UNIT 2 AUDIT OF CASH AND CASH TRANSACTIONS Estimated Time: 6.

0 HOURS
*Use Louwers 4th edition

Discussion questions 2-1

1. Describe the following cash-related terms. Show pro-forma schedules or examples to the class. a. Cash count sheet b. Bank reconciliation c. Standard bank confirmation d. Proof of cash e. Kiting f. Lapping g. Window dressing 2. What should be considered in classifying cash items? What are those items that should be accounted for as cash and cash equivalents? How should we account for those items that are not cash?

Discussion questions 2-2 Controls over the receipt and disbursement of cash
Refer to Louwers 6-9 and 6-10.

Discussion Questions 2-3 Substantive audit procedures for the audit of cash
Refer to Louwers 6-15, 6-16, 6-17, and 6-18.

The valuation of cash shown on the balance sheet as of end of 2012 was P3,264,400. Your examination of cash showed the breakdown to be: Coins and currency Checks received from customers Certificate of deposit, term: 2 months Petty cash fund Postage stamps BDO, checking account balance Post-dated check, customer Post-dated check, employee Money order from customer Cash in savings account Bank draft from customer Utility deposit to gas company, refundable Cash advance received from customer NSF check, customer Cash advance to company executive, collectible on demand MBTC, checking account, overdraft (OD) IOUs from employees Total P60,000 560,000 245,000 6,000 400 2,000,100 12,000 8,000 15,000 117,000 45,000 5,000 8,000 20,000 180,000 (25,000) 7,900 P3,264,400

Problem 2-1 Analysis and classification of cash balances

Compute for the correct amount of cash and cash equivalents and its composition as of December 31, 2012.
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Problem 2-2 Analysis and classification of cash balances

Boyet Dee, the controller for Fort Bonifacio Company, determined P10,542,700 as the amount of cash and cash equivalents that would be reported on its December 31, 2012 financial statements (FS). As per your audit, the following was the breakdown of Boyets schedule of cash and cash equivalents: a. Commercial savings account of P1,200,000 and commercial checking account balances of P1,800,000 held at UCPB. b. Travel advances of 360,000 for executive travel for the first quarter of next year (employee to reimburse through salary deduction). c. A separate cash fund in the amount of P3,000,000 restricted for the retirement of long-term debt. d. Petty cash fund of P10,000 (inclusive of unreplenished vouchers in the amount of P4,560). e. An IOU from a company supervisor in the amount of P190,000. f. A bank overdraft of P250,000 which occurred at one of the banks the company uses to deposit its cash receipts. The company had no deposits at this bank and the Boyet had this amount deducted from cash and cash equivalents in his schedule. g. Two certificates of deposit, each totaling P1,000,000. These certificates of deposit had a maturity of 90 days from the FS date. Date of purchase: December 30, 2012. h. A check dated January 12, 2013 in the amount of P125,000. i. A cash balance of P400,000 at all times at UCPB to ensure future credit availability (already included in item A). Found out to be not legally restricted as to withdrawal. j. P2,100,000 commercial paper of PLDT Co. which is due in 190 days. k. Currency and coins on hand amounting to P7,700.

The 2012 financial statements of Fort Bonifacio should include (compute for the amounts or provide the journal entries, as applicable): 1. Cash on hand. 2. Cash in bank. 3. Adjusting entry for item G. 4. Adjusting entry for item H. 5. Cash and cash equivalents.

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Problem 2-3 Cash fund count

You conducted a surprise cash count of the imprest petty cash fund of LLL Cosmetics Corporation on January 5, 2013. The ledger balance for petty cash is P5,000.00 with Per Dy as the petty cash custodian. Result of your examination revealed the cashiers drawer to contain the following: Bills P1,350.00 Coins 874.75 Petty cash vouchers (PCV): Delivery charges (12.14.2012) 420.00 Computer repairs (12.18.2012) 700.00 Messengers fare (12.23.2012) 120.00 Advances to employees (12.27.2012) 900.00 Checks (including Check 30108) 2,600.00 Sales invoices 1,400.00 Envelope tagged as employees contribution 760.00 Additional information: 1. Check 30108, issued by Mr. A, an employee, amounting to P1,200.00 was returned by the bank as NSF check. 2. The envelope tagged as employees contribution has not been opened and still intact.

Case 1 1. How much is the total unreplenished vouchers counted in the petty cash fund? 2. How much is the total items counted in the petty cash fund? 3. How much is the total accountability of the cashier? 4. How much is the cash shortage/overage? 5. How much is the petty cash fund as of December 31, 2012? Case 2 In addition to information given above, you found another PCV dated January 3, 2013 spent for photocopying amounting to P24.50. Moreover, you found out that the envelope tagged as employees contribution has been opened and the money removed. 6. How much is the total unreplenished vouchers counted in the petty cash fund? 7. How much is the total items counted in the petty cash fund? 8. How much is the total accountability of the cashier? 9. How much is the cash shortage/overage? 10. How much is the petty cash fund as of December 31, 2012?

