who separates the checks and remittance advices received
from the customers?
A. Mailroom employee C. Accounts receivable accounting staff
B. Cashier D. Any of the above.

6. An auditor decided to conduct a surprise cash count on its client’s petty cash fund.
Which of the following items showed by the custodian is not a valid support for the
balance of petty cash fund?
A. A check made by the treasury department payable to the petty cash custodian
B. Employees’ IOUs
C. Petty cash vouchers with a corresponding replenishment check
D. Bills and coins in the cash box

7. In conducting cash count, which of the following is an incorrect procedure?

A. The petty cash custodian should not be present during the cash count to maintain
the element of unpredictability of the count procedures.
B. Cash counts must be performed on a surprise basis on the part of the custodian
to prevent substitution of items.
C. A follow-up shall be made by the auditor regarding the disposition of the items
counted.
D. No control shall be given to the petty cash custodian during the cash count.
E. None from the choices.

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8. Which of the following assertions is not addressed when an auditor performs bank
confirmation procedure?
A. Existence C. Valuation
B. Rights and obligations D. Cut-off

9. Upon receipt by the treasury department of a voucher for disbursement, which of the
following shall be performed first?
A. Prepare a prenumbered check.
B. Review voucher for completeness and approval (e.g. review the voucher package).
C. Cancel the voucher and voucher package upon receipt.
D. Do nothing and proceed to the preparation of check.

10. Which of the following procedures shall be performed by the AP Department upon
receipt of the cancelled voucher and check summary from the Treasury Department.
A. Update the accounts payable master file.
B. Print the cash disbursements journal.
C. Both A and B
D. Either A or B

11. Which of the following statements is incorrect regarding the auditor’s performance
of bank confirmation procedures?
S1: A bank confirmation letter shall be sent to all banks which the client has an
account even those with zero bank balances.
S2: The bank confirmation letter shall be made on the auditor’s letterhead but
signed by the client entity so that the replay is sent to the client’s address.
A. S1 only C. Both statements
B. S2 only D. None from the statements

12. What assertion is primarily addressed by the audit procedure known as test on bank
reconciliation?
A. Existence C. Rights and Obligations
B. Completeness D. Cut-off

FINANCIAL ACCOUNTING CONCEPTS

13. Which of the following is not a cash item?
(1) Savings deposit (3) Formal compensating balances
(2) Time deposit (4) Bank drafts
A. 1 and 4 only C. 2 and 3 only
B. 3 and 4 only D. 2, 3 and 4

14. Which of the following statements regarding cash and cash equivalents is false?
A. Not all items included in cash constitute legal tender money.
B. Legally restricted Compensating cash balance for payment of a current liability
is shown as part of cash and cash equivalent provided restriction is disclosed.
C. Petty cash fund of P 8,000 composed of currency and coins of P 2,100 and
unreplenished petty cash vouchers of P 5,900 should be shown in the current
asset section at P2,100 only.
D. If a bank or financial institution holding funds of a reporting entity is in
bankruptcy or financial difficulty such cash should be written down to estimated
realizable value if the amount is lower than face value.

15. Which of the following statements is true regarding cash and cash equivalents?
A. To qualify as cash equivalent, a short-term investment in debt securities must
have a remaining term of three months before maturity date as of reporting
date.
B. A compensating balance that is legally restricted as to withdrawal can be
included as part of cash and cash equivalents.
C. Post-dated checks payable to the company are not part of cash.
D. Investment in equity securities can be part of cash and cash equivalents if
acquired three months before maturity.

16. In preparing a bank reconciliation, which of the following items is added to the
balance per ledger?
A. B. C. D. E.
Interest income on bank deposit Yes No Yes No No
Deposit in transit No No Yes Yes No
Bank service charge No Yes No No No
Understatement on recorded
collections on depositor’s records Yes Yes Yes Yes Yes

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17. OGRE MAGI INC. reported the following items on December 31, 2018:
Bank A-demand deposit P135,000
Undeposited customer checks 52,000
Currency and coins on hand 5,800
Savings deposit - fund for plant expansion 4,000,000
Bank B - demand deposit 200,000
Treasury bills - 7 months’ maturity 300,000
Treasury bills - 2 months’ maturity 150,000

The demand deposit in Bank B represents a 20% compensating balance for a P 1,000,000
loan with the bank. OGRE MAGI may not withdraw the balance until the loan is repaid
in 2021.

What amount of cash and cash equivalents should OGRE MAGI report on December 31,
2018?
A. P642,800 C. P342,800
B. P842,800 D. P542,800
SOLUTION:
Bank A-demand deposit P135,000
Undeposited customer checks 52,000
Currency and coins on hand 5,800
Treasury bills - 2 months’ maturity 150,000
Total cash and cash equivalents P342,800

18. MOON RIDER CORP. provided the following information on December 31, 2014:
Petty cash fund P 50,000
Current account - First Bank 4,000,000
Current account - Second Bank (overdraft) (250,000)
Money market placement - Third Bank 1,000,000
Time deposit - Fourth Bank 2,000,000
* The petty cash fund included unreplenished December 2014 petty cash expense
vouchers for P15,000 and an employee check for P5,000 dated January 31, 2015.
* A check for P100,000 was drawn against First Bank current account dated and
recorded December 29,2014 but delivered to payee on January 15,2015.
* The Fourth Bank time deposit is set aside for land acquisition in early January
2015.
What total amount should be reported as "cash and cash equivalents" on December 31,
2014?
A. P4,130,000 C. P5,130,000
B. P4,880,000 D. P5,150,000
SOLUTION:
Petty cash fund (50,000 - 15,000 - 5,000) P30,000
Current account - First Bank (4,000,000 + 100,000) 4,100,000
Money market placement 1,000,000
Total cash and cash equivalents P5,130,000
In the absence of specific term, money market placement, time deposit and treasury bills are
short-term investment of three months or less and therefore qualify as cash equivalents. The
Fourth Bank time deposit is a noncurrent asset because it is set aside for the acquisition of a
noncurrent asset.

19. The cashier of MEEPO INC. prepared the following bank reconciliation:
Balance per bank P 28,375
Deposits in transit:
12/30/18 P 4,500
12/31/18 1,525 6,025
34,400
Outstanding checks
160 11/30/18 P 2,200
214 12/26/18 675
219 12/27/18 850
225 12/29/18 2,500
228 12/31/18 7,225 (13,450)
20,950
Customer note collected by bank (3,000)
Error: Check #216, written on 12/27/18 for P 270 was erroneously
charged by the bank as P 720; bank was notified on 1/2/19 450
Book balance P 18,400
The adjusted cash balance as of December 31, 2018 is
A. P 21,850 C. P 19,100
B. P 21,400 D. P 15,400
SOLUTION:
Balance per bank, unadjusted 28,375

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 Deposits in transit 6,025
Outstanding checks (13,450)
Bank error - overstated check payment (P720 - P270) 450
Balance per bank, as adjusted 21,400

20. The August 31 bank statement of AZWRAITH CORP. showed a balance of P113,000. Deducted
in arriving at this amount was a customer's NSF check for P2,400 that had been
returned. AZWRAITH had received no prior notice concerning this check. In addition
to the bank statement, other records showed there were deposits in transit totalling
P17,200 and that outstanding checks totalled P10,800. What is the cash balance per
books at August 31 (prior to adjustments)?
A. P121,800 C. P117,000
B. P119,400 D. P115,400
SOLUTION:
(113,000 + 17,200 – 10,800) = 119,400 adjusted balance + 2,400 NSF = 121,800 unadjusted balance
of cash per book (squeezed upwards)

- END OF EXAMINATION -

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