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Problem 2-4 Cash fund count

As an associate member of the team that audits Oak Tree Foods Incorporated for the year ended December 31, 2012, when the United States (US) dollar ($) to Philippine peso is $1=P41.50, you were assigned to conduct a surprise cash count in the morning of January 5, 2013. You found the following items inside the petty cash drawer of Pretty, the cash custodian: Petty cash vouchers: Overtime meal for the Christmas Party 12.19.2012 Additional expenses Christmas Party 12.21.2012 Purchase of hand sanitizer 12.21.2012 Transportation 12.22.2012 Purchase of printer ink and folders 12.26.2012 Gasoline for the van 12.27.2012 Meals of maintenance left during New Years Day 01.01.2013 Protective lotion used by the person who collected the contribution for Mulanay dengue patients 01.03.2013 Floorwax and Lysol 01.03.2013 Checks No. 00692 12.28.2012 from Australian Bazaar, customer No. 12300 12.29.2012 from Monina, employee No. 10236 01.02.2013 from Nelia Maga, customer No. 45201 01.03.2013 from Arctic Fever, customer No. 78090 01.04.2013 from Stella, an employee Paper bills Coins P725.00 965.00 96.25 34.00 375.00 690.00 460.00 25.00 175.00 1,400.75 1,493.50 3,150.60 3,700.45 1,000.10 ? ?

2 pcs, P1,000; 3 pcs, P500; 2 pcs, P100; 14 pcs, P20; 1 pc, $5.50

Envelope containing contributions for the dengue patients of Mulanay, amount indicated P1,400) but per count is P1,375. Inside the envelope was an official receipt named to the company amounting to P25 for the protective lotion bought by an employee who passed around the envelope around the offices. Additional information: 1. The client maintains an imprest petty cash balance of P10,000. 2. Further investigation also disclosed that the official receipts from December 28 to January 3 totaled P8,251.80. These were already recorded in the cash receipts journal. 3. Check No. 78090 was encashed before year-end.
1. Prepare a cash count sheet indicating any overage or shortage. 2. Determine the adjusted balance of petty cash fund as of December 31, 2012

6 loose, P10; 34 loose, P5; 17 loose, P1

supported by a proof.

Refer to Louwers 6-47. Refer to Louwers 6-50.

Problem 2-5 Procedures for auditing a clients bank reconciliation

Problem 2-6 Manipulated bank reconciliation

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Problem 2-7 Bank reconciliation

Top Cat Corporation had poor internal control over its cash transactions. Data pertaining to its cash position at October 31, 2012 were as follows: The cash book showed a balance of P76,634.77, which included undeposit receipts. A credit of P950 on the bank records for a deposit made did not appear on the books of the company. The bank statement had a balance of P68,835.99. The outstanding checks were as follows: No. 0210667 P462.80 0210671 490.00 0210693 1,053.00 0210734 789.94 0210737 1,648.20 0210749 643.15 The cashier misappropriated all undeposited receipts in excess of P10,880.07 and prepared the following reconciliation: Balance per books, October 31, 2012 Add: Outstanding checks No. 0210734 0210737 0210749 Less: Undeposited receipts Balance per bank, October 31, 2012 Unrecorded credit Correct cash balance, October 31, 2012 P76,634.77 P789.94 1,648.20 643.15

3,081.29 P78,966.06 10,880.07 P68,835.99 950.00 P67,885.99

How much did the cashier misappropriate and explain how did it happen?
You are auditing the general cash for Daisy Duck Company for the fiscal year ended July 31, 2012. The client has not prepared the July 31 bank reconciliation. After a brief discussion with the owner, you agree to prepare the reconciliation, with assistance from one of Daisy Ducks clerks. You obtain the following information: General Ledger P49,610 254,560 (236,150) (218,110) (870) (61,000) (3,110) P10,460 Bank Statement P61,030 250,560

Problem 2-8 Bank reconciliation

Beginning balance Deposits Cash receipts journal Checks cleared Cash disbursements journal July bank service charge Note paid directly NSF check Ending balance

P86,060

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June 30 Bank Reconciliation Information in General Ledger and Bank Statement

Balance per bank Deposits in transit Outstanding checks Balance per books P57,530 6,000 17,420 46,110

Additional information obtained: a. Checks clearing that were outstanding on June 30 totalled P16,920. b. Checks clearing that were recorded in the July disbursements journal totalled P204,670. c. A check for P10,600 cleared the bank, but had not been recorded in the cash disbursements journal. It was for an acquisition of inventory. Daisy Duck uses the periodic inventory method. d. A check for P3,960 was charged to Daisy Duck Company but had been written on a different companys bank account. e. Deposits included P6,000 from June and P244,560 for July. f. The bank charged Daisy Duck Companys account for a non-sufficient check with a total amount of P3,110. The credit manager concluded that the customer intentionally closed its account and the owner left the city. The check was turned over to a collection agency. g. A note for P58,000, plus interest, was paid directly to the bank under an agreement signed four months ago. The note payable was recorded at P58,000 on Daisy Duck Companys books. 1. Compute the amount of checks outstanding on July 31. 2. How much is the deposits in transit on July 31? 3. How much is the adjusted cash balance on July 31? Refer to Louwers 6-49. Refer to Louwers 6-48.

Problem 2-9 Interbank transfers schedule

Problem 2-10 Proof of cash Problem 2-11 Proof of cash

While performing an opinion audit of the financial statements of Malaber Company as of December 31, 2012, you have extracted the following data regarding the cash account: a. b. c. Balances per books Balances per bank Outstanding checks November 30 P619,304 742,800 254,096 December 31 P670,392 774,696 320,184*

*A check of P20,000 was certified by the bank.

d. The cash receipts book showed a total of P9,341,780 while the bank statement for the month of December showed total credits of P5,401,800. e. Malaber records NSF checks as reduction of cash receipts. However, NSF checks which are later redeposited are then recorded as regular receipts. The data about the NSF checks are as follows: 1. Returned by the bank in December and recorded by the company in January 2011, P9,200.
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f. g. h.

i.

j.

2. Returned by the bank in December and recorded by the company in December, P25,000. 3. Returned by the bank in November and recorded by the company in December, P1,000. A bank credit memo dated December 27, 2012 was received by Malaber stating that the companys account was credited for the net proceeds of a note for P8,060. This is not yet recorded in the books. A check of Malabey Company amounting to P9,292 was charged to the company account by the bank in error on December 30. The company has hypothecated its accounts receivable with the bank under an agreement whereby the bank lends the company 80% of the hypothecated accounts receivable. The company performs accounting and collection of the accounts. Adjustments of the loan are made from daily sales reports and deposits. The bank credits the company account and increases the amount of the loan for 80% of the reported sales. The loan agreement states specifically states that the sales report must be accepted by the bank before the company is credited. Sales reports are forwarded by the company to the bank on the first day following the date of sales. The bank allocates each deposit 80% to the payment of the loan, and 20% to the company account. Thus, only 80% of each days sales and 20% of each collection deposits are entered in the bank statement. The company accountant records the hypothecation of new accounts receivable (80% of sales) as a debit to Cash and a credit to the Bank Loan as of the date of sales. One hundred percent of the collection on accounts receivable is recorded as cash receipt; 80% of the collection is recorded in the cash disbursements books as a payment on the loan. In addition with the hypothecation, the following information were discovered: 1. Collection on accounts receivable deposited in December, other than deposits in transit, totaled to P4,800,000. 2. Included in the undeposited collections is cash from the hypothecation of accounts receivable. Sales were P162,000 on November 30, and P169,000 on December 31, the balance was made up from collections of P128,440 which was entered in the books in the manner indicated above. For the month of December, the interest on the bank loan amounting to P24,560 was charged by the bank against the account of Malaber. This was not recorded in the books.

Prepare a four-column proof of cash of the cash receipts and cash disbursements recorded on the bank statement and on the companys books for the month of December 2012. The reconciliation should agree with the cash figure that will appear in the companys financial statements. Thereafter, determine the following: 1. Cash balance as of November 30. 2. Cash balance as of December 31. 3. Book receipts for December 31. 4. Book disbursements for December 31. 5. Cash shortage at December 31, if theres any.

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Problem 2-12 Comprehensive problem

You were able to gather the following from the December 31, 2012 trial balance of Bugs Bunny Corporation in connection with your audit of the company: Cash on hand Petty cash fund Gold Keeper Bank current account Diamond Bank current account no. 01 Diamond Bank current account no. 02 Bronze Bank savings account Bronze Bank time deposit (three-month) P530,000 10,450 1,230,000 1,080,000 (80,000) 1,200,000 500,000

Cash on hand includes the following items: a. Customers check for P40,000 returned by bank on December 26, 2012 due to insufficient fund but subsequently re-deposited and cleared by the bank on January 8, 2013. b. Customers check for P20,000 dated January 2, 2013, received on December 29, 2012. c. Postal money orders received from customers, P30,000. The petty cash fund consisted of the following items as of December 31, 2012. Currency and coins P2,350 Unreplenished petty cash vouchers 1,300 Currency in an envelope marked collections for charity with 1,200 names attached Employees vales 1,600 Check drawn by Bugs Bunny Corporation, payable to the petty 4,000 cashier Total P10,450 Included among the checks drawn by Bugs Bunny Corporation against the Gold Keeper current account and recorded in December 2012 are the following: a. Check written and dated December 29, 2012 and delivered to payee on January 2, 2013, P80,000. b. Check written on December 27, 2012, dated January 2, 2013, delivered to payee on December 29, 2012, P40,000. The credit balance in the Diamond Bank current account No. 2 represents checks drawn in excess of the deposit balance. These checks were still outstanding at December 31, 2012.
The savings account deposit in Bronze Bank has been set aside by the board of directors for acquisition of new equipment. This account is expected to be disbursed in the next four months from the balance sheet date.

Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2012: 1. Cash on hand. 2. Petty cash fund. 3. Gold Keeper Bank current account. 4. Cash and cash equivalents.
